Wednesday, 22 November 2017

What did we learn?

Earlier this month I posted what I hope will be my last tiki tour of some Special Housing Areas (SHAs) near our place. And at the time I said I'd have a go at trying to put some figures on the effectiveness or otherwise of the whole SHA experiment.

I've had a look, and there's good news and bad news.

The bad news is that, using MBIE's latest Auckland Housing Accord Monitoring report (available here, with all the previous ones), I can't tell whether the SHA experiment made a difference.

There were 5,527 building consents in the SHAs over the October '13 to June '17 period covered by the report. That made up 16.4% of the total 33,639 consents issued. But whether you should think about this as 'big' or 'small' isn't obvious, because you don't know how many of these SHA approvals would have happened in any event, and were merely shifted from one box (ordinary consent) to another (SHA consent).

You can't tell whether there was any net addition from the SHA initiative. Nor can you tell (although this was one of its objectives) whether the SHA consent process sped up development. To date, 3,105 dwellings have been completed in the SHAs: the report says "The 154 Special Housing Areas are expected to eventually supply over 66,000 dwellings or sections over 20-25 years". At the risk of sounding snarky, this doesn't look like lightning progress towards that target.

I'm prepared to believe that SHAs may have facilitated some particular, large projects. As the graph below shows, more than half (56.6%) of all the SHA consents were in just 8 of the 154 SHAs (the 8 with more than 300 consents). If they were instrumental in getting the Hobsonvilles underway, excellent. But again it's hard to know whether the counterfactual is that Hobsonville would have gone ahead anyway, or faster without jumping through the SHA hoops.


If I was facing a firing squad and had to guess to save my life, I would guess that the SHAs were an intrinsically nifty idea (faster consents for helping with social objectives) but that (a) the planning streamlining may have been more apparent than real (b) the dollar give-up by developers to meet the social objective became too expensive in a roaring bull market and (c) some developers weren't going to be swayed by anything (SHAs included) until they saw how the Auckland Unitary Plan played out. Goodish plan, somewhat sidelined by events. Story of all our lives.

And the good news?

People gave a new idea a go, in an area that badly needed moving along. It was an experiment. And we need more experiments like it, in housing and across the board. Not that our opposition political structures are well suited to running them: we haven't exactly got a system that tolerates "mistakes" or "failures", when in reality they're nothing of the kind. They're opportunities to find out what works and what doesn't.

In that light, though, if you're going to run experiments, as you should, you have to figure out beforehand, in some detail, how you'll know whether the experiment was a success or not. Sometimes it's obvious - the laboratory explodes - but often it isn't. In the case of the Auckland Housing Accord, progress towards consent targets was not an adequate metric. It needed some sort of control group comparing SHA and non-SHA volumes and speeds. My little trek around Browns Bay but writ larger, and with a budget. And it would have been useful to get inside developers' heads to see exactly what mattered most to them.

Tuesday, 21 November 2017

Market power?

There's a fair head of steam building overseas to "do something!" about the allegedly overweening market power of the FAANGs - Facebook, Apple, Amazon, Netflix and Google.

Some of it is entirely respectable analysis. Last year, for example, President Obama's Council of Economic Advisers came out with an influential report, 'Benefits of competition and indicators of market power', which was well argued and reasonable. This graph from the report, for example, has got a lot of airtime (including an outing at this year's Competition Law and Policy Institute annual workshop).


As it shows, there's a small group of companies, which includes the FAANGs, who are doing far, far better than everyone else and bagging quite remarkable rates of return on their equity (ROEs). It's not surprising that they've attracted attention from people genuinely concerned about how they have achieved these results, about what they are doing with the market power they've created - the classic being the European Commission's big fine last month on Google for allegedly illegally discriminating against competitors in online advertising - all the way down to assorted ambulance-chasers following the money. There have even been proposals that some of these companies need regulating like utilities: there's a Wikipedia entry, for example, on the idea of 'Social media as a public utility'.

