The Opportunity Cost Of David Shearer

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DAVID SHEARER’S “not sure” that the case for public ownership of state assets “stacks up”.

Quizzed on the subject by RadioLive’s Duncan Garner, the Labour leader refused to commit an incoming Labour-led government to repurchasing the privatised shares in the state’s energy generators, Mighty River Power, Meridian Energy and Genesis Energy.

Garner had made the proposition easy for him by pointing to the billions of dollars currently sitting untouched in the so-called Cullen Fund.

“Why don’t you commit, if these things are so important to you, to using the Cullen Fund to buy these back?” Garner asked.

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It was at this point that Shearer responded: “You’re going to forego income on some other level if you go ahead and do that … I wouldn’t want to do that because I’m not sure that the economic argument stacks up, Duncan. That’s the first thing. And, secondly, I don’t know what the books are going to look like in 2014. To make a an enormous commitment like that – I mean we’re talking in the order of billions of dollars – in order to try and get some of those dividends that we would be losing as a result of selling up the assets today.”

Okay, fair enough, the Leader of the Opposition’s assessing the opportunity cost of spending billions of dollars on the repurchase of the state-owned energy generators – as opposed to investing the same amount in other kinds of state-owned assets such as the public education system, the health system or public transport.

But, wait a minute, isn’t that precisely the argument of the Minister of Finance, Bill English? Doesn’t he point to the parlous state of the Government’s books and ask us to indicate where, in the absence of National’s partial privatisation programme, he’s supposed to get the money for new schools, hospitals and roads?

One answer, of course, might be to reverse Mr English’s 2010 tax cuts – and then impose a swingeing surtax on the incomes of the top one percent of income earners.

Of course that sort of policy is unlikely to recommend itself to a National Party finance minister. A Labour leader, on the other hand, should have little difficulty in signing-up to such measures.

A more progressive fiscal policy would go a long way towards meeting the objections against repurchasing the energy companies which Mr Shearer raised with Duncan Garner.

Besides, repurchasing the assets would not represent a loss to the state, however they were re-acquired. They’d remain, after all, just that – assets – and would be represented as such on the Government’s books.

New Zealand governments of the future would be able to borrow against such valuable properties – offsetting the cost of the loans with the energy companies’ dividends.

The truly frustrating aspect of Mr Shearer’s comments (apart from their deeply demoralising effect on Labour Party members and supporters) is that they demonstrate such a low level of tactical skill.

Had his leadership of the Labour Party begun with a clear and unequivocal promise to repurchase – at cost – any assets sold by the National-led Government, then the entire partial privatisation programme would have been rendered moot.

What would have been the point of investing in a package of shares which the incoming government was going to immediately and compulsorily repurchase? Overseas and institutional interest would have been nil. The whole policy would have been a dead letter.

Mr Shearer’s comments are further proof (if proof is still required) of the man’s ideological orthodoxy, economic passivity and political timidity.

No wonder the Right is so determined to keep him exactly where he is.

Perhaps it’s time to calculate the opportunity cost of David Shearer?

Chris Trotter blogs at Bowalley Road

35 COMMENTS

  1. “Had his leadership of the Labour Party begun with a clear and unequivocal promise to repurchase – at cost – any assets sold by the National-led Government, then the entire partial privatisation programme would have been rendered moot.”

    If Shearer had started his leadership with an attempt at sabotaging Government policy like that his credibility would have lasted less well than it has.

    • What kind of opposition is afraid of opposing government policy? In what kind of democracy is dissent disruptive?

      I find your Orwellian weasel words disturbing.

      • There’s a difference between dissent or opposing policy and sabotaging policy.

        Labour obviously and presumably Shearer knows the difference and know if they tried to sabotage economic policies then both proponents and opponents (that is, the country) will suffer the effects.

        “In what kind of democracy is dissent disruptive?”

        Could be in any kind, especially when the disruptive dissent is carried out by a minority and it impacts adversely on the majority.

        • “There’s a difference between dissent or opposing policy and sabotaging policy.”

          ?!?!

          Pete, that’s inane.

          You’re looking at it as if Labour was a sub-set of National.

          It’s not. (Or, it’s not supposed to be.)

          They are (supposedly) two separate Parties with two competing, opposing ideology and philosophy.

          If they weren’t – you might as well have a one party state.

          There is no reason why Labour shouldn’t re-nationalise the power companies.

          Just as a National/ACT supporter would insist there’s no reason why those same assets shouldn’t be privatised. (Actually, there is a very good economic reason not to privatise them – but National supporters tend not to understand simple bottom-line figures.)

