Wednesday, 5 September 2018

Regulation done right

From overseas I've caught up with the news that the Telecommunications Commissioner Dr Stephen Gale has decided not to deregulate the market for national mobile roaming.

The current regime (summarising a bit) is that the incumbent mobile network operators (Spark, Vodafone, 2degrees) have to provide wholesale network access to any serious new entrants. That way the new entrant is able to offer a national service from day one: offering patchy network coverage would otherwise be a big turnoff to potential customers and realistically would all but nobble a new entrant's prospects.

National roaming is a 'specified' service, which in telco regulatory jargon means that it must be made available, but on commercial terms struck between an incumbent and an entrant. A more stringent form of regulation would be a 'designated' service, at a price set by the Telecommunications Commissioner.

I liked this decision from at least five perspectives.

One, it was correct.

Two, it was short (38 paragraphs). Maybe that was inherent in the relative simplicity of the issue under consideration. But in any event it was mercifully concise: well done.

Three, plain English, or at least as plain as as you can be when grappling with telco acronyms.

Four, an appropriate bit of "behave yourselves or else" ("We remain of the view that 2degrees’ commercial roaming arrangements with Vodafone were only secured against the threat of regulation. We consider that similar difficulties could potentially arise for a new entrant as have affected 2degrees"). Effective outcomes without actually reaching for bigger sticks: good one.

Five - and this is down to the overall design of the telco regulatory regime - there is a working mechanism where the Telco Commissioner has to regularly check whether regulation of 'specified' or 'designated' services is still needed. They have to be revisited no later than five years after they've been regulated. An excellent idea that stops the sector being littered with redundant rules.

Though you are immediately left with the thought: why isn't this done with regulation more generally?

Case in point - on the latest episode of The Block (no, I don't watch either) apparently two contestants "won't be able to market their property as a four-bedroom house for sale (or rent), because it  contravenes the Government's Housing Improvement Regulations 1947".

That makes regulatory sense. Let's face it, not much has changed since 1947.

Wednesday, 29 August 2018

Now you see it

Markets need institutions to help them work properly - things like a practically enforceable rule of law, well defined property rights, and the likes of our Fair Trading Act and 'weights and measures' provisions to prevent misrepresentation and deceit and to foster trust in commercial exchange.

All that orthodoxy said, the Fair Trading Act and its companions, worthy though they are, have never greatly floated my boat, and I'm relieved that it's someone else pinging (for example) the back-of-a-truck ratbags selling overpriced tat to poor people.

But during the week I came across an interesting new piece that raised my opinion of the impact Fair Trading enforcement can have. It's from the States, and it looks at the impact of making the airlines disclose the full price of tickets, including all taxes.

By way of background, we don't have rules that require all-inclusive pricing. Back in 2012 when consumer law was being updated, the Commerce Commission argued for all-inclusive pricing to be mandatory, as it is in Australia. MBIE however didn't see an issue, so the Commission's proposal died the death. A pity: I have a lot of sympathy for Consumer New Zealand and its "sneaky fees" campaign. As they say here,
our research shows the problem is real and, with the rise of online trading, looks set to get worse. When goods and services are bought online, we’ve found extra fees may only be revealed near the end of the purchase process.
Not only does the practice mislead consumers, it also makes it difficult to compare prices and gives the retailer an unfair advantage over companies that are upfront about costs. All-inclusive pricing rules would ensure consumers can easily identify the price of a product.
What I didn't know, before I read this American research, was how big the impact of fully disclosing the total price might be.

The paper, published last month, is 'Hidden Baggage: Behavioral Responses to Changes in Airline Ticket Tax Disclosure', and was published in the discussion paper series of the Fed. I came across it, by the way, thanks to the very useful Brookings Briefs which trawl for interesting papers across a variety of issues. Here's what happened.

From early 2012, the US Department of Transportation brought in "full fare advertising rules", or FFAR, which required airlines to show the ticket price including various flight-specific taxes that had previously not been shown until you went to pay. Finding out what those taxes were, by the way, was very difficult in the pre-FFAR regime, assuming you even knew that there were extra taxes and that they varied quite a bit from flight to flight.

On the very large database of  international flights the two authors looked at, the average price was US$750 and the taxes were a sizeable $100, with quite a lot of variation (standard deviation of $45). As the authors show (on pp7-8 and in Table 1) it would have been very easy to pick a flight that looked cheap on a pre-tax basis, but which turned out to be an expensive option on a full-disclosure basis.