It hasn't helped that some of these firms have at times got right up the noses of competition authorities, with Facebook's 2014 purchase of WhatsApp being a good example. As part of the EU merger approval process, Facebook said that it  was technically impossible to merge WhatsApp's customer data with Facebook's. It wasn't, and they did. The Commission fined Facebook €110 million "for providing misleading information"; Facebook said it was inadvertent.

But there is also some pretty poor 'diagnosis' of 'a problem' floating around. Somewhere on Twitter recently I got pointed to the latest annual Trade and Development Report, published in September by UNCTAD, the United Nations Conference on Trade and Development. While it sounds like a tedious Leninist tract - "Market power and inequality: The revenge of the rentiers" - Chapter VI actually contains an interesting empirical go at measuring the quantum of allegedly "excess" profits being earned at these superstar companies.

Their approach as they said on p124 was
define a benchmark that captures typical firm performance in given market conditions. The idea is to measure the gap between actually observed profits on the one hand, and typical or benchmark profits on the other. A positive gap between these two variables means that some firms are able to accumulate surplus or “excess” profits.
Sounds reasonable enough in principle, and rather resembles an OECD exercise recently which attempted to measure excessive mark-ups.

Their key result is shown below: as they summarise it (pp124-5), "the share of surplus profits in total profits grew significantly for all firms in the database until the global financial crisis, from 4 per cent during the period 1995−2000 to 19 per cent in 2001−2008. It increased again to 23 per cent in the subsequent period", with bigger increases again for the 100 biggest firms (by equity). Recently, we are asked to believe, 40% of total top 100 firms' profits are "surplus" or "excess".


The only trouble is that the whole thing falls apart when you unpack the methodology. Their measure of benchmark profit is the median rate of return on assets (ROA), which they say (p124) is "a widely used accounting measure of profitability". That's your first clue right there that something's naff: economists - and this is an economics-focussed chapter - would not normally, em, come to the aid of an accounting measure of profits if its hair was on fire.

The UNCTAD people at least had the gumption to apply their median ROA sector by sector since cross-sector ROAs are essentially meaningless. But even then I doubt if their database was sufficiently granular to do the job properly (I couldn't find out how many sectors they used, either in the report or on the UNCTAD website). Even if you got down to a  'shipbuilding' sector, say, if half the firms are making fishing boats with lowish amounts of fixed assets, and the rest are making battleships in enormous facilities, the higher ROA on fishing boats is going to spit out 'excess' profits where there may be none.

The whole ROA exercise still tells you nothing about the proper focus of inquiry, ROE: the battleship builders could be the more profitable. And there are other issues. In particular, there's no inherent logic in using the median sectoral ROA as the benchmark. You could well have - and likely do in many industries - have a small group on the efficiency frontier earning normal profits (or even excess profits) with a long tail of relatively inefficient firms earning sub-normal returns. The right level for identifying 'excess' profitability could be the 80th or 90th percentile or even above.

"Clearly", the UNCTAD report said, "these results need to be interpreted with caution". Indeed.

As it happens the report (p122) mentioned - but didn't subscribe to - an alternative explanation:
Schumpeter pointed out that temporary surplus profits, or rents, could play an important role in facilitating technical progress by compensating innovative entrepreneurs (as opposed to imitators) for risk-taking and initiative. Importantly, these entrepreneurial rents – now generally referred to as Schumpeterian rents – do not require protective regulation such as, for example, IPRs [patents]. They are the result of “thinking ahead of the curve”. According to Schumpeter... .since imitators would eventually catch up, such rents or surplus.profits would be only temporary.
So, on the one hand, UNCTAD with its view (as put in the Chapter VI press release): "the vicious cycle of market power begetting lobbying power has meant that the economic underworld of corporate rent-seeking is becoming legitimate". On the other, Schumpeter: consumers all over New Zealand finally getting video choice at a decent price (Netflix), with thriving social lives (Facebook) and good e-commerce (I'm a big fan of the Amazon-owned Book Depository). And some of us will have to have our iPhones prised from our cold, dead hands.

Which view sounds the more reasonable to you?

Monday, 13 November 2017

...and then the wheels came off

It was all going so well.

