A summary of trickle down economic theory:

[Agathon]

Originally posted by obiwan18

I challenge that assertion. Look at the Mazenkowski report, which I support. Greater privatisation should allow us to save our beleagured health care system from collapsing.

Or increased taxation, or reallocation of public funds.

As for education, look at any secondary school here in Canada. Teachers have to buy books out of their own pockets because the government does not fund proper school equipment.

And privatising this will help, how? All that will happen is that a few schools will improve most will stay the same and the worst will become basket cases. All privatisation is, is an excuse for the wealthy to give their children an unfair advantage.

False premise. The poor are overtaxed here in Canada under our current system.

There's no such thing as overtaxation. It sounds like a technical term but, in the way it is used, it isn't really. It's just a word that the right throws about.

A flat tax will not increase taxes for the poor. I don't know why you think that it will.

I don't - I claim it will increase the share of the burden on the poor. If the tax system is flattened, either the level of government services will go down and the poor will pay the same amount of tax (in which case they'll lose) or they'll stay the same and the poor will have to pay more (in which case they'll lose).

As a poor person, I would rather be working and earning more money rather than being stuck in a dead-end job. Cutting taxes of the rich should help for job creation if the rich reinvest the money into businesses.

If they do. We got told all this crap in NZ. It turned out to be a load. Most people there now think (rightly IMHO) that this was a con job. Anyway, this assumes that government spending doesn't lead to job creation, almost as if the money spent by the government vanishes into thin air.

So words are not real? Puzzling from a man who makes a living off of words.

Nope - only sounds are. Meaning is a construct.

[Adam Smith]

Originally posted by Agathon
And I've yet to see any real factual support for the "Republican" claims. School vouchers just don't work in my experience and introducing a market to health care just results in massive overheads and ridiculous purchases. The same goes for electricity - the market reforms where I lived just meant higher prices and worse service.

The basic argument is that public enterprises face less competition for their products and have less of a need to raise capital (most of it comes from taxes) than privately owned firms do. This means that public enterprises tend to have higher prices, higher costs, and lower quality than privately owned firms do, all else equal. (Regulated private firms also tend to face less competition for their products, but still have to raise money in the capital markets. This puts them somewhere between public and unregulated private firms.)

Most of the references I have are at the office, but the one source (1987) I can lay my hands on right now lists the following studies (Mostly US but also some UK, Australia) in support of the proposition (plus a few sources I can name off the top of my head):

Electricity:
Stigler and Friedland, What Can Regulators Regulate? (1958) Original article indicating private providers more efficient than public.
Wallace and Junk (1970) Public firms have 40-75 percent higher operating costs
Spann (1977) Private firms are more efficient than public firms with respect to operating costs.
Primeaux (1977, 1978) Competition reduces cost of public provision
DeAlessi (1974) Private sector supply lower cost than public
Joskow (MIT / Yale), Wolak (Stanford), and Borenstein (Berkeley) each have a bunch of recent articles reaching the same conclusions. I posted one of these articles in a California Electricity thread a few weeks back.
(Note: these articles apply almost exclusively to the US. I am not very familiar with the experience in New Zealand.)

Water:
Mann and Mikesell (1976) Public firms have 20 percent higher costs
Morgan (1977) Public firms have 15 percent higher costs
Crain and Zardkoohi (1978) Public firms are 40 percent less productive.

Health Insurance and Hospitals:
The seminal article here is Cotton M. Lindsay, A Theory of Government Enterprise, Journal of Political Economy, October 1976.
Clarkson (1972) “Red tape” is much more prevalent in non-profit hospitals
Wilson and Jadlow (1980) Proprietary hospitals deviate less than public hospitals from a perfect efficiency index.
There was also an article in the Rand Journal of Economics in the past year or so by people from Harvard Med School and Harvard Econ dept showing that operations performed by an HMO were half as costly as similar operations performed by public institutions.

Education
Carolyn Hoxby authored several
STUDIES of US cases indicating that competition resulting from vouchers can reduce the cost of education and improve student performance. Hoxby is a professor at a well-known bastion of conservatism, Harvard University. She was also runner up for the John Bates Clark Award, given to the best American economist under age 40. (Note: I seem to remember reading in another article that New Zealand’s experience did not have the same results.)

