Thursday, 17 October 2019

Gone

I've just finished John Gibney's A Short History of Ireland, 1500-2000 (Yale University Press, 2017). Near the end (pp236-7) he recounts how
The Republic of Ireland in the 1980s was a state gripped by a recession, burdened by a huge national debt, and ravaged yet again by emigration on a huge scale: more than sixty-one thousand people left Ireland in 1988 alone, with two-thirds of them departing for the United Kingdom ... The spectacular economic growth of the 1990s saw emigration, a traditional litmus test of Irish economic performance, reverse; Ireland instead began to receive immigrants ... The upsurge in the southern economy had an impact on the emigrant flow: young Irish people were staying at home during the boom, as there were now jobs to be had
So, how do we fare on that "traditional litmus test"? Here's the annual net flow of New Zealand citizens over the past 40 years or so. Over the period we lost very nearly 800,000 people, nearly all to Australia.


New Zealand's a great place from many perspectives, but let's not kid ourselves. We've been hopeless at closing the gap in the standard of living between here and Australia, which is the big driver behind that loss of 800,000 Kiwis. When it comes to the final verdict on our economic performance, people have voted with their feet. And how many people really believe that, under this government or its recent predecessors, there's been an urgency to turn it around?

Solutions in search of a problem?

Yesterday evening in Wellington the Law and Economics Association of New Zealand (LEANZ, here's its spiffy new website), put on its latest seminar, 'Regulating Big Tech: Key Findings from the ACCC’s Groundbreaking Digital Platforms Inquiry', presented by Morag Bond, Joint General Manager of the ACCC's Digital Platforms Branch. There'd been an earlier one in Auckland at lunchtime.

Morag (below) did a fine job, in front of a good crowd. That was partly down to the intrinsic appeal of the topic, and partly down to coordination between LEANZ, the New Zealand Association of Economists, and the Competition Law and Policy Institute of New Zealand, each of whom gave the heads up to their memberships. Nice one. And hat tip to Russell McVeagh Wellington, who generously hosted.


Morag's slides aren't up yet, so in the meantime, if you're not already familiar with it, here's the ACCC's page on the inquiry, which includes the press release, an executive summary, and the whole 619-page inquiry itself. If videos are your thing, here's the 37 minute press conference on publication day.

Overall, my feeling remains where it was when this territory was traversed at this year's ComCom conference: quite a lot of smoke, no clear fires. There are, to be sure, some issues that need investigation. One that should indeed bother merger regulators, for example, is the big incumbent platforms buying up fledgling businesses that might have morphed into credible competitors. It is of course (as Morag noted) open to an ACCC or ComCom to make that case now under our existing legislation, but the inquiry said it might help if the law was made more explicit. It recommended that
Section 50(3) of the Competition and Consumer Act 2010 (CCA) be amended to incorporate the following additional merger factors:
(j) the likelihood that the acquisition would result in the removal from the market of a potential competitor;
(k) the nature and significance of assets, including data and technology, being acquired directly or through the body corporate
Maybe that might help to stiffen the odd judge's spine, but the reality is that a rewording doesn't ease the underlying difficulty, which remains highly vulnerable to both Type 1 error (stopping the purchase of a non-challenger) and Type 2 (allowing the purchase of a real threat). You can see how Type 1 errors might happen when every venture capitalist behind a start-up is puffing to new investors that it is The Next Big Thing. And you might well threaten the pipeline of innovation if inventors of useful complementary technology are wrongly prevented from cashing out to the guys with the big chequebooks.

In dynamic industries, as a general principle it's probably best to do as little as needed. It's fine to ping clearly anti-competitive practices ("thou shalt have no browser but My browser") if you come across them, and Morag said the ACCC has five investigations underway. But beyond that, you are dealing with a high-speed industry with strong network effects, where bigness is almost inevitable and the most likely playbook is a Schumpeterian succession of temporarily highly-profitable near-monopolies. It's true, as Morag said, that Facebook is being somewhat disingenuous when it argues that someone might topple Facebook as readily as Facebook toppled MySpace, but that's the longer-term way to bet. If you're my age, you once wrote in WordStar and worked with data in Lotus 1-2-3: where are they now?