The Commerce Commission had pinged a whole series of real estate agencies for price fixing. The claim was that, after Trade Me tried a big jack-up of its house listing rates, the real estate companies had colluded to stop absorbing the previous, lower cost and to collectively pass on the new charges to house vendors.

Seemed straightforward. As the judge put it at [19] in the Online case, for example
Prior to the agreement, the status quo was that the cost of standard Trade Me listings was commonly absorbed by the real estate agents. In the normal course, any move to a vendor-funded listing arrangement against that background would most likely have resulted in some real estate agents electing to negotiate, thereby retaining competition in the market. Although Trade Me did not ultimately implement the per-price listing arrangement initially proposed, as a result of the Hamilton agreement the majority of Hamilton real estate agents implemented a vendor-funded model. This has been retained despite the implementation of the revised subscription model. The Hamilton agreement has brought a significant and lasting change to the market.
Sure enough one agency after another rolled over, conceded they'd contravened s30 of the Commerce Act, and agreed on penalties with the Commission, which were later ratified by the High Court.

They weren't small penalties, either: in the context of small to medium provincial businesses, even to my unsympathetic eye they were looking down the severe end. Alternatively, you could argue that the Commerce Commission was finally getting the courts to take price fixing more seriously. In any event, the Commission was enjoying a string of wins.

And then along came Justice Jagose in what I'll call Lodge & Monarch, the case where two Hamilton real estate agencies (and their principals) defended the charges. And they won.

The judge stepped through all the bits needed to prove a contravention of s27/s30.

Was there a "contract, arrangement or understanding"? Yes there was. It wasn't a cold, clear-eyed sit around a table process - the key meeting on September 30 2013 was actually a disorganised, talk-over-each-other general bitch and moan about Trade Me - but the judge found at [193] that
the defendants were part of a consensus giving rise to expectations each would not absorb the cost of Trade Me’s proposed per listing fees, and each (other than Success) would withdraw their standard listings from Trade Me by January 2014, subsequent Trade Me listings to be vendor funded. For the purposes of s27, the defendants entered into an arrangement, or arrived at an understanding, to those ends.
Did they "give effect" to it. Yes they did, as the judge found at [200]. The judge did not make a big thing of it, but the coordinated withdrawal of listings from Trade Me was highly suggestive.

Were the agencies "in competition with each other". Clearly yes. There was a little bit of argy bargy from the Commission about market definition, but nothing was going to affect  the obvious.

And then we got to the knobbly bit, "Fixing, controlling, or maintaining, of the price". Here are the key paras (my emphases):
[231] The defendants’ refusal to absorb the cost of Trade Me’s new fees says nothing about the price of their services to vendors. Nothing in the arrangement or understanding reached between the defendants constrains any freedom to charge any price to any individual vendor on any individual transaction, including by absorbing part or all of the cost of the residential property’s standard listing on Trade Me.
[232] Neither does anything in the arrangement or understanding ‘provide for’ such constraint: the only relevant constraint on an agency’s price-setting is the degree to which it is prepared to absorb, rather than to pass on, the expenses it incurs in the delivery of the service. Even if the comfort any agency drew from knowing of its competitors’ intentions made it less likely any proportion of those expenses would be absorbed, that does not ‘provide for’ price-fixing in s 30’s sense. “Providing for” means steps taken in advance of the direct fixing, controlling, or maintaining of the price as well as alternative means of achieving that result. But agencies retained their full pricing discretion, despite the arrangement or understanding.
End of story: it can't have been a price fix.

Lessons for the future, assuming the Commission doesn't appeal and get it overturned?

The obvious one: despite the acquittal on the facts of this case, it remains highly dangerous to go near any discussion of price or pricing models with your competitors. The Commission may have been worsted on the battlefield on this occasion, but it was no accident that it ran a panel on 'The anti-competitive potential of industry groups' at its big conference this year.

