GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 12

[DanS]

"Not sure I get what angle you want, but trade in anything is good"

Exactly what I was looking for. The angle I'm most interested in is if there is anything that the gov't does that holds trade in services back.

My hunch is that a true productivity miracle in developed countries would be accompanied by large amounts of services trade, considering that most of our economies are in services. Those countries with the highest growth rates seem to be those whose economies are based on products that are tradeable. Those with the lowest growth rates (US, for instance, once you subtract immigration), seem to be those economies with the lowest % of tradeables.

[DrSpike]

Originally posted by DanS

Exactly what I was looking for. The angle I'm most interested in is if there is anything that the gov't does that holds trade in services back.

Sure they do in practice.......such as tariffs, the provision of funds for vocal industries, all these sorts of things. Of course most 3rd world competition isn't in services, but as I said earlier outsourcing of certain tasks to 2nd world countries is common.

[DanS]

I reserve the right to revise and extend my remarks.

[Agathon]

I was thinking of nationalised electricity generation for the purposes of efficiency.

We had a less than cheerful experience in New Zealand with privatisation, much of which can be chalked up to introducing a competitive market where it wasn't needed. Prices went up and supply occasionally became erratic, once shutting down the country's financial heart for weeks. What's worse is that there wasn't a whole lot wrong with the old nationalised system that couldn't have been sorted out with more efficient management.

And for the record, privatisation of the electricity sector in New Zealand was for "political purposes", so nationalisation/privatisation - it cuts politically either way for me.

[DanS]

Well, every country seems to have a botched privatization or two. In the US it was electricity. In the UK it was railroads. Don't think we should draw broad conclusions about privatization from it though.

[Agathon]

I think there is more to it in this case. I think that however well the privatisation had gone it would have been worse than an efficient restructuring of the national system.

It seems to me that under certain conditions and with respect to certain goods, public monopolies can do a far better job than private competition. I'd add education to my list as well.

Another example is New Zealand's domestic airline. There simply isn't enough traffic to support two airlines (one has just gone bang) so it looks like we are back to a (semi in this case) public monopoly which will have to be regulated to avoid gouging (and don't tell people to take the train until you've been on a New Zealand train).

I'd suggest that would be privatisers could do with a dose of pragmatism.

[Ted Striker]

I agree with you Kiwi.

[TCO]

Originally posted by Agathon
I was thinking of nationalised electricity generation for the purposes of efficiency.

We had a less than cheerful experience in New Zealand with privatisation, much of which can be chalked up to introducing a competitive market where it wasn't needed. Prices went up and supply occasionally became erratic, once shutting down the country's financial heart for weeks. What's worse is that there wasn't a whole lot wrong with the old nationalised system that couldn't have been sorted out with more efficient management.

And for the record, privatisation of the electricity sector in New Zealand was for "political purposes", so nationalisation/privatisation - it cuts politically either way for me.

1. I wouldn't be so blithe about saying "just needed mroe effecient management". The criticism of state-run industries is that they usually have very inefficient management. Since they are not drivien by the amrket, efficient management is not forced. The Soviet Union had lots of time to work on how to be more efficient, but never really cracked the nut.

2. What I mean by political is not whether or not you are in favor of nationalization, what I mean is that nationalized industries will not respond to customers or compete in the manner that competetive ones do. What they respond to is political issues.

[TCO]

Originally posted by DanS
"Not sure I get what angle you want, but trade in anything is good"

Exactly what I was looking for. The angle I'm most interested in is if there is anything that the gov't does that holds trade in services back.

My hunch is that a true productivity miracle in developed countries would be accompanied by large amounts of services trade, considering that most of our economies are in services. Those countries with the highest growth rates seem to be those whose economies are based on products that are tradeable. Those with the lowest growth rates (US, for instance, once you subtract immigration), seem to be those economies with the lowest % of tradeables.

What services do you think should be traded more?

