Thursday, 17 May 2018

Surprises are over-rated

It’s generally best, in fiscal and monetary policy, to make your plans clear and stick to them: Finance Ministers and central bank governors are better off leaving the rabbits in the hats. So the first good thing to say is that this government made its plans reasonably clear early on with its “100 Days” initiatives last year and in the pre-Budget positioning over the past few weeks, and the Budget itself was mercifully rabbit-free.

Everyone expected this to be a Budget that would deliver a large boost to spending on core government services like health and education, and it was. Of the extra $11.4 billion in operating expenditure that the government plans to spend over the five years to 2021-22, for example, $6.5 billion goes under the heading of “rebuilding critical public services”: health gets $3.25 billion of it, and education $1.6 billion.

Everyone also expected the Budget to stick to a “fiscally responsible” script, and it did. There will, for example, be fiscal surpluses every year from here,  building up to a forecast $7.3 billion surplus in the year to June ‘22, which would be a reasonably sizeable 2% of so of total GDP. The likelihood of the New Zealand political process actually leaving $7.3 billion unspent on the table is extremely low, but at least for now the intention is there to run ever larger surpluses and get net public debt down to below 20% of GDP.

The Budget’s also one of the big forecasting set pieces, and once again there were no huge surprises in the expected economic outlook – ongoing growth in the next few years at about 3% a year, enough to get unemployment down to 4.1% by the middle of 2020. There are two big uncertainties (apart from the ever present risk of international instabilities). One is whether housebuilding has the capacity to grow at the rate Treasury expects: not much in the coming year to June ‘19 (+1.4%) but quite substantially in the two years after that (+5.0% and +5.5%). That’s a big ask for a sector widely suspected of capacity constraints. The other is net immigration: the Treasury thinks it will gradually drop off to a net gain of about 25,000 people a year, but the reality is, it’s anyone’s guess, as you can see from these different forecasts (a graph included in the Budget Economic and Fiscal Update).

A key aspect of the Budget is whether fiscal policy boosts or brakes the overall economy. Here’s the answer, acknowledging that the calculations are down the iffier end of the spectrum of economic analyses. Fiscal policy gives the economy a decent boost of about 1% of GDP in the current year to June ‘18, and much the same again in the year to June ‘19, before the brakes go on in later years. Again, I’ll be surprised if the political process actually allows those brakes to be applied, but again the effort is currently there to keep fiscal policy on prudent lines.

And policy – particularly in small open economies on earthquake plates – needs to keep a reasonably conservative grip to leave us lots of room to cope with external or domestic shocks. We can’t flag away a “rainy day” approach, particularly as our forecast fiscal surpluses are reliant on us continuing to benefit from high world prices for the things we sell. Here’s a somewhat worrying picture: it shows our forecast fiscal surplus track, adjusted for the cyclical state of the economy, compared with what the picture would be if our terms of trade were at their 30-year average, and not well above it. Answer: if the world became very difficult for the likes of our dairy farmers, there would be no surpluses, not now, not in future.

All that said, and accepting it’s a balancing act, you’d wonder if the Budget wasn’t almost too conservative. These are, for example, exceptionally good times to be be spending even more again on infrastructure: the accumulated shortfall is huge, and financing costs are still very low, even if we’ve somewhat missed the boat on raising money at the exceptionally low financing costs of 2016 and 2017. I’m not sure I’d agree with the claim in the Budget speech that new transport spending in Auckland, large as it is, will in fact be enough to “free up our biggest city”.

Whether it got the balance right between social policy and economic development is also debatable. The Budget will be putting a rather smaller $2.8 billion of operating spending into “Promoting economic development and supporting the regions”, compared to the $6.5 billion on public services. And there’s a lot under that label that is a stretch to call a contribution to economic development, including the big $1.1 billion expansion to our “international presence” and the Provincial Growth Fund boondoggle.

To be fair, there is one productivity initiative which could be significant. The Budget expects the government to spend over $1 billion if businesses take up the R&D tax credit to the degree it expects (12.5 cents back for every dollar spent, for companies spending at least $100K a year on R&D).