And what happened when buyers could see the full price?

First of all, consumers ended up wearing much less of the taxes, and the airlines absorbing much more of them. This is the bit of tax economics known as "incidence", which looks at who actually ends up paying taxes (or receiving subsidies), as opposed to who formally pays them - they can be quite different. You might think, for example, that subsidies to first home buyers will go to the formal home buyer beneficiaries: typically, they won't, and will actually be trousered by housebuilders.

In this case, pre-disclosure, the airlines correctly reasoned that what you can't see or can't be bothered about, we'll dump entirely in your lap. Post-disclosure, consumers were more sensitised, and to keep their custom airlines had to sharpen their pencils and cut their base fares. Or as the paper says (p21)
Three-quarters of every dollar in ticket taxes are thus borne by the airlines in the post-FFAR period, in marked contrast to the pre-FFAR period when  consumers bore the entire tax.
The researchers also found, by the way, that the pattern of pass-through varied with how competitive the route was. If there were lots of competitors (as measured by a lowish HHI index) pass-through by the airlines was higher, which is what theory predicts (low profit margins in a competitive market don't leave much room for sellers to absorb costs in base prices). And it was lower in low-competition markets: "Following the adoption of tax-inclusive pricing ... pass-through rates for unit taxes are shown to drop most sharply in more highly concentrated (i.e. "duopoly") markets" (p28).

Consumers also wised up. Before FFAR, they could see base fares (disclosed), non-tax charges (disclosed) but not ticket taxes (undisclosed). They reacted as you'd expect to the first two (buying less when the cost went up), but paid little or no attention to the taxes, which, as noted, they consequently ended up wearing. Post FFAR, they became sensitised to all elements of the cost:
Adoption of FFAR, however, is associated with significant de-biasing [i.e. responding to all components of costs the same way], such that when base fares, unit taxes, and non-tax charges are all included in total fares in an equally salient [transparent] manner, consumers respond to each equally - consistent with the standard theory of (attentive) consumer behavior (p23, square brackets are my explanation of some of the terminology)
The airlines got hit in a couple of ways. They had to cut base fares to accommodate their new share of the taxes, and were faced by more price-sensitive customers. All up, it made quite a big difference:
The combined impact of reduced ticket tax pass-through and reduced passenger demand (in relation to the portion of the tax still born by consumers) together imply that a $5 increase in unit taxes is furthermore associated with a 2.4% reduction in airline ticket revenue (p30)
As the authors say, "These represent large potential losses in ticket revenue ... and lend strong justification for the U.S. airline industry's intense and persistent efforts to reverse FFAR through lobbying and public relations campaigns" (p26). Best I can tell, a Bill which includes a provision to reverse FFAR has got through the US House of Representatives, but hasn't yet got through the Senate. In Trump's America, though, if you're an airline CEO, you've got to fancy its chances of going all the way.

Maybe the airlines weren't hit as badly as they looked: "it is also possible that carriers may have compensated for lower base fares and ticket revenue through increased reliance on product unbundling and the use of less heavily regulated add-on fees, such as baggage and check-in fees, seat upgrades, in-flight meals and service, etc., whose costs to consumers we do not observe in the ticket data" (p26).

If so, mandating FFAR (and full price disclosure more generally) in New Zealand "should be tempered by the possibility of fostering unintended consequences" (p30) like extra fees for this, that and the other. Me? I'd go for it. These are big bucks being transferred from consumers to producers solely because of off-the-radar treatment. Looks to me as if efficiency and equity point the same way.

As a final thought, it was great to see empirical methods being applied to an issue like all-inclusive pricing. It's all very well running in-principle arguments before Select Committees, but facts are trumps. Big data got by, for example, 'scraping' online prices (as in this paper), are increasingly going to inform what otherwise would be semi-philosophical debates. About time, too.

Monday, 27 August 2018

A different view of productivity

New Zealand's biggest economic problem is our low productivity by international standards. Here, for example, is a chart from an excellent paper by the Productivity Commission's Paul Conway, 'Can the Kiwi Fly? Achieving Productivity Lift-off in New Zealand'.


In the better-off parts of the OECD people can produce 100 widgets an hour (and in the US, more like 105). Australians can produce 90. We can only produce 65.

