The morality of corporate takings

In the comments on my post containing the open-letter to the Labour Party’s two Davids a couple of weeks ago, John Small and I got into a discussion about the morality of a government policy that would wipe value from a private company (in this case, suggested changes to the electricity market that would reduce the profits of privately owned electricity companies). John wasn’t sure why I raised the issue of morality; this is worth post on its own.

It is inevitable that changes in government policy will result in both winners and losers, just as changes in the non-governmental actions will. One of the starting points I argue in my Honours class in welfare economics is that, in terms of practical policy (as distinct from the conceptual benchmark of a mythical social planner) the world is, always has been, and always will be Pareto efficient, and so a rule that policy changes cannot impose costs on anyone is tantamount to a rule that policy changes can never occur. But I think we can suggest some guidelines for when government-imposed costs are justified. The key issues are whether the policy is imposing costs on individuals or corporate bodies, whether the policy is a direct appropriation of property or one the imposed costs are indirect, and whether the policy is designed to improve efficiency or serve some social objective. Let’s take each in turn.  

• Is the cost imposed directly on individuals or on corporations? Takings from individuals require a higher threshold of benefit than takings from corporations. I don’t here mean to that corporations are somehow separate from the individuals who own them, or that their owners have lesser rights than other citizens; this is simply recognising the fact that company owners have the opportunity to diversify risk in their shareholdings, and hence to diversify the implications of government policy changes. A policy that forced lower electricity prices might wipe value from electricity companies, but add value to electricity buying companies as well as final consumers. If such a policy were efficiency increasing, there is no reason for it to impose significant costs on any diversified shareholder.
• Is the policy one that appropriates resources directly or one that changes the value of current assets? A direct takings, such as when the government uses compulsory purchase to acquire land for a highway, is a more serious use of government power than one that imposes costs indirectly through revaluations of assets, simply because a direct takings has the potential to impose far greater costs to an individual if their personal valuation of the asset is greatly in excess of its market value.

Based on these two criteria, I have no problem on morality grounds with, say, the government’s forcing Telecom to give other companies access to its copper wire network, with the anti-trust actions against Microsoft, or with changes to patent law that would stop Apple from suing Samsung. In each case, the question for me would be simply whether such policies would promote long-run efficiency or not. (In the case of these three examples, I suspect the answer would be No, No, and Yes, but that is an empirical question.)  The issue becomes more when the policy is put in place to achieve social objectives.

• Is the policy one that is designed to improve efficiency or to bring about social redistribution? In my view, the hurdle has to set very high before one can justify a direct or indirect takings to fund redistribution. This is not to say that social redistribution is not warranted, but rather the moral case for redistribution should be grounded in a transparent and honest policy that seeks to share the burden broadly rather than hiding the costs. Financing redistribution through indirect takings smacks too much of offering the other kid’s bat for my taste.

This is the key question in the case of Labour’s proposed electricity reforms. If their proposal were based on a view that market power was keeping price above marginal cost so that reducing price would be efficiency enhancing, then the issue would be the technical one of whether there is market power and whether eliminating that market power through a single payer would cause more problems than it would solve. But the proposed policy is explicitly to set price below marginal cost in order to equate price to average cost. John argued from a utilitarian perspective that the redistributive benefit would likely exceed the efficiency cost. We can debate about how large the efficiency cost would be, and whether, if you had revenue available for redistribution, subsidising electricity prices would be the best way of using it. But if we want to have more redistribution, either with an electricity subsidy or with direct transfers, then we should finance that directly with broad-based tax increases. Let’s not get into the game of arguing for a policy to transfer resources from corporate owners to electricity consumers on the basis of “they must have known that regulation is very very common in this industry” and hence that the costs are ethically inconsequential.

Afternoon roundup

Posting has been light as I've finished one set of grading and polished off a submission with Matt Burgess to the Law Commission on their alcohol issues paper. More grading for the weekend. In the meantime, enjoy these:

• The University of Akron demands a DNA sample from staff. I don't worry much about my DNA being out there, but is the kind of place that would want this the kind of place that you'd want to work? Sheesh.


• George Soros throws $50 million at funding anti-economics economists. Will the academic outcries be as loud as when BB&T gave $1 million to fund a course in Ayn Rand studies? Similar bequests on the right have led to endless handwringing about subversion of the independence of academia: just remember the establishment of the Friedman Center. Why the silence now? Hmm.


• I'd warned that ACC might have cause to worry about annoying John Small. Seems I was right.


• Lindsay Mitchell points to a new Treasury document showing that

  Households (with children) in the bottom half of the income distribution effectively pay no income tax or receive tax credits, because of the interaction with the income support system.
  
  The top 10% of income earners (those earning more than $70,000) pay more than 40% of all income tax revenues and about 20% of GST revenue.

  The bottom half pay zero net tax; the top 10% pay 40% of the tax. Yikes.

Poking economists can be risky

When I got annoyed about BERL's work on the "social costs" of alcohol and wasn't impressed with their response to critiques, things got interesting.

Now it seems that John Small is a motorcycle rider. And he's started digging into ACC's justification for massive increases in insurance levies on motorcycle registrations. And he doesn't like what he's finding. I hope for ACC's sake that they're able to quickly show him what they were up to, or that Small doesn't get a lot of consumption value out of annihilating shonky analyses that justify imposing costs on him. 'Cause as mildly irritating as I was for BERL, I'm sure Small would be far more irritating for ACC.

