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Rentiers on notice

Written By: - Date published: 9:06 am, April 20th, 2013 - 36 comments
Categories: capitalism, energy - Tags:

There are two basic ways to make money in this world – do something and get paid for what you do/produce is worth, or own something that produces wealth out of all proportion to the little or no work you put in. The latter is rentier behaviour – and it’s every capitalists’ dream. You do nothing, yet you get to enjoy a big slice of society’s output.

The electricity market has been a classic example. If you own one of the big hydrodams that produce two-thirds of our power, you have basically have a licence to print money. You didn’t pay to build the thing, you’ve got no capital cost associated with it, and it costs less than a cent per kilowatt hour to run and maintain but you’re sure to earn ten times that much when you sell the power at the cost of operating the few thermal plants that make up a quarter of our electricity production.

You’re not making this massive profit because you’re a clever little dicky who has worked out a more efficient way of doing things, cutting your costs – which is the theoretical justification marginal pricing is good in ordinary markets. You’re making massive profits because you inherited a cheap electricity generator and the market that National created sets the price that you get for that power at the cost of the most expensive plant that runs to match demand.

Rentier behaviour is actually really, really bad. It kills innovation in an economy and sucks up capital and household spending that could otherwise be spent on genuine wealth creation (property speculation is the other form of rentier behavior prevalent in the New Zealand economy – so, you see what I mean). Ironically, National’s mining and oil dream, if it ever came to fruition, could take us close to being a rentier state like the Middle Eastern petro-economies – fortunately, that’s going to remain a dream that Joyce sees after a night on the pipe, because we don’t have the cheaply accessible hydrocarbon reserves he thinks we do.

Neoliberalism has been all about rentier behaviour. It’s about taking public assets and converting them into massive profit streams to private owners who do next to nothing to earn them. Infratil, which is a major owner of Trustpower, has been a chief rentier – they aim for a 20% per annum return on investment for doing nothing but owning assets that used to be in public hands and extracting a rent.

Now, Infratil, Trustpower, and Contact Energy’s share prices are plummeting after the Green/Labour announcement that the rentier behaviour in the electricity market is going to come to an end when they enter government. The fact that the prices of these companies has fallen so much just on the announcement of this policy shows that the market knows NZ Power would do its job of taking away their rentier profits and giving them back to families and businesses. It also shows that the market thinks the Greens and Labour are serious and are likely to govern soon.

You’ll notice that National has made no real effort to claim that NZ Power won’t work, because they know it will. Instead, Joyce has run around like a chicken with his head cut off (or a fatcat with his rentier income stream cut off) crying about the loss of shareholders’ paper wealth – because people struggling to pay their power bills this winter will have so much sympathy for a shareholder in Contact who is losing money on the prospect of lower power prices.

So, how much of a hit to profits is the market factoring in? Well, share price is the net present value of future dividends (in theory). From the peak just as Shearer, Norman, and Parker made the announcement to the trough yesterday, Contact fell 56 cents, or 10%. Factor in what the market sees as the odds of Labour/Greens governing (let’s say 50%) and the odds of the policy being implemented if they do (let’s say the market prices that at 80%), then a typical discount rate of 8% (a dollar today is 8% more worth having than waiting a year to get that dollar)… my maths shows that , with those assumptions, the drop we’ve seen in Contact’s share price amounts to a 33% drop in profits after NZ Power kicks in.

That equates to the market estimating that NZ Power means hundreds of millions of dollars a year less on our power bills. The bad news for electricity company owners, and the great news for everyone else who has been paying them too much for power, is that the hit’s probably going to be more like 66% of profits.

36 comments on “Rentiers on notice”

  1. geoff 1

    Nice reminder of what NZ’s biggest problem is.

    • Colonial Viper 1.1

      That and the politicians who support them. Labour’s attempt to bring property investor rentiers to heel was weak and washed out (and didn’t touch the banks who are a major factor behind sky high house prices).

      But Labour has pretty much hit a home run with NZ Power.

      The banks are an absolute must to address next. They are extracting an excess $500M-$1000M a year out of the NZ economy, from NZ businesses, workers, mortgage holders, than can be justified in the bankers wildest dreams.

      • tc 1.1.1

        ‘The banks are an absolute must to address next.’ +1

        All those profits they extract that could be reinvested in NZ, they are also stifling growth with their aggresive policies on business/personal running a zero risk winner takes all game.

        I’ve know of someone about to made bankrupt by Wpac over his house payments , he’s had 3 willing buyers over 18 months, all on solid incomes and all turned down by the banks as not meeting criteria.

        • geoff 1.1.1.1

          If a political party had the stones to show how all of this rent-seeking behaviour is connected and to present that in a coherent vision to the mainstream then they would romp to victory.

          The Green’s are closest to doing this but they haven’t pulled it together into a consistent over-arching narrative. Mana also has a lot of good points but unfortunately they have not reached critical mass and are still too easily pigeon-holed as extremists by the mainstream. Some of Hone’s stunts haven’t helped in that regard either.

