Friday, 27 March 2020

Lessons for later

There will be lots of economic policy lessons from covid-19. One of them, I hope, will be about the coordination of fiscal and monetary policy.

Before the virus, there were many people saying that monetary policy had already been loosened so much that it left central banks too little room for further support if the proverbial encountered the wind redistribution device. And they were right.

Have a look at this simple and I'd say uncontroversial macroeconomic policy schema. There are four states of the world, too high/low inflation crossed with too high/low unemployment. Some folks might prefer an 'output gap' to 'unemployment' but same diff.

What's 'too high' or 'too low' inflation? Judgement call, but there's enough of a consensus these days around 'materially above/below 2%' as a good enough rule of thumb. And 'too high' or 'too low' unemployment? Unemployment is unwelcome at any substantial level, but for these purposes let's call it 'materially above/below the level that would get inflation accelerating' (the 'NAIRU' in the trade). Nobody has a very tight grasp on that level, but (according to Figure 5.3 down the back of the RBNZ's most recent Monetary Policy Statement in February), it's somewhere in the 4% to 4.75% area. So let's say 'clearly above 4.75%/clearly below 4.0%'.


In principle, in two states of the world (the green boxes) fiscal and monetary policy ought to have been pulling together. In the top right quadrant, anything the RBNZ did to boost inflation would likely do the real economy some good, and ditto for fiscal policy helping to increase inflationary pressures.

Did any of that happen? No. In practice the official cash rate got all the way down to 1.0% before fiscal policy belatedly came to the party by way of the $12 billion infrastructure spending plan in the December 11 Half-Year Economic and Fiscal Update. Here's the stance of fiscal policy, from that HYEFU.


During the whole of the 2012 through to 2017 period fiscal policy was actually contractionary - not expansionary, as it should have been, since unemployment was too high through all that period as this chart from the RBNZ shows (again from February's Statement).


I've painted things rather black and white, and there are some nuances being left out. One is that I can see some of what contractionary policy was trying to achieve which, in part, was to restock the ammo after the splurge on anti-GFC and post-earthquake support. And another is that whether the OCR was 5% or 3% or 1% at the onset of the covid-19 out breakout has become somewhat moot, since monetary policy would have seen the OCR cut to its present 0.25% and unconventional monetary tactics deployed either way. And I'm conscious that we're far from the worst in the world at this: the eurozone, for example, pushed monetary policy even further than we did (into negative interest rate territory and into tactics like quantitative easing) and were even more feeble on the fiscal front.

All that said, there has to be a better way. Pushing one setting of policy to Full Steam Ahead and leaving the other on Mild Astern makes no sense in periods when they should be coordinated (like most of the past decade). When we get out of this, we need No 1 The Terrace and No 2 The Terrace to get their act together.

Tuesday, 24 March 2020

Patrolling a fine line

There is a growing disquiet - particularly in the US, but also elsewhere - that competition policy has got too soft on mergers, and has been permitting anti-competitive increases in market concentration. By coincidence the latest in ComCom's excellent series of telco market monitoring reports included some data on the international costs of mobile plans and broadband. It showed just how acute the problem has become in the US, which is well entrenched on the expensive right hand side of both graphs.


As Thomas Philippon said (pp5-6) in his recent book The Great Reversal: How America Gave Up on Free Markets, "In most advanced economies, consumers pay around [US]$35 for broadband internet connections. In the US, they pay almost double. How on earth did that happen? How did the US, where the internet was "invented" and where access was cheap in the 1990s, become such a laggard, overcharging households for a rather basic service?"

His answer, which feels right, is that incumbents' market power to charge more and/or give less has increased as some markets have become overconcentrated. "First, the entry rate of new businesses has declined. Businesses are now older and face fewer new competitors reach year. This has led to concentration from the bottom up", and he says that "lobbying and [new-entrant-unfriendly] regulations explain much of the decline in entry rates". "Second, agencies and judges have allowed more frequent mergers among large businesses. This has led to concentration from the top down. Together, they account for the rise in concentration that we have observed" (all from p96).

However true that may be, there is a risk that the backlash goes too far the other way and puts in jeopardy mergers that would make pro-competitive sense, despite the first-blush look of yet another increasingly concentrated market. While the latest big mergers won't make any of the "you've gone soft" critics happy, they look to have been the right call.