But has enough overall been done to facilitate a decent lift in our productive potential? If you take the view that we need a step lift to our game, the forecasts don’t suggest it’s in our near-term cards. The IMF, for example, thinks word trade will grow by 5.1% this year and by 4.7% in 2019: the Budget forecasts don’t see our exports of goods and services keeping up with world trade growth in general.

One Budget, obviously,  isn’t going to transform our low productivity overnight, and even a  succession of Budgets strongly friendly to facilitating productivity may only go part of the way. But this time next year I think I’d like to see rather more focus on closing the gap with the kinds of income the higher-performing economies in the OECD are capable of generating for their citizens.

Friday, 11 May 2018

Selective unemployment (yet again)

In response to my post yesterday about unemployment by educational level, a reader who knows their way around Stats' Infoshare database better than I do pointed me to a now discontinued series (it stopped at March '16). Thanks for that, mate: as the series goes all the way back to March '86, we can see how unemployment behaved through a couple of recessions. Here's the answer.

And it is indeed exactly as you might have surmised. In the worst episode - the combination of the costs of Rogernomic restructuring, the very tight monetary policy of the early days of the Reserve Bank Act, and the overseas 'Anglo-Saxon recession' of 1990-91 - everyone got battered, but those with no qualifications got battered most, with their unemployment rate peaking around 17%.

Conversely the good times of the pre-GFC 2000s rolled long enough to bring unemployment rates even for the less qualified down very significantly. By 2007-08 the unemployment rate for people leaving school with a qualification had got down to only 4% - lower than our overall unemployment rate today (4.4% in March). Sustained expansions do wonders for getting even the harder-to-place people into jobs.

The policy lessons stand. Sometimes - if you've let inflation get out of hand, if you've run big fiscal deficits for too long - you may find yourself in austerity mode. Best not go there in the first place, of course, but if you have, you'd better do something to alleviate the impact on the more marginalised groups in society, because they end up wearing the worst of the downturn. More positively, if you can contrive to keep an expansion going long enough, a good deal of social angst goes away as a progressively tighter labour market puts pay packets into far more people's hands.

Thursday, 10 May 2018

Unemployment strikes selectively (revisited)

A reader looked at the cyclical pattern of unemployment by ethnicity which I posted about the other day ('Unemployment doesn't strike evenly') - Maori and Pacific people fare unusually badly in downturns and require a long spell of labour market strength before their unemployment rates get back down closer to those for European and and Asian people - and asked me if the same pattern applied by education level.

You'd think the same pattern would apply for less qualified people compared to more qualified people, but off the top of my head I couldn't recall whether our labour market data included educational qualifications. The good news is yes, they do, but the bad news is that they don't go very far back in time (they start in the middle of 2013).

Here's what's available. To keep it manageable I've just picked out three levels of qualification: post-grad, the better end of a secondary school qualification, and no qualification at all. If you're interested in more detail, head for Infoshare and have a fossick: go to 'Work, income and spending', then 'Household Labour Force Survey', and then 'Labour force status by highest qualification'.

Unfortunately there isn't a big enough cycle going on over this time period to see what happens to the less qualified in recessions: all we know (which anyone would have guessed beforehand) is that those with the highest qualifications have the lowest unemployment rate.

In the US, though, we can see a longer picture of cyclical history: here's what's happened to those at the top of the educational ladder (adults with a PhD) and those at the bottom (adults with less than one year of high school). The shaded areas are recessions. Again you can get more detail for yourself from the excellent (and free) FRED database.

You do indeed get the same pattern happening as for ethnicity. Those who find it hardest to get work in good times also get hit far worse in bad times, but if the labour market stays strong enough for long enough, even those with no formal qualifications at all will start finding jobs. Remarkably, the unemployment rate in the US for those with no qualifications is now down to under 5% - but it's taken the longest peacetime expansion on record to get it down to those levels.

Policy lesson: no matter how you cut it, the groups with less going for them suffer disproportionately when the economy turns down. 

