The economics of Game of Thrones

I'm a reader, the old-fashioned kind. The house is full of books, there's a stack of unread ones beside the bed and a Unity Books loyalty card in my wallet, I've got accounts with Amazon, and Barnes and Noble, and The Book Depository (NB no postage charges to New Zealand). I've got nine library books currently checked out, and another five books stacked up as requests on the (excellent) Auckland Library system.

And normally I wouldn't give you tuppence for the film or TV adaptation of any book I've read, as I like to think the images you create for yourself when you read are better than the ones confected for you by someone else. Especially when the confections are by the big US studios, where you're pretty much guaranteed a dumbed down slab of sugary pap.

With one big exception.

I passed on the books. And I let three and a bit seasons of the TV series go by before deciding to give it a try. And then I got hooked on - well, you saw it in the title of this post, it's Game of Thrones. I binged on the thing, two or three episodes a night till I'd done the lot.

Why, you ask, is this in an economics blog?

First up, because I was kind of intrigued by the reaction of the makers of Game of Thrones (HBO) to the news that GoT was the most pirated TV show of 2013 (ditto in 2012). Instead of the "piracy is killing Hollywood" moaning you might have expected, they were upbeat about it. In this article, for example, we got the views of the top brass:

Similar to Game of Thrones director David Petrarca, [Jeff] Bewkes [CEO of HBO's parent company, Time Warner] believes that the free word of mouth advertising eventually leads to more paying subscribers.

“Our experience is that it leads to more paying subs. I think you’re right that Game of Thrones is the most pirated show in the world. That’s better than an Emmy,” Bewkes said.

I'm aware, from expert economic evidence given in legal proceedings, that there are theoretical arguments that piracy may not in fact harm the copyright holder, though I have to say it's always looked a bit of an uphill argument when stacked against what looks like a more immediately obvious "taking the bread from our mouths" line. I suspect that economists in the expert witness game who take a benign view of piracy will be making good use of this latest GoT evidence. And I also suspect that we are in the absolute infancy of internet business strategy: when the makers of a red-hot series are relaxed about piracy, you sense that they are on to something that isn't yet in the Harvard Business Review.

And second, what's all this about piracy?

Did I go trolling through the deepest darkest internet for GoT? Visit dubious torrent sites? Set up some devious VPN workaround to convince US sites I wasn't in New Zealand?

No. I went to Polly Streaming. I've no idea who they are, and their 'About us' page is uninformative, but they offer basic free services (which include the whole of GoT) plus a premium subscription, and have a Facebook page, so they're hardly lurking in some shadowy internet lair. And they don't seem to care where in the world you are. All of which tends to suggest that the GoT folks know all about them, and either don't give a damn, or reckon it's a good thing, or are actively in on it with them. Every which way, you sense, again, that there's a cunning strategic plan behind this "piracy".

And then there are the economic lessons from GoT itself.

The big lesson from GoT is that if you're spending up big, spend the money on the right things. If the choice is (and it often seems to be), (A) spend US$20 million on the bankable name that you think will put bums on seats no matter what the movie is, or (B) spend US$20 million on sets, locations, effects, no-name but highly competent actors and a quality product, then HBO has successfully demonstrated that the second choice works better, no matter what the bean counters might advise. The more I look at successful products, the more I'm convinced that out of the SPQR mix (service, price, quality, range), quality trumps all in the longer run.

Another lesson is that the public is not made up of ninnies in a convent school. Do we want to watch only MLVS movies? No. But do we want to see sanitised, infantilised, prettified versions of MLVS issues? No we don't. GoT treats its customer base like adults. And like most business strategies that rely on people being intelligent judges of the product, it's a winner.

Another is that it made me wonder about the supposed wonderfulness of our new Ultra Fast Broadband (UFB) rollout. My copper-based ADSL internet service delivered GoT to my laptop, with completely acceptable video quality (and I'm not even getting the top end of copper-based delivery). Remind me why I need to pay more for the same experience delivered over fibre?

Finally, I was struck by the quality of the GoT opening credits. And it seemed to me that there was a good economic motivation for the high quality (as there was for the equally stunning opening credits for the Rome series). Bankers used to adopt the same strategy, and for the same reason. How do you signal to new customers of an intangible service, who know nothing of you or your reputation, that you are a quality service provider? In the case of banks, and I'm thinking here of the likes of Irving Trust and Morgan Guaranty and their erstwhile palazzi on Wall Street, by having extraordinarily opulent-looking head offices. Look how rich we are! How dependable!

And so it goes with the opening titles. Put your production values into the opening - sophisticated computer graphics, lush colouring, an original and striking theme tune, a bit of ambiguity, a hint of special effects - and before they see the rest of it, consumers are convinced that here's a quality product that's had thought and money spent on it.