Sit back and let it evolve is likely to be a good default competition policy strategy from another perspective. If there are real issues, for example genuine consumer concerns over privacy or data sharing - and in my view it's not yet proven that enough consumers care about the current bargain they've struck -  I wouldn't underestimate the ability of markets to deal to them. Worried about the outfits tracking your every online move? Instal Ghostery: as I write it's telling me there are no trackers following the ACCC site, four tracking ComCom's, and 13 tracking mine. Hah! Worried about the trustworthiness of a site? Instal Web of Trust. And even the incumbents are beginning to realise that it's in their own longer-term interest not to push their luck: have a look, for example, at 'How to Set Your Google Data to Self-Destruct'.

The ACCC inquiry was required in its terms of reference to consider "the impact of platform service providers on the level of choice and quality of news and journalistic content to consumers", and the upshot was that the Australian public allegedly risks losing some worthwhile public interest coverage of (for example) local politics. This is because, as shown below in a chart from the Executive Summary,  online advertising has eaten the old media's classified advertising revenue, which means they can no longer afford proper "local beat" journalists and are forced to recycle cheaper celebrity gossip, clickbait, and grief porn (my words, not Morag's or the inquiry's).


But I wonder if citizen journalism and the rise of "digital natives" - media that have only ever existed online - are a better market-oriented answer than the taxpayer subsidies the ACCC recommended for coverage of local courts and local politics. As Morag mentioned, the barriers to entry for new media have dropped enormously, enabling that "long tail" of small pockets of interest to be accommodated. Even in relatively niche areas, all of us now read expert, informed, committed media, from all ends of the spectra of opinion, that didn't exist a few years back. If local politics matters to people, and it does to some, it's highly likely someone will rise to the challenge unprompted.

Maybe I'm wrong, the North Shore Times will fall over, and the deliberations of the Hibiscus and Bays Local Board will be lost to posterity. I doubt it, but yet again, the better course is to see how it plays out before jumping to 'solutions'.

Friday, 11 October 2019

In the eye of the beholder

There's been a lot of focus on what looks like a large $7.5 billion fiscal surplus in the fiscal year just ended. Part of it, as Treasury explained in the financial statements for the year, is due to various one-offs, which in a nerdy fiscal policy wonk sort of way, I'd thought I'd have a look at.

I didn't come across anything earth-shattering, although personally - and this'll show why accountancy is not my forte - I wouldn't have put any of the revaluation gains arising from a change in how the rail network is valued into the surplus, which is, after all, the "operating balance excluding gains and losses". But as explained on p15, the surplus includes $2.6 billion of "Reversal of prior year impairments that impacts OBEGAL". Never mind.

Along the way I came across something interesting, and it's this. Down the back of the statements you can see the value placed on the government's ownership interest in three electricity generators, Genesis, Mercury and Meridian. The Auditor-General's audit report says (p35) that "As outlined in Note 16, the electricity generation assets, which are at least 51% owned by the Government, are valued at $17.2 billion at 30 June 2019. The valuation of these assets is carried out by specialist valuers because of the complexity and significance of the assumptions about the future prices of electricity, the generation costs, and the generation volumes that these assets will create".

Note 16 shows that the specialists' valuations are based on the net present value of future earnings (give or take), and that's fine. But then I wondered, why don't the accounts just use the market price? Maybe modern accounting policy doesn't support the approach, though I seem to remember that post the GFC, there was a move to have more investments and liabilities "marked to market", i.e. valued at what they'd actually fetch rather than on some notional basis that might flatter the real-life value of investments or minimise the real-world cost of liabilities.

So here are the valuations at market price as well as the valuations on the government's books.


The valuations on the fiscal books are (unless I've got my calculations wrong) uniformly higher than what the financial markets say. There's nothing sinister about that: I'd guess the financial accounts are required by the accounting standards framework to follow some acceptable valuation methodology, and this is how the cards have fallen.

But it's an interesting outcome. It's intriguing that the markets don't think the generators are worth what the valuers' approach shows. Now, it may be that the answer to any valuation question depends on the context of the question: a valuation to establish a regulatory asset base, for example, may have its own imperatives. But even so, you look at the two sets of numbers, and you're tempted to ask, who's right? What does one approach know that the other doesn't?.

