Australians are fed up with Qantas as it takes eye-watering sums of public money while posting huge profits. It controls more than half of the nation’s highly concentrated domestic aviation sector (with help from its subsidiary Jetstar), and has been one of the most complained about companies over the past two years.
This week Labor handed down its much-anticipated aviation white paper, which proposed an ombudsman to oversee airlines and airports. But does the national carrier need a bigger shake-up? Is it time to nationalise Qantas? That’s the question debaters are tossing around in today’s Friday Fight.
Arguing for privatisation we have economist Margaret McKenzie, and arguing against we have economist Steven Hamilton.
To be clear: there are some things governments should do, and there are other things private firms should do. And the government absolutely has an important role in laying down the ground rules for how private firms do what they do.
The obsession with privatising government services through the 1980s and 90s clearly overreached in a number of instances. The privatisation of government employment services is one example that comes to mind. The exclusive purview of private providers in the childcare sector is another.
But overreach in some respects doesn’t imply overreach in all. Indeed, I can think of many highly positive privatisation examples.
There’s simply no good reason for governments to own and run electricity or telecommunications retailers, for example. Or a bank. Or an airline. We’ll get to that one shortly.
The challenge is to understand when government ownership makes sense and when it doesn’t.
It’s uncontroversial to claim that in typical cases, markets offer the best possible way to organise production. Private market participants deciding for themselves whether to risk their own capital on a venture have every incentive to ensure its success. And they have nobody else to blame if it fails. It’s efficient and it’s fair.
But this relies on a raft of assumptions, which aren’t always satisfied. Let’s consider two crucial ones.
The first is competition. Competitive markets play an important role in keeping private companies honest. When consumers face few alternatives, the merit of private markets dissolves. Firms can be inefficient, perform poorly, or exploit customers without consequences because they have no incentive to do otherwise.
But a lack of competition, on its own, is not enough to justify government ownership. And that’s because there’s a less intrusive alternative with the potential to generate incentives for good performance while limiting firms’ exploitative practices.
And that’s regulation.
Monopolies are quite common and yet we almost never resort to government ownership to deal with them. Take, for example, electricity transmission. Like a troll blocking the only bridge for miles, owners of transmission wires can exploit their monopoly position. So governments tell them what they are allowed to charge.
We have well-functioning regulatory agencies all across the country doing exactly this every day, obviating government ownership of trillions of dollars of assets.
That takes us to the second assumption, which is perfect information. There are cases in which regulation is simply unworkable. These involve extreme asymmetries of information between consumers and producers or between producers and government.
Consumers knowing more about their own health status than their insurer makes private health insurance markets unworkable (economists call this “adverse selection”). And the reverse is just as problematic, with medical professionals knowing far more about your true health needs than you do.
How viable would a fully private health system be with such rampant information asymmetries? I have strong doubts. Healthcare is just one of many markets in which it’s best for governments to have a high degree of direct involvement.
That doesn’t mean they’re perfect. And of course, it isn’t always the case that governments will do a better job than private markets — but it’s often a decent bet.
Which leads us to our question of the week: should we renationalise Qantas?
To my mind, the answer is very clearly: no. To understand why, let’s reconsider the two crucial factors: competition and information.
The airline industry is among the most competitive in the world. Where competition is robust, airlines have every incentive to efficiently provide good services.
Indeed, to the extent you are dissatisfied with Qantas, the best solution is likely to simply unleash more competition. That means ensuring free and fair access to slots at airports. And it means allowing access to domestic routes by foreign carriers — something the government refuses to do so as to prop up Qantas’ monopoly.
To the extent you believe Qantas would still maintain some monopoly power, at least on certain routes, then there may be a role for regulation to limit the exploitation that results.
The modern online airfare market is extremely information-rich. Customers have access to every bit of information they could ever want. We have apparently effective regulation of airline safety. We employ regulations to ensure airlines are transparent about the fees and charges they apply to tickets. We could of course do more, like requiring mandatory compensation for late flights, as they do in the US.
Worried about Qantas being available in an emergency? Governments have ample ability to incentivise or compel Qantas to serve the national interest in times of crisis. Worried about Qantas making too much money? Governments have ample ability to tax the profits generated by large corporations like Qantas.
None of this requires public ownership. None of this requires confiscating taxpayers’ money and investing it against their will in an airline on their behalf.
DING! DING! DING! CRIKEY EDITORS DECLARE HAMILTON HAS OFFICIALLY PASSED HIS ALLOCATED WORD COUNT
None of this requires the misalignment of incentives and inefficiency that would inevitably result.
There are some things private firms should do. And there are other things governments should do. Flying just isn’t one of them.
Read the opposing argument by Margaret McKenzie.
