Wednesday, 23 September 2020

Keep up the support

Last week I was making the point that one of the key things to look for in the Pre-Election Economic and Fiscal Update or PREFU was whether fiscal policy was going to be supportive or contractionary over the next wee while, and to what extent, and whether the proposed fiscal stance matched up with the likely state of the economy. 

You might have thought that Ministers of Finance need no special advice on aligning fiscal policy with the cyclical needs of the economy. Surely (you might have thought) they let it rip when times are bad, and wind it back when times are good: obvs, to use the technical macroeconomic term.

And if so you'd be in for an unpleasant surprise, at least if you were a citizen of the US or the EU. Overnight we had this presentation from the OECD on their latest economic outlook. It included this graph, where the blue bars are the same measure of the stance of fiscal policy I used in looking at least week's PREFU, except that the OECD shows bars above the line as fiscal tightening and bars below as loosening (our Treasury does the opposite, it's arbitrary, either works). The yellow triangles are a measure of how poorly each regional economy is faring. The grey shaded area is the GFC.

In both the US and the EU you'll see the local fiscal response was bang on: decent sized fiscal stimulus. And in both regions you'll see that it was taken away much too soon. There are all sorts of reasons why the GFC was a doozy, but premature fiscal braking was one of the larger moving parts. Inevitably politics played a large part, including a Republican Congress wanting to unwind anything President Obama initiated.

The OECD says, rightly, that eventually everybody's fiscal house will have to be put back in order, and done the right way, but as of today "Undertaking fiscal consolidation measures now would be premature". I suspect in our case the eventual retrenchment won't be able to get started  before 2023.

The other big messages are that the world economic outlook, on the OECD's latest base scenario, is a bit better than it was when the OECD took its last stab at a guess back in June ...

... but before rushing out into the street to celebrate, bear in  mind that the range of uncertainty around the base scenario is still very wide, as it is here at home.

Finally, the OECD points out (on p10 of the Outlook) that
With long-term interest rates close to zero in many advanced economies, the social rate of return on public investment is likely to exceed the financing costs for many projects. Investment is particularly needed in areas that have large positive externalities for the rest of the economy and where under-investment might otherwise occur due to market failures, including in health care, education, and digital and environmental infrastructure.

Here in Auckland the Bridge has been out, aggravating the already inadequate transport infrastructure, the water supply is iffy, and housing land remains stratospherically expensive: I passed a sub-division the other day, admittedly with largish sections in a nice rural area, where section prices are "from $985,000". When are we going to start fixing it, if not now?

Friday, 18 September 2020

The most important bit

Every year we get Treasury's economic and fiscal updates - the latest, the Pre-Election Economic and Fiscal Update or PREFU on Wednesday - and every year the analysts and the pundits get stuck into the size and pattern of government spending and taxation, the size and trend of the fiscal surplus or deficit, and the size and trend of government debt. All worthy topics, to be sure. 

Yet every year one of the most important aspects of the update struggles to get a proper look in. It should be right up there with the politicised argy-bargy over whose plan for debt is better than whose. This year it's arguably the single most important aspect of the update.

It's whether fiscal policy is boosting or braking the economy. That's important anytime, but doubly important now: once because of fighting the impact of covid, obvs, but also because the other big policy tool for managing the economic cycle, monetary policy, has mostly shot its bolt, so perforce most of the the heavy stabilisation lifting from here will need to be done by Grant Robertson rather than by Adrian Orr.

Here's what the expected impact of fiscal policy is looking like. All these kinds of fiscal impact calculations are by guess and by God, but they're all we have and despite their inherent measurement challenges they're probably in the right general area. I've included the likely impact as shown in the PREFU and the shape that had been expected back in the May Budget.

First of all fiscal policy is strongly expansionary over the next two years, as it should be. And the shape is looking more realistic and more appropriate in the PREFU than it looked back in May at Budget time. I wasn't sure that the government machine was capable of delivering that big a boost in 2019-20 in that short a time (unless it was very heavily weighted to get-it-into-people's-bank-accounts-quickly initiatives like wage subsidies). And it's become apparent that fiscal support will need to be kept going for longer than previously thought, so healthy fiscal stimulus in both 2019-20 and 2020-21 rather than one big hit in 2019-20 is looking a better plan.