Wednesday, 9 May 2018

Mind the gap

We've been lucky, over the past year, to see two top-notch, data-heavy analyses of the gender pay gap appear in New Zealand. One, from March last year, is by AUT's Gail Pacheco, 'Empirical evidence of the gender pay gap in New Zealand', and was done for the Ministry for Women. The other, also last year, was by Motu Research's Isabelle Sin, Steven Stillman and Richard Fabling, 'What drives the gender wage gap? Examining the roles of sorting, productivity differences, and discrimination', and saw the light of day thanks to the Marsden Fund (and which I posted about in 'Competition is good for women's pay').

Gail reprised her research last night at the latest Auckland Law and Economics Association of New Zealand seminar, and if you're interested in the topic and you're based in Wellington, get along to Isabelle Sin's LEANZ seminar on Tuesday 22nd at 5.30pm (free registration here).

As it happens, and though they used different lines of attack, they both came out with much the same headline result, a gap against women of around 12-12.7% (Gail) or 16% (Isabelle et al). Gail used a battery of factors that might explain the gap - for example the industries people work in (if women were concentrated in low paying sectors, there might not be any gender difference in pay rates at all, even though there was a headline gap), or their levels of education. Here's how the battery of factors helped explain what is going on.

As you add more and more factors that might explain pay gaps, the amount of the gap that you can 'explain' goes up, but at the end of the day it remains remarkably small. When you try to adjust for the observable differences between men and women that might account for the overall 12.7% gap, you end up explaining only 2.1%, and not knowing where the other 10.6% came from. We're not unusual in that, by the way: as Gail mentions in her paper, there are sizeable pay gaps and sizeable proportions unexplained in many countries overseas, too.

It's the not knowing that Gail regards as significant. If you knew exactly what was going on, it's possible you mightn't be worried. Perhaps there's some extra factor, like the cost of potential interruptions to women's career paths to have children, that employers might be putting into the equation (no correspondence please, that's just a guess, not an endorsement). And if you were still worried (kinda reminded me of the old L V Martin line, "it's the putting right that counts"), you wouldn't know the right policies to fix it until you knew exactly how the problem arises. Motu, though, were less reticent about what's at play: "we blame sexism", as they put it in their executive summary haiku.

We may well get a better understanding from new work that Gail and Isabelle have in the pipeline, which looks at things like the impact of pregnancy career breaks, and which Gail said will be coming out at the end of this month.

It's possible, of course, that a bigger or different or finer set of explanatory variables might throw more light on the unexplained proportion. Gail suggested last night that degree subjects might matter, rather than just having a degree of any kind, and that's highly plausible. And there's also evidence that the more exactly you define comparable jobs, the smaller the pay gap gets.

Here, for example, are the key results of a very interesting global survey carried out in 2016 by Korn Ferry Hay, the recruitment people, based on a huge (8.7 million jobs) data base, which has info on exactly how 'big' each job is.

"Aha!", you might think, "there's no discrimination! Measure the nature of the job right, and gaps disappear!".  In New Zealand's case, a headline gap of 22.8% becomes almost nothing (0.9%) if the comparisons between the jobs held by men and women are as precise as possible.

But of course this raises a whole new issue: as Korn Ferry Hay put it, it's true that "men and women doing the same job, in the same function and company, get paid almost exactly the same". But "That’s because they still aren’t getting to the highest-paying jobs, functions, and industries, while men thrive in all three", and the question shifts to why they get (say) the Head of HR role rather than CIO or CFO or COO.

In any event, another excellent thought-provoking LEANZ seminar. Well done to Gail, to Richard Meade who organises the Auckland ones, to Andreas Heuser for organising the upcoming Wellington equivalent, and especial thanks to Bell Gully for hosting and sluicing both events. Without corporate support, they wouldn't happen. Though members' subs help too: here's the LEANZ subscription page.

Friday, 4 May 2018

Unemployment doesn't strike evenly...

Yesterday's labour force data for the March quarter came out much as expected: forecasters had been expecting a 0.6% increase in employment, and they got it, and they also got their predicted 4.4% unemployment rate, down from 4.5% in the December '17 quarter.

