Monday, April 6, 2009

Auckland Supercity

Central government in Wellington seems set to force Auckland's eight local councils to merge into a mega-city. Complaints thus far have centered around the potential loss of voice as constituents become more distant from their representatives.

I'm worried about something else entirely. Voice is nice, but the threat of exit is a more powerful check on local governments' activities. Tiebout explained it all back in 1956 with his pure theory of local expenditures. In short, competition among jurisdictions for residents forces them to run their operations more efficiently; mobility across jurisdictions also allows matching between consumer preferences and government service bundles. So, if the rates in one of the local councils are getting steep relative to the services provided by the council, moving to the other side of town can help.

Whatever efficiencies of scale there are from having services provided to a larger jurisdiction can also be achieved by contracting out. This happens endogenously and only where the economies of scale are substantial enough to justify it. It's then hard to see from whence come the efficiencies of amalgamation. For example, if a couple of councils find that they'd save money by jointly running their fire services, nothing stops them from setting up a joint fire service that caters to both councils.

Muriel Newman today links to a couple of nice Canadian case studies of amalgamation. In Winnipeg, where I did my undergraduate studies, amalgamation led not to efficiencies but rather to a leveling-up of union contract salaries to match those paid in the highest-paid prior city, a deterioration of service quality, and stagnation. Winnipeg community activist Nick Ternette is even giving a talk tomorrow at the Frontier Centre on the failures of Unicity!

I hope that local government minister Rodney Hide, who has lectured in economics and ought to know Tiebout, has thought this one through. I've not yet seen the case made where any serious weight is put on the loss of Tiebout competition. The Royal Commission Report makes no mention whatsoever of Tiebout. A search on "competition" finds lots of references to how well a unified Auckland could compete with other "global cities", but nothing on the loss of interdistrict competition. There's one mention at page 348 of how competition among vestigal local bodies post-Amalgamation ought be stifled. None of this fills me with confidence. Note, however, that I do not purport to have read through the Royal Commission Report in any great depth.

Update: Ilya Somin here talks about the importance of Tiebout competition among US States.

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