Refuse Collection
Kitchen (1976) Municipal suppliers are more costly than private ones.
Pommerehne and Frey (1976) Operating costs are significantly lower fro private firms than for municipal firms.
Stevens and Savas (1977) Municipal firms are 10 to 30 percent more costly than private firms.
Spann (1977) public firms are 45 percent more costly
Bennett and Johnson (1979) private less costly than public provision

Airlines
Davies (1977) Private airline is clearly more efficient than nearly identical public one.

Transit
Obeng (North Carolina) has several article showing that private firms are more efficient than similar public firms.

Banks
Davies (1982) Private bank productivity and profitability are higher than in public banks

Cleaning
Bundesrechungshof (1972) Office cleaning is 40 to 60 percent more expensive when done by a public firm than when contracted out
Fischer and Mendershausen (1975) Cleaning costs would be reduced 30 to 80 percent if the service were contracted out.

Weather Forecasting
Bennett and Johnson (1980) Government service is 50 percent more costly

Originally posted by Agathon
There's also a basic falsehood: the so called existence of slackers. ..... It just shows that people will work when there are proper jobs available ....

You never met my brother in-law.

(edit: fixed url)

[Imran Siddiqui]

Adam Smith always coming to the rescue with TONS of cites... As soon as he appeared I realized Agathon was in trouble .

[The diplomat]

Why is it so bad if the rich get big tax cuts?
First, most rich people work very hard for their wealth. It takes a lot of education, skill and intelligence to be a succesful CEO, for example.
Second, isn't the goal for everybody to be as rich as possible? I thought that was the American dream!
Third, and here comes the trickle down economics lesson, the corporation that gets a 20 million dollars capital gains tax cut is going to stimulate the economy a whole lot more than the guy on miminum wage that gets a 100$ refund check. How many jobs can the guy on miminum wage create with a 100$? This is not to say that the guy on minimum wage should not get anything. But if you want to stimulate the economy, you have to put the money where the jobs are. After all, it takes money to make money!

[Ned]

Re: A summary of trickle down economic theory:

Originally posted by Vesayen
The goverment gives tax cuts for the rich, allowing them to get extra money.

The rich then use this money to buy vast quantities of alcohol, which they expel from their body in the form of a yellow liquid which trickles over the rest of Amerca.

Thoughts?

Hah! I was about to say that a rising tide raises all boat. But, on second thought, Vesayan has identified the source of the rising tide. So, I guess the old saying is really true.

[Agathon]

Originally posted by Adam Smith

The basic argument is that public enterprises face less competition for their products and have less of a need to raise capital (most of it comes from taxes) than privately owned firms do. This means that public enterprises tend to have higher prices, higher costs, and lower quality than privately owned firms do, all else equal. (Regulated private firms also tend to face less competition for their products, but still have to raise money in the capital markets. This puts them somewhere between public and unregulated private firms.)

Merely citing papers isn't an argument. Believe me, I have read enough academic papers to know that there are disputes about almost everything. Plus, with all due respect, those are pretty old papers.

I don't understand why you introduced competition. The public services I'm interested in are monopolies so there is no competition. The point of having them is that markets fail in certain areas.

Privately owned utilities have to make a profit or people won't invest in them, public utilities don't. But that doesn't mean that a public utility can't be run efficiently. The main problems with public services (like NZ's electricity generation department) is that they become means of decreasing unemployment rather than focusing on what they are supposed to do.

I don't disagree with all the authors, but the health care case is laughable. Not too long ago Canadians were spending 10 percent of GDP on healthcare; Americans were spending 15 percent of GDP, and that didn't even provide health care to every single American. Almost no Canadian would swap their health care system for a private one.

One of my old profs noted that in the states his insurance company had been charged 8 dollars for a Tylenol. Surely you can't call that efficient.

Vouchers don't work either. We tried this in NZ. It was called "school choice" - all that happened is that the best schools did slightly better but most of them were worse off.

[Agathon]

For the record the New Zealand reforms, which began to take place 3 years before your book was published were in a large part a response to the heavy handed Keynesianism of the previous (conservative) administration, which had, among other things, embarked on a series of huge ill-advised industrialising public projects. There was also a bizarre range of agricultural subsidies and tariffs which weren?t doing much good. Add to that the fact that the public was being run largely as a means to provide jobs rather than services, and the reformers had a good case for change.