As Paul says on page 41 of his paper , "This is unusual within the OECD, given that lagging economies have, in principle, greater scope for improving productivity more quickly than leading economies. New Zealand's lack of productivity catch-up is even more perplexing given that its economic policies are often regarded as fit for purpose".

The more I've been thinking about this, the more I'm convinced that we should recast the problem in a slightly different way. What if we put it like this?

In the better-off parts of the OECD people take an hour to produce 100 widgets (and in the US, more like 57 minutes). Australians take 67 minutes. We take 83 minutes.

Exactly the same data, but when put in terms of how slow or fast we are, it suggests some different lines of inquiry about what's going on and what some remedies might look like.

As a thought starter, think about infrastructure planners. Say they've got a budget of a billion a year, and they've got five equal sized $1 billion projects in mind.

One choice is to start the five projects at once, spending $200 million a year on each one, and therefore (because of the budget constraint) necessarily doing them slowly over five years, using 1,000 people with shovels on each one. Five low-productivity projects.

The other choice is do project 1 quickly, using only 200 men and lots of productive (but expensive) heavy equipment, and spend the whole annual $1 billion budget on it. Then do Project 2 in year 2, again in a concentrated burst, and so on. Five high-productivity projects.

In New Zealand's culture, though, which choice do you think will be made?

Quite. And never mind that doing it the high-productivity, short-time way will actually deliver 10 years of benefits from the projects by the end of year 5, whereas going the slow-delivery route will have generated no benefits at all till the completion of all five slow-moving projects.

Not that it's wholly to be laid at the door of the commissioning planners. I'd suggest that spinning out five years of 1,000 men with shovels suits the bidders just fine, too. They keep the band together, and they take out the risk (if they do the $1 billion quick job) of being left high and dry with a lot of idle heavy equipment if they don't pick up a job in year 2. In an economy where lumpy projects don't necessarily appear like clockwork, that's a rational fear, and I'm not the first to observe that one productivity-enhancing policy might be a pre-announced big-project timetable.

Or another example. In public procurement of commercial construction, we are, apparently, extremely tough on cost over-runs. You go over budget, you wear it - too bad, as Fletcher Building has painfully experienced. But does completion time get anything like a decent look-in compared with the focus on cost? If a public buyer had to choose between the bidder who says, "It'll cost a bit more but I'll have it done by Christmas, no dramas" and the bidder who says, "Cheap as, but it'll be next Lammas Eve twelvemonth, probably", I wonder which way they'd go?

Not that I wonder a lot, as I suspect I know the answer.

And it's not just big construction projects or public buyers that are dragging the chain. I've worked in a variety of in-house and external consultancy environments: some have been on the ball, with quick turnaround times, some have been, shall we say, rather more relaxed. No doubt you've experienced the same in your career.

Thinking of low productivity as slow pace also puts a different spin on how prospective solutions might work. Many people (including the Productivity Commission, and me) think greater competition is part of the answer. Too many dozy producers are enjoying the quiet, low-activity life because there aren't enough people snapping at their heels to make them do any better. Typically, we think of competition as forcing out inefficient levels of costs, or pushing prices down to 'normal profit' levels. Maybe we should think about how it could also be harnessed to improve response and delivery times? 

Viewing our productivity problem as a low-speed issue isn't a panacea. There's still a lot of mileage to be got from the more usual low-production view. But at a minimum it's a useful complementary viewpoint. I'm quietly convinced that digging into the incentives to do things slower or faster could provide some extra answers to our productivity conundrum. 

Tuesday, 21 August 2018

A little light on a mystery

There's been something quite odd happening for quite a while. Employers are saying they are having a lot of difficulty finding staff, as this graph from the latest Monetary Policy Statement shows.


But at the same time there are large numbers of people telling the Household Labour Force Survey (HLFS) that they are currently part-timers but are available, and want, to work more hours. So how can we have employers tearing their hair out that they can't get people, and yet a whole bunch of people are saying "Pick me! Pick me!"?

Quite apart from being a mystery that it would be nice to unpick, it's also a reasonably important macroeconomic issue. If there really is a reserve army of people ready to take up jobs, or at the very least more hours in their current jobs, then the labour market mightn't really be as strong as it looks. Big wage increases wouldn't look terribly likely either if there are lots of people standing ready to take jobs at the current prevailing rates of pay. Conversely, if this reserve army isn't really there, then maybe employers' concerns are the thing to watch as an indicator of likely pay increases down the track, as employers bid against each other for the limited staff availability.