Even if there were no immediate dramas in the data, it's still worth picking out one aspect - a reminder of how unemployment rates vary by ethnicity.

The European and Asian rates are very much lower than those for Maori and Pacific people, and if you knew nothing else about New Zealand than what this graph showed you, you'd diagnose that we have some serious social issues to grapple with, and you'd rightly be looking very hard at our education and training systems and our active (or inactive) labour market policies.

But another interesting aspect is the very different cyclical behaviour of the ethnic unemployment rates. When bad times strike, groups that find it harder even in good times to find a job are disproportionately affected. That's the pessimistic read: the optimistic read is that a prolonged period of decent GDP growth will bring even the higher ethnic unemployment rates down.

The Maori/Pacific rates, which got as high as 14-15% in the aftermath of the GFC, are down to 8-9% - still too high, but a hell of a sight better than they were. And the gap with European/Asian rates will keep on narrowing as long as GDP keeps trucking along at a decent rate. Exactly the same happens in countries overseas: I gave a US example a while back ('Rising tides lift all boats').

The policy lesson from this is worth repeating. There are people who have concerns about the impact or value of ongoing economic growth: environmental damage, for example, would be high on many people's lists. The lesson is, don't imagine that restraining growth will be socially costless: as the data here and overseas clearly show, the people that will be hit worst are those on the outer. Find smart ways to contain or prevent the concerns that worry you, but otherwise push GDP along as fast as you can: it's the ticket to a better livelihood for the people you likely worry most about.

Thursday, 3 May 2018

Patrolling the petrol market

BP's been getting it in the neck about that leaked pricing memo from 2017, which proposed to fix its little local difficulty on the Kapiti Coast. BP Otaki had been bleeding volume because of its regionally high pricing, and the idea was to raise prices at BP Levin and BP Paraparaumu up to the BP Otaki level, and hope that the other petrol companies followed suit rather than leave all three BP outlets high and dry with out-of-the-market prices. BP had grounds to believe the others might well follow: the memo said that Z Paraparaumu had already followed the first 5 cents hike.

Cue for hysteria all over the place, carpetings by The Minister, and calls for boycotts and bonkers policies (eg national uniform petrol pricing).

While BP is perfectly capable of fighting its own corner - 'BP defends petrol pricing strategy' - it might be helpful to step back and look at the wider picture.

Yes, it's not good for consumers if the petrol industry starts running a leader-follower model and the leader is taking prices higher (we'd have much less of a problem if the leader was driving prices down). And the petrol companies are getting away with higher margins in parts of the country than they would if they faced more competition.

But to be fair to BP, it's not systematically a higher-price leader, though it used to be. Have a look at this graph, from MBIE's petrol study last year (I originally covered it here).

The bottom panel shows that over the period 2008-10 BP had virtually always led prices up, and had almost never led them down: if there was a time to rip into it, it was back then. Shell was the mirror opposite, always the leader down and never the leader up. 

But after Shell was bought in 2010 by the NZ Super Fund and Infratil and later renamed Z, the pattern changed markedly. Over 2010-15 Z was now the most likely to be first to raise, ahead of Caltex, though BP still did a bit of it. And the pattern changed on the down side, too: Z was still most likely to cut prices first, but BP was also a pretty active first mover. Strategies may have changed again since 2015, but BP isn't obviously the "let's take prices higher" coordinator it's been painted.

It's also not odd, by the way, for companies to be experimenting with all sorts of price changes, up and down. Here for example is a graph of what Air New Zealand was charging for a one-way flight from Auckland to Wellington, no bag, for travel on Wednesday May 3 or Thursday May 4.

The airlines, as memorably satirised in 'If airlines sold paint', are at one extreme of price differentiation: they've got more scope for it than the petrol companies because one flight is often not a perfect substitute for another, whereas a litre of 91 is a litre of 91. But it's also not unusual, even in workably competitive markets, to find companies selling much the same product at different prices in different circumstances. It's certainly not a strong basis for blowing a gasket and reaching for regulation.