    • Yes, truly his credibility would have been destroyed by taking a principled stance in line with his party’s own heritage and philosophy and simultaneously reflecting the views of a huge number of New Zealanders. Wait …

      • Wasn’t he kinda hamstrung when National included the ‘asset sales’ figures in their budget, essentially spending the money that the sales are supposed to generate? Any promise to buy them back from then on was going to cost a monumental amount. Supposing he had gone ahead and said, “f**k your budget, we’re buying them back”, and the asset sales had generated little interest as a result, couldn’t he/the policy potentially have cost the country a few hundred million dollars? The money anticipated for the asset sales has, after all, already been banked; the difference in budgeted vs actual sales revenue (possibly hundreds of millions) could be spun directly at him. Budget deficit? David sabotaged it. Flagging economy? David sabotaged it. Sluggish investment sector? David sabotaged it.

        • Ah, no, Konrad.

          Wasn’t he kinda hamstrung when National included the ‘asset sales’ figures in their budget, essentially spending the money that the sales are supposed to generate?>

          Not at all. Why should Labour be “hamstrung”?

          Was National “hamstrung” by the fact that these are state owned enterprises? Nope – they went ahead anyway.

          If Labour can stop the state asset sales, and these “impact” on the Nat’s budget – well, perhaps Key shouldn’t have cut taxes in 2009 and 2010.

          Supposing he had gone ahead and said, “f**k your budget, we’re buying them back”, and the asset sales had generated little interest as a result, couldn’t he/the policy potentially have cost the country a few hundred million dollars? >

          No, not at all.

          What cost the country a few BILLION dollars were two unaffordable tax cuts. Now the Nats are having to part-sell state assets to make up for the billions in shortfall in revenue.

          The money anticipated for the asset sales has, after all, already been banked; the difference in budgeted vs actual sales revenue (possibly hundreds of millions) could be spun directly at him.>

          What “money has been banked”? You can’t “bank money” that hasn’t been earned yet from asset sales that haven’t materialised yet.

          Aside from that, Key & Co can’t even agree how much the asset sales will earn the government. Estimates range from $10 billion to $5 billion to “wild guesswork”, as English has admitted.

          What IS banked is the revenue from our power companies, Air New Zealand, and Solid Energy (before it was wrecked on Key’s watch).

          The retrn on those SOEs was an averaged 17%. Not bad, eh.

          That’ll be cut, as we lose the revue stream. Bad economics.

          Budget deficit? David sabotaged it. Flagging economy? David sabotaged it. Sluggish investment sector? David sabotaged it.

          I think it’s National that has been in office for the last four years, not Labour.

          And Labour left the reconomy in pretty good shape by 2008.

          Any idea when National starts taking responsibility for their poor policies and decision-making?

  2. nothing like controlled opposition aye 😛 Keeping the leadership of Labour meek for the benefit of Nationals asset sales scheme.

  3. New Zealand governments of the future would be able to borrow against such valuable properties

    Governments, being sovereign, don’t need to borrow. They can print the money and they can print as much as they want as long as they have taxes high enough to balance the printing out.

    Of course, that will upset the private banks who seem to think that’s a privilege only they get to enjoy.

    Mr Shearer’s comments are further proof (if proof is still required) of the man’s ideological orthodoxy, economic passivity and political timidity.

    No wonder the Right is so determined to keep him exactly where he is.

    Agreed but it’s not just Shearer with the failed economic orthodoxy but the entire Labour Party.

  4. Besides, repurchasing the assets would not represent a loss to the state, however they were re-acquired. They’d remain, after all, just that – assets – and would be represented as such on the Government’s books.

    You’re wrong about this. The reason is that the stock holders won’t intentionally sell their shares for zero gain. So the Government will need to pay a SIGNIFICANT premium in order to coax shareholders to part with their investment. In my books, buying something back for MORE than you sold them for, represents what is commonly defined as a “loss”. Unless you pull a Hugo Chavez or Robert Mugabe and “repatriate” the stocks on them of course (which means you don’t need to spend ANY money), but I suspect that won’t go down well.

    • Nitrium is correct. It is not possible to commit to buying back these shares, as 1) They are likely to be higher than the sale price (price will be discounted to make it a sweet deal for all) and 2) it would create a moral hazard in that shareholders would believe there is some floor in the share price.

      What he could say is that no further key assets will be sold and leave it at that.

      This process is a simple transfer of wealth from those who do not have access to capital to those that do. It’s simple redistribution but upwards.