It makes sense that bikes would have to pay a bigger fixed cost than cars even if risks per mile driven were identical across the two vehicle classes: bikes use less petrol per kilometer, and ACC charges a petrol levy of 9.9 cents per litre to reflect the added risk per additional amount driven. They can't charge differential petrol taxes per vehicle, so it has to get loaded into the fixed charge. Given that, though, it would take remarkable differences in accident risk/damage by type of motorcycle to generate the fixed charge difference between small and large bikes that ACC proposes: $257 for a <125cc bike and $745 for >600cc. The larger bikes use more petrol per kilometer than the smaller bikes.

Small is definitely right that there's a bias against motorcyclists built into the system, but the optimal tariff structure given an untaxed segment is pretty difficult. First best, we eliminate the untaxed segment: we can and should put an ACC levy on cyclists. It would be fairly easy to require a rego for cyclists and to charge an appropriate ACC premium for them (risk rated for type of bicycle, whether there's a kid's seat, etc). Doing it for pedestrians would be pretty tough. The only way of doing it, best I can reckon, would be through a poll tax added onto your regular income tax, perhaps risk rated by number of pedestrian accidents in your neighbourhood. In that state of the world, premiums could reasonably reflect the two-sided nature of accident costs (a car-bicycle accident needs both the car and bicycle present).

Outside of that state of the world, whenever a bicyclist gets on the road, the ACC premium for any vehicle that can injure a cyclist, even if it's one of those horrible cyclists that plug up Riccarton Road going through Hagley Park despite the existence of perfectly good cycle paths going through the park paralleling the road (hates them I do), goes up. So the bias is really on any segment that is taxed compared to the untaxed segment. We'd then expect, though, that trucks and buses would have a heavier charge attached to them -- they do more damage to the untaxed segment in any encounter between the two. Small says trucks are getting a pretty sweet deal. Given that diesel trucks don't pay a petrol levy, he's almost certainly right; would need more details on accident rates to be sure though.

That's enough for now - I'm off for a ride.

If I were ACC, I'd be rather nervous about the "for now" part. Sounds like there's a fair bit he could take a sledgehammer to, were he so inclined.

Anti-Paternalism

John Small wonders what the deal is with anti-paternalism. First, in his view, it seems an ad hominem attack on any kind of disliked policies. Second, many "nanny state paternalistic" policies are supported by lots of folks; objection to those policies then seems anti-democratic.

Taking those in turn, while there are some policies where John rightly notes fuzzy boundaries between paternalistic and non-paternalistic policies, for most it's pretty clear-cut. A policy is paternalistic if its main objective is to protect you from yourself. So, yeah, it would just be ad hominem (and absurd) to label, say, laws against murder as paternalistic. We don't have laws against murder solely for the purpose of saving the murder from ex post regret. But it's hardly ad hominem to note that a policy's main goal is to stop you from doing things that might (or might not) hurt yourself.

The main problem is that all sorts of laws that are based mainly on paternalism are framed as being based on externality grounds. Because their proponents know not only what's best for you but also that you'll oppose those laws if they're presented honestly. It's hardly ad hominem to slash through the shonky veneer that gets pasted over such policies.

Small then finds it incongruous that Buchanan would advocate that a popular vote (on a constitutional amendment) could be used to prohibit the use of popular votes on issues like paternalistic restrictions. Buchanan noted the case where weak majorities might be found preferring each of several paternalistic policies (while strong minorities oppose each) but where broad support could be found for restrictions on democratic choice on the set of policies (because different folks are in the minority on different issues).

The whole point of Buchanan's constitutional enterprise is that it is wholly legitimate and even necessary for democracies to bind themselves against certain types of decisions. At the constitutional level, we set restrictions on certain types of choices, requiring that they pass only by means of supermajorities. This doesn't "deny the legitimacy of democratic decision making"; rather, it makes it possible for democratic choice to be legitimate!

Buchanan and Tullock lay it all out in their 1962 Calculus of Consent. If we consent to the constitution, then the rules that follow afterwards also are legitimate. What sorts of constitutions could be supported behind the veil of uncertainty? Well, we want to make sure that we're not going to be on the losing side too often, especially on decisions where fundamental rights are at stake. But it's often better to be on the losing side on some issues if the value of playing the game at all is high enough: all having a veto on everything probably wouldn't work too well. So, what sorts of decisions should pass by supermajorities? Ones where external costs are high relative to decision-making costs. Recall that decision-making costs are increasing in the size of the required majority (it's more costly to get 75% to agree than to get 51% to agree) while external costs -- the costs falling on those who disagree with the decision -- are decreasing in the size of the required majority. So, where are external costs relatively high? Decisions relating to fundamental rights, for starters. Would we want 51% to be able to expropriate the other 49% by popular vote? Does saying no deny the legitimacy of democratic decision making?

Where else might we expect external costs to be relatively high? On decisions that affect personal autonomy where no other issues are at stake. Yes, my autonomy is restricted by having to drive on one side of the road rather than the other, but others' autonomy to hurt me is restricted at the same time. The class of rules that would restrict my autonomy for the sake of preventing my imposing harms on myself (as others deem harms and benefits) seems pretty likely to have pretty high external costs behind the veil. And so it isn't crazy to think that constitutional rules could well be warranted protecting against this kind of legislation.