And let's also recall that price discrimination isn't necessarily bad for consumers, either. The high price that an airline charges for the inelastic business passenger demand at the start and end of the business day helps fund those cheapo offerings for the budget end of the market. If there was uniform pricing, the budget traveller wouldn't get a look in at all.

It's also not at all clear that the petrol companies are collectively gouging everyone. It's true that their margins have been going up a bit recently as this chart shows (it comes from MBIE here). 

But short-term trends aren't a great guide to the longer-run state of profitability. As MBIE's longer-run and inflation-adjusted series shows below, margins aren't unusually high at the moment. They were higher in the mid 1990s, for example, and a good deal less than they were in the cushy days of the over-regulated industry of the 1980s.

All of this isn't to say that the petrol industry is problem-free from a competition point of view, as hapless buyers of petrol in the bottom of the North Island and the whole of the South Island know. Here are the petrol companies' margins, split out by North and Sound Island (again from last year's petrol market study).

The difference, of course, is the absence of Gull from the South Island: where it operates, Gull acts as an effective competitive discipline on the other companies' pricing. It's no coincidence where this latest brouhaha blew up: Gull is in Levin (its second most southerly outlet). The first best solution to keeping the petrol companies honest would be for Gull, or some other discount operator, to expand nationwide. 

Competitors rolling out their own infrastructure will always be the consumer's best friend. How hard would it be, for example, to get Whenuapai up and running as an effective competitor to Auckland Airport? And how much better would it be to have genuine traveller choice, and the lower prices that would come with it, than any regulate-the-one-supplier approach?

Whether a new or expanded competitor in the petrol game is realistic or not, I don't know. What I do know is that the ACCC's studies of the markets for petrol in the big Australian cities have shown that you need a reasonably large number of operators to get prices to sharp competitive levels. As I wrote in 'How many is 'enough'?', even though Brisbane has quite a decent range of operators (more than we have here in New Zealand), prices are 3.0-3.5 Aussie cents a litre higher than they are in the even more competitive Sydney market.

And I'm still not convinced that the Commerce Commission got it right when it let Z buy Chevron: Chevron and its Caltex stations had not been a strongly independent price-setter, but under different management it might have become one. Loss of that option may well prove costly, if nobody else is going to step up to the plate and expand a Gull-like pricing challenge.

Monday, 30 April 2018

Focus on the worst

I've been reading Auckland University lecturer Ed Willis's excellent submission on the Commerce (Criminalisation of Cartels) Amendment Bill, which he's put up on his 'Great Government' blog. I don't know what other submitters have put in - at time of writing the submissions, which were due on April 9, haven't yet been put up on the Economic Development, Science and Innovation Select Committee web page about the Bill - but I'm completely on board with what Ed has to say.

His big argument is that we should keep criminalisation for the worst 'hard core' cartel cases, and he's right, for the various reasons he lists. I agree, but when you read the Bill you find that there's nothing in it about confining criminalisation to the worst cases. Here's the relevant clause:
82B Offence relating to cartel prohibition
(1) A person commits an offence if—
(a) the person,—
(i) in contravention of section 30(1)(a), enters into a contract or arrangement, or arrives at an understanding, that contains a cartel provision; and
(ii) intends, at that time, to engage in price fixing, restricting output, or market allocating
Other than the reference to intention, there's nothing there about "deception" or "dishonesty" or any other word for the "seriously bad stuff" that criminalisation would normally be appropriate for. And even intention may have been well-meant rather than predatory, for example as an ancillary provision that collaborators thought was necessary to make a go of some joint venture. There is an out in the legislation for people in that position (it's section 31(1) of the Commerce Act), but what if a court decides, after the fact, that the cartel provision wasn't, in its view, "reasonably necessary" for the joint venture? S31(1) is a pretty slim protection against accidental criminal overreach.