Friday, 4 October 2019

Good stuff

Little did I know, when I got antsy the other day about where the electricity price review had got to, that Dr Megan Woods, the Minister of Energy and Resources, was only days away from publishing the review's final report and responding to it (all the relevant documents - government decision, Cabinet minute, final review report, and the earlier options paper - are here).

The review's got extensive media coverage so no need to reinvent the wheel here - in particular there's an excellent piece by Stuff's Tom Pullar-Strecker, 'A run down on the Government power plan', that ticks all the what-you-need-to-know boxes.

Overall the review team and the government have done a fine job. I don't find myself quibbling with much, even though some of the recommendations looked a bit counterintuitive at first. Banning "win back" counter-offers from incumbents - preventing them competing back, as it were - at first blush doesn't look supportive of the competitive process, but when you think about it a bit more it is necessary for competition to work at all in this area (the thought had crossed our minds when we made our switch). Similarly the ban on prompt payment discounts, which aren't the reward to consumers they appear but effectively act as regressive late payment charges on financially stressed households. The abolition of low fixed charge plans is in the same bucket: sounded like a good pro-consumer idea, turned out (among other things) to "unintentionally shift costs to households with low incomes and high electricity consumption" (final report, p62).

Increasing the ability of electricity retailers to hedge against price volatility is an especially useful idea. Normally both buyers and sellers of commodities like energy have a joint interest in a functional futures market ( a 'contract market' in the sector terminology): they both see value in price predictability. Less so in our energy sector, when the availability of price insurance helps challenger retailers compete more effectively with the gentailers' own retail arms. Effective retail competition needs an effective hedging mechanism, and if market-making in a contract market needs to be imposed on generators, so be it.

Both regulators in this area - the Electricity Authority and the Commerce Commission - get some raps on the knuckles, particularly for lack of consumer engagement. The final report said (p12)
A frequent complaint we heard from consumers was that neither the Commerce Commission nor the Electricity Authority – but particularly the latter – listened to, or took account of, their views. Consumers need to see regulators making a concerted effort to understand their points of view. Nothing beats meeting people in person. It was disappointing, therefore, that neither regulator attended the stakeholder meeting in Te Kuiti convened by The Lines Company at our request. Both would have benefited from hearing residents’ stories, as well as understanding their expectations of regulators – the chief of which is that they focus on consumers’ long-term interests.
Oops. It hasn't helped that on several other fronts progress has been too slow. It's understandable that the Minister is now getting impatient. On the contract market, for example she said that "I want to be assured the fragility previously observed in the wholesale market at times of stress is not repeated in future, and I will make it clear I do not want to wait for a “better solution” that might never be found" (decision paper, para 96). She noted that "The Electricity Authority has been reviewing transmission pricing for more than ten years" (para 102). And she's prepared to bypass the Authority if it doesn't get on with the review recommendations (see paras 34-5).

The Authority, and the Commission, are independent agencies as the Cabinet decision recognises, and can't be told to jump to ministerial whim, and in general I'm no fan of expanding ministerial discretion in an already micromanaged and over-politicised economy. But our policymaking and regulatory processes are too slow, and on this occasion a bit of holding feet to the fire doesn't seem amiss.

Two final points. The proposed new Consumer Advocacy Council for the electricity sector could, as the decision says (para 40) "potentially be extended to cover gas, telecommunications and other utility services ... This is because consumers of those services, which are increasingly bundled with electricity, are also likely to lack an effective voice". It's not just the consumer voice issue: it's the sit there and be ripped off consumer inertia issue, too, which is liable to be just as prevalent in those sectors and which, to be honest, no country has really got its head around. The Brits and the Aussies have been equally befuddled ('Have we got the same problems?'). An early task for the Council should be to reach for some industrial strength behavioural economics research.

And finally, as both the review and the government's response acknowledge, the energy hardship some households are experiencing isn't so much down to locally high electricity prices - the review said (p1) that "residential prices on average ranked 10th lowest among 35 OECD countries in 2017" - as locally inadequate incomes to pay them. It would be nice if this, and successor, governments showed the same urgency to get on with raising living standards as they have in reforming the electricity business ('Are we serious?').