Maybe, to come full circle, you can't judge a book by its cover. But you can choose a TV series by its opening.

Phone line rentals are still too high

Just before Christmas the Commerce Commission came out with its latest report (carried out for them by Teligen) which benchmarks retail prices for fixed line phone and broadband services against the rest of the OECD (here's the media release and here's the full report). There'll be a similar one on retail mobile prices in February 2014.

There are so many interesting results in this report that it's hard to know where to start. Why don't we start with a good outcome, from p16 of the report (especially as the telco folks at the Commission likely regard this survey as in some sense a report card on outcomes from their work).

For various reasons the Commission's reports don't allow tracking of how prices of comparable products have evolved over time, but there is one that appeared in both the 2011 report and this latest one, and it's the price of a 60GB broadband plan, either bundled with voice calling or standalone ('naked'), and it's shown below.

In both cases prices have fallen (-14% for bundled, -41% for naked) though the naked result is somewhat misleading as it is typically available as a product only when you're an on-account mobile customer.

It's hard to keep going with the good things, though, as the rest of the report leaves you with two disquieting thoughts - the extent to which we are still being ripped off by high copper line rentals, and the heavyhanded price discrimination against power broadband users (who want a lot of data at high speed).

The line rental issue shows up implicitly and explicitly. Here, for example, is how New Zealand rates on voice-only fixed line products. I know, few households these days buy standalone voice, but (as the report shows) typically buy a bundled broadband and voice package. And yes, in our household too the bulk of the voice calls we get are cold-call marketers, robot diallers and wrong numbers ("Anecdotal evidence indicates that many households now make very little use of their home phone for conventional voice calls", report, p17). But the Teligen voice data still throw light on the issue of relative line rental costs: here's a service where the line rental is most of everything. The table below shows four levels of phone calling: typical New Zealand usage is somewhere between the 60 call and 140 call baskets.

We're being stiffed. The value on offer is dire by OECD standards. And don't be misled by the apparently good outcome vis-a-vis Australia for the bigger call baskets: that's only because "Australia is also a poor performer" (p18).

And why is this? In Teligen's words, "The poor ranking is largely driven by the high monthly line rental charged in New Zealand, which in turn has largely been driven by the TSO price cap, which allowed line rental to increase by the CPI every year" (p18). The good news is that in Teligen's view "competition from alternative voices services such as mobile is now constraining the price of the fixed-line voice service", and copper line owners are no longer able to keep ratcheting up the rental. But you are still left with the strong impression that there is a good deal of legacy fat in the copper line rental charges. And it corroborates the Commission's other benchmarking work, which has shown that the cost of access to the local copper and its electronics is too high.

This next table is arguably the key result in the report - how we compare for the typical bundled voice/broadband package that NZ consumers use.

Relative to the value on offer elsewhere in the developed world, it's not great for any package, and it gets worse the bigger the package you want. "Some of this differential", Teligen say (p12) "could be attributable to price discrimination by retailers to recover the relatively high wholesale costs of providing a voice plus broadband retail service. Only the wholesale price of unbundled lines is currently cost based".

I'm left with three thoughts about this result.

One, obviously, is that we need more cost-based pricing rather than the legacy write-your-own-rental prices we are still paying - ideally brought about by infrastructural competition, but if not, then by the kind of regulatory cost-modelling the Commission does.

Two, the degree of price discrimination.  We know that price discrimination is not a problem in itself. It can be good, neutral, or bad from an efficiency or equity point of view. And higher-spec products often go for higher prices, for obvious reasons. And yet: in the earlier days of broadband, it seemed to me that Telecom was trickling out broadband as slowly as it could, minimising the pace of its capital spend and soaking the most desperate-to-have-it users (monopolists limit quantity as well as raising prices). So I'm agnostic, to say the least, about whether this price discrimination is more of the same exercise of market power, or an efficient way of recovering costs.

Three, the pattern of price discrimination. If the providers of copper and fibre based broadband are going to hit the heaviest users of big fast broadband really hard, then you can kiss goodbye to the "build it and they will come" dreams attached to the UFB network. Build it, price it like this, and they'll walk away. And how many of the benefits of UFB are predicated on precisely this group of intensive users?

Good papers from the Reserve Bank

I like the Reserve Bank's series of 'Analytical Notes' (you can subscribe to the Bank's e-mail update service here if you'd like to know when new ones come out). They're good, practical, background papers which don't have to be scrubbed up to peer-review publication status, don't commit the Bank's policy arm to anything ('views of the author, not the Bank'), and generally have something interesting to say about topical issues of the day.

Two more came out this week, Chris McDonald's 'Migration and the housing market' and Elizabeth Watson's 'A closer look at some of the supply and demand factors influencing residential property markets'.

From the migration paper, here's the overall relationship between net migration and house prices.

