http://crookedtimber.org/2004/03/06/the-equity-premium-and-the-mixed-economy/ Out of the crooked timber of humanity, no straight thing was ever made Sat, 21 Nov 2009 23:33:23 -0800 http://wordpress.org/?v=2.8.6 hourly 1 http://crookedtimber.org/2004/03/06/the-equity-premium-and-the-mixed-economy/comment-page-1/#comment-20490 nnyhav Sat, 06 Mar 2004 15:53:37 +0000 http://crookedtimber.org/wp/?p=1199#comment-20490 Add <a href="http://markschmitt.typepad.com/decembrist/2004/02/a_heavy_accusat.html">another wrinkle</a>. Add another wrinkle.

]]> http://crookedtimber.org/2004/03/06/the-equity-premium-and-the-mixed-economy/comment-page-1/#comment-20489 nnyhav Sat, 06 Mar 2004 15:28:24 +0000 http://crookedtimber.org/wp/?p=1199#comment-20489 The equity premium puzzle (and consequent questioning of market efficiency under rational expectation) doesn't lend itself to an either/or framing on modes of ownership. One can argue that state intervention in economic affairs contributes noise (interference?) to market signals; that recourse to underlying assets via state contract enforcement represents implicit debt insurance; that market equilibrium is not static, with unforeseeable (unpricable) technological innovations driving increased equity returns; that not only are capital markets incomplete (though less so than in the past) but also that state strictures embed both incompletability and inefficienies (regulation, taxation, etc). All we have to go on is experience with a mixed economy; another aspect of the equity premium that I find interesting is that its evolution seems to coincide with that of fiat currency. The equity premium puzzle (and consequent questioning of market efficiency under rational expectation) doesn’t lend itself to an either/or framing on modes of ownership. One can argue that state intervention in economic affairs contributes noise (interference?) to market signals; that recourse to underlying assets via state contract enforcement represents implicit debt insurance; that market equilibrium is not static, with unforeseeable (unpricable) technological innovations driving increased equity returns; that not only are capital markets incomplete (though less so than in the past) but also that state strictures embed both incompletability and inefficienies (regulation, taxation, etc). All we have to go on is experience with a mixed economy; another aspect of the equity premium that I find interesting is that its evolution seems to coincide with that of fiat currency.

]]> http://crookedtimber.org/2004/03/06/the-equity-premium-and-the-mixed-economy/comment-page-1/#comment-20488 John Quiggin Sat, 06 Mar 2004 11:02:07 +0000 http://crookedtimber.org/wp/?p=1199#comment-20488 Bob, the points you make are quite right. In making the analysis I took account of the tax treatment of earnings (in the Australian case this actually goes the other way - government-owned corporations pay company tax, but do not benefit from the associated imputation credits) and concurrent changes in monopoly/competition policy. Bob, the points you make are quite right. In making the analysis I took account of the tax treatment of earnings (in the Australian case this actually goes the other way – government-owned corporations pay company tax, but do not benefit from the associated imputation credits) and concurrent changes in monopoly/competition policy.

]]> http://crookedtimber.org/2004/03/06/the-equity-premium-and-the-mixed-economy/comment-page-1/#comment-20487 Bob McGrew Sat, 06 Mar 2004 09:56:13 +0000 http://crookedtimber.org/wp/?p=1199#comment-20487 "If the advantages of privatisation outweigh the difference in the cost of capital, and assets are sold in a competitive market, then the government should come out ahead by selling assets and using the proceeds to repay debt, thereby reducing obligations." Do government-owned companies enjoy other benefits as a result of government ownership in these cases? Those benefits would need to be included in your empirical test (esp. if they do not represent efficiency gains). I could see a couple of examples in which that could be the case. For instance, government-run companies might not pay taxes, whereas they would pay taxes on earnings after privatization. (Being an American, the only proximate examples I can think of are the postal service and water and garbage collection, which fit. I suspect those aren't your favorite examples, however.) Another example is that, as a government-run company, telephone services are protected from anti-trust enforcement and often guaranteed a monopoly. Both the monopoly and the anti-trust protection would no longer exist were the company to be privatized. Both of these effects would depress the future earnings of the privatized company relative to the future earnings of the public company, partially wiping out the premium from better management. “If the advantages of privatisation outweigh the difference in the cost of capital, and assets are sold in a competitive market, then the government should come out ahead by selling assets and using the proceeds to repay debt, thereby reducing obligations.” Do government-owned companies enjoy other benefits as a result of government ownership in these cases? Those benefits would need to be included in your empirical test (esp. if they do not represent efficiency gains). I could see a couple of examples in which that could be the case. For instance, government-run companies might not pay taxes, whereas they would pay taxes on earnings after privatization. (Being an American, the only proximate examples I can think of are the postal service and water and garbage collection, which fit. I suspect those aren’t your favorite examples, however.) Another example is that, as a government-run company, telephone services are protected from anti-trust enforcement and often guaranteed a monopoly. Both the monopoly and the anti-trust protection would no longer exist were the company to be privatized. Both of these effects would depress the future earnings of the privatized company relative to the future earnings of the public company, partially wiping out the premium from better management.

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