Tuesday, 1 October 2019

Are we serious?

Every couple of years the OECD updates its Going For Growth reports, which are meant to be its best policy advice to governments on how to raise living standards. Or at least that's how it used to be: the focus up to 2017 was exclusively on productivity and incomes, but in 2017 it widened to include social inclusiveness and, in this latest iteration, brought in environmental sustainability as well. Worthy causes, to be sure, and there are of course interlinkages with productivity and incomes, but I'd have preferred if they'd kept Going For Growth as a productivity instruction manual. Especially for its New Zealand readership, given that our low productivity performance is something we self-evidently could use a bit of focused help with.

Not, I suspect, that Going For Growth has much of a New Zealand readership. Neither the 2017 version ('Take advice? Moi?') nor this latest one appears to have got much mainstream or social media attention. So if you're not one of the select policy tragics who've had a look, here are the OECD's five priorities for New Zealand (if this whets your appetite here's the full country report):
  1. Reduce barriers to FDI [foreign direct investment] and trade and to competition in network sectors. Non-transparent screening, barriers to trade facilitation and competition in network sectors deter investment and hinder the competitiveness of downstream firms [in this bit they mean the 'barriers' to extend to 'barriers to competition']
  2. Improve housing policies. Restrictive land-use policies reduce housing supply responsiveness to demand, accentuating price increases when demand rises
  3. Reduce child poverty. Child poverty is higher than in the top performing countries. It has adverse effects on children’s health and development.
  4. Reduce educational underachievement among specific groups. Students from Māori, Pasifika and vulnerable socio-economic backgrounds have much poorer education outcomes than others
  5. Raise effectiveness of R&D support. Relatively low public funding of business R&D contributes to below average R&D intensity
Four of these were on the 2017 priority list, too (number 3 is a new one reflecting the new focus on social inclusiveness), and the implementation record since 2017 has been distinctly patchy. There was no action taken at all on number 1, for example. Number 2 continues to be a national scandal, and I see in today's DomPost that it's not just Auckland, either: "Wellington City has consented fewer buildings this year, its waiting list for social housing has spiked sharply, and its rental crisis is on par with Auckland's". The only achievement the OECD records on number 4 is the Sir Humphrey Appleby "appointment of a taskforce". Number 5 is the one recommendation where there has been anything like a respectable response: the current government has, for example, run with the recommendation to "make the tax credit refundable so that firms that are not yet profitable can benefit".

It's hard to see why we haven't followed up what looks like a reasonably uncontroversial list of targets and tactics (although the anti-trade nutters may jib at #1). They're almost certainly not enough to make huge inroads into our productivity problems, but they'd be a good start, and a couple of them (#3 and #4 in particular) would be worth doing in their own right, even if they didn't have spillover productivity effects on the talents of our workforce.

There is one possible explanation, albeit a depressing one. In the economics trade we call it "revealed preference": you can figure out what people value from what they actually do.  It could well be that successive central and local governments haven't put the priority they claimed on higher living standards. When it's come to having the national incomes to pay for modern healthcare, or rationing the expensive drugs, they've preferred rationing. When it's come to a choice between wealthy homeowners having an unobstructed view of a volcano, and poor families with young children sleeping in cars, they've been with the homeowners.

It would be nice of the OECD's 2021 scorecard showed a better rise to our livings standards challenge. But I won't be holding my breath.

Monday, 30 September 2019

Did it work?

A year ago, in the interest of making competition work, we switched our electricity supplier ('We take the plunge'). And now that we've got a year of bills from our NewCo, we can compare them with what our OldCo used to charge. Here's how it worked out.


Pretty good, eh? So there's not a lot of reason for you to be one of the 400,000 to 750,000 people who've never switched, is there? Off you go to Consumer New Zealand's Powerswitch or the Electricity Authority's What's My Number. Make the competitive process work for you.

Incidentally, that estimate of the very large number of people who've never switched came from the Electricity Price Review. As its website says, "Please note: the review delivered its final report to the Minister of Energy and Resources on 29 May 2019. The timing of its public release has yet to be determined".