      It’s time to move on, see what happens and come back to the topic closer to election time.

      • “Look, you can’t unshit a bed. This government is selling these assets, and they are doing so on the cheap. They will not be getting full market price for them. They are selling them below market price for purely political reasons, and that itself is just a further outrage that makes a bad idea even worse.

        But that’s what they are doing, and the only way to stop them is to tell them not to loudly, in any way you all know how. Buying them back at market value in the future will be difficult if not impossible. That’s the way they’ve structured this. We can’t unshit the bed they are making.”

      • To address your concerns.

        1) The market price of the shares could be depressed in several ways before the government begins to buy back the shares.

        2) There is no particular harm, moral or otherwise, from the government setting a low floor for the share price.

        Waiting until election time seems to me to be a slightly illogical suggestion – by then the assets will be long gone.

  5. Even if you think property rights are sacrosanct, aren’t the rights of a whole nation in assets that have been built up with blood, sweat, tears, and tax revenue more important than those of a few speculators? Shearer and his frontbench should just join ACT and get out of the road.

  6. Lucky Labour Party members got KOA signatures before he said that! Why would you bother if you thought the leader of your party thought keeping them wasn’t the best option.

  7. Has Labour ever elected a more inept leader ? And no, I’m not a David Cunliffe supporter. A great ‘back story’ doesn’t necessarily mean that person is fit to lead a country – just look at the P.M. Completely out of touch with reality, unless you’re rich.
    David Shearer has a good dose of the um’s. He flip-flops just as much as the P.M. did at the start of his first term in power. The trouble with Labour, is that it is being run by a bunch of middle class losers, who like National, want power, but don’t want to accept responsibility for their actions. That’s why Mr Shearer won’t commit to anything.

  8. Absolutely. I have maintained, on the Standard, and elsewhere, that Labour possessed the weapon to stop asset sales in their track – simply announce that they would be repurchased at the sale price of shares (no profit) in 2014. Naturally, I got shouted down by Shearer’s supporters on that blog, and I expect you may get the same treatment here.

    But very sad, Labour doesn’t appear ready to take the Treasury benches back in 2014, and we may need to prepare mentally for a third National term.

    • Peter,

      Perhaps if they added in “at the sale price plus interest as calculated by the average 10 year government bond rate over the period”.

      Now that would be a very bold statement indeed. The legal issues would be very problematic indeed but it would probably derail the whole sales process.

      I wonder if they investigated the legal issues at all?

      • The thing is that the mention of the existence of the weapon stops it, you don’t even have to use it. Hence, no worries about legal issues down the line.

        But that chance is now blown – Labour didn’t show any leadership.

    • I have maintained, on the Standard, and elsewhere, that Labour possessed the weapon to stop asset sales in their track – simply announce that they would be repurchased at the sale price of shares (no profit) in 2014.

      A number of us have been telling them or similar that but they’re not listening.

  9. Good article Chris with sound alternatives. The only flaw I can see is the assumption that these pathetic policies and strategies are in fact Shearer’s, when he’s really just a puppet.

  10. Regulate. Regulate heavily. Create an “Energy Purchasing Authority”, make it the sole middleman between generator and consumer. Have it set prices and create a monopsony.

  11. Buying the sold shareholdings back is unrealistic and probably impossible, especially with a hostile media.

    David Shearer needs to focus on keeping the shareholdings in the floated companies, the remaining SOE’s, and others in public ownership.

    Though there probably also needs to be a review as to whether the SOE model is still appropriate for some companies.

  12. Chris has posited an exceptionally good idea. Why not use the Cullen Fund to repurchase our power cos? Especially if they are as profitable as we’ve been told.

    Doesn’t it make more fiscal sense to invest in our own assets rather than somewhere of in LalaLand, especially if privatised assets – owned by offshore interests – send profits offshore and thereby further screwing up our Balance of Payments?

    Of course it does.

    And if Shearer doesn’t understand this…

    Well, the Greens and NZ First stand to gain from Shearer’s reluctance to make a committment.