In the US, the example is the merger of the number three and number four mobile telcos, T-Mobile and Sprint. You might think, looking at the left hand panel in the graph above, that allowing further concentration in the already expensive US mobile market would be a difficult proposition to justify. And yet: the argument for it is that a bulked up three-plus-four will be a more effective competitor to the two big incumbents (AT&T and Verizon) than three and four separately would have been. There's a logic to that: it was raised, for example, in one of the first merger clearances I was involved in (Telstra/Clear in 2001) though in the end the merger was cleared along traditional ongoing competitive constraint from incumbents/new entrants lines. In the US, both the Federal Communication Commission and the Department of Justice were prepared to go along. Individual states weren't best pleased, but the last of the them standing, California, has also folded its hand after negotiating some state-specific goodies.

In Australia, it's similar. The ACCC had opposed the TPG-Vodafone merger: the ACCC reckoned that left to its own devices, TPG would have rolled out a fourth mobile network to compete with the big three (Telstra, Optus and Vodafone itself). The case in the end turned out to be less a contest of economic merger perspectives and more one of disputed facts. The court disagreed with the ACCC's view of the world: at [34] the judge said that "The Court has been left in no relevant uncertainty, after reviewing the evidence, as to the future of the retail mobile market which will not involve Mr Teoh [TPG's executive chairman and CEO] or TPG entering the Australian retail mobile market in the next five years" (full judgement here). Earlier this month the ACCC flagged away appealing.

Incidentally, as any of us who have to try and guess where competition litigation will go will agree, you have to tip your hat to Tony Boyd, the Chanticleer columnist at the Australian Financial Review, who in a (possibly paywalled) piece 'ACCC misreads mobile market' back in May 2019 absolutely nailed it: "ACCC chairman Rod Sims is headed for what is almost certainly an embarrassing defeat in court ... Rod Sims is kidding himself if he thinks the Australian Competition and Consumer Commission can win". He got it bang on: Justice Middleton could have saved himself most of his 899-paragraph judgement if he'd just copied and pasted Boyd's conclusion that "The problem with the assumption that TPG’s executive chairman David Teoh will spend billions of dollars building a new network is that it is completely without foundation".

So even against an appropriately heightened sense of scepticism about the merits of even further mergers, ones will still pop up there may be no loss of competition compared with the no-merger counterfactual (as in TPG-Vodafone) or there is the procompetitive emergence of a more effective post-merger competitor (T-Mobile-Sprint). Whether any of these arguments apply to the other behemoth out there - if it's survived the recent market havoc, the proposed merger of  the global number two and number three insurance brokers, Aon and Willis Towers Watson, to create a new number one - will remain to be seen. There look to be a good deal of potential back-office efficiencies, but whether they, and the claimed capability synergies, make up for the potential reduction in competition is debatable.

Finally, the latest ComCom telco report got me digging in the archive. Here are a couple of graphs from the very first telco monitoring report, published back in 2008.



Nor pretty at all back then, was it? The improvement since then, especially on the mobile side, has been enormous. And a lot of it goes to prove Philippon's points: for a good competitive outcome you can't beat new entry (particularly 2degrees) and entry-facilitating regulation (a whole swathe of things, from early 'ladder of investment' ideas like wholesale access through to mobile termination regulation and local loop unbundling).

Wednesday, 11 March 2020

One Rule to bring them all and in the darkness bind them

"Chatham House rules", said the invite, though as Chatham House itself says, "There is only one Rule", namely
When a meeting, or part thereof, is held under the Chatham House Rule, participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.
So let's just say I've been at a forum where two items got discussed - whether the institutional set-up of the Commerce Commission is all that it might be, and whether our Court of Appeal threw a lit firework through the windows of the Commerce Act.

The first bit was partly a push-back response to the New Zealand Initiative's 2018 Who Guards the Guards? - Regulatory Governance in New Zealand (media release here, fuller version here), but even if the Initiative had never raised it, it's a good idea to talk about, and MBIE or ComCom itself also ought to be kicking the tyres from time to time and checking that processes and policies are fit for purpose.

The Initiative argued that "the separation of board and executive functions at regulators like the FMA [Financial Markets Authority] contributes to greater accountability and to greater levels of expertise.  Commission models like the one in place at the Commerce Commission fared worse". In other words, in the Initiative's preferred state of the world, Commissioners would set the general strategic direction of the place, and hold the CEO accountable for delivery, in the way that a corporate board would, but the CEO and the staff would make the actual decisions on mergers, trade practices, and sector regulation.