And while it's tempting for people stuck in a Trade Me jack-up fix to argue, "Look, all of us going over to charging the customer for the new fee was always going to happen anyway, where's the beef?" - there were economists lined up in the background of Lodge & Monarch to argue along those lines - it won't do you any good. As Justice Jagose put it at [238]
Constraints on price-setting are deemed in breach of s 27. That the same price may have arisen in the counterfactual (ie, absent constraint) does not respond to the presence of constraint in the factual.
In the well-known air cargo cases, airlines were similarly hit with new, higher costs for the likes of airport security. Their shipper customers may also have ended up wearing the bill come what may. But it's not on (as the airlines did) to collude on a standard tariff. How much of a cost to absorb, and how much to pass on, needs to be your own independent decision.

Saturday, 11 November 2017

A good start

The new Public Policy Institute at the University of Auckland kicked off yesterday with a public lecture by Professor John Hewson on 'The most risky and unpredictable global outlook in my lifetime'.

You'll most likely know Hewson not as a professor but as the former leader of Australia's Liberal Party. As Leader of the Opposition he lost the "unloseable" 1993 Aussie general election to Paul Keating and in the unsentimental way of politics was rolled in 1994 by Alexander Downer.

He left parliament in 1995 - inevitable, perhaps, but a loss. He was ahead of his time with his Fightback! economic policies, but as his Wikipedia entry notes, "apart from supporting right wing economics, [he] also supported abortion, gay rights and working mothers", making him one of that critically endangered species, the economically literate and socially liberal politician. And irrespective of where you stand on Fightback!, it's clear that Hewson would have made a better party leader and Prime Minister than several of the EQ-less muppets that followed him.

His arguments about high unpredictability? Economists' analytical tools have broken down: printing money hasn't led to inflation, the Phillips curve has vanished, "impossibilities" like negative interest rates have materialised. Europe: common currency stresses haven't fully played out out, and he's pessimistic about the Brexit endgame. US: on top of everything else problematic, notably the Fed's challenge of normalising interest rates without knackering the US or global economies, there's  now Trump. Hewson had a great line, that what worried him most about Trump's 3.00am tweets was that Trump wasn't drunk at the time. China: debt, pollution, demographics, corruption, faked GDP growth, foreign policy adventurism. Everywhere: a breakdown of trust in established political processes. Geopolitics: North Korea in particular, where we're now at the mercy of an accident or miscalculation, but also elsewhere.

He spoke for nearly an hour without notes and (as the old TV panel game used to say) without hesitation, repetition or deviation: a class act. There was time for a few questions: I snuck one in, about what structural reform still needs doing in Australia. Lots, was the answer, across all policy areas, but only limited prospects of progress given the "Nope!" style of Aussie oppositional politics, for which he rightly fingered Tony Abbott. Another in the audience asked if Hewson saw any way of reducing the growing political polarisation we're seeing in a range of countries: short answer, no.

Not comforting, in sum, as a seasoned take on the global outlook. Personally, I'm more in "the world economy will muddle through" camp: the latest JP Morgan / Markit composite index of global economic activity continues to show ongoing (and likely accelerating) growth in the global economy, and if you take a look at The Economist's collation of the latest forecasts for next year you find that virtually every country of any consequence is expected to keep growing in 2018 (ex the haplessly mismanaged Venezuela). But equally I wouldn't be too surprised if some of Hewson's scenarios came to hand, either.

It was a lively start for the new Institute, which has also posted a first batch of policy briefings and which now provides some competition to AUT's established Policy Observatory and its set of briefing papers. I'm hoping for a bit of intellectual diversity, too: the market for academic hand-wringing over the evils of "neoliberalism" is already well supplied.

Wednesday, 8 November 2017

Special?

Almost two years ago now, I went and had a look at a Special Housing Area (SHA) that had been set up a few Ks away in Browns Bay. Oddly, there was nothing happening at the supposedly fast-tracked SHA, while all around it non-SHA apartment blocks were sprouting like mushrooms.

I went back three months later. Still nothing at the SHA (and nothing happening at another one on East Coast Road that I also went and sussed out). Still full speed ahead on the non-SHA sites, though.