The odd thing, though, is the planned and quite large (3.7% of GDP) contractionary impact from fiscal policy in 2021-22. Sure, at some point a Minister of Finance has to tack back on the other course, either (in the short term) because the economy is now strong enough not to need further fiscal stimulus or (in the longer term) because deficits and debt will need some repair work. But 2021-22 is not that point. On Treasury's forecasts the unemployment rate will still be 7.6% in June 2022, still unacceptably high and in no way the appropriate time to slam on the fiscal brakes. 

Another way of getting to the same point is to look at the 'output gap', which is how far the economy is below full employment of its resources. Here's the PREFU estimate (which I backed out of the data supporting Figure 1.6 in the PREFU). An economy still substantially (4.0%) below full potential in mid June 2022 is an economy that is not ready for fiscal retrenchment.

What I drew from the PREFU is that fiscal policy is at the moment appropriately supportive, but also that - barring a miraculously early development and deployment of a covid vaccine - there is a degree of unreality about how quickly the current levels of stimulus can safely be withdrawn.

Tuesday, 8 September 2020

An excellent resource

Interested in staying up with Australia's criminalisation of cartels, and New Zealand's impending move to do the same? Then head over to the MLex site and download your free copy of  'Collusion Damage: Australia’s struggle to secure its first criminal cartel convictions — and make jail time a deterrent at last '.

It's an excellent resource. As the report says, "Since the first individual criminal cartel charges were laid early in 2018, MLex has been present at every material court hearing in Canberra, Melbourne and Sydney", and the expertise shows. The report is on top of all the cases currently live. My take, not theirs, but after reading this report, and also going by the coverage of the case in the Australian Financial Review, I do wonder from a variety of perspectives if the ACCC is going to succeed with its alleged cartel case against the underwriter banks left with unsold ANZ Bank shares. 

There's a chapter in the report about New Zealand's impending regime, where I agree with MLex that "It’s true that the Commerce Commission will still have the full suite of civil offenses at its disposal and will be under no obligation to unleash a criminal prosecution for trivial matters. Yet ensuring that well-meaning, small businesses -  those that aren’t large enough to have in-house counsel or even to employ a law firm to review their decisions - don’t get caught up with criminal offenses designed to ensnare larger, possibly global players, will remain a challenge for the agency".

In writing up the CLPINZ session on cartel criminalisation I'd also wondered about potential overkill, and had assumed we in New Zealand would end up with some arrangement similar to that between the ACCC and the Commonwealth Director of Public Prosecutions, which hopefully would set some seriousness threshold before unleashing the criminal process. But I learn from the MLex report that "Unlike the ACCC, the Commerce Commission will be able to take its investigations to court directly, without handing the file over to public prosecutors; however, it will be required to ascertain how its planned prosecution measures up with the Solicitor General’s Prosecution Guidelines, which demand “evidential sufficiency” and proof that the prosecution is in the public interest". As the Guidelines say, "The predominant consideration is the seriousness of the offence", and hopefully a conservative approach will be the way to go, rather than feeling the collar of commercial naïfs.

Speaking of resources, I came across the MLex report on its useful Twitter feed. If you're interested in competition tweets, head over to my own Twitter posts and help yourself to my Twitter 'Competition' list (currently 73 members). And if New Zealand economics is your thing, then the 'NZ economics' list (52 members) should be of interest. If there are local competition or economics folks I've missed, let me know and I'll add them.

Friday, 4 September 2020

It's not every day ...

 ... you get to listen to a Nobel prize winning economist, so big shout out to the University of Auckland for its Dean's Distinguished Virtual Public Lecture last night by Nobel Laureate Jean Tirole, Professor at the Toulouse School of Economics, and further hat tip to the university's extending the availability of the lecture to the Law and Economics Association of New Zealand (LEANZ, you are a member, aren't you?).

Tirole was talking about "Digital Dystopia", or as the invite put it, "How transparent should our life be to others? Modern societies are struggling with this issue as connected objects, social networks, ratings, artificial intelligence, facial recognition, cheap computer power and various other innovations make it increasingly easy to collect, store and analyse personal data. While this holds the promise of a more civilised society ... citizens and human rights activists fret over the prospect of mass surveillance by powerful players engaging in the collection of bulk data in shrouded secrecy. A dystopian scenario will be used to emphasise the excesses that may result from an unfettered usage of data integration in a digital era".