I didn't find the Initiative's conclusions persuasive at the time about ComCom, and after this latest forum I remain unconvinced. It's true that the Initiative were onto a worthwhile topic, and also true that the data they collected from survey respondents on a wide range of regulators (which you can download for yourself here) were fascinating. But if you unpack ComCom's performance, you find some interesting patterns.

Its worst performance on the 23 criteria the Initiative canvassed came from "The ComCom understands the commercial realities facing your industry", where 57.9% strongly disagreed or disagreed. On its face, you can see why the Initiative would then call for "broadening the skills set of the commissioner/board members of the commission to include members with industry expertise".

But hang on: when asked whether "The leaders of the ComCom are skilled, knowledgeable and well-respected by businesses in your industry", they came out well, with only 18.9% strongly disagreeing or disagreeing. The staff at ComCom, ditto, with only 19.4%. That's hard to square with the picture of clueless wallies.

The simplest explanation of these two contrasting pictures is that the "you don't understand our industry" response is special pleading. "If only you understood airlines/electricity/shipping/insert professional service here, you'd realise why we need to be able to agree on prices/set capacity/restrict entry". And you might start thinking dark thoughts about regulatory capture if the likes of a ComCom ever got too-high marks for helpfully going along with old Spanish practices.

The next worst ComCom score, by the way, was on the question, "You are not hindered or deterred from taking action to improve the profitability of your business by any lack of predictability in the ComCom's decision-making", with a 54.1% thumbs down. Noting that this doesn't really speak to the issue of form of governance - a structure where the staff make the calls could be just as unpredictable as one where Commissioners do - my guess is that the low score says more about the state of New Zealand competition law (and in particular around the state of the law on abuse of market power)  than about ComCom structure or process.

At the forum I was at, the point was made that maybe we ought to have a comprehensive review of our competition law, as the Aussies did in 1993 (the Hillmer review) and again in 2015 (the Harper review). I tend to agree, though clearer or better legislation won't be the complete silver bullet: drawing the appropriate line between vigorous competition from big players and anti-competitive use of market power remains problematic in every jurisdiction, irrespective of the wording of the law. But taking whatever steps we can to clear the air (and adopting Australia's "effects test" would be a good start) would go some way to address the uncertainty the Initiative's respondents were voicing.

Finally, the other major area the Initiative survey identified as a concern was "The ComCom is readily held to account for the quality of their work (including any mistakes) by its responsible government department, minister, or some other effective external accountability mechanism", where 44.1% were unhappy. This seems to be a widespread concern across all 24 regulators asked about: the average answer is 43.4%, so ComCom's rating is entirely typical.

My personal feeling is that in ComCom's case the response may reflect the lack of visibility of the accountability mechanisms, which are stronger than people may realise. If, for example, you had to operate within and report on the tightly hypothecated budget buckets that MBIE makes the Commission use, I'd bet you wouldn't like it. And while Select Committee oversight tends to be for policy trainspotters rather than for the wider community, Committee members can be robust in their attitudes to the Commission (as I noticed for myself when I turned up to argue the case for the Commission being able to initiate market studies). Again, the state of the law may also be a factor: ComCom in its everyday business isn't subject to "merit reviews" through the courts. It can be challenged on the law, or on due process, not on substance. You can understand why people might feel frustrated at not being able to relitigate the facts.

While I'm sympathetic to the Initiative's accountability concerns, I'm not sure that the corporate board model is the right one in this quasi-judicial context, a point also made at this forum. I wouldn't want a Supreme Court sitting back and managing the clerks' budgets, while the (nameless?) clerks make the decisions.

The second part of the forum dealt with the possibility that the courts may have further muddied the legal waters, by calling into question how the Commerce Act is supposed to work. The case  is the Court of Appeal's 2018 NZME/Fairfax judgement, and the argument is about how you decide whether something is on balance a good idea, after taking all the benefits and detriments into account.  Is the test, the country as a whole will be better off (a "total welfare" standard)? Or is it, consumers will be better off (a "consumer welfare" standard)? Or something in the middle where the country's better off and at least some consumers see some of the benefits (a "modified total welfare" standard)?