          The frustrating thing is that creating the content for media that would achieve those goals would be so easy (and fun) to make. Labour’s talking head vid during the last election was in the right direction but didn’t go far enough and didn’t have any humour (that I can recall) which would be essential to make it ‘go viral’.

        • Hilary 1.1.1.2

          Anyone noticed the TSB TV ad? Nice little bit of political history about how they resisted the merger with Westpac despite much political pressure and the rest of Trustbank joining up, and then the whole lot was sold to Australia. Leaving TSB still a community and NZ owned bank.

    • Draco T Bastard 1.2

      Yep, the rich and their demand for ever higher profits.

  2. johnm 2

    100% True 🙂

    Rentier Behavior (RH) is the major cause of inequality. Buying a house is almost impossible for our young people now but if you removed all the capital gains sharks out of the market, fuelled by Australian Bank money and by a self reinforcing bidding upwards mechanism, with a 80% Capital gains tax backdated 15 years the housing market would quickly return to a sane level of value and young kiwis could then have a stake in their own land whereas now they might as well just go to Australia.

    Neoliberal regimes have always lusted after Public Assets as these must continue for the public good but now the profit vultures and shareholders want the action. The rest of the investment NL edifice has collapsed under the weight of its own greed, so let’s get those Public assets hang the common good.

    Another evil of RB in stealing our assets is that the income stream is lost forever to the public purse. Next thing the complicit NL government screams: “We don’t have money for public services,we have to cut and cut them do austerity” other than to go into debt and become debt slaves to foreign bankers.

    Those who buy say Power Companies will have borrowed the money on the international market. So: the hapless kiwi consumer is paying:
    1. Foreign debt loaded with interest
    2. Shareholders piece of the pie
    3. CEO excessive salary packages
    4. Profit
    Look at the U$K since privatising their Power prices have become unaffordable for ordinary Brits.
    Poverty stalks that unhappy land ravaged by RH NeoLiberal profit taking and privatisation.

    When I and my wife first bought a house in NZ in 1981 it gave us both a feeling of belonging, a stake, something to work for a vital connection to NZ society. But today it’s be almost impossible without 30 years of debt, if you have to rent all your life well, you might as well go to Australia, renting is a serf’s existence.

    • Colonial Viper 2.1

      You got it. NZ’s massive house value increase has been fed by hot banking money. The bigger the easy mortgages which are available, the more house prices increase. Which further justifies even bigger mortgage debt being approved for hapless drowning workers.

      • Descendant Of Sssmith 2.1.1

        It’s also fed by low wages and high profits.

        Company lowers wages to make more profit they then have to do something with that money.

        I know lets buy property so I can get the wages back that I’ve already cut.

        Still not enough – my workers can’t afford to buy stuff now cause their wages are low and I’ve upped their rent.

        I’ll just have to lend them money to pay for the things they can no longer afford.

        The low wage high profit model only ever leads to people working for nothing. Trickle up theory except it’s not a trickle.

        The same people that own the companies, own the rental properties and own the banks. Individual share ownership has largely been replaced with unit trust and fund manager type ownership arrangements where your money is used but the voting rights belong to the trust managers.

        The theft of people’s labour through low wages just gets compounded in a viscous circle.

        Even a return to 50% of GDP being paid out in wages through both more jobs and higher pay would provide an enormous boost to the economy. If the distribution has to be through the tax system and jobs via the public sector so be it.

        That in itself if done with a social conscience in mind could significantly increase opportunities for those with disabilities and youth.

        Let’s not pretend that the private sector will ever create enough jobs for those two groups in particular. They never have in New Zealand and when left to their own accord things only get worse for those groups.

      • tc 2.1.2

        It’s also fuelled by no CGT as any rise in value is tax free for speculators.

        Asked an english couple the other day where they see the biggest investment opportunity and they replied any dwelling within 10k of akl CBD, who cares what you pay with no public transport/CGT/standards enforced on rentals, so we coiuld rent it without touching it, it’s a no brainer.

        • Colonial Viper 2.1.2.1

          A serious CGT would apply to all houses even the family home, with monies going directly into social housing.

          There is a simple objective to make people understand: a home is a retirement investment, but don’t expect to make speculative tax free gains out of it.

          • weka 2.1.2.1.1

            For some people a home is just home. Defining a home as primarily/solely a financial investment is anti-community.

          • RedLogix 2.1.2.1.2

            There is a simple objective to make people understand: a home is a retirement investment, but don’t expect to make speculative tax free gains out of it.

            Absolutely agree. While I’ve made no secret of the fact that I have substantially invested in rental property (actually building rather than just buying) … I have zero intention of selling in the foreseeable future. Therefore capital gain is of zero interest to us.

            We’ve done our long-term projections based on exactly what property always has done over the long-term … a very boring inflation plus 2%.