Good policy development shouldn't be precipitate, but I'm leaning towards the view that four months is enough thinking time given that a range of options were canvassed and consulted on during the review process (if you've forgotten them, head to 'At A Glance', which is p3 here). It's getting time to see the report and the government's response.

Tuesday, 24 September 2019

CLPINZ 2019

Last weekend we had the 30th annual workshop of the Competition Law and Policy Institute of New Zealand, and to mark the CLPINZ anniversary we went back to Christchurch where it had all started (on August 11-12, 1990). We even had two of the original attendees (John Land and Alan Lear). Back then the inaugural workshop had spent a fair deal of its time on s36, abuse of market power - plus ça change, eh? Thirty years on we're almost on the cusp of junking our ineffective s36 and going the Aussie route, but we're not quite there yet.

The keynote speaker via video link was David Evans, chairman of Global Economics Group and co-author (with Richard Schmalensee) of the excellent Matchmakers: the New Economics of Multisided Platforms, which is a very good guide to two (or more) sided platforms. His topic was "The role of market definition in assessing anti-competitive harm in Ohio v. American Express", and his conclusion was that the US Supreme Court got it right in finding for Amex.

It was a top-notch presentation, but not everyone was convinced by the conclusion. I hadn't been, either, when I first encountered the Amex case. Amex was trying to defend the practice of "anti steering": shops who accepted Amex cards were contractually prevented from suggesting that customers taking out their Amex cards should or could use competitor cards like Mastercard and Visa (which were cheaper for the shop to accept). As blatant an anti-competitive contractual provision as you could find, you might think, and initially I thought so, too. But I changed my mind ('Two sides to the story') and I'm now with Evans.

From discussions at the workshop, however, some of my colleagues think it's a mistaken ruling, and let's not forget the court itself had split 5 - 4. One attendee sent me 'Why credit-card rules are anticompetitive', and you can find the formal economics here. And there are others who think that between Amex and the AT&T / Time Warner merger, the US Supreme Court has lost the pro-competitive plot: see for example 'Policy Failure: The Role of "Economics" in AT&T - Time Warner and American Express'.

I won't reprise the whole workshop: copies of the presentations will be going up on the website for members (you are a member, aren't you). I'd particularly recommend Professor Martin Richardson's paper on 'The role of lay members in court', which has a lot of useful stuff on what makes for a good expert economist witness. In the interim, if you're desperate for Evans' paper, you can find a version here.

Assorted takeaway thoughts:

- Chris Whelan from RBB Economics presented on 'Cutting edge tools in economics' and mentioned the upward pricing pressure arithmetic of vertical mergers, bargaining theory, machine learning, and an application of regression to separating "buy" trades from "sell" trades in financial markets (an issue that arose in an Aussie case alleging manipulation of short-term interest rates). On that occasion the regression approach was misapplied and fell over, and that's fair enough, but in my discussant paper I argued that regression is still the go-to workhorse tool for a great deal of empirical work outside competition cases, and there's a lot of scope to use it more than it has been (I was pleased to see interesting regressions pop up in the Commerce Commission's petrol market study)

- from the Fair Trading Act session on making unsubstantiated representations, I have to confess I didn't know that you had to be able to justify any advertising claims you make at the time you make them. Even if they're subsequently challenged and found to be true, you're at risk. I noticed that all the early prosecutions were about manufacturing (heat pumps, steel mesh, water filters): happenstance maybe, but it left me wondering about enforcement in the 70% of the economy that's made up of services

- cartel criminalisation goes live in New Zealand in 2021. The Commerce (Criminalisation of Cartels) Amendment Act 2019 does not distinguish between 'hard core' and other cartels, though a lot of us would hope that criminal sanctions would only apply to the more egregious ones. I learned from the presentation by Gilbert & Tobin's Elizabeth Avery that in Australia there's a mechanism (an understanding between the ACCC and the Commonwealth Director for Public Prosecutions) for sorting the worst from the less bad. I presume - hope? - that we'll do something similar

- in the electricity sector, there's a plausible scenario that we're going to need a big expansion of generation capacity to cope with the likes of cars moving from petrol to electric power. But I'm left wondering whether we can get our infrastructural and regulatory acts together to enable it to happen. And while we're on electricity, what's happened to the retail electricity pricing review?