At the time (including in my own coverage) the big issue in the NZME/Fairfax case was seen as what things can properly be counted as benefits or detriments, with a big focus on whether ComCom was entitled to count loss of media plurality as a detriment (it was). Nobody paid huge mind to the bits of the judgement dealing with 'The Act's objectives' in [42] to [53], with Australian precedents in [66] to [68], or the punchline in [75]. Essentially, the judgement said, "Look, ComCom, you've always used a total welfare standard. You seem to think the courts required you to. Don't know about that - we in this court certainly didn't. And at a minimum you're certainly free to use the modified total welfare standard if you want to. You call it like you see it, and we'll tell you if you've gone wrong".

My inclination is towards a total welfare test, even if it leads you down the odd uncomfortable path: the example everyone mentions is the Commerce Commission's 2015 wool scouring authorisation. There, there were consumer detriments (higher prices as a result of the market power of the merged-to-monopoly incumbent), offset by efficiencies from rationalising production facilities. The total welfare standard says money may have moved from consumers' to producers' pockets, but so what: the country's better off not tying up unnecessary resources in wool scouring plants. The consumer welfare standard says, get outta here.

Perhaps nobody will follow up the Court of Appeal's musings on the meaning of it all. But it is odd, to say the least, that this late in the game - the Commerce Act dates back to 1986, and its current purpose statement to 2001 - people are still wondering what, if anything, the legislators meant to achieve. Did the new purpose statement - "to promote competition in markets for the long-term benefit of consumers within New Zealand" - mean to enshrine a consumer welfare standard? If it didn't explicitly, can or should a consumer welfare standard be read into it?

There's a huge debate underway overseas about whether competition and merger enforcement has gone soft, particularly in the US: mergers, the argument goes, have been let through that shouldn't have been, and the big guys have been allowed to throw their market power around to ill effect. If you haven't read Thomas Philippon's The Great Reversal: How America Gave Up on Free Markets, now would be a good time. Against that background, maybe we should sort out our own thoughts in our own heads, too, and sit down and have a ground zero reassessment of what sort of competition law we ought to have.

Monday, 10 February 2020

The ABA goes down under

Last Thursday's seminar in Sydney run by the American Bar Association's antitrust section was the most successful overseas seminar they've ever run in terms of attendees. I'm not surprised: there were quite a few first-time attendees (including me) attracted by 'Competition Down Under: Platforms Regulation & Merger Litigation'.

One thing I especially liked was that the panel session chaired by Gilbert & Tobin's Luke Woodward on 'Riding the Wave of Digital Platform Regulation' included one of the Big Tech companies - Facebook, represented by Mia Garlick, director of policy for Australia and New Zealand - as well as the ACCC's Morag Bond (previously featured here), Ashurt's Peter Armitage, and Allens' Jacqueline Downes. It's easy for lawyers and economists to talk to (or past) each other in the abstract, but distinctly more helpful to have someone from the coalface (I'd felt the same about TradeMe's representation at the Commerce Commission's conference last year).

Mia said that the view of the big techs as being all-powerful was not at all how it felt inside the organisation. The industry felt highly dynamic, there'd been a large rise in competition for people's attention, and Facebook's engineers would be "flummoxed" by any suggestion that they enjoyed "superdominance".

The ACCC's Rod Sims had wondered, as part of his introductory Q&A session with Clayton Utz's Linda Evans, whether, if Adam Smith came back today and saw the relatively concentrated state of many markets, he'd think there was enough competition for his invisible hand to do its stuff: Sims guessed he wouldn't. In the tech space Mia described, though, I suspect if Schumpeter came back and saw the Googles and Amazons and Facebooks, he'd be quite relaxed. Indeed, given Schumpeter's ego, I'd expect him to be crowing "Told you so!" - temporary monopolies, each anxiously looking over its shoulder for the next disrupter. I'm also currently leaning towards the Schumpeterian view that, even if the current incumbents have their own market power, they've arguably done us all a favour by dealing to the (rather larger?) market power of the previous lot. How many people think we're worse off with Google ads than we were with the newspapers' classifieds?

Overall, the thoughts I took away from the discussion were that concerns about the tech titans represent a range of different issues (competition and market power, privacy, unfair trade practices, political influence, fake news) which are often unhelpfully conflated. And while it's hardly rocket science, one implication is that you need to reach for the right policy tool for the right issue. It's also clear that different countries are on very different policy trajectories. While it would normally make sense for relatively peripheral countries like Australia and New Zealand to wait for the big guys to do the heavy lifting on, say, privacy, there's little chance of a single settled global policy regime emerging anytime soon. So we're left with an unappealing alternative of doing our own limited and perhaps fragmentating thing in the meantime (as the Aussies have with their digital platform service inquiry and its recommendations).