Truth be told, it wasn't the easiest presentation to follow: not because of Tirole, whose style is affable and conversational, but more because Zoom webinars are not the best medium for presenting equation-rich material, or at least not for those of us below Tirolean levels of mathematical deftness. Most of the invited panel of commentators appeared to have read it beforehand, and that was the sensible thing to do - here's a link.

Even if the details of the maths beat me, I got the message, and it's plausible. Tirole said that, at first, people had assumed that the likes of the internet and other modern social tech would be a good thing - empowering the previously voiceless and all that - and momentarily reminding me of the optimism around the Summer of Love before it petered out into drug overdoses in squalid squats. But he reckons that this upbeat assumption, like the flower children's, is worth revisiting, and that there are real risks of technologies like facial recognition becoming oppressive - and effective - methods of totalitarian control. The poster child in his presentation was China's proposed 'social credit' rating system, which looks to bundle all of a person's activity into a composite measure of whether they are a good citizen in their everyday life and whether they are going with the Communist Party flow, with potentially unpleasant personal consequences if they aren't (for example though restrictions on their access to credit, employment, education or travel).

In the discussion afterwards, there were quite a few questions (including mine) about whether the social credit rating would be as effective as feared. My thinking had been that people would see through the government's rating as a political device - I was reminded of the crack in the Soviet Union that "we pretend to work and they pretend to pay us" - and would actually judge you by (for example) your buyer or seller scores on whatever is the Chinese equivalent of eBay. 

Tirole, as we should have expected, had thought of that, and his answer was that an authority minded to go down the social credit rating route would deal to the private scoring systems to stop them being used in exactly that way. On p4 of the paper he says, "The state must eliminate competition from independent, privately-provided social ratings. Because economic agents are interested in the social reliability of their partners, but not in whether these partners’ tastes fit with the government’s views, private platforms would expunge any information about political views from their ratings. This competition would lead to de facto unbundling, with no-one paying attention to the government’s social score". 

He also said that people couldn't just ignore the ratings when they carried real penalties, and he pointed to an insidious feature of the rating system, 'guilt by association'. You might well want to allow the poorly rated dissident to buy a business class air ticket, but your own rating will suffer if you do. It reminded me that we've been here before: how many people kept buying from Jewish shops in 1934, when the SS were taking notes? Tirole also raised some interesting historical parallels, quoting Aldous Huxley's letter to George Orwell in 1949, where Huxley felt that oppressive governments would find it easier to go for lower cost routes than running gulags. Orwell was right in the shorter-term, but Huxley might be closer today: "the recent developments fit well with his overall vision" (p6).

What should be done? "A key challenge for our digital society will be to come up with principle-based policy frameworks that discipline governments and private platforms in their integration and disclosure of data about individuals" (pp35-6). But as he also says with very considerable understatement, "The exact contours of such disciplined principles are still to be identified", particularly (I'd add) because we also want to keep sight of the very large benefits the new platforms have brought.  Tirole argued for the desirability of keeping divisive issues out of the databases and aiming to "monitor platforms' foray into political coverage unless platform regulation is performed by one or several entirely independent agencies".

Friday, 28 August 2020

Three management questions

Look, I'm an economist, and management thinking isn't normally my thing, and what do I know anyway, but from assorted encounters over the last wee while I've got three questions.

1 Are people kidding themselves about post-Covid working conditions?

There's a lot of optimism about remote working increasingly coming to replace the traditional battery hen office and its zero-privacy rent-minimising collaborative open spaces. I'm reasonably optimistic myself, as I wrote in 'Why the status quo is in for a hard time after COVID-19', where inter alia I said that "My guess is that we’ll look back at pre-COVID management practices like we look back at photos of 1950s typing pools". It'll be useful, too, if the evidence confirms that there is indeed a free lunch here - happier, more empowered employees and higher productivity. But I'm also wondering: in the businesses where the core problem is a command-and-control, hierarchical management mindset, how much will really change? Will us optimists be blindsided by the rise of things like intrusive computer monitoring software and locked-down-tight collaborative 'tools'? 