- I'm now persuaded (rather belatedly) that prohibiting the Commerce Commission from accepting behavioural undertakings in the context of a merger makes little or no sense. Sarah Keene at Russell McVeagh has been arguing this for yonks, and did again at the workshop, and no doubt others have been pushing the barrow too, and I think it's correct. The Commission might well end up using the power sparingly, but it's better than not having the option at all

Christchurch itself was an eye-opener: there are more swathes of the CBD than I'd expected that are still vacant lots. A lot of reconstruction has already been done, and a good deal more work is underway, but there's still an awful lot left, as the cathedral in particular reminds us.


Friday, 20 September 2019

Let's get more active

By far the best single way to get unemployment down is to keep up a good run of economic growth at a robust pace. Not only does the unemployment rate go down, but the longer and stronger the expansion, the more it succeeds in bringing more marginalised groups into employment.

I've shown previous versions of the graph below: here's the up to date version, which shows (yet again) that less favoured groups suffer distressingly high rises in unemployment when the business cycle goes pear-shaped, but conversely a long expansion works its magic on everyone, even on those who tend to be on the outer. It's not perfect - rates of unemployment for some groups, notably Maori and Pasifika, are still too high - but the long post-GFC expansion has seen big falls in the unemployment rate across all groups..


Because growth alone will not deal to everything there's always a role for 'active' labour market policies that try to make the labour market work better. Residual unemployment for example could be down to things like skills mismatches: employers are looking for people with skills they don't have. Or it could be down to regional immobility: who's going to move from Northland to a job vacancy in Auckland given the cost of putting a roof over your head in Auckland? And there can be other mismatches preventing people willing to hire from signing the deal with people wanting to work.

There's a brilliant new bit of research out looking at active labour market policies, and which ones work. They're not just any old active policies: they're ones where there was a control group experiment, where you can see how those who went through the programme fared compared to those who didn't, which is how the researchers can tell if it made any difference. Here's the more readable version for the intelligent public - 'Understanding what works for active labour market policies', on the excellent Vox site - and full-blown policy tragics can get the more academic version here.

Here's the key result in terms of the impacts on earnings and employment:
If we focus on the median impact on earnings, wage subsidies and independent worker assistance ['Support to micro-entrepreneurs and independent workers'] show the greatest impact relative to the control group, with improvements of 16.7% and 16.5%, respectively. Vocational training programs have a median impact of 7.7%, while employment services show an almost negligible impact. The median impact on employment outcomes exhibits a similar pattern
Here's the graph they drew to show the results, though to be honest it's hard to see the scale of the impact with the vertical scale they've chosen to use.


They also discovered a variety of other things that make complete sense: "Individualised coaching or follow-up of the participants, training exclusively focused on a specific industry, and the provision of monetary incentives to trainees all correlate with better outcomes in vocational training programmes (the most frequent ALMPs in our dataset)", and, unsurprisingly, they also found that you get better outcomes when you run these programmes in good times rather than in the pits of a recession.

They also found (noting that cost data isn't uniformly available) that you get what you pay for. As the graph below shows, employment services programmes are cheap, but useless, while the most effective option, helping people to do their own thing, costs the most.


There's a lot we could learn from this. Currently we're down the wrong end of the OECD league ladder when it comes to what we spend on active labour market policies (as I discussed here). This research gives us a pretty clear steer on what we should do to up our game.

It's also left me wondering about our policy institutions. This research works because all over the world people have invested in randomised control trials - experiments where you try something out and compare it with what happens where it wasn't rolled out. But I can't think of many home-grown examples where we've had a go at economic policy field experiments: charter schools, maybe, but they got sat on.

My feeling is that we're too fond of the over-dirigiste 'one size fits all' approach. And our chronic political oppositionism makes both the public service and the decision-making politicians far too wary of experiments that might go wrong - even when they might hold valuable information about what works and what doesn't. There's too high a political price to pay for what will be pilloried as 'failure', and it's hindering finding out what might or might not make a real difference to those hardest to get into work. We should move on: it's time to join the adult policy world.