Then we had an entertaining panel chaired by King & Wood Malleson's Caroline Coops on 'Litigating Merger Cases', with Ruth Higgins from Banco Chambers, Judge Amit Mehta from the US District Court for the District of Columbia, Washington DC, Richard Parker from Gibson Dunn and Crutcher also in Washington, and Wendy Peter, general counsel for the ACCC.

L-R: Messrs Peter, Parker, Mehta, Higgins

The topic I was most interested in was the role of economic experts. Richard Parker said that what you most want is a "teacher" - someone who can explain the underlying logic and make complex facts understandable. Judge Mehta strongly agreed. First and foremost what he valued was the ability to present ideas, which was far more important than the credentials of the expert: often he got dense expert opinions that didn't need to be. He also said that experts tend to think they're going to win or lose the case, but actually they're only part of the jigsaw, and their evidence needs to meld with the rest of the story being argued. Ruth Higgins echoed Parker's comments about the role of giving "a normative narrative" explaining what is going on, and also cautioned about expert hubris: the issues in competition cases aren't more exotic than others that judges are routinely dealing with, and counterfactual analysis has been in the law "for centuries". 

Wendy Peter gave a big thumbs up to "hot tubs", pre-trial conclaves of experts to exchange and debate views. They allow courts to see and explore the reasons why people have different takes on what is happening in a merger. Ruth Higgin added that the hot tub process leads to more intellectual honesty, in front of one's professional peers, than may get elicited in cross-examination.

Both panel sessions canvassed "killer acquisition" mergers that allegedly take out potential challengers before they get going. I think there's something to this line of argument, and I asked the panel whether merger jurisprudence was up to the challenge. Richard Parker felt that it was. He argued for example that one of the cases often raised, Facebook's US$1 billion purchase of Instagram in 2012, didn't stand up to much scrutiny: at acquisition the company had zero revenues, few employees, and was one of several companies doing the same sort of thing at the time. It was hard to see, in his view, that there was anything especially disruptive about its potential. He felt the existing law on nascent competition was working fine. We'll find out a bit more as some big US cases on alleged killer mergers progress: Fiona Schaeffer from Milbank in New York, who runs this global seminar series, pointed me to Sabre/Farelogix and Schick/Harry's.

Good seminar - let's have more of them down our neck of the woods.

Friday, 20 December 2019

Beneath the calm surface

The Productivity Commission's been working on 'Technological change and the future of work'. Last month it came out with the second report, 'Employment, labour markets and income', in what will be a five-part series (press release here, whole thing here). The big headline takeaway was that it might be well worth looking at systems like Denmark's 'flexicurity', where people's incomes are supported through employment volatility. The idea is that the labour market needs to be able to be flexible, and jobs will come and go, but people's incomes will be cushioned against the volatility through, for example, an employment insurance scheme. All very sensible.

Along the way Chapter 4 looks at the case for 'active' labour market policies, things like retraining to help people find new jobs. The Commission is somewhere between agnostic and outright sceptical about their value: "There is a large gap between good intent and robust evaluation of the effectiveness of labour-market programmes. Few programmes are subject to robust evaluation.  Of labour-market programmes, ALMPs ['active' ones] have received more evaluation effort. The results of those evaluations are not encouraging (p78) ... Overall, the Commission cannot say whether New Zealand’s labour-market programmes are effective or not" (p80).

The Commission may have missed the latest bit of evidence, which I wrote about in 'Let's get more active', and which was more upbeat about their potential. It found that two kinds of programme appeared to be effective (wage subsidies and helping people to go out on their own as self-employed), vocational training wasn't too bad an option, but brokering services (helping match job seekers and recruiters) were a waste of space. So if I were the Commission I think I'd be taking a modestly more constructive view of the potential to make the labour market work better, particularly as it's a vital economic issue.

For one thing, governments in many countries (though not Denmark, obvs) have been failing to live up to the social compact underpinning an open, flexible, market-based economy. The core bargain is that the national gains from openness will create enough income for the winners to be able to compensate the inevitable losers and still come out ahead. But the redistribution to the losers hasn't been happening, and the resulting resentment in the world's Rust Belts is feeding tear-up-the-old-rules populists everywhere.

