Tuesday, May 26, 2009

Auctions can end give-a-ways

Auctions and Politicians, by David Warsh, Economic Principals:

For all their success organizing private markets, economists still often face an uphill struggle when it comes to winning government work. The reason is simple:  auctions are all about, as the old saying goes, getting the most feathers out of the goose. The geese in the government flock are all owners or would-owners of something the government used to license at nominal rates or ignore altogether – the right to broadcast on a certain frequency, to harvest timber in a national forest, to send pollutants into the air.  They would have paid for the privilege in the past – a relative or two on the payroll, good seats at the baseball game, a bundle of campaign contributions.

But whatever they paid for the privileges they received probably would have borne little relation to the worth of the franchise. That’s precisely the information an auction is designed to elicit, along with the cash. No wonder companies reflexively oppose auctions; auctions cost them cash.  So spend freely to avoid them.

That’s why, for example, the US Department of Transportation earlier this month canceled plans to auction landing slots for New York’s three busiest airports. The Bush administration had sought the measure, hoping to cut delays at the chronically congested airports (and, of course, raise some much-needed cash). The airline industry lined up against the proposal, so did Democratic congressmen. Incumbent airlines will continue to profit; frequent travelers will continue to suffer delays.

Similarly, the banking lobby, among the nation’s strongest interest groups, has so far successfully opposed Treasury Department attempts to put up for bid banks’ questionable (now “legacy”) assets. ...

Even when overwhelming pressures bring about some fundamental change in the regulatory apparatus, you can count on industry to oppose the auction mechanism. That’s the case with the landmark legislation to limit greenhouse gas emissions through a cap-and-trade permit system expected to be taken up by the full Congress in July.  President Obama campaigned on a promise to auction the permits.  But a coalition of Midwestern and Southern Democrats teamed up to alter the bill, and when its language was released last week it turned out that fully 80 percent of the permits would be given away at first ..., with the portion of permits to be sold at auction slowly rising to 100 percent by 2030. Consumers will experience higher prices only slightly less slowly, but owners of capital will have twenty years to adjust. The gradual transition is a price the president is said to be willing to pay in order to pass the bill into law. Equality of sacrifice will take a back seat to the goal of capping carbon emissions, a tradeoff noted with special force by journalist Matt Yglesias.

But the historical momentum in this case is clearly on the side of equality.  Auctions, especially auctions of government property, are not a tool of the rich, especially when coupled with egalitarian principles of distribution (for instance, the proposition that every citizen should benefit equally when the radio spectrum is sold). As principles of market design become more thoroughly articulated and widely understood, the sphere of governmental discretion will shrink.  More and more, politicians will be forced to play by the rules. ...

Posted via web from jimnichols's posterous

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