Monday, 22 April 2013

Deregulation - how quickly we forget

New Zealand's in a regulatory and re-regulatory frame of mind these days - witness the recent Labour/Greens proposals for the electricity market - and to some degree that chimes with what is happening overseas, too. Many commentators have blamed the GFC, at least in part, on excessive or poorly executed deregulation of the financial markets, for example, with some  recent comments after Mrs Thatcher's death tracing it all the way back to what they say was the ultimately malign effect of the 'Big Bang' deregulation of the City of London in 1986. Re-regulation of the financial sector is consequently on the agenda pretty much everywhere, and by extension the supposed role of deregulation of financial markets in spawning the GFC has justified a general push towards more regulation of other markets as well.

To be sure, there were indeed fallibilities and excesses in the financial markets, and some reform is indeed needed. But how quickly we forget the real and ongoing benefits of deregulation. I was reminded of this by an excellent graph in last week's Economist, (print edition of April 13, not sure if this website link works for non-subscribers but it's http://www.economist.com/news/business/21576136-quiet-success-americas-freight-railways-back-track).

It shows the outcomes after the US railroads were deregulated in 1980, and they were just as you'd expect -  large declines in (real) prices for railroad customers, large increases in tonnage carried, and a huge increase in productivity (to two-and-a-half to three times the pre-deregulation level). And while the deregulated companies have had to fight much harder for business - (real) operating revenues are only just back to pre-deregulation levels - they are investing heavily in new infrastructure and making an acceptable rate of return on equity.

The GFC may have complicated the picture, but the big picture is still the same - if you want utilities or any other services delivered sustainably and at competitive prices, the first-best solution is still likely to be a workably competitive market based on rivalry between competing infrastructures.

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