There needs to be a better corralling of cartel criminalisation than currently proposed. We already have a lamentably high rate of incarceration by international standards; we have been too ready to create new ‘strict liability’ offences which penalise people who had no ill intent; we maintain as criminal offences activities which many in society would no longer regard as sanctionable (‘assisted suicide’, recreational use of cannabis); some politicians, partly following overseas examples, have seen electoral advantage in being ‘tough on crime’; and in general, across many issues from commercial failure through to drug use we reach for punitive approaches which fill the prisons, instead of for rehabilitation or prevention approaches which are cheaper, more effective, and more humane.

But all that said, there's still a decent case for criminalising the worst cartels. These are cartels where the intent to cartelise is clear and deliberate; where the behaviour is covert because the cartelists recognise that it needs to be concealed both from customers and local competition authorities; where it is systematic and prolonged rather than an isolated or brief episode; where there are agreed mechanisms for reporting on the cartel’s effects, the distribution of the illicit gains, and disciplining any deviation from the cartel agreement; and where it involves senior members of the cartel companies rather than rogue junior employees possibly not acting at the behest of the company. These are seriously harmful conspiracies, and deserve their own sanction. The first criminalisation case in Australia (see 'The Shipping News') ticked all the boxes.

And quite apart from their conspiracy and deceit aspects, let's not forget the significant economic impacts, including on other (and more honest) businesses who are often the prime victims of these rorts. By far the largest survey available of the international evidence – which covered 700 instances of economic studies or court decisions which looked at cartel price increases – found that
The primary finding is that the median episodic cartel overcharge for all types of cartels over all time periods is 23.0%. It is lower for cartels with solely domestic membership (18.2%), higher for international cartels (25.1%), and highest of all for global cartels (30.4%).
But the proposed law as it stands makes no distinctions, and it should. Ed's solution is as good as any, to split out the especially bad stuff (bid-rigging and "deliberately deceptive" cartels) and leave everything else as is, as a civil rather than criminal offence.

Saturday, 28 April 2018

The power of ideas

There's a paper,  'Modelling public expenditure growth in New Zealand, 1972–2015', coming out shortly in New Zealand Economic Papers - it's online already here if you've got access - which has a go at explaining the long-term trends in New Zealand government spending as a share of GDP.

Here's what the data look like.

The paper - by Norman Gemmell (Victoria), Derek Gill (NZIER) and Loc Nguyen (Victoria) - tests out three theories. One (they call it a "public finance" view) says, there is a demand function for publicly provided services like health and education, and expenditure responds to demand changes. A second ("public choice") says expenditure reflects political pressures (eg voters' demand for greater redistribution). And a third ("public administration") says spending follows changes in how the state sector is run. And they find some support for the first two views, but rather less for the third.

I was struck by something rather different when I saw the chart. I thought it demonstrated the immense power of ideas. 

At the start of the period, we're in the heyday of programmes like Lyndon Johnson's 'Great Society' and other attempts to radically improve the scope and the effectiveness of the welfare state. We're in the era of aggressive Keynesian demand management. We're in a world with an expansive view of the commercial activities a government should or could undertake ('Think Big'). 

But by the end of it we've passed through the stagflation that discredited the theory behind the old Keynesian policies. We have new ideas on how cycles develop and what if anything we can or should do about them, with some seeing government as part of the problem rather than the solution. We're more into 'austerity' and leaving ourselves 'fiscal leeway'; privatisation and funder/provider models reflect less ambitious ideas of the scope of government.

The authors, by the way, note (p23) that "past levels of spending strongly constrain future levels – changes in spending demonstrate inertia", and you can see it for yourself just by eyeballing the chart: when it's going up, it keeps going up, and likewise when it's going down (the hump at the end is the GFC and the Canterbury earthquakes, and chances are the otherwise downward trend is still intact). That, in my view, is entirely consistent with keeping on working from the same policy playbook. And I don't think it's any coincidence that the series peaks in the late '80s as the ideas underpinning ever greater state activism got displaced, here and overseas. Our paradigms and models shifted, the policy playbook got reprinted, and the size of government fell into line.

I found myself reminded of Keynes' wording (pp383-4 of the General Theory):
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back...soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
It's also left me wondering - again ('Those who don't know history...') - why economics courses both here and overseas spend so little time on the history of economic thought and on economic history in general.