And if you're more of a numbers person than a graphs person, here are some numerical estimates of the impact of net migration both on house prices and (on the supply side) new housebuilding consents.

More info is better than less, and I'm glad this research is out there, but I also hope it isn't abused by the troglodyte protectionists in several of our political parties, who are already liable to blame high house prices on people arriving at the auction with suitcases full of Korean won. As the paper notes, there's more going on here than the suitcase story: generally good economic conditions in New Zealand (as right now, for example) simultaneously drive up local consumer confidence, reduce emigration, and encourage immigration, all of which are likely to feed through to house prices. 

The supply and demand paper is also full of interesting stuff. Before reading this paper, I'd have said that house prices relative to some set of fundamentals were at an all-time high, but perhaps the perspective from my home office has been distorted by the beyond-white-hot North Shore property market outside my window. Here's one chart from the paper, which shows that prices appear to have been even more out of whack in 2007. That's not to say we shouldn't worry about some aspects of where we are now, but we've seen worse.

Another thing that emerges, to me, is the role of local authorities in impeding housebuilding. In a previous post I'd concluded that "if you want to find the real culprit behind Auckland's housing shortage, look no further than your friendly local council staff". This paper shows that residential building consents (including apartments) dropped sharply in Auckland from 2002-04 to 2008-11: some of this reflected cyclical conditions, and slower population growth in Auckland than previously (from the paper, 1.2% a year 2006-13 compared to 2.4% a year 2001-06), but the consents drop was bigger than the population slowdown. You'd wonder (my take, not the paper's, just to be clear) if there wasn't an anti-development ethos gaining force in Auckland's planning offices. 

Beyond higher prices than necessary because of the supply constraints, another outcome (as the chart below shows) was that Auckland people were getting more cramped in their living arrangements, just when the rest of the country was getting more room to live in.

I've got one small question about one of the conclusions of the paper. It quotes some earlier research from Arthur Grimes and Andrew Aitken at Motu that "relative to population growth, districts in Auckland had the lowest supply responsiveness in the country during that time [1991-2004]. Grimes & Aitken (2006) estimate that Manakau, North Shore, Auckland City and Waitakere are the areas that have the least responsive housing supply in the country and that, within Auckland, areas with lower supply responsiveness tend to have higher house price inflation", and then it graphs these four least-responsive regions (in the top graph) against four other regions in Auckland (bottom graph), as shown below.

It might be down to my advancing decrepitude, but if there was a pattern there before, I can't see it now.  

In any event, have a look at these Notes for yourself - you're bound to find something interesting and informative. And I'd also like to commend them, and the Bank, for adopting the very useful practice of including, upfront, a 'Non technical summary' for the intelligent lay reader. It seems to be spreading as good practice across a variety of media, and not before time. You've probably been as maddened as I've been by those useless 'summaries' in some of the academic journals (of the "In Section 5 we present our results and in Section 6 we present some conclusions" variety - what results? what conclusions?). 

The journals are getting better - I've just gone through all the articles in the latest American Economic Review, and every single one had a meaningful summary - but the non-technical summary goes one step better again. 

Another quiz

The Herald's Viva magazine this morning had a round-up on the past year's restaurant scene, 'The Year in Food: What we loved and loathed in 2013'. It's a good article, even if I disagree on the attraction of communal tables in restaurants. And 'raw' cooking, if it comes to that.

It also provided the opportunity for another quiz, so here it is.

Context (quote from the Viva article):

"Failed restaurants ... yes, we love a new restaurant as much as the next person but if the council keeps granting permission, without a massive influx of people to Auckland to support them, expect to see some close. Better planning please".

Q1 What happens when supply of a service is restricted?
A Prices go up
B Choice goes down
C Potentially better providers get shut out
D Businesses unproductively invest in the approval process
E Incumbents get an unfair advantage
F The planning process gives market power to functionaries, who may abuse it
G All of the above
H Consumers benefit

Q2 Is keeping every incumbent business going a good aim of public policy?
A No
B No
C Both of the above

Q3 Why should new restaurants, or any other licit business, have to get local authority planning approval?
A Buggered if I know
B Sounds daft
C Mostly A
D Mostly B

A flight of fancy

As I mentioned last week, I said I'd start to have a look at the submissions various parties have made to the Productivity Commission on our regulatory institutions and practices.

Air New Zealand wants to escape from the ambit of the Commerce Commission and be primarily regulated by the Ministry of Transport, because the airline business is allegedly different to others ("international aviation is a unique market operating outside the normal influencers of a domestic economic or consumer environment") and the Ministry knows the scene best ("The Ministry is the national centre of expertise in international aviation and is the incumbent authority for alliance approvals").

On the other hand it wants precisely the opposite to happen to the airports. They should be taