Cheap airfare craze produces inevitable results

August 22, 2010

The surprise is that anyone would be surprised. After three years since entering the NZ domestic air travel market with the primary strategy of cheap fares, Pacific Blue calls it quits because they cannot make enough money to remain in that business.

And so all those bargain-motivated people, and principally the popular media who ran breathless headlines about how air fares were now wonderfully cheap and good for consumers, now bemoan that competition will diminish and low fares will be harder to come by. It’s not fair!

Well, what did we expect? That private businesses will be happy to run at a loss just so we can grab the cheapest possible deals forever? While grabbing cheap seats is a rational behaviour in the short term, it’s irrational in the long term because in the end it makes businesses less viable and more prone to cut back on the parts of their business that cannot help recoup their losses.

Over time, we bargain-hungry consumers get what we pay for – cheap deals in the short term but insecurity about the long-term survival of the services and products we value so little that we won’t pay a reasonable price for.

I’m happy to pay a fair and respectful price for all the services I regularly use, from electricity and phone to the local petrol station and favourite cafe, because I’m then confident that they’re making enough profit to remain in business and give me ongoing service. Try screwing them down too hard and next month they may not be there.

So with air fares, I’d rather pay a fair price than grab a cheapie if it means that the airline will still be around when it comes to actually flying me.

2 Comments | Business, Economics, Media reporting | Tagged: , | Permalink
Posted by David Armstrong

Government turning back toward socially negative attitudes

July 21, 2010

I’m becoming increasingly disappointed and sometimes a bit angry that the National Government is steadily reverting to the type of attitude that was more common in less enlightened times – of going out of its way to encourage division within New Zealand society in the name of economic growth and productivity.

Political commentators see it as the National party feeling confident enough of its electoral strength that it can start to please its harder constituency – the ones who see any humanity in the economy as being soft, anti-growth and anti-business. They’re probably right.

Instance 1: I wrote a few months ago about what I still believe is the fundamental ethos on which National’s national standards education policy is based – that the best way to get results out of teachers (and their pupils) is to point the finger, make them feel bad or inadequate, and trust that this will make them ‘pull up their socks’. It’s an approach to community activity that is basically mean-spirited, critical, law of the jungle, and ‘us/me versus them’.

The results, sadly, are what you would expect – it merely divides people, dampens cooperative growth, and delivers worse outcomes on average.

Instance 2: Blame and belittle welfare beneficiaries. Here we go again with National getting tougher on one of their two traditional targets, those on welfare and particularly sole parents. ‘Rebalancing welfare’, my local MP said in his press release last week. Making work more available by forcing mums (and disability beneficiaries) to get part-time work after their children have reached school age. Yeah, right!

Beneficiary bashing is an easy activity for those with a negative personality streak, and sadly National are showing their true colours again. Treat people as if they are lazy and out to cheat you, and eventually most of them will fulfill your expectations. But give them the benefit of the doubt and most of them will feel valued and try to become contributing citizens.

Instance 3: (National’s other traditional target.) Legislate against workers and unions so that employers can treat them more like second-class participants in workplaces. The extension of the 90-day trial period, the added restrictions on employees’ access to unions, and stupid, unworkable rules about sick leave are simply unnecessary and will create an unhappier workforce. Assume they’re all out to cheat and bring down employers, and fewer workers will feel any desire to work with their bosses and take a part in thriving together.

For those who can remember back over 20 – 40 years ago, the improvements (on average) to workplace satisfaction and harmony over the past decade have been pretty remarkable. The balance between the needs and aspirations of workers and employers seemed about right. Strikes and other industrial unrest are now quite infrequent, and many workplaces operate on mutual respect and appreciation of each others’ roles.

But now, in the name of ‘making it easier to employ people and create jobs’, but actually about getting tough and letting employers take less care of their workers, the scene is set for unnecessary strife and unhappier employees, and ultimately less productivity.

It’s a real shame. The sort of society we need to make a better and more resilient country values highly the cooperative spirit of citizens as they grow together in a vibrant economy, not the dog eat dog competition that seeks winners and losers for the personal satisfaction of those with power.

19 Comments | Business, Politics | Tagged: , , , , , | Permalink
Posted by David Armstrong

Kiwibank and ‘Three strikes’ revisited

May 28, 2010

It’s been a busy week in this household, so this time I’m just going to comment briefly on two current news items that I’ve expounded on in the past.

1. Kiwibank and its possible partial sale

I am again disturbed by the renewed suggestions by the right-wing elements of the government and some of the business community (you can tell them by the glint in their eyes as they envisage getting a piece of the action) that shares in Kiwibank be made available to the public.

(I was going to link here to a blog article I wrote last July, setting out my thoughts at that time. Unfortunately, the link to that article seems to have been lost, so I’ve copied it and placed it at the bottom of this current article.)

My comments last July were made at the time when some pundits were suggesting that the government-owned bank be expanded to provide full trading services and therefore needed vast new investment – presumably from shareholders.

Now we seem to be one step on, wondering how the extra money might be obtained. But my main problem remains with the underlying assumption – that because Kiwibank is a business it must seek to grow. Businesses cannot stand still, it’s said. You grow or you die.

I challenge this assumption. There are plenty of cases where this does not need to happen. As a simple example, consider the web design business I ran for 9 years. After a few years working hard to build a viable and sustainable operation, I faced the decision of either maintaining the limited (but, it seemed, much appreciated) service as a one-man band, or taking on staff and pushing harder for a much larger and richer client base. I chose the former, and never regretted it. I worked on improving my service and my expertise, but not on growing beyond what one person could handle.

Kiwibank was set up for the specific purpose of mainly serving the indigenous domestic and small business market, and apparently it is now running that quite profitably and offering services that the privately owned banks are not interested in providing (such as small, part-time teller services in NZ Post shops).

But this is not enough for Big Business. They demand that Kiwibank grows to compete with the big boys. For this, it needs private investment. But then it would have to please its shareholders as top priority and offer unprofitable services next. And it would probably have to play in the international money market and borrow larger amounts from overseas.

I reject that. I suspect that Kiwibank’s boss, Sam Knowles, rejects it too, and has announced his resignation because he doesn’t believe that this sort of quantum leap in investment to fund wider trading operations is good for Kiwibank’s core customers.

With the exception of Jim Anderton’s input, the argument seems to have “moved on” to one of who should own shares in Kiwibank, but for me (and Jim) it should be back at a more fundamental issue: Does the bank have to grow through external stimulus? Should it not retain the business model it started with and grow organically within its own capabilities? Should it not continue to be the one larger bank with national coverage that offers banking services to ordinary Kiwis first and making profits and growing second?

2. Three Strikes law

I also wrote about this in January when the policy was announced and steps began to enact it.  You can read what I had to say then.

Since then I’ve done a great deal more reading on this topic and listened to various commentators and visiting legal experts, and my view has changed somewhat.

I still think that there will be some gains when the really hard-core violent criminals who are unlikely ever to be capable of rehabilitation. But I do believe that they can (and should) be dealt with within existing law (or what was existing law until this week).

My opinion has modified (or hardened) in two major ways:

1. Considering that only crimes committed from now on can contribute to the “three strikes” tally, it may be 10-20 years or even more before these targeted criminals are even considered for their 3rd strike. That is just so far out that it doesn’t register. Do we really have to wait that long before the main supposed main benefits – the ability to lock up the real nasties for ever – are manifest? It appears so, and therefore the law is just a bit of pandering to alarmists without actually doing anything in the short to medium term.

2. One of the most consistent claims for the need for harsher penalties is that they will send a deterrent message to potential criminals that it’s not worth it, and therefore there will be fewer crimes. Now if this does in fact hold any water at all, we should see immediate effects. Like, from today onward. We have sent the message. If it’s to have any effect, it must cause violent crime rates to slow right now. If they don’t within a statistically adequate period like one year, then the deterrence argument is just a load of hogwash. I know which outcome my money would be on.