  3. weka 3

    “the market that National created sets the price that you get for that power at the cost of the most expensive plant that runs to match demand.”

    How and why did that come about?

    • Colonial Viper 3.1

      I presume its the usual story of “free marketeers” setting the market rules in order to extract the most rent possible from hapless NZers.

    • Draco T Bastard 3.2

      It’s the theory of free-market economics.

      The price of something on the market is, supposedly, the cheapest that the most expensive can sell it for. Everyone else, who can produce it cheaper, thus makes higher profits which is supposed to push investment towards the cheaper means of production which will, eventually, take the most expensive out of the market with the result that prices become ever cheaper.

      It’s a nice, simple hypothesis. Doesn’t work though as the ever increasing price of power shows.

  4. kiwicommie 4

    “Joyce cries for the declining value of their shares but that fall tells us that the market thinks Labour and the Greens will govern.” I thought that too, can’t wait till they get the boot (even if it is ages away in 2014).

  5. millsy 5

    Brian “Listing everything on the NZX will solve all of all our problems” Gaynor and Francesca “I for one welcome our Middle Kingdom overlords” O’Sullivan, are going on about how the NZ Power plan will wipe out the wealth of shareholders.

    I say, tough titty.

    People who use their savings to play on the stock exchange are well aware that these things can happen. You can be a millionaire one day, and a pauper the next. Thats how it happens. You want somewhere to put your money, put it in a bank. Don’t use it to screw what money they can get out of the single mothers in Otara and the pensioners in Westport. That is just un-kiwi.

    • Colonial Viper 5.1

      Labour has given Fran O’Sullivan plenty of fair warning.

      Fran, if you were a prudent investor, rotate your monies out of electricity stocks. It’s quite easy if you think its a sinking ship, there’s no need to follow the ship down.

      HOWEVER NZ Power as a single buyer is likely to be able to offer power firms far more market stability, ability to forward plan and consistency in profits.

      So what do you want eh? Some capitalist type trade-offs your clan are supposedly expert at, to be had there methinks.

    • felix 5.2

      Tough titty indeed.

      If your “wealth” can be wiped out by an effort to allow old people to be able to afford to heat their homes, then it was never really yours.

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    BeehiveBy beehive.govt.nz
    4 days ago
  • Coastal Shipping Webinar
    Introduction, seafarers and POAL Good morning everyone, I am delighted to be online with you all today. Before I begin, I have to acknowledge that COVID-19 has disrupted the maritime sector on an unprecedented scale. The work of seafarers and the maritime industry is keeping many economies around the world ...
    BeehiveBy beehive.govt.nz
    4 days ago
  • Support for resilient rail connection to the West Coast
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    BeehiveBy beehive.govt.nz
    4 days ago
  • Major investment in safe drinking water
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    4 days ago
  • Supporting stranded seasonal workers to keep working with more flexible options
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    BeehiveBy beehive.govt.nz
    4 days ago
  • Relief for temporary migrants, employers and New Zealanders who need work
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    BeehiveBy beehive.govt.nz
    5 days ago
  • Freshwater commissioners and fast-track consenting convenor appointed
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    BeehiveBy beehive.govt.nz
    5 days ago
  • Appointment of Judge of the High Court
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    BeehiveBy beehive.govt.nz
    5 days ago
  • Feedback sought – Commercial Film and Video Production Facilities
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    BeehiveBy beehive.govt.nz
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  • Govt launches bold primary sector plan to boost economic recovery
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    BeehiveBy beehive.govt.nz
    5 days ago
  • Wellbeing of whanau at heart of new hub
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    BeehiveBy beehive.govt.nz
    5 days ago
  • New Report on Auckland Port Relocation
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    BeehiveBy beehive.govt.nz
    5 days ago
  • Dual place names for Te Pātaka-o-Rākaihautū / Banks Peninsula features
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    5 days ago
  • Government and Air New Zealand agree to manage incoming bookings
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    BeehiveBy beehive.govt.nz
    5 days ago
  • $80 million for sport recovery at all levels
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    BeehiveBy beehive.govt.nz
    5 days ago
  • Keeping ACC levies steady until 2022
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    BeehiveBy beehive.govt.nz
    6 days ago
  • Extended loan scheme keeps business afloat
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    BeehiveBy beehive.govt.nz
    1 week ago
  • New investment creates over 2000 jobs to clean up waterways
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    1 week ago
  • Speech to Labour Party Congress 2020
    Tena koutou katoa  Nga tangata whenua o tenei rohe o Pōneke, tena koutou Nau mai, haere mai ki te hui a tau mo te roopu reipa Ko tatou!  Ko to tatou mana!  Ko to tatou kaupapa kei te kokiri whakamua  Tena koutou, tena koutou, tena tatou katoa   Welcome. I ...
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  • PGF top-up for QE Health in Rotorua
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    BeehiveBy beehive.govt.nz
    1 week ago
  • Building a more sustainable construction sector
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    BeehiveBy beehive.govt.nz
    1 week ago