The regular HLFS tables don't shed a lot on these 'underemployed' people. We know from Table 12 of the HLFS that they are disproportionately women: of the 117,000 (seasonally adjusted) who were recorded as 'underemployed' in June, two-thirds (78,000) were female, compared to the roughly 50:50 male:female split of employment. And we know from Table 13 that of the 112,800 underemployed (not seasonally adjusted this time) in June, some 48,000 of them are not 'actively seeking' work.

That might suggest that they're not, actually, awfully interested in taking on full-time jobs, and maybe the employers' view is more descriptive of reality. But I'm not sure about that. I don't think it's the right thing to do, in these days of online job ads, to say that someone is not actively seeking work if all they've done is read the ads. But that's how Stats views things: you have to do more than scan Seek (or wherever) to be counted as 'actively seeking'. Not how I see today's world, but there we go.

Other than those little nuggets, though,we know nothing from the headline HLFS about these underemployed folk. So I asked Stats if they could break out the underemployed by industry or by occupation. And the ever-helpful people at Stats came up with the goods. Here are the answers. Stats would like me to say "Source: Statistics New Zealand, customised report and licensed by Statistics NZ for re-use under the Creative Commons Attribution 3.0 New Zealand licence", so there it is.



I'd love to say, Aha! Solved it! But the data, interesting and useful though they are, don't crack the puzzle.

You'd wonder, for example, when the housebuilding industry is desperate for anyone who can carry a hod, how 21,400 labourers say they can't get as many hours as they'd like.  That kinda points in the "yes, there's slack available" direction.

On the other hand the highish number of underemployed represented by retail trade and accommodation points another way. No matter how strongly business picks up at the motel, the motelier is very likely not going to add another full-time person: more likely, it'll be another person to do the 8.00am to 2.00pm shift to clean up the 10 extra units being occupied. The economy can pick up all it wants and won't make a blind bit of difference to motel cleaner-uppers (or peak-time sales assistants) who'd like longer hours.

And then you start asking yourself, why don't the motel and shop people move to other lines of business where there might well be a full week's work on offer? Is it because they have low level skills that aren't in demand? Unlikely, since demand for unskilled and low skilled staff is actually stronger than it is for skilled or highly skilled, as MBIE's latest online vacancies survey shows. Plus you look at the 7,400 managers (who you'd think have transferable generic skills) and the 17,000 professionals (a fair proportion ditto, you'd guess), and wonder why they don't move.


Still at least as many questions as answers, I'm afraid, but at least we've now got more data to be ignorant about.

You're welcome.

Tuesday, 14 August 2018

Workshop takeaways

Last weekend was the latest annual workshop of the Competition Law and Policy Institute of New Zealand (CLPINZ). Wellington turned on its loveliest weather, all the speakers and discussants performed well, there were sausage rolls at the meal breaks, and during my absence in Wellington the Warriors broke their home game hoodoo and took the two points. An excellent week-end all round, and special thanks to Chapman Tripp for providing the excellent facilities.

Many of the usual suspects were at the workshop, but if you're in the game and had to miss it, head over to the CLPINZ website, sign up as a member, and you'll get access to the papers (they're not up yet, but will be). You'll also get access to previous years' presentations.

The papers speak for themselves: here are some personal thoughts I took away.

Cartels - the cause célèbre du jour is the Lodge case. This is the one where a whole bunch of real estate agencies pleaded guilty to price-fixing, but for the eponymous hold-out in Hamilton, who went to trial and to widespread surprise beat the rap in the High Court. At the time I wrote about the fines for those who had pleaded guilty and said that "in the context of small to medium provincial businesses, even to my unsympathetic eye they were looking down the severe end". Having listened to the cartels session, and to the session on coming to a negotiated settlement with the Commission, I'm more of that view now. I never thought I'd feel that way, but as David Blacktop's presentation said, there can often be some "precipitating event" that causes otherwise well-meaning, normally competitive businesses to lapse into a concerted (rather than independent) response to the event - in this case to Trade Me's attempted jack-up of real estate listing fees. No, they shouldn't collude on a response, and in principle it doesn't matter that they would have come to the same decisions independently, but all the same they got backed into a corner and were anything but the cartoon cartelists in the proverbial smoke-filled room. Time for more understanding, in my view, of the reality they found themselves in. The goss, by the way, is that the Commission stands a good chance of having Lodge overturned in the Court of Appeal, but stranger things have happened. And while we're on the topic...