2 And while we're talking computer systems ...

Why is it that virtually every corporate in the western world provides its employees with gear that's more limited than what they could buy themselves, for less, at the nearest Noel Leeming or Harvey Norman?

3 'Stars'

There's been any amount of angst about the widening gap between the pay of the CEO and the pay of the average Jack or Jill. And then I read the other day about yet another company that's just recruited its new CEO from the marketplace for top executives. Fine: good luck to them. Probably a great pick who'll do them well. But I've got two observations. If every big company starts fishing in that pool - or to fake an economics veneer to it, the demand curve shifts out to the right - should anyone be surprised if CEO salaries blow out? And whatever happened to what I always thought was one of the main responsibilities of a board, which was to make sure that the current CEO was developing enough internal bench strength?

Tuesday, 25 August 2020

CLPINZ 2020 goes online

Last week's Competition Law and Policy Institute (CLPINZ) workshop was - perforce - the first time CLPINZ has run the annual event online, and the good news is that the technology worked just fine (ably organised by Conference Innovators, special hat-tip Olivia Lynch). Covid is reshaping a lot of things (as I wrote in Acuity, the accountants' magazine) and sometimes for the better. Online workshops may not provide the same personal contacts and networking but they can deliver a lot of bang per buck once travel costs don't come into the equation for speakers or attendees.

Can't cover everything but here are some of my highlights.

The keynote was the topical 'Antitrust in times of crisis and emerging from the crisis', by Maureen K. Ohlhausen from Baker Botts in Washington DC, with commentary by Ayman Guirguis from K&L Gates in Sydney and session chair Anna Ryan of Lane Neave in Christchurch. One theme was the need for competition authorities everywhere to scramble hard to authorise (or at a minimum stand aside from preventing) collaborative activities between firms who would normally be competitors, when they are responding to covid logistical challenges (eg coordination of grocery deliveries, or availability of medical resources). The ACCC in particular has in my view been commendably quick to get provisional authorisations out the door. 

Another was how to treat 'failing firms': there are a lot of cases where firms are in trouble (or heading for foreseeable trouble) and while they can't qualify for the usually strict merger conditions around a 'failing firm', a properly forward-looking analysis of the competitive outlook might well lead you to allow a merger. 

A third theme was the renewed focus on market power in the tech space now that we're all even more dependent on the big tech names for our remote working and our online shopping. The conclusion as I saw it was that there is still no clear verdict on whether these markets are naturally tippy towards one predominant incumbent, or whether there are issues of market power that need to be corrected.

Consumer law isn't usually top of my interests, but I was very much taken with the session on 'Unconscionability and unfair contract terms', where the speaker was Sarah Court, Commissioner, ACCC, the commentator Anna Rawlings, Chair of the NZ Commerce Commission, and session chair James Craig of Simpson Grierson. As background, Australia's got unconscionability on the statute books, and we're minded to go the same way. I'd heard Sarah Court on this topic before (see here) and while the Kobelt case she cites as showing the Aussie law isn't working might be one of those odd cases that might not influence anything over the longer haul, there's a real chance that our courts might also struggle to nail genuinely ratbag behaviour. Why not read Kobelt and see what your call would have been? And if you think Kobelt got the wrong end of the stick, what would you suggest to fix it?

Another area where we look to be heading to align our legislation with the Aussies is changing our current s36 of the Commerce Act, the bit that deals with abuse of market power. The plan is we will move away from our current legal test (which focuses on the 'counterfactual test' of what would a firm without market power have done) to an 'effects test' which, as it says on the tin, tries to take an objective view of whether the conduct actually works anti-competitively (both jurisdictions would also retain anticompetitive purpose, which would catch those incriminating internal e-mails). 

I went into this session - 'Misuse of market power – what an 'effects test' would mean for New Zealand', speaker Dr Katharine Kemp from the University of New South Wales, commentator Brent Fisse of Brent Fisse Lawyers, session chair John Land from Bankside Chambers - with what I regret to reveal was a largely closed mind: I'm pro-change. But I came out with the odd niggle of doubt about potential over-reach. Faced with the choice of the status quo or the change, I'd still change, as the counterfactual test asks the wrong question plus we get the benefit of trans-Tasman alignment, but I suspect policy analysts on both sides of the Tasman will be watching the first few 'effects' cases very closely indeed.