And a year ago I went back yet again. Signs had just gone up on the Browns Bay SHA site saying a very smart looking apartment block was planned, but there was no sign of any construction. Nor at the other SHA on East Coast Road. Meanwhile the non-SHA projects were all progressing nicely.

And today - you guessed it - I went and had another shufti.

Here's the SHA in Browns Bay. Best you can say is that at least it's started, though as you can see it's only at the very earliest stage of construction.


Meanwhile the non-HSA apartment blocks on the same street are all finished. Here are two I snapped before, 'The Pines' at 25 Bute Road...


...and the 'Norfolk' at 19-21 Bute Road. Both already have people living in them, though The Pines is still looking for tenants for its streetfront office/retail space.


And at the other SHA on East Coast Road? Nada. Still looks the same as ever. It hasn't made the original target, which was to have 39 apartments finished by "the early part of 2017", according to the blurb on the Auckland Council SHA site (it's the 'East Coast Road, Pinehill' one in Tranche 4).


And finally I thought I'd go and look at another SHA, currently the site of The Brownzy pub on the corner of Beach Road and Bute Road. Nope: nothing underway there yet either, which is a shame as it's a decent-sized pozzie. The Council write-up ('Beach Road, Browns Bay', in Tranche 10) says it will eventually carry 66 homes, with the first ones available by the middle of next year. Can the developers wind up the (still operating) pub, knock it down, and put the new housing up in seven months? We'll see.


Let me finish by saying (as I've said before) that I'm not criticising the owners of these sites in any way. They can develop - or not develop - their own properties to whatever schedule they damn well like, and good luck to them. And as an economist I'm congenitally inclined to believe that they know their own interests better than any outsiders, and it's highly likely - subject to the current capacity shortages in the Auckland building trades - that they'll be making the most efficient use possible of these valuable properties.

But as for the Special Housing Areas as a policy experiment?

My working hypothesis is that they've been an almost complete dud. And I wouldn't rule out that they may even have been counter-productive, when you see the non-SHA sites have gone ahead at full speed while the SHAs have just been sitting there.

Guesses, sure. Small sample size, absolutely. And I'll try and put some numbers around the whole SHA scheme when I have half a mo, and see if I can substantiate what I suspect. But for now, who am I going to believe: the original hype, or my own lying eyes?

Tuesday, 31 October 2017

Competition improves inequality?

There's a fascinating debate going on about whether market power makes income inequality worse or, putting it the other way round, whether more competition would reduce inequality.

It's been spurred in particular by a piece which appeared recently on the OECD's website, 'Inequality: A hidden cost of market power', where you can find links to the full working paper by three OECD staff economists and to a shorter, more plain English version published by Competition Policy International (CPI) as part of a symposium, 'Antitrust's Inequality Conundrum?'.

The gist of the idea is straightforward. Businesses are disproportionately owned by the rich, which is largely uncontroversial, since we know that there is a heavily skewed distribution of wealth. If businesses manage to exert market power, they can raise prices to above-competitive levels. Consumption is relatively evenly distributed, so everyone feels the pain to much the same degree. But the benefits from above-normal profits flow to the owners of the firms, whose incomes increase even further. Inequality worsens.

The authors have even had a go at measuring the impact, based on sectoral data on firms' mark-ups over cost in eight economies. They've got a model where they can use observed data to back out what pricing in a competitive economy would have looked like, after allowing firms to earn a competitive return. "To illustrate", as they say on pages 17-18 of the full paper, "in the sector of wholesale and retail trade and repairs, the mark-up observed in the UK is 16% and the minimum mark-up (found in
Germany) is 12% [i.e. they're taking this as a benchmark of what a 'normal' mark-up needs to be]. The UK excess mark-up for that sector is then calculated as the difference, i.e. 4.0%". They do the same calculation across all sectors and all economies.

Summing up for all eight countries and sectors, they find the average 'normal' mark-up over cost to be 10.2%, but the actual observed mark-up to be 18.0%, leading to an 'excess' market-power-driven mark-up of 7.8%. And with their model they trace the distributional consequences of this excess mark-up (p23): "Market power may contribute substantially to wealth inequality, augmenting wealth of the richest 10% of the population by 12% to 21% for an average country in the sample...Market power may also depress the income of the poorest 20% of the population by between 14% and 19% for an average country in the sample".