The law - okay, I'm an economist, and anyone who gets their legal advice from an economist deserves what happens to them, but I've got some questions. Is there anyone on the look-out for where Australian and New Zealand competition law might be diverging? We don't want, for example, the situation John Land described, where the legal approaches to price fixing may be going down different roads. Is there any kind of trans-Tasman body that keeps a weather eye out and acts to harmonise on best practice? And speaking of harmonising on best practice, it seems from what Minister Faafoi said at the workshop dinner that reform of s36 - anti-competitive abuse of market power - will be back on the agenda next year. Good: the Aussies have fixed their equivalent, and we should get in behind. I've also got some disquiet (partly stemming from Lodge but also more generally) whether behaviour at the lower end of culpability will be prosecuted under the forthcoming criminalisation regime, rather than the 'hard core' cartels that should be its target.

Regulation - I found myself in strong agreement with Ross Patterson's response to Sasha Daniel's paper on 'The future shape of telecommunications regulation'. Ross argued that there is no lack of competition in access to fast broadband and hence no case for regulation, especially when you're regulating one technology (fibre) but not another (fixed wireless) and with a - I think he said 'clunky', but if he didn't I am - a clunky form of 'building block' price cap regulation.

The internet - our new digital economy is going to be a minefield from both competition and consumer law perspectives, and I suspect we'll be making both Type 1 and Type 2 errors for some time before we get it right, if we ever do. That was my overall impression from the keynote 'Collusion without the smoke-filled room: from public statements by wetware to algorithmic pricing by software' from Professor Joseph Harrington and 'Consumer Analytica: NZ consumer law application to international developments in privacy and use of data' from Sarah Keene. I suspect there's likely to be behaviour that is anticompetitive or unfair/misleading that will not be pinged, and behaviour that's legit that risks being rapped. Joe Harrington is surely right that we likely need jurisprudence and new guidelines to distinguish between the two, but we're still a long way from being able (for example) to "develop rules for how a platform can intervene in the setting of prices" or to "define the class of prohibited pricing algorithms".

Market studies - the papers presented at the session I chaired were absolutely on the money. If you're thinking about how the Commission should use the powers it's (more than likely) going to get, you've got to read the excellent presentations from Mike Tilley and Richard Meade. They've both had first-hand experience of doing these studies, and it showed. Market studies are a great idea, but there are more process issues to think through than you (or I) might have imagined. I'll just chuck in one final thought for MBIE's consideration: I suggest that any company that attempts to invoke our 'anti-dumping' provisions should automatically trigger a market study into its industry.

Quantification - James Mellsop and his NERA colleague Kevin Counsell gave a very good presentation on 'Mergers: exploring the economic tool box', and walked the attendees through unilateral effects in auction markets (using a pathology merger example), vertical arithmetic (a version of critical loss analysis) using the AT&T/Time Warner example, and then some Cournot modelling of a wool scouring merger (using made-up data, by the way, if anyone involved in any of those cases is wondering). Good stuff, and they got it across in a user-friendly way that - my keyboard nearly inserted 'even' - lawyers could understand. My feeling is that we are, finally, on the brink of a new more data-driven and more quantitative approach to competition analysis, after a long period when the tide had gone out a very long way indeed on playing with the numbers. As I've said a few times before (eg here or here) there's far more empirical data becoming available, and better (and often more robust) ways of interrogating it. The Commission's Reuben Irvine said that some of these quantitative techniques, like the auction and vertical arithmetic tools James and Kevin mentioned, are already in use, if somewhat behind the scenes, at the Commission, and about time, too. In my stint there, applicants and opponents very rarely reached for even the more basic econometric methods (regression, differences-in-differences), and you could go years without tripping over a correlation coefficient. We've become an immensely data-rich world: time to start using it, rather than making anecdotal guesses about (for instance) the degree to which products are or are not in the same market.