And yet another area where we are harmonising with the Aussies (and with global practice generally) is criminalisation of cartels, where on the topic of  'Cartels – criminalisation – lessons from the Australian experience' we heard from Marcus Bezzi, Executive General Manager at the  ACCC, commentary from Marc Corlett QC from Britomart Chambers, chairing by Glenn Shewan from Bell Gully. I'm generally not in favour of yet more criminal offences when we already have far too many people in jail (by developed economy standards), but I'm prepared to make an exception for 'hard core' cartels which I see from a moral perspective as akin to fraud (quite apart from the often sizeable economic detriments).

One thing that's worried me, though, is that every 'ordinary' New Zealand cartel, if I can call it that, would attract criminal charges, which I would regard as overkill. I was partly relieved to hear Marcus talk about a memorandum of understanding between the ACCC and the Aussie Commonwealth Director of Public Prosecutions which aims to keep the criminal route for the worse cases, which is surely right. I presume something similar will go into place here at home before we go live in April next year. Marc Corlett's remarks said (to me at least) that individuals caught in the grinder between the criminal prosecutor and a perhaps not always supportive employer are going to be in a tough place: another reason in my view to make sure that we concentrate on the hard core conduct and the big fish.

The session on 'Acquisitions of nascent competitors', speaker Renata B. Hesse from Sullivan & Cromwell in Washington DC (who if I heard it right may indeed have coined the phrase 'killer acquisition'), commentator Iain Thain from DLA Piper in Auckland, session chair Will Taylor from NERA Economic Consulting in Auckland, got me thinking. This is a really tough area. It's important to stop killer acquisitions: as Iain emphasised, it's the competitive struggle that unearths all sorts of lucky discoveries (sometimes unexpected ones) even if in the end the market tips to one big winner. But it is very hard for competition authorities to deal with, when even those most up with the game in any given sector can't be sure what might have developed into a credible challenger to an incumbent, but for its pre-emptive acquisition. As Renata said, you're often trying to do an objective analysis of something that is inherently subjective. 

Some days I favour channelling my inner Schumpeter, not worrying too much about temporary tech monopolies and letting it all play out in the creative destruction gale. Sometimes there must be good outcomes when an incumbent offers a genuinely better product, once it has bolted on the smaller-firm functionality it's just bought, whereas you might be waiting years for the small firm to develop a full-feature offering. But then will incumbents' internal R&D slack off if they can rely on buying the next bright idea? And what if ... you get the drift. This is hard.

Life's too short to summarise everything but for the record we also had an economists' panel - 'Hipster economists? Values, welfare and evidence', and a corporate counsel oriented panel - 'Handy hints for practice – Joint ventures and commercial agreements', and if they ring your bell you can get in touch with the panellists (here's the full workshop programme with the details).

Wednesday, 12 August 2020

It helps, but we'll need more than this

No surprises in today's Monetary Policy Statement from the Reserve Bank. The official cash rate (OCR) was kept at 0.25% - as every one of us surveyed in the Finder forecaster survey had expected - and the size of the Bank's Large Scale Asset Purchase (LSAP) programme was increased to $100 billion. The point of the LSAP is to keep longer-term interest rates down by buying bonds: me, I'd be tempted to go the Aussie route where they've explicitly said what rate they're aiming for (0.25% for the Aussie three-year government bond). The RBNZ governor got asked at the press conference if the RBNZ was minded to some explicit bond yield targeting: it isn't ruled out, but it's not being ruled in, either. Can't see it hurting, as it would add to the information available on where the RBNZ is headed over time, its 'forward guidance' in the jargon.

Speaking of which, I'm not really sure anymore why the RB is keeping the OCR at 0.25%. Yes, it seems to want to have its forward guidance seen as rock solid, and it had said back in March that the OCR would be on hold "for at least the next 12 months". There may also have been some element of giving the banks a heads up about a timetable for getting their systems in order to handle a negative OCR. But in the wider scheme of things I'm inclined to think the extra support from a 0.25% cut now, especially if it helped weaken the NZ$, trumps the forward guidance credibility. And there is  not a lot of credibility downside risk anyway, given the recent turn of events and a new community outbreak. When the facts change, etc.