It makes for some pretty dramatic pictures, such as this one from the CPI version of the paper


As you can imagine, this graph has been making the rounds of social media like nobody's business.

But you'll have noticed that the authors carefully said "may" contribute and "may" depress, and that I've included a question mark in the title of this post. We needed to: while it is tempting for pro-competition campaigners to add "substantially lower inequality", like that in the graph, to the list of good things that more competitive markets might achieve, it's a stretch. There's a lot that this model glosses over.

For one thing, it assumes that wages don't rise in response to the higher prices consumers are facing: that's a big ask right there. As the authors concede (p10 of OECD paper), "In fact, if market power increased prices and wages in the same proportion, the redistributive effect of market power would likely be negligible, since workers and business owners would be affected in the same way".

There's also the point that some of the above-normal profits are entirely benign, and not something to be regulated away or deplored: if you've got the hottest software or smartphone or blockbuster movie, good for you. As the authors say (on p6 of the CPI version), "We are by no means suggesting that wealth acquired from market power is in any general sense improper. Much of the profit from market power, and quite possibly the majority, is derived from legitimate sources, such as patents, trademarks and brand differentiation". You should really only be bothered about the inequality (and other) impacts of "bad" market power from, for example, excessively concentrated markets.

And you can pick other holes in it, as for example University of Michigan professor Daniel Crane does in his symposium contribution, "Further Reflections On Antitrust And Wealth Inequality" (there are other critical articles there, too). Pro-competition interventions might themselves be regressive: he has an example of one constraining real estate agents, but benefiting their, wealthier, house-selling clients. The profits from market power don't always accrue to the shareholders, but get siphoned off by key personnel or indeed employees more generally. And the costs mightn't be borne as much by the ordinary guy in the street as you might at first think. It may be, for example, that high market power prices in the health sector might be paid largely by the government, which is actually funded on some progressive tax basis. Richer, higher rate taxpayers end up wearing the bill.

I'm kinda inclined to the view, which Crane says (p5) is the "most salient" response to his critique, that, all qualifications considered,  "Even if many other interests within the firm capture a share of monopoly rents, shareholders capture enough of them to skew this one effect to such a degree that it necessarily outweighs all countervailing effects".

But as Crane puts it, "Maybe. I don’t know. Nor, I suspect, do the people making this assertion. And that’s my point. Before turning to antitrust as a lever to fight income inequality, we need to admit a degree of modesty about what we really know and don’t know. The story is not so simple as it is made to seem".

He's right. We don't know for sure that less market power means lower inequality, even if, to some of us, it looks the way to bet: after all, how likely is is, really, that those with the incentive and ability to raise prices would end up flattening the income distribution?

Fortunately inequality is high on many institutions' and researchers' agendas at the moment, and we'll be seeing a lot more research in this neglected area: there's been surprisingly little until quite recently. Even if they're only along case study lines, like the Mexican mobile phone prices cited in the CPI version of the OECD paper, they'll be a welcome advance in our understanding of something we in the economics and policy trades should have looked at long ago.

Friday, 27 October 2017

And never the twain shall meet*

According to the text of the Labour/Greens confidence and supply agreement, "Auckland’s East-West motorway link will not proceed as currently proposed".

I'm not surprised, though before I was asked to look at the East-West Link, I'd have had a different reaction. Auckland's been so short of infrastructure investment, and transport investment in particular, that I would have welcomed anything at all that helped, even if it wasn't especially efficient. Two billion dollars, the ballpark cost of the Link, however poorly spent, had to be some sort of advance on half of five eighths of the proverbial alternative.

And then the Campaign for Better Transport asked me to have a look at how the New Zealand Transport Agency had signed off on the Link. A Board of Inquiry had been set up to decide whether to approve the Link: would I be interested in putting in an expert view? I would. I did.