Wednesday, 8 August 2018

Here's a revolutionary idea

There's an ongoing barney on social and mainstream media about what the latest poor numbers for business confidence might or might not mean, and, in that unappealing Kiwi way, who's to blame. The truth is, we're all reduced to guessing what goes through the minds of the people who fill out the survey forms and bung them back to the ANZ and the NZIER.

My conjecture - an upmarket way of saying 'sort-of-informed guess' - is that it's actually a mix of several things. There's probably an element of party politics in it, though as I said the other day, it looked to me as if the business community had got past the toys-out-of-cots stage. There's probably an element (beyond partisan) where they've looked at government policies and think they're bad news (irrespective of who introduced them). There's certainly concern about pressures on profitability, where there's pretty obvious evidence of costs pressures that aren't easy to pass on to consumers.

But do I really know? Does anyone?

So here's my revolutionary idea. Why don't ANZ or the NZIER ask, what's bugging you?

And here's the template. It's from NAB's latest quarterly survey of Australian businesses.


That's not hard, is it? You could ask the same questions here, word for word, and you'd be left with as clear an answer as the Aussie survey shows.

Just before I let go of this business confidence thing, could I say to all those talking up and talking down the 'confidence' figures, confidence readings are kinda interesting in their own right, but you're both paying them far too much importance. The links between 'confidence' and actual business outcomes aren't always that strong.

But don't extrapolate from that and say, business surveys are airy fairy indicators of nothing in particular. It is - and you can't say this terribly often in economics - beyond reasonable question that some of the measures in these surveys, particularly the ones related to firms' own prospects, have very strong links to reality. You might think a simple 'getting better/getting worse' question isn't going to get you very far. But it often will, which is why even official statistical agencies run them. 

Here, just to belabour the point, are the latest results from the French statisticians.


And to belabour it into the ground, here is the link between Aussie GDP and the 'Performance of services index' compiled by the Australian Industry Group, which is again based on the balance of better/worse answers.



And, finally, here at home here's how a combo of some of the business and consumer measures in the ANZ business surveys track against our GDP (it's a graph in the latest one). It's a pretty good relationship. It helps too that it is timely, and a leading indicator of what's down the track (the graph shows a five month lead between changes in the indicator and subsequent changes in GDP).


So for all those knocking business surveys because it suits them tactically - give over. These are useful, cheap, timely and while not every bit of them is always telling you useful stuff, in parts and in combo they give reliable readings on where we are and where we're going. If the evolution of the economy, good or bad, is giving you political conniptions, don't shoot the messengers.

Sunday, 5 August 2018

Have we got the same problems?

Earlier this week the LEANZ programme of Auckland seminars got a more than usually eminent speaker: Professor Sir Martin Cave, who among many other achievements is now chair-elect of the UK's energy regulator the Office of Gas and Electricity Markets (Ofgem).

Picture from http://www.martincave.org.uk/
He was on his way to Wellington to assist MBIE's Electricity Price Review, given his background as one of the members of the UK's extensive two-year review of the British electricity markets (for regulation uberwonks, all the source material you'll ever want can be sourced here, and for the rest of us the summary report is here). If I've got it right I think the invitation to New Zealand came from Vector, but in any event Vector certainly hosted the Auckland event, emceed as usual by Richard Meade. Well done, folks, LEANZ activities in Auckland and Wellington depend on business support.

The gist of what Martin said was that the review found the wholesale market was working tolerably well: there was room for some improvements but it generally got the green tick. The distribution (lines) businesses were already closely regulated. But the retail market - that was quite a different story. There appeared to be a large lump of captive customers, or if not captive, at least not interested in escape. As the summary says (p22), "72% said they had never switched tariff with an existing supplier, did not know it was possible, or did not know if they had done so". It will be no surprise that the incumbent retailers had them on expensive tariffs. The summary says (pp45-6) that
we estimated the detriment from excessive prices to the domestic customers of the Six Large Energy Firms to be about £1.4 billion [NZ$2.7 billion] a year on average over 2012 to 2015, the entire period for which we had data, with an upwards trend, reaching almost £2 billion [NZ$3.9 billion] in 2015. We consider this our headline estimate of the annual detriment arising from high domestic retail market prices.
In our discussion in Auckland, we had some difficulty getting our heads around this. In particular, why aren't the excessive returns from these passive victims competed away? To which the answer was, you can wave attractive offers in front of them till you're blue in the face, but They. Won't. Move.