———————————————————————————————-

Earlier comments on Kiwibank, written July 2009:

I may be wrong but . . . . I get a feeling that Big Business is making another push to get Kiwibank gobbled up into the game playing and greed of the more-market business world. And that possibility disappoints and concerns me.

Last Saturday (July 17th) the Christchurch Press newspaper published a feature report on Kiwibank in the Businessday pages, written by Roeland van den Bergh. As we’re all aware, Kiwibank was set up at the start of this decade, and in the eyes of ordinary, supportive Kiwis it had two clear primary purposes, as summarised by van den Bergh: to “look after ordinary New Zealanders and keep profits onshore”.

Through the 1990s large numbers of people were becoming unhappy at the growing fees being charged by the four main banks, all Australian owned, along with increasing profits remitted to their Australian shareholders. So . . . despite complaints from the ideologues and big players of the business world, Kiwibank was set up and initially funded by the government to provide a viable nationwide, New Zealand-owned alternative. And it has done surprisingly well, putting some pressure on the big four and reminding us of the days when banking meant financial services for ordinary people rather than speculating on world markets to foster greed and maximise profits for remote shareholders.

Kiwibank, we’ve been told, has grown steadily to the point where its market share is edging up toward the space long occupied by the big four, especially among domestic customers. Apparently it’s been working mainly on the business model that I always thought (in my naivety?) is or should be the basic operation of banks – borrowing from people with excess money (paying interest for the privilege) and lending re-packaged money to suitable people who needed it (charging interest for the service).

As van den Bergh wrote, referring also to the other main locally-owned bank TSB, “both banks fund their lending almost entirely from domestic retail deposits, while the big banks have been hamstrung by their need to borrow on international money markets, which have been frozen”.

That confirmed for me something that has bothered since last year’s financial crash – why was it such a huge problem that nervous banks were not lending to each other, causing the system to grind to a halt? Shouldn’t banks just be borrowing from savers (people and businesses) and lending to borrowers (other people and businesses)? Why do they need to spend so much effort borrowing off and lending to each other? (Apart, that is, from extracting fees for every transaction.)

Back to Kiwibank. So far so good with the Press article. Then I became uneasy as I read that as Kiwibank “grows its balance sheet beyond $10b it will have to increasingly diversify its funding to include international wholesale lending to maintain its growth.” (my italics).

Here we see again the Big Business ethic that growth is imperative. Apparently it’s not enough to just do what you do well or better, to grow organically by getting more and more customers to use and appreciate your core services. And according to the growth imperative if the growth rate is not being maintained, then it’s not enough to operate on a plateau.

Why does Kiwibank need to keep growing in size and reach, even when it may mean that its whole raison d’etre is imperilled? Ah yes, of course . . . it’s because the people pulling the strings – the government – are aligned with the business world. They’re not satisfied with providing a service that can pay for itself, grow organically, and offer the bonus of an optional, modest dividend. Forget about serving customers and retaining income within NZ, just make money for the government and its business friends!

As van den Bergh wrote, “The Government has discussed expanding Kiwibank amid calls for it to beef up the State-owned bank to help push interest rates lower.” OK, beef it up and take advantage of the bank’s ability to affect domestic interest rates, but don’t get into the same silly corporate money games with overseas markets that have caused so much grief recently to the private banking industry and society as a whole.

21 Comments | Business, Economics, Politics, Prison policy, crime | Tagged: , , , , | Permalink
Posted by David Armstrong

The big lessons from volcanic ash and oil spills

May 10, 2010

One problem with being a worrier about the way the world is going is that when your predictions become reality it’s hard to know what to say without sounding holier-than-thou.