For another, virtually nobody outside the economics trade (and not always inside it, either) realises just how vast the flows in and out of the labour market actually are. We learn from Stats, for example, that total employment went up by 16,000 in the June quarter, and by 6,000 in the September quarter. That doesn't look like a lot of movement.

But what is actually happening is that huge numbers of people change jobs, get fired, and get hired each quarter. The 6,000 in the September quarter is the small net effect of enormous gross flows in, out, and between.

In recent years, roughly 155,000 new jobs are created each quarter, which has happily been ahead of the 145,000 or so jobs that have gone bung in the quarter. The 10,000 or so increase in employment in each quarter is the outcome of very large gross flows indeed. The data, by the way, come from Stats' Linked Employer-Employee Dataset ('LEED'), which you can play with yourself for free on NZ.Stat. I've done rolling four-quarter averages to take out the pronounced seasonality.


And the big levels of job creation and job destruction are only part of the wider ferment in the labour market. People are moving around from one job to the next in very large numbers. A bit over 350,000 people each quarter change seats.

Are we out on a market-turmoil limb here? Not at all. In the States, for example, the increase in jobs in any given month is around 200,000: in December it was 266,000, which was thought of as quite a large increase at this late stage of the long U.S. expansion. But that is absolutely tiny compared to the gross flows. According to the U.S. JOLTS data, which show us the underlying gross flows, in the month of October alone (the latest to hand), 3.5 million people voluntarily quit their job in the month. Another 1.75 million were laid off or fired. Employers hired 5.75 million people. In one - one - month.

Bottom line. There are two reasons we ought to be helping people a lot more to cope. One is that moral compact: for both efficiency and equity reasons, we need to have a dynamic but not painful labour market. And the other - acknowledging that a fair amount of it is entirely voluntary, with people quitting (especially in good times) to do better for themselves in a new job - there's far more turnover in the labour market than you likely thought. Flexicurity, and 'active' labour market programmes, aren't just for the unlucky few in the meat processing factories: they're for all of us.

End-year bits and bobs

We're all winding down and people's appetites for competition and regulation stuff are likely waning, but as we all head for the beaches (Golden Bay in our case) here are some assorted bits and bobs that will tick over into 2020.

1 What's happened to Lodge? That's the case about real estate agents in Hamilton charged with anti-competitive collusive behaviour. The High Court said they didn't. The Court of Appeal said they did. The Supreme Court allowed an appeal last March and heard it in (from memory) August. Is four months the normal gestation period for a Supreme Court decision? Or is there some extended thinking going on about exactly what constitutes a meeting of minds as opposed to simultaneous but independent agreement on a course of action?

2 And if the Supreme Court does ping the Lodge real estate agents, what about the penalty? Other real estate companies hadn't fought the case, pleaded guilty, and got what I thought were fines on the high side of appropriate. I'm no fan of cartels: I was really pleased for example when the Aussie courts threw the book at the Japanese shipping lines (most recently here) and totally delighted when they nearly quintupled the fine on a brazen bang-to-rights Japanese cartellist who'd unwisely appealed the original A$9.5 million. But I'm not at all convinced that the book needs to get thrown in Lodge. Yes, of course, you don't want cartel fines becoming just another cost of doing business, and all that economics stuff about optimal deterrence needs to get an airing. But there also needs (in my view) to be a clearer distinction drawn between the less culpable and the most egregious.

3 Talking about appropriate penalties, when cartel criminalisation goes live in New Zealand in April 2021, is every cartel case going to be treated as a criminal matter? Or only the worse ones?

4 Still on cartels, I wonder how the ACCC's underwriting case is going to fare? Apart from the current skirmishing over whether the evidence trail has been contaminated - the case is definitely in criminal law process territory, as we will be too from 2021 - we're going to have another of those Lodge-style bunfights about whether everyone took the same view, given the force of the ambient circumstances, or went that step too far and collusively agreed to act together (in this case, allegedly, controlling how many unsold ANZ Bank shares would be dribbled out onto the market).

5 Does history repeat itself? You betcha. Seen the ACCC's first go under the new Australian 'effects' based formulation of abuse of market power (media release here, concise statement of claim here)? Let's see now, what does a port with its own pilot and towage business allegedly over-reacting to a competitor remind you of?