Which leads to the next obvious question, why not? Many theories. Part of it appears to be down to the characteristics of the customers who have "disengaged". The review ran a big survey which found (p33) that "those who have low incomes, have low qualifications, are living in rented accommodation or who are above 65 are less likely to be engaged in the domestic retail energy markets against a variety of indicators of engagement". The already disadvantaged, as usual, fare worst.

There are also process explanations (p35): "there is some evidence indicating that the process of searching for an alternative supplier and successfully switching has been problematic for some customers. Significantly, the perception of the complexity and burden of the process appears to be worse than the reality, which may further dissuade domestic customers from shopping around and/or switching".

And if you accept all this - and for balance maybe you should read this piece which UK consultancy Oxera did for one of the Big Six, and which disputed the excess profits and argued that there might be perfectly rational  reasons for customers not to bother switching - the final questions we knocked about for a while were, what do you do about it? And have we in New Zealand got the same issues?

In the UK, they are pressing a number of buttons at once, trying to work on both the lumpen demand (eg by setting up an accessible database of non-switchers that will be easier to market to) and the excess profits from too-high prices. Legislation was passed in the UK last month to impose price caps, which will kick in this coming northern hemisphere winter.

That will help people with their bills, but price caps are a clunky bit of economic regulation that is generally not nearly as good as getting to the root of impediments to effective pro-consumer competition (though that's easy to say 11,000 miles away from the problems). You'd wonder - and we kicked this about a bit with Martin - whether you wouldn't be better off with transfer payments directly to the disadvantaged who have big power bills. A better-targeted version of our recent winter energy package would deal to the immediate affordability problems while leaving room for more market-oriented solutions to competition impediments.

Have we got the same issues? While we're not clones of our neighbours, it's interesting that the Aussies have something similar to the UK. The final report from the ACCC's Retail Electricity Pricing Inquiry, released last month, found (from the media release) that "It is clear that most households are paying far too much for electricity. In addition, some of the most vulnerable in our community are forced to struggle through freezing winters and scorching summers, with many others also having difficulty paying their bills".

The Aussies have also gone for price controls: the ACCC recommends "Abolishing the current retail ‘standing’ offers (which are not the same between retailers), and replacing them with a new ‘default’ offer consistent across all retailers, set at a price determined by the Australian Energy Regulator".

And while we haven't seen anything definitive yet from our own inquiry, its latest process update to stakeholders says that "we have already identified common positions on some key areas. A notable example is that some consumers are genuinely unable to afford such basics as heating their homes, and that something must be done to help them".

That's suggestive that we're broadly in the same area, too, though I'll wait to see the evidence, and I also think there's a good chance that we may have made a better go of publicising and facilitating switching than either the UK or Australia with initiatives like the Electricity Authority's WhatsMyNumber. If we have a problem, though, I hope we don't default to price caps as the easy to reach for answer. Make the market work better is the first best option: go elsewhere only if you have to.

Friday, 3 August 2018

Doom and gloom? Yes and no

As any number of recent headlines will tell you, there's a bunfight going on about a slump in business confidence and a rise in unemployment. There's the usual partisan point-scoring going on about the size of it, who caused it, and what comes next.

What's really happening?

Let's deal to the unemployment rate first, up from 4.4% in March to 4.5% in June. Should anyone be worried about that?

No, for at least three reasons. One, the statistic comes from a survey, which has sampling error. If I've read Infoshare right, and I've been known to get it wrong, the sampling error for the unemployment rate is 0.3%, which means there's a 95% chance the true unemployment rate is between 4.2% and 4.8%. A 0.1% rise may not even have happened. And second, even if it did, the economy is not an automaton, and you expect to find "noise", random fluctuations even in the middle of a longer-term trend. And third, and most important, the unemployment rate rose for a rather comforting reason: the participation rate went up.

The logic is that the participation rate goes up in good times. People aren't stupid, and can judge what's happening in the jobs market. Discouraged people lurk outside the labour force when they reckon there are few jobs to chase. They delurk when they think it's all on. Sure, there'll be the odd person who's forced by bad stuff - the mortgage getting out of hand, a redundancy in the family - to go hunting for a job, but overwhelmingly the evidence is that the participation rate going up is a signal of the labour market running in job seekers' favour.