That was all well and good, but the problem was that the politicians responsible for the reforms were hijacked by extreme market fundamentalists whose mantra was basically to privatise everything. Sometimes it worked quite well: for example the telephone system in New Zealand is far better than it was before the reforms (even though the government stupidly sold it too cheaply ? but that?s a different story).

What they started doing was to reconstitute public utilities as State Owned Enterprises. This was a good idea even though many workers were laid off. The basic idea is to run the SOE as efficiently as possible free of excessive union interference and other efficiency drags. This worked very well, although it annoyed a lot of people who thought they had jobs for life. For example, our local power plant used to have a huge staff who were there in case anything broke down. Most of the time they weren?t doing anything except getting paid and they couldn?t be fired because they were public servants. This was expensive and silly. It was far cheaper to hire contractors when things actually broke down, which is what most companies in a similar situation would do. In essence the result was not dissimilar to a private company, except it had a monopoly. However, there was intense pressure on people running the show to economize, just as there would be on the managers of a private company.


This is what I mean when I talk about public ownership. I don?t mean the old style of public service in which contracting out is forbidden and everything has to be done in-house.

[Adam Smith]

Originally posted by Agathon
Merely citing papers isn't an argument.

I never said it was. The argument is the first paragraph. The papers present facts which support the argument.

Originally posted by Agathon
Plus, with all due respect, those are pretty old papers.

That's what I have within arm's reach at home on a rainy saturday afternoon. There's plenty more where those came from. The electricity and education cites are much more recent.

Originally posted by Agathon I don't understand why you introduced competition. The public services I'm interested in are monopolies so there is no competition. The point of having them is that markets fail in certain areas.

Competition in the product market helps ensure that firms produce good quality products at competitive prices. Competition for capital helps ensure that firms don't waste scarce resources. The point is that many of these firms don't have to be monopolies, so why organize them as such? It makes sense to have only one firm delivering electricity to my house. Thats a natural monopoly. But there is no reason we cnat have plenty of different firms generating that electricity. Why is electricity generation organized as a monopoly. Similarly, there 800K people in the county I live in. There is one public school system. But many cities with only 100K people have efficient school systems, and there are many private schools here in this county. Why does the local public school system have to be a monopoly?

Originally posted by Agathon The main problems with public services (like NZ's electricity generation department) is that they become means of decreasing unemployment rather than focusing on what they are supposed to do.

Precisely the point. Competition helps keep firms focussed.

Originally posted by Agathon Not too long ago Canadians were spending 10 percent of GDP on healthcare; Americans were spending 15 percent of GDP, and that didn't even provide health care to every single American. Almost no Canadian would swap their health care system for a private one.

One of my old profs noted that in the states his insurance company had been charged 8 dollars for a Tylenol. Surely you can't call that efficient.

How much each country spends on health care depends on several factors within each country, and rightfully deserves its own therad. The point here is that in the US, private firms appear to provide health care more efficiently than public firms, however inefficient both of them may be in the US. Funny you should mention the an insurance company, since the Rand study I mentioned specifically discussed how HMO's were more efficient than insurance payment because HMO's could see through nonsense like this.

Originally posted by Agathon Vouchers don't work either. We tried this in NZ. It was called "school choice" - all that happened is that the best schools did slightly better but most of them were worse off.

The Hoxby studies I cited indicated favorable results in the US. As I said in my previous post, it was my understanding that New Zealand did not have the same experience. I don't know enough about the two cases to know why they led to different outcomes, but I see no reason to dismiss Hoxby's favorable results due to the unfavorable New Zealand experience.

[Agathon]

Originally posted by Adam Smith
I never said it was. The argument is the first paragraph. The papers present facts which support the argument.

WADR it isn't much of an argument.

That's what I have within arm's reach at home on a rainy saturday afternoon. There's plenty more where those came from. The electricity and education cites are much more recent.

And ideological no doubt.

But there is no reason we cnat have plenty of different firms generating that electricity. Why is electricity generation organized as a monopoly.

Because it's cheaper. You don't have to furnish a profit and you don't waste money on advertising and multiplying bureaucracy.

Similarly, there 800K people in the county I live in. There is one public school system. But many cities with only 100K people have efficient school systems, and there are many private schools here in this county. Why does the local public school system have to be a monopoly?

It depends on what values you hold dear in an education system. The first result of the voucher scheme in NZ was that many parents went mad because they had to cart their kids halfway across town because they could no longer get in their local school.

Precisely the point. Competition helps keep firms focussed.

But it isn't a panacea. One of the results of the NZ experiment was that schools wasted time and resources competing with each other instead of teaching the children.

How much each country spends on health care depends on several factors within each country, and rightfully deserves its own therad. The point here is that in the US, private firms appear to provide health care more efficiently than public firms, however inefficient both of them may be in the US. Funny you should mention the an insurance company, since the Rand study I mentioned specifically discussed how HMO's were more efficient than insurance payment because HMO's could see through nonsense like this.

Yes the HMO's are a response to the failures of insurance companies. None of them provides health care as efficiently as the Canadian single payer system (which really is excellent) which manages to provide it to everyone.

The Hoxby studies I cited indicated favorable results in the US. As I said in my previous post, it was my understanding that New Zealand did not have the same experience. I don't know enough about the two cases to know why they led to different outcomes, but I see no reason to dismiss Hoxby's favorable results due to the unfavorable New Zealand experience.

Because it's politically motivated bull****. How's that for a reason.

[Adam Smith]

Originally posted by Agathon
WADR it isn't much of an argument.

WADR = what? Some organizations face competition, others don't. You look at the facts, control for factors which differ, and consistently find that publicly owned firms have higher costs. Seems like a good argument to me.

Originally posted by Agathon And ideological no doubt.

The studies were cited in Viscusi, Vernon, and Harrington, Economics of Regulation and Antitrust, which probably the most widely used text in this field of economics. Each of the studies was in a peer reviewed economics journal. Viscusi taught when I was in grad school. He was a bastard, but he was not an ideologue. And, as I mentioned before, Hoxby teaches at that famous home of conservative reactionaries, Harvard University.

Originally posted by Agathon
Because it's cheaper. You don't have to furnish a profit and you don't waste money on advertising and multiplying bureaucracy.

That's not what the evidence shows. Public firms must eventually earn a competitive return on their capital, or else they will have trouble attracting capital from other more productive uses. Public firms advertise. Public firms have bureaucracy. And you yourself said they become a means of decreasing unemployment.

Originally posted by Agathon It depends on what values you hold dear in an education system.

In my case, I want my kids to be taught the name and location of the 50 states sometime in their school careers; I want them to learn their multiplication tables instead of taking bull**** tests; I want them to learn things which are appropriate to their age level and ability; ... but I digress. [/rant] In short, the quality is not what I had hoped. My wife and I supplement much of this ourselves.

Originally posted by Agathon Yes the HMO's are a response to the failures of insurance companies. None of them provides health care as efficiently as the Canadian single payer system (which really is excellent) which manages to provide it to everyone.

My understanding is that the Canadian system provides basic coverage, while the US system focusses on quality of care. This is really a topic for a health care thread. Note however, that single payer is not a panacea. The US has a single payer defense procurement system, and we all know how efficient that is.

Originally posted by Agathon Because it's politically motivated bull****. How's that for a reason.

Hoxby looked at the facts and reached her conclusions. The basis for your statement is .... what?

[Agathon]

Originally posted by Adam Smith
WADR = what? Some organizations face competition, others don't. You look at the facts, control for factors which differ, and consistently find that publicly owned firms have higher costs. Seems like a good argument to me.

With All Due Respect.

It's not good enough. You have to give a reason for it. Where I come from the publicly owned system of power distribution was far better in terms of price and reliability than the competitive option.

The studies were cited in Viscusi, Vernon, and Harrington, Economics of Regulation and Antitrust, which probably the most widely used text in this field of economics. Each of the studies was in a peer reviewed economics journal. Viscusi taught when I was in grad school. He was a bastard, but he was not an ideologue. And, as I mentioned before, Hoxby teaches at that famous home of conservative reactionaries, Harvard University.

I have a habit of disagreeing with work published in journals. But then again I do philosophy, which is built on that sort of thing.

That's not what the evidence shows. Public firms must eventually earn a competitive return on their capital, or else they will have trouble attracting capital from other more productive uses. Public firms advertise. Public firms have bureaucracy. And you yourself said they become a means of decreasing unemployment.

There doesn't seem to be any good reason why they have to. If you start with the goal of providing power to everyone at the lowest price possible and the managers are rewarded for efficiency, there's no problem. A state wide public firm will have less bureaucracy than three competing private firms that will waste energy competing with each other, advertising, etc.