6 In the great scheme of things I'm more interested in competition and regulation than consumer protection. But I get it that consumer law has its place in making markets work well, and was persuaded a bit more in that direction at this year's RBB Economics conference. So I think we're on the right track with the new Fair Trading Amendment Bill, which aims to bring in a new 'unconscionable conduct' provision, and which you'd think would help address gross imbalances in market power between sellers and buyers. "Unconscionable" isn't defined in the Bill but the government's explanatory note (which presumably will come into play when there's the eventual statutory interpretation headbutting) says that "Unconscionable conduct is serious misconduct that goes far beyond being commercially necessary or appropriate". The good bit is that s7(3) and s8 try to give some guidance to the court, in order to avoid the Kobelt outcome we recently saw in Oz (good summary here, case itself here) where it went to penalty goals and a 4 -3 decision against finding the alleged unconscionability. But - and maybe it's a fool's search to go looking in the first place - I can't say that "serious misconduct that goes far beyond being commercially necessary or appropriate" rings my bells as a decisive guide.

7 Out of the blue, earlier this month I got an e-mail from the American Bar Association Antitrust Law Section about a seminar that will "be focused on platforms regulation and merger litigation. Rod Sims will deliver a keynote that follows-up on the ACCC’s Digital Platforms Inquiry and provides an update on the ACCC’s next steps, followed by an interactive panel discussing that report and other issues related to digital platform regulation. This will be followed by an all-star panel of judges and litigators from the United States and Australia discussing the unique features and challenges involved in the increasingly common practice of litigating merger cases". I looked it up: it sounds promising, and I'm going. It's free, and only half a day, in Sydney on February 6. While it's free, you need to register here.

Wednesday, 11 December 2019

Give that man a DB

Everybody from blind Freddy upwards has been telling this government, and previous ones, to get on with fixing New Zealand's gross infrastructural deficiencies.

"We should pull finger and get the hell on with it while the going is still pretty good", I wrote just over three years ago. "Roll out the infrastructure we need, and pull finger about it while you're at it", I said over two years ago. And apart from an unfortunate predilection for 'pulling finger', I was right, as was everyone else who has been banging on about it.

So all credit to Grant Robertson, who at today's Half Yearly Economic and Fiscal Update ('HYEFU') has done precisely that: an extra $12 billion into infrastructure. It was, from an economic perspective, completely correct: we need the choke points fixed, borrowing costs are at historical lows, and monetary policy has been driven into ever more grotesque distortions because fiscal policy wasn't carrying its share of the inflation-boosting load. Show me someone who disagrees with this boost, and I've a better than average chance of showing you a nutter.

To be clear, I'd say well done to whoever held the portfolio: I try to be non-partisan, and I'll give credit where it's due. In this case the economics said, go for it, and he did. Robertson also ran a bit of a political risk: "you can trust us with the public purse" was an electoral asset, and he's been prepared to face the "you promised a fiscal surplus and you blew it" flak (you'll have seen it's already flying) for the greater good. Good call.

There are practicalities that might intrude. With this spend-up, there is are risks that any old vanity project will get a green light. There are probably capacity constraints, meaning good intentions won't translate into diggers on sites, and hence and otherwise you'd want to see some thought given to (say) apprenticeships in the engineering and construction trades. There could be other constraints: it's a wild guess, and probably totally unrelated to whatever might be the Commerce Commission's next market study, but I wonder what are your chances of buying construction materials at a reasonable price, if  you were minded to buy a lot more of them? And the infrastructure spend-up is going to make overall expenditure control trickier: "you could find $12 billion for roads, but you can't find money for [insert allegedly deserving cause here]". For all that, it's still a good plan.

The other interesting thing from today's HYEFU was the update on whether fiscal policy is likely to boost or brake the economy. Yes, I know I go on about this, but for good reason. Most of the fiscal coverage is from a vested interest point of view - will my pretties get their share of the lollies - and the overall national interest doesn't get enough of a look in. But we all need to know whether on balance, overall, the government is on an austerity tack or whether it's adding to the national spend-up.

The answer to that question - and when I say 'answer', I have to confess it's the best we've got, rather than an outright humdinger of a clearcut answer - is given by Treasury's estimates of the 'fiscal impulse'. Here they are. Bars above the line say that fiscal policy is supportive, below the line it's contractionary. The blue bar is the best one to look at.