[DanS]

Trade where the production is, I guess. From the list of products and "services" taken very broadly, here's a few target areas...

http://www.bea.gov/bea/dn2/gposhr.htm#1994-2001

Business Services (5.4% of GDP and growing)
Health Services (5.8% of GDP and fluctuating)
Wholesale trade (6.8% of GDP and fluctuating)

A couple of years ago, Roland pointed out that the US spends a lot on health care, which at that time I agreed with. I'm surprised by looking at those numbers, though, as it's roughly in line with what is produced in Europe--5.8% of GDP. Of course, then you've got to do 1.4x to account for the size of US economy. Maybe I'm not counting enough and he'll set me straight tomorrow. And maybe he would like a piece of those legal services.

Edited liberally, since I was looking at the wrong table and other stuff.

[DanS]

Those are fun tables. A full 1.7% of GDP is produced by securities and commodities brokers.

Also, housing as a %-age of GDP hasn't moved much over the last 10 or 15 years. Where's that bubble again?

[TCO]

Originally posted by DanS
Trade where the production is, I guess. From the list of products and "services" taken very broadly, here's a few target areas...

http://www.bea.gov/bea/dn2/gposhr.htm#1994-2001

Business Services (5.4% of GDP and growing)
Health Services (5.8% of GDP and fluctuating)
Wholesale trade (6.8% of GDP and fluctuating)

A couple of years ago, Roland pointed out that the US spends a lot on health care, which at that time I agreed with. I'm surprised by looking at those numbers, though, as it's roughly in line with what is produced in Europe--5.8% of GDP. Of course, then you've got to do 1.4x to account for the size of US economy. Maybe I'm not counting enough and he'll set me straight tomorrow. And maybe he would like a piece of those legal services.

Edited liberally, since I was looking at the wrong table and other stuff.

Give me some tangible examples of what should be traded more.

[Adam Smith]

Kind of busy tonight, so I will just step in for a minute or two.

re public vs. private firms:

Econ literature, primarily in the US, shows that public firms usually have higher operating costs than similar private firms. Studies include electricity, water, hospitals, refuse collection, railroads, airlines, and weather forecasting. There's a good summary in Viscusi, Vernon, and Harrington, Economics of Regulation and Antitrust, 2ed, cpt. 14.

re NZ airlines:

If there is only room for one airline (natural monopoly), cost effects are such that it is probably more efficient to regulate it rather than have it publicly owned. Public ownership provides fewer constraints on cost than admittedly imperfect regulations.

Also, probably the most convincing study of costs of private vs. public firms is David Davies, "Property Rights and Economic Efficiency: The Australian Airline Revisited", Journal of Law and Economics April 1977. Davies compared two Australian airlines, Ansett (private) and Trans Australian (public), which were nearly identical in terms of route structure, freight, passengers, revenue, etc. He found that Ansett's costs were half those of Trans Australian for the same service.

re political motivations of public firms:

One particularly disasterous recent case was the Bonneville Power Administration, a public firm which produces hydroelectric power in the Pacific Northwest. At the height of the California power crisis, Bonneville refused to sell power into California because they understood their political mission to be providing low cost electricity to consumers in the Pacific Northwest. A profit-oriented firm would have sold power into California, increasing PNW prices a bit, but reducing California prices dramatically.

I will be at an economics conference most of this week, so I won't be around much.

edit: spelling

[DanS]

Well, OK, let's try health services. Tell me if this is tangible enough. Of course, I'm pulling this outta my azz.

Health services are extremely information-intense. Much of the back-room stuff should be moved to India, where they can do this cheaper. Where possible, tasks involving information should be standardized in the back-room operation. This should help reduce costs.

Doctor groups in the US should pair with Indian doctor groups. Many of our doctors state-side are Indian anyway. As many health services as possible from 6 pm to 6 am should be moved to remote doctoring and doctor support facilities in India. In turn, specialists in the US will consult or direct Indian doctors on some areas. All of this should increase availability, reduce cost, reduce doctor hours on call, and reduce doctor error due to fatigue state-side.

[DanS]

Excellent post, AS.

And that airlines colleague has nothing on you!