I accept that your point would be true if we were talking about government owned department stores or something like that. But that's not what I'm interested in.

My understanding is that the Canadian system provides basic coverage, while the US system focusses on quality of care. This is really a topic for a health care thread. Note however, that single payer is not a panacea. The US has a single payer defense procurement system, and we all know how efficient that is.

Actually, I was going to bring that up. Would you really want to privatise the military? I know it isn't a panacea but can you imagine the nightmare if people had to individually pay for their own defence.

Hoxby looked at the facts and reached her conclusions. The basis for your statement is .... what?

Bitter experience. A couple of US academics came to look at our system and thought that while it had its good points it was on the whole not worth it. But then again our school system was way better than most so it had a long way to fall. I'll have a look around for their book. There was an article about it in the NYRB a couple of years ago.

One of the problems with our system is that people want to do it on the cheap (this was part of the motivation behind school reform); but the problem is that right now teaching salaries are really uncompetitive compared to what they were 25 years ago. This has led to a sharp decline in the quality of teachers, especially at the secondary level. But privatisation isn't going to fix this since it has tended to downgrade quality.

[Adam Smith]

Originally posted by Agathon
You have to give a reason for it.

I gave a reason. Competition keeps organizations focussed.

Originally posted by Agathon Where I come from the publicly owned system of power distribution was far better in terms of price and reliability than the competitive option.

Are you talking about New Zealand or Ontario? And have you accounted for other factors? E.g., if the public authority owned all the hydro, which is dirt cheap and has few moving parts, then of course the public authority would be cheaper and more relaible. But then all else is not equal.

Originally posted by Agathon There doesn't seem to be any good reason why they have to. If you start with the goal of providing power to everyone at the lowest price possible and the managers are rewarded for efficiency, there's no problem. A state wide public firm will have less bureaucracy than three competing private firms that will waste energy competing with each other, advertising, etc.

First, if public firms are not earning a competitive return on the capital they use, then that is a signal that the capital can be used more productively elsewhere, providing society with a net benefit. Second, there is no a priori way to argue what the appropriate firm size should be. Some costs increase with firm size (eg, coordination costs), others decrease (some types of fixed plant), and others stay the same regardless of firm size. This is an empirical question, and in the case of electricity generation there is no savings to having larger firm size.

Originally posted by Agathon I accept that your point would be true if we were talking about government owned department stores or something like that. But that's not what I'm interested in.

I am talking about functions which don't need to be monopolies, so I guess the department store example applies.

Originally posted by Agathon Actually, I was going to bring that up. Would you really want to privatise the military?

Nope. Defense is a classic example of a public good (I am still defended, even if I don't pay for it.) Leave this as a government function, but please fix the procurement system.

Originally posted by Agathon Bitter experience.

As I said before, there may be differences between the US and New Zealand results.

(edit: fixed the quotes)

[Ben Kenobi]

Nope - only sounds are. Meaning is a construct.

"When I use a word.
It means just what I say it means,
neither more nor less."

-Lewis Carroll, Alice in Wonderland.

Now, what about virtue. Are virtues subjective, Agathon?

As for overtaxation, that is a technical term. So long as the government wastes money, the poor are overtaxed. Simple as that.

I claim it will increase the share of the burden on the poor.

What if the cutoff for taxable income increases at the same time? How does one define, 'poor?'

[Kidlicious]

Originally posted by Adam Smith
There's been 150 years of economics since Marx. You might want to read Marshall, who said that price was determined by both the cost of production and the value in use, and that trying to attribute price determination to one factor or the other was like trying to say which half of the scissors cuts a piece of paper.

I know what supply and demand is, but wanting things is not the same as producing things. Value only comes from labor. We just have to produce things that we want. That's all.

[Kidlicious]

Originally posted by MichaeltheGreat
There is no such thing as a policy that benefits everyone. That's a fallacy. Especially forced wealth transfers. Like the old joke about FDR and Moses. Nobody is "entitled" to a certain standard of living just because they feel like it.

Yes there is such policy. It's a choice that we make. The current policy benefits the wealthy more. If you want to benefit everyone equally then you just change your policy.

You've already made the assumption that people with money are superior. Probably it's not because you really believe it, but because you think that a fair system would be bad for you personally. That's not necessarily true unless you are very rich right now.