I don’t like being told “I told you so” by anyone else, so I prefer not to say it to others when what is obvious to me, but is negative lefty thinking to others, turns out to actually happen. And generally you can hardly be pleased to be right, because what you’re right about too often results in a mess that you really, really don’t want.

But every now and then things happen that cause you to sit up, put two and two together and say: We are going in the wrong direction! It’s obvious. Why could you not see that this was going to be the result? I did tell you so.

Two recent events have made it abundantly clear that unsustainable activities eventually have downstream costs which even the cheerleaders of relentless economic growth acknowledge are horrendous.

Now I didn’t predict the eruption of that volcano in Iceland, and the ensuing disruption to air traffic. And I didn’t predict the accident at the oil rig off the US coast. So I won’t say ‘I told you so’ about these specific events (though some people actually could).

But what I have thought, spoken and written about for many years, and am being proven correct often enough, has been that the more we allow ourselves as residents of this planet to become dependent upon economic growth and the unsustainable tools of growth, the more likely a disaster results when mother nature or human error throws us a curve ball and these tools let us down.

The volcano event has shown how dependent most of us are, mainly indirectly, on scheduled air services. When they’re interrupted for days or weeks, products cannot get to market, people get stranded, people run out of funds to live, business contracts are threatened or breached. And the thing is …. we can’t do anything about it. Good old Mother Nature reminds us that she’s in charge. No amount of management skill, market-driven competition, economic growth or new technology has any real effect.

I’m not saying that good public management skills, sound trading markets or new technologies are poor goals. I’m just saying that we all need a level of self-sufficiency in our places of living, our communities, and our lives such that our existence is not threatened by distant acts of nature. Disrupted, maybe; but not seriously threatened. Making us ever more dependent on remote technologies and activities is just not the way to go.

(I wrote about this in this article on the Haiti earthquake.)

And then we come to the oil rig situation – an even more salutary event with far longer-term implications and an even more obvious lesson for us. Here I’m going to borrow ideas and a few sentences from an opinion article I read in the Christchurch Press (May 3), written by The Times’s Simon Barnes. It was his piece that prompted me to think: I should be writing in the same vein, because I sure think the same.

As we watch on TV the desperation of the Americans who live and earn their livelihood by the coastline that will now inevitably be ruined for decades by the incoming oil slick, it is impossible to see any good side to this. There is no grey area, no “Yes, but ….”, and certainly no bright side. We’ve got it wrong, and we’re going to pay for it.

Those Americans whose jobs will be ruined by the destruction of the seafood stocks will be directly affected. The rest of us will be affected by the resulting costs and how they ripple through our economies.

And although the operator/owner of the exploded oil rig, BP, and its technology suppliers are directly to blame, we’re all indirectly responsible. Everyone who whinges every time the price of petrol goes up, and who demands the right to use a petrol-powered vehicle to go wherever they please, has played a part in this and every costly mistake made within the petroleum industry (including the tanker whose short-cut caused damage to Australia’s Great Barrier Reef last month). The oil suppliers are merely responding to demands from addicted consumers for petrol at the cheapest possible cost – which inevitably means ‘cut corners if you have to, I want my petrol now!’

As Simon Barnes put it: “These spills concentrate the mind, at least for a while. They tell us that our addiction for oil is madness, that our short-term thinking is madness, that our reckless approach to containment – oil at any price – is madness. Treasure this spill; it is a rare occasion on which we can see this essential truth of the way we run our lives with absolute clarity.

“We crave oil like a junkie craves his fix, and like the junkie, we will put up with anything to get it. But even for an addict, there come moments of searing clarity. A sudden revelation that this is actually a stupid way to live life. Well, the spill tells us that this is a stupid way to run our planet.”

Sorry for copying that bit, Simon. But it’s exactly what I’ve thought about the attitude of too many people who lack any longer-term respect for our environment, and he’s said it in far better words than I could have used.

And so I say, with feeling, “I also told you so!”