I was rather surprised when I had a look at the benefit/cost ratios for each of the six options that the NZTA had shortlisted for the Link. The option chosen was far from being the best on a benefit/cost basis. Compared to the chosen one, there was an alternative that would have achieved slightly more benefits, but for only 60% of the cost. And there was another one that was less ambitious - only half of the benefits - but was very cheap indeed, at only a quarter of the cost. The preferred option was, bluntly, inefficient.

But mankind does not live by cost/benefit ratios alone, and the NZTA, sensibly, also put all six options through a 'multi criteria analysis' wringer, prodding them from every possible perspective, including Maori, historical, and environmental.

Again the preferred option didn't stand out. That cheap and cheerful one - half the benefits but very cheap to do - scrubbed up well (again). And even if you played around with the weightings, as I did, I couldn't get the NZTA's preferred option to come out on top. Even when I gave double weighting to transport outcomes, which after all might be what the NZTA was prioritising, there were better ways of doing the Link than the NZTA's golden-haired choice.

As happens in these sorts of proceedings there's a "hot tub" where the economists get together to say what they can agree on and what they can't. On this occasion there were five of us: in the post-tub joint statement we put in to the Inquiry, four of us agreed that "The [NZTA's] application [to build the Link] and subsequent evidence does not establish...How Option F [the NZTA's preference] was arrived at as the preferred option and, in particular, how the Option reconciled with the NZ Transport Agency's own system for prioritising Projects". The NZTA's economist disagreed.

In sum, I couldn't make much sense of the NZTA's justification for ploughing ahead with their preferred option, and said so when I fronted up to the Inquiry. If you're seriously short of better things to do, the transcript is here. I come onto the stage at page 4897 (!) and the most relevant bits are on pages 4907-10 where I have trouble with the NZTA's thinking behind its choice and finish up by rhetorically asking the NZTA, "with all that lovely information, why did you do F?"

Lots of other people have been having trouble with the decision, too. Cameron Pitches of the Campaign for Better Transport has had a go at 'The Economics of the East West Link' with part two here, and the Greater Auckland site has a string of posts, with highlights being the latest 'Where to now for the East West Link?' and the earlier 'Rethinking the East-West Link'The Spinoff's  Simon Wilson has also been on the case, with 'The most expensive road in New Zealand history is coming to Auckland. Why?' and '‘I have not quantified the benefits’: the astonishing truth about NZ’s most expensive road ever'.

Bottom line: my guess would be that you could deal to a lot of the Onehunga/Penrose congestion with a slimmed-down version of the Link, and still have a billion dollars left over. That's a rather irresistible bit of economic - and political - calculus.

What happens to the Inquiry itself? Far as I know, it's still due to deliver its final decision by December 22, and I hope it's let do it. The board seemed to me to be a very sharp collection of folks, and I'd like to hear what they made of it all, even if swathes of it may have become moot.

There's also a point of law they had to consider that could be important for future regulatory proceedings. Was the board constrained to examining only what the NZTA put in front of it, or could it enquire into the NZTA's thought processes when it came up with the scheme?

As the chair of the Inquiry said (p4909, para 35)
it seems to be  reasonably clear law that we as a Board can't sit down and start scratching our heads and drawing alternative lines over bits of paper and saying, "Well, this option might have been better than that option" etc. We really have to judge on the merits what's been served up to us.
But on the other hand as one of his colleagues said (p4913, para 15)
I think you're quite right that we have to be satisfied that there was a robust process of evaluation of the alternatives.
In practice it may not make a huge difference. Submitters could (and did) propose that the NZTA's preferred option should have been redirected around this town centre, or slimmed down along that stretch, or mitigated a different way, and would have effectively smuggled the NZTA's discarded options back into the proceedings irrespective of whether the Board itself did not want to revisit the NZTA's original decision.

But it's still an important point. My preference lies down the end of tyre-kicking that "robust process of evaluation of the alternatives". If, by analogy, some group appeared before the Commerce Commission for authorisation of an otherwise anti-competitive arrangement that nonetheless has a net public benefit, I would expect Commissioners to ask, very early in the piece, did you consider other or better or less intrusive ways of doing this? What did you find? Why did you go with this one? And if they weren't satisfied, I'd expect them to say, go back to the drawing board.