Treasury's commentary (p16 here) says that
Compared to Budget Update [last May], the fiscal impulse in 2019/20 and 2020/21 is now more positive (0.9% and 0.3% respectively, up from 0.0% and -0.2% previously). The change in the 2019/20 impulse largely reflects operating spending shifting from 2018/19 to 2019/20. The change in the 2020/21 impulse reflects increased capital spending.
I don't blame you if you're wondering what's being said here. Unpacked, there's good news and bad news.

The good news is that fiscal policy is going to be more helpful over the next year or two than originally planned, which, given that the current preponderance of risks in the global economy is tilted to the downside, is a good precautionary move, as well as taking the heat off the Reserve Bank and starting to chip at our infrastructural problems.

The bad news is that $12 billion of extra infrastructure spend, which you'd think would make quite an impact, will take forever to kick in. Here's the profile (from p13 here).


Some of this is inherent in the nature of infrastructure spending: you can't go out tomorrow and start hacking away at Transmission Gully or a second Auckland Harbour crossing. Some of it is down to unnecessarily complex and slow planning processes. Some of it is down to governments not being ready (from a cyclical management point of view) with the proverbial 'shovel ready' projects or (from a longer term investment perspective) not having a coherent portfolio of projects thought through well ahead of time.

But however you parse it, you can announce $12 billion today, but only $3.7 billion is actually going to be spent over the next three and a half years. So while Treasury talks about increased capital spending contributing to a fiscal boost in 2020/21, the effect is quite small because infrastructure is harder to get moving than a teenager with an attitude.

I'm not the first to say this, but there is a ever stronger case building for a non-partisan agreement on a core programme of infrastructure spending. We shouldn't be in a position where overdue investment happens only when cyclically opportune; we shouldn't be in a position where one government's 'holiday highway' is the next government's 'road of national significance'; we shouldn't be reacting, after the event, to stresses that have become evident because we haven't had the wit to preempt them. And on the supply side, we won't have the range of contractors we'd like to have to build the projects we need, unless they get the comfort of a pre-announced schedule of potential contracts. We risk being hostage to the big few who can ride out the dry years.

But enough of the quibbles. Did fiscal policy step up to the plate? Yes. Did we get more real about infrastructure? Yes. Does that man deserve a DB? Yes.

Monday, 9 December 2019

This doesn't help

The OECD came out the other day with its latest PISA results - "the Programme for International Student Assessment (PISA) examines what students know in reading, mathematics and science, and what they can do with what they know. It provides the most comprehensive and rigorous international assessment of student learning outcomes to date". Here's how New Zealand students have been doing over the history of the PISA tests. We used to be clearly better than the OECD average across reading, maths and science, but the results have been deteriorating in all three areas.


We're not alone in this. Here are Australia's PISA results. Almost exactly the same.


You could, I suppose, take some comfort from the fact that our performance levels (even if steadily declining) are still not that shabby by international standards. Here are the top 30 countries (I'm using countries loosely here to include for example the consolidated results from four regions in China producing quality-meeting PISA scores), when ranked by reading scores. We're still 12th, Australia's 16th. But self-evidently we'll get eaten if, for example, the rapidly developing economies of eastern Europe up their game and we continue to slide.


I'll leave the bunfight over the reasons for our (and Australia's) recent PISA declines to others. What bothers me about these trends is the contribution they may be making to our long-standing productivity problems, where for any given degree of effort and resources we seem to produce less than the higher-income OECD countries. Australia's also hit a productivity wall: its latest official estimates showed that "market sector multifactor productivity (MFP) fell 0.4% in 2018–19, the first decline since 2010–11 ... Labour productivity fell 0.2% in 2018–19, the first recorded negative for the sixteen industry market sector aggregate (since the beginning of the time series in 1994–95)".

A wee while back I wrote a column for the Australia and New Zealand accountants' magazine Acuity, documenting New Zealand's and Australia's productivity problems and canvassing some of the usual suspects ('Is there any scope for multifactor productivity growth?'). I didn't include falling skill levels for new entrants to the workforce - a fall of some 4.7% across all three areas since 2000 - but maybe I should have. Normally you'd expect each entrant cohort to the labour force to be bringing higher, not lower, levels of skills to the productivity party: it gets a lot harder to make progress when your starting point is going backwards. In the context of productivity growth, where small changes matter a lot over the longer term, a drop in entrant skills of approaching 5% in two decades is a big thing. This is a ball and chain we don't need.