23 Comments | Business, Community living, Environment, Uncategorized | Tagged: , , , , , | Permalink
Posted by David Armstrong

Private operation of water supply will cost us more

May 5, 2010

Help! I need an unbiased economist or accountant to explain something to me.

This morning I heard on the radio that the National-ACT government is making it easier for private companies and multinationals to run (and eventually own) our water supplies and delivery services. And I heard Rodney Hide explain that this was because ratepayers were demanding “lower rates and better performance”.

I assume he would really like to have said that ratepayers wanted to “pay less for their water supply and that it be supplied more reliably”, but that may be something different altogether so he couldn’t say it.

Before I ask the questions I need answering in order to make up my mind on this issue, I need to say that I have for the past 20 years been strongly against private companies and multinationals owning the infrastructure or having the sole rights to deliver public services and products that are essentially monopolies.

For example, I’m firmly of the opinion that New Zealand’s electricity market has been screwed up (and still is) by attempts to corporatise it. For almost every New Zealander, there is no real choice but to plug into the national grid to get electricity, and whichever company is our chosen retailer, the outcome is no better than it would have been had a single publicly owned supplier continued to run the show. The so-called competition in the “electricity marketplace” is mere tinkering around the edges of what is otherwise a great business game for the major players.

Likewise water. I have no real choice in who provides the pipes to my house and makes sure clean water comes through it. It’s a monopoly service in any particular geographic area, and Hide wants to put it increasingly, and for longer contracted periods of time, in the hands of multinationals.

Now I’m not one of those cardigan-wearing, tree-hugging luddites that are branded such if they appear politically left of the ACT party. I’ve run a successful business of my own for 10 years, and before that was an employee of a large private business. (Nesting my parentheses even further, by “successful” I don’t mean “made heaps of money”; I meant “made enough to live comfortably while building up a large number of clients who appreciated my services”).

Back to my question: how does placing water infrastructure and/or delivery by local bodies into the hands of multinationals make for (a) lower payments by consumers and (b) better performance [whatever that means]?

Let’s see. If the city council doesn’t deliver the service, it will charge less in rates. True! No problem with that. But now, how will the private company running the service make any money? How will it be able to not only survive but also pay a dividend to its shareholders? By charging for water use, of course.

But who will they charge for the water use? It can’t really be the councils which have given them their 30-year contracts, because then the councils would have to raise rates to source those funds. So it would have to be the end users of every drop of the water. Water metering would become universal. We’d be paying less to the council for our rates, but at the same time we’d be paying the water supply company for our usage.

OK, we’ll just be changing the people we send our cheques to. But hang on – that water supply company has to pay for more than just the infrastructure maintenance and the delivery costs (which the council had to do), it also has to pay dividends from its profits (oh yes, profits – they have to get more money from us than the actual cost of supplying the water) to its shareholders. And as most companies capable of handling such large contracts will be multinationals, most of those profits will go offshore.

Right, unless an economist can tell me I’ve got this wrong, we’ll be paying more overall (less in our rates but more to the private supplier), but at least we’ll be getting better performance, right?

If the record of so many private companies supplying core goods and services is anything to go by (think Telecom’s XT), then I’m not as confident as Hide. And what if they get it wrong? What if a determination to make a profit (which is the top priority of any company with shareholders) overrides costs such as adequately maintaining infrastructure and water purity? They’re on long-term contracts, so local body councils can’t just replace them willy nilly.

When water delivery is a public operation, there is accountability through the ballot box and other public lines of complaint and redress. When it’s in private hands, you can’t vote with your feet, your hands, your wallet, your mouth …. There is no alternative supplier (short of drilling your own back-yard well). You cannot vote them out.

Unless I can be persuaded otherwise, then, I think I’ll stick with the belief that basic, life-supporting public goods that are supplied through effectively monopoly channels should be in the controlling hands of accountable civic bodies, not multinational or private companies.

5 Comments | Business, Economics, Politics | Tagged: , , , , | Permalink
Posted by David Armstrong

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