It's also worth pointing out that some of the Bank's other policy options would also get more bang per buck if the OCR were lower. As the Statement said, "Because the NZGB [New Zealand Government Bond] curve is already relatively flat around the current level of the OCR, a lower OCR would likely increase the effectiveness of LSAPs by lowering short-term interest rates and allowing LSAPs to flatten the yield curve at a lower level" (p19) and "A term lending programme may be increasingly useful for supporting the pass-through of monetary stimulus if the OCR were reduced" (p20).

But in any event further policy support, if only by way of a bigger LSAP at this stage, is absolutely the right thing to do, and would have been even without the latest Covid outbreak. And it's helpful that its previous easing is also quietly bearing fruit: as the Statement pointed out, "At least 50 percent of mortgages are due to be re-priced in the next 12 months" (p18), which will make quite a difference to a lot of households. 

At the same time you can't help feeling that monetary policy is well into diminishing returns territory. As cropped up in the press conference, marginal changes to interest rates aren't going to make much difference if, in deeply uncertain times, borrowers won't borrow and lenders won't lend. So the heavy lifting from here is going to have to be done by fiscal policy, and earlier plans to put the revolver back in the holster now look behind the curve.

Fiscal policy has been hugely important up to now: the Statement rightly pointed out that "The Wage Subsidy has temporarily supported more than 71 percent of New Zealand businesses and 1.7 million workers, helping employers to retain staff. As a result, the [Covid] impacts on employment to date have been small despite the unprecedented reduction in economic activity" (p25). The reality is that it's going to have to do a lot more again: "Fiscal stimulus is likely to be more significant and more front-loaded than we assumed in the May Statement" (p18). 

At this point, though, we don't have a great feel for what's likely to happen on the fiscal front, or as the Statement phrased it, "The exact timing, composition, and magnitude of government spending remains uncertain" (p10). August 20's Pre-Election Economic and Fiscal Update is going to be one of the most important policy statements of recent times. And I very much hope it doesn't fall into the election campaign's depressing "I can out-austere you" heffalump trap.

Finally a wonkish point that only an economist will warm to, but it's important all the same. One of the things you need to know when you're trying to figure out how monetary policy is working is what interest rates people actually pay or receive (duh, but bear with me). The Statement noted, however, that "Detailed data on business lending rates is limited. The Reserve Bank has begun collecting information on actual new lending rates faced by firms, which will enable better monitoring of monetary policy transmission to businesses in the future" (p18)

Better late than never, and well done the Bank for getting on with it, but it's yet another Covid-revealed instance of our statistical infrastructure letting us down. On the other side of the election, the next Prime Minister could usefully appoint herself Minister for Statistics, and find out why have we been so bad over long periods of time at collecting the fuller set of data that policymakers - and the rest of us - need. It's a gap that's all the more bizarre when the world is awash in data that can be turned into useful official info, as Stats, the RB and Treasury recently showed when they came up with the New Zealand Activity Indicator

In campaign season, the pols are prepared to make all sorts of commitments: how about committing to a fully First World set of statistics?

Tuesday, 14 July 2020

The OECD's take

Yesterday I had a go at estimating what the drop in New Zealand GDP had been during the June quarter, when the lockdowns were in place. Meanwhile, in Paris, the OECD was just putting to bed its Employment Outlook 2020 (best link here, others got on my wick with overenthusiastic use of dynamic charts and highlighted text), and they helpfully included this chart of what they think happened in June across the OECD. 

They have the New Zealand June decline at -15%: yet another sign that our June quarter wasn't quite as bad as it originally shaped up to be. It's also, despite the relative stringency of our lockdown, not too bad an outcome by OECD standards: the median decline across the OECD was -12.9%. If you'd like the raw data to play with they're here.

The OECD report also had this interesting chart on use of wage subsidy (and similar) schemes. We're right over there on the left hand side as a big user.

That's fine by me - it was IMHO a completely appropriate and even necessary fiscal response, and especially by New Zealand's chronic micromanagement standards a remarkably quick, simple and effective one. And it's interesting to see that nearly all of the other countries (ex France and Germany) went the same hassle-free 'ask no questions' route and approved virtually every application that came in.

As things stand, the wage subsidy scheme won't be available for much longer (last applications close on September 1): at the moment I can't see how it can sensibly be wound up without some replacement made available for the worst of the tourism, hospitality and accommodation sectors.