If Boards of Inquiry find they don't have these powers under the Resource Management Act process, then maybe we should fix the Act so that they do.

*OK, pretty corny, but if you don't recognise it it's a bit of Rudyard Kipling: "Oh, East is East, and West is West, and never the twain shall meet"

Wednesday, 25 October 2017

Dear Kris...

Welcome to your new role as competition czar and overlord of the Commerce Commission.

It's now up to you to make sure that consumers continue to get a good choice of goods and services at fair prices, and that businesses can compete vigorously for their custom.

You'll find that the Commission, and the competition policy bits of MBIE, are full of talented people with their hearts in the right place. You'll also find that many of them are frustrated by the glacial pace of policy change.

So my first suggestion is: don't be another obstacle in their way. Move things along.

What things? Start with these.

Currently the plan is that the Commission will - sometime - be allowed to look into competition problems, but only if asked to by the government (the jargon is "market studies").

By all means keep the option for you and your colleagues to ask the Commission to look at stuff. You'll find (for example) there's a lot of support for a study of our petrol industry.

But a much better plan would be to let the Commission also look at things off its own bat. That's normal overseas, by the way, and if you want to see a good example of how it works, look at the Australian Competition and Consumer Commission's series of  reports on petrol markets in Oz. Here's their latest media release, 'Lack of competition driving high Brisbane petrol prices'.

Keep a budget lid on it, though. Currently the plan is, the Commission will get $1.5 million a year, max. That's plenty, and will give them the right incentive to be efficient.

Next there's cartels. We were going to jail 'hard core' cartelists, the guys who secretly get together in hotel rooms at trade shows and conspire to fix prices, rig auctions, and carve up the world's markets among themselves.

One of your predecessors said, Nah, let's not feel their collar. He was wrong. The Aussies - and others - who can jail these crooks have the right end of the stick.

And while you're dealing to cartelists, take away the special treatment for the shipping lines. They still get their own cosy bit of the Commerce Act. They shouldn't, especially since they've been revealed to be global cartelists (you'll enjoy this). If they need to coordinate things, have them get an authorisation from the Commission, just like everyone else.

Now a trickier one. It's tricky here, and everywhere, but now you're The Man who's got to make the call.

It's what to do when a big company is using its size to impede or eliminate smaller competitors ("abuse of market power"). We have a law against it - section 36 of the Commerce Act. But the law is broken. It's incapable of pinging anything except in very rare cases. It's like nailing jelly to the wall. Disclosure: I've been one of those jelly-nailers.

But you don't have to take my word for it: you'll be having a early coffee, I dare say, with Mark Berry at the Commission, the current chief jelly-nailer. He'll tell you that s36 is knackered, and he's right.

Answer? The Aussies have turned their minds to this (their "Harper review") and fixed their law. So the answer is, import their wording holus bolus into our own Commerce Act. And strike a blow for trans-Tasman harmonisation while you're at it. The media release writes itself.

While you're having your first meet and greet coffees, have a natter with Murray Sherwin and the guys at the Productivity Commission. Your colleagues with economic portfolios will soon be tearing their hair out over New Zealand's poor productivity performance: as Murray and his mates will tell you, one of the answers is stronger competition to put the heat on business performance.

One last thing.

It's easy to get into an anti-business mindset in the competition and regulation game - all these cartels and abuses of market power and whatnot.

Don't go there. The thing that you've got to stay focussed on is the competitive process itself. That's what delivers the benefits to consumers, and to the businesses who best meet their needs.

And if anyone down the big end of town starts giving you gyp about an anti-business stance, quietly remind them that the primary victim of cartels and other rorts is often other businesses. They want an example? The cardboard box rort in Australia: every company on either side of the Tasman  (including some very large ones) who wanted to put their stuff in a box was being ripped off.

That's enough to be going on with - good luck!