Put that together with the all-time record employment rates for women and Maori and a strengthening in wage increases, and the marginal rise in the unemployment rate is neither here nor there. If you get a press release from a pollie banging on about it, mentally subtract a little from your previous estimate of their credibility. Negative numbers are allowed.

The business confidence slump is not so easily dismissed.

For a start, it's beyond any question of sampling error or random wiggles. It's large, and evident over several readings. There's a lot of focus on the ANZ Bank's latest and particularly glum survey, but it goes back further than that. The NZIER's June Quarterly Survey of Business Opinion showed more unhappy campers, too. It's true that you should focus on the 'activity' measures in these surveys rather than the 'confidence' ones, but the activity numbers are also in rapid retreat.

As the latest ANZ survey said, "Firms’ perceptions of their own prospects are a better gauge of economic outcomes, but the news wasn’t upbeat here either: it dropped 5 points to a net 4% expecting an improvement. This is the lowest reading since May 2009 and well below the long-term average of +27". There have also been growth slowdowns captured in the latest BNZ / BusinessNZ surveys of manufacturing and services.

Here's one graph that I think helps explain what's going on. On the trusted principle that in a market economy an analyst should follow the money, here's what businesses have been telling the ANZ survey what they think the outlook is for their profitability.


There's clearly (to my eye) a political component. The sharp drop in expected profitability after we got the new Coalition government might have been rational - "this lot aren't business friendly" - but likely also had some sort of political protest mixed in. But businesses appeared to have got over themselves by March or April of this year - only for expected profitability to drop to even lower levels than immediately after the election. So my guess it's no longer a "should have been National" two fingers, but a signal of something more real.

A good deal of it, I suspect, is pressures on wages and other costs (notably energy) which haven't been able to be passed on. As many others have commented, the rise in the minimum wage, from already high levels by international standards as a percentage of average earnings, and with more to come, is putting sectors like retailing under intense pressure. Retailing has large numbers of minimum wage workers, and bricks and mortar shops have little or no ability to pass the costs on when e-commerce is already stealing their lunch. I was walking around Newmarket today for the first time in a while, and while the area was generally busy, I was startled to see how many retail vacancies there are.

Nor are many businesses enthused about the cost - real or imagined - of having to go back thirty years and sign up again for collective agreements. And I suspect they, like everyone else, are wondering about the sort of generalised wage pressures that look like leaking from the public sector. Any public sector union worth its salt has sized up this government as an easy mark. And they're right: the chance of a Coalition Finance Minister actually getting to the finishing line forecast in this year's Budget is half of five eighths. As I said at the time, "The likelihood of the New Zealand political process actually leaving $7.3 billion unspent on the table is extremely low".

I'm not even there myself. With the infrastructure - where it exists at all - creaking all around us, I'd be using that money, too, especially as we've got not only cash in the government cheque account but also the opportunity to borrow at once-in-a-generation low interest rates and make a substantial and lasting difference.

Inaction on that front may be part of business malaise too, especially when contrasted with the readiness to spend on lower quality ideas (think boondoggle regional lollyscrambles). I was somewhat dismayed, reading MBIE's latest national construction pipeline report (summary here, full thing here) that "Infrastructure is forecast to remain relatively unchanged, increasing marginally to $7.3b in 2023" (p1 of the summary) and that (p4) " Infrastructure activity is lower than previously forecast". And although the summary also notes (p4) that " Pacifecon’s research data suggests that there is a high value of infrastructure construction scheduled to be initiated over the next six years", it always seems to be light rail tomorrow but traffic jams today.

The previous government, by the way, was just as bad as getting the facilities built that would enable all of us to get on with our lives more productively. The longer it goes on, the more likely we're going to hit capacity and productivity constraints that stop the economy growing at the rates we'd like. Whatever else may or may not be needed to be done (or undone) by the current government to move us forward from where we are now, a larger and earlier infrastructure spend has to be part of the answer.

Bottom line, some of the beat-up over the slowdown (actual or imminent) in the economy is exaggerated. But some of it is realistic, especially if you put some weight, as you've got to in this late stage of the post GFC global recovery, on the external environment hitting a bump. Recent surveys of global fund managers, for example, show that they are worried about the impact of trade wars on world economic activity, and with a buffoon pressing the protectionist policy buttons, they're right to be biting their nails. So the ANZ's take looks realistic: "with businesses in a funk, it’s fair to say that the road ahead is looking less assured, and risks of a stall have increased".