What's Yours is Ours,
What's Ours is Our Own
a special report by NETWIT
(NETWork Interested In Telling-it-like-it-is)
Public attention has recently been drawn to the cases of the cancellation of the Toronto Island bridge and the intention of the McSquinty government to roll back fees on the Highway 407 electronic toll highway. This opens up an opportunity to examine the vital underlying issue, which is the concerted campaign of business, supported by right-wing rhetoric, to appropriate public goods. We touched on this subject some years ago (in a piece still to be transferred to this site).
The general rubric used to described this process, which began in earnest in the mid 1980s, is"public-private partnerships" or P3.
The backdrop to this process is provided in article no. 2 in the Economics for Humans series. Briefly, in response to unprecedented losses in the 1970s due to the erosion of paper values by higher inflation, the bondholder class (who used to be known as capitalists) rose mightily and instructed the Archangel Volcker to smite, well, just about everybody except the bondholders. This smiting took the form of a tripling of the real interest rate.
This did the trick nicely but created its own dynamic. On the one hand it created a new stick with which to beat "government" in the form of ballooning deficits and debt created by the tripling of the real interest rate. This was all right and good.
On the downside it raised the bar for return on capital. Enormously. Suddenly holders of credit could get close to the rates of return they were used to from actual investments in real economic activity (plant, equipment, buildings) just by buying short-term paper. This rippled through the system like a change in the orbit of the moon upon the tides. At every level of risk the ante went up.
How could this be maintained? Since it was a change to the real rate of interest it could only be sustained by investment in real assets. Eventually the paper would just become a Ponzi scheme. As we now know, several Ponzi schemes have, indeed, come and gone. The first led to Black Monday in 1987. The second culminated in the great Bailout of the Savings and Loans companies (which was caused by massive real estate overvaluation). The most recent was the collapse of the dotcoms.
There are three ways in which the high real rate could have been sustained:
By "public goods" we have in mind another of the relatively few useful constructs of economics. Economic theory distinguishes private and public goods on the basis of "rivalry" and "exclusion". Bebe and Spiro cannot both buy the services of Nancy at the same time; hence those services command a price (actually they could both buy Nancy's services at the same time, but Nancy would charge, if not double, then more than the individual service price). Bebe and Spiro are rivals for the private consumption of Nancy's services which they enjoy exclusively. In contrast, the benefits of national defence or of streetlighting are conferred upon all citizens with no rivalry or exclusion.
- some epoch-making technological shift that actually increased productivity;
- a redefinition of real economic goods and services to include new forms of economic value (or, to a certain degree, fiddle the economic accounts); and,
- enlarging the sphere of private goods by appropriating public goods.
All of this comes down to the very definition of that great shibboleth "private property". The dangerous line the P3 movement is treading is that it is a very short step to move from disputes about exactly what the "property" is that the 407 consortium thinks it owns to the widespread realization that all property rights are granted by the state and that there is no real distinction between the property rights granted to stockholder-owned corporations and "public" corporations.
Instead, there's a spectrum of goods from pure private goods (Mars bars) to pure public goods (national defence) and of ownership rights, from land titles conferred upon individuals encompassing subsurface minerals and the air space above the land to state ownership. What we have seen in the past twenty years is an unprecedented effort to shift goods and property rights along this spectrum into the sphere of a special type of property right known as "corporate ownership". This corresponds to strategy 3 above.
Naturally the touts for P3 have trotted out a number of specious arguments in support of this shift. These are:
- governments are "bankrupt" and have no money for capital projects;
- P3 allow for "more appropriate risk sharing"; and,
- the "private sector" is inherently more "efficient".
Highway 407 is a wonderful refutation of all three. After twisting and turning in its effort to get private money into the building of 407 the Rae government was forced to conclude that financing the project though a provincial bond offering was by far the cheapest way to raise capital. This is always the case. Despite the media's steady drumbeat of propaganda to the contrary, there is no evidence that investors have balked or will balk at debt issues from any level of government. Moreover, the interest rates are always less than the cost of capital to private owners, since the latter always has some amount of equity (share ownership) which is always more expensive than debt.
Allegedly the higher rate of return to equity is to reflect greater risk. This is also purely arbitrary. Our laws give greater precedence to claims on assets based on certain types of securities (e.g. bonds or loans from banks versus, say, unpaid wages or supplier accounts); this creates risk of a purely legal nature. The real risk is that the assets will not produce the expected benefits. In the case of 407 this was the risk that traffic would not show up and that the new electronic toll technology would not work. The taxpayers of Ontario shouldered both of these risks; then their government sold off the rights to the future revenues from what is now a riskless licence to print money.
Worse, the Harris government of the day extended the authority of the state to the private corporate ownership in the form of all kinds of collection powers enshrined in legislation. For example, the 407 consortium is the beneficiary of reciprocal agreements between the province and several US states regarding the collection of unpaid fees. In the early years, the authority to renew vehicle licence plates was put at the service of the consortium.
As for greater "efficiency" try telling that to the tens of thousands of 407 users stacked like airplanes over Chicago O'Hare in a thunderstorm trying to talk to a sales representative (probably located in the Philippines) over some inexplicable bill for use of the highway.
One of the encouraging signs in David Miller's victory in the Toronto mayoralty race is that Miller, a trained corporate lawyer, is not afraid to call the bluff of the Pavlovian right over the supposed ascendancy of "private contract" rights with respect to the Toronto island airport bridge fiasco. We wish that McSquinty would follow his lead. In a larger sense, what is at stake is nothing less than the underlying issues of the Magna Carta: no taxation without representation and the related principle that only legitimate (i.e. representative) authority can bind the powers of government, including the acts of future legislative assemblies.
If the corporate lawyers who advise the 407 consortium failed to advise their clients that Ontario is a jurisdiction in which the legislature is sovereign over areas of its constitutional authority (which a road certainly is) then it's just too bad (the modern version of "free trade" is nothing more than an attempt to erode state sovereignty in favor of corporate rights, but try trading a road). If, after five years in court, the consortium is able to buy enough judges to get a ruling in its favor, then just pass a new law and start it all up again.
What we advocate as a new Reform movement, not just in Toronto but in every advanced jurisdiction, is that governments reassert their sole legitimacy to make laws and, in a ju-jitsu move, turn corporate legal tactics against the corporations. The way corporations routinely get their way is through sheer legal muscle. They can delay and delay until they get the settlements they want because they have deep pockets. Deepest pockets win. Big companies beat small. Monopolies beat firms that have rivals. Oil companies beat everybody, except the banks. Governments should do the same instead of shrinking at the first mention of a lawsuit. In the end, no one has deeper pockets than the government. Whatever the legal costs, they will be orders of magnitude less than giving away the public good for a song.
What's Yours is Ours, What's Ours is Our Own © NETWIT, 2004
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