    Make no mistake, this could win the election for Labour. (Unless the Nats sabotaged the Cullen Fund first. Which they’d never do, of course, being so principled…)

  13. At last years marches in particular the july 24th one we held a public show of hands 3 tier referendum.. Labour Greens Mana and others were represented as were many other unions groups etc. We asked for a commitment to ty to stop the first asset on the block Mighty River Power.
    The objective for some of us at least was to try to devalue the Company by making them shed customers as happened to Contact Energy after they privatised and put up prices .. That was our precedent!
    We asked if people would agree.. a) Not to buy the shares as Mum & Dad investors b) to tell others they were fiscal and unethical investments c) Agree to switch off Mercury and help get message to others to do so too purely to undermine the share offer stage well in advance.
    Meeting shareholders expectations not just guessing with NO PLAN B is not what investors will want to see. That is what Key & English admitted.
    They had no Plan B
    For some who stood with David Russel etc and watched all arms go up in agreement.. This was a collective PLAN B
    Sady it is has not sao far turned out to be.
    Marching and protesting even expensive lawsuit has worked to get wider attention attention but not stopped anything.
    No one will HAVE TO BUY BACK or CHAVEZ ( R.I.P) anything.. IF they cant get a decent price in the first place.. Ryall English and Key have said that.
    Some actually have mooted case to demand the opposition aka Labour Greens Mana etc promise to re-nationalise or get back the assets with or without money pre the next election.
    Doesn’t look likely today does it?..
    Anyone actually want to go back to PLAN B now.. A collective one?

    If it had as promised, been adhered to, we may not be even having this conversation..
    Unlike politicians some of us do not break promises even if it has been a very lonely endeavour at times with so few honouring that public commitment to do so, agreed in front of how many thousand you want to actually guesstimate were present on Bastille Day last year?
    Even if it was only 2000,00 or so as the media claimed by now if everyone of them had told 2 people who had told 2 more etc..
    Might be a different prospect.
    May not be too late but take a lot of hard work and kept Promises.
    Just my late thoughts..
    Thanks Frank..great article..
    Anyone interested you can find me here tomorrow
    https://www.facebook.com/SwitchOffMercuryEnergy?fref=ts
    ..
    Will link this article too..
    People NOT politicians have got the power.. They just need to choose wisely how to use it in my opinion.
    Jax

  14. The money phrase …”Mr Shearer’s comments are further proof (if proof is still required) of the man’s ideological orthodoxy, economic passivity and political timidity.”
    Sadly true.

    I’ve been asking (on other sites and blogs) for some examples where the sale of state owned assets has save a country from financial recession etc.. Can any pro asset sales people please help me find these examples?

  15. Correction (sorry was so late when I posted) Bastille Day march July 14th 2012

    First they ignore or threaten to dismiss you : The marches.. The referendum

    Then they fight you: The Maori Council’s excellent but costly court battle

    Finally I hope they realise We do Have Plan B’s

    Drought Mighty River Power where it hurts .Switch off Mercury Energy at the customer base
    and use the
    The Cullen Fund
    Jax

    http://www.switchoffmercuryenergy.org/*

  16. I have a question: why buy back the assets at all? Seize back the assets without compensation to the purchasers. That’s the way it should go.

    Good heavens, if it’s good enough for this present mal-Administration to propose seizing bank depositors’ funds to prop up Banksters’ criminal fraud and incompetence, it surely is no large step to take back assets created out of the taxpayers’ purse and wrongfully sold to private interests. I want to see some political Party show that has the balls (or the ovaries) to take on the Fat Cattists and hit the buggers where it hurts.

    Ram through retrospective legislation – the Nats are no strangers to this kind of thing – making it illegal for any Government to sell State assets. The fact is, every single State asset sale since 1984 has been an unmitigated disaster for this country, perpetrated by sheer ignorance as to why those assets were in the public domain in the first place.

    That Neo-Classical economics of Milton ‘From whom that hath shall be given; to whom that hath not shall be taken away’ Friedman suited the ideologies of Fat Cattist government, of course. But there is absolutely no reason to suppose that the ‘Free-Market’ (so called – there is no such thing) is the most efficient method of allocating and distributing scarce resources. Only if the allocation is to the Fat Cats and the distribution is into their pockets. It is a straight out lie, based on not a shred of empirical evidence.

    The sale of Telecom surgically removed at least $11 Billion out of the New Zealand economy whilst obscenely overpaid CEOs like Deane and Gattung pushed a policy of gouging their captive customers, at the same time milking the asset for all they were worth for their American masters. It took strenuous efforts by successive governments to make Telecom at least look as though it was investing in new technology. Not only that, Telecom is still exporting jobs to the Philipines, for crying out loud!

    The net effect of the sale of New Zealand Steel was to pay some private outfit something in the order of $160 Million to take it off our hands.

    I do not see that the sale – flogging off – of Mighty River is going to be handled any more competently, nor do I see its benefiting the New zealand economy a cent. To the contrary, it will cost, and cost big.

    In closing, lest readers (who get this far) are inclined to think my language immoderate, my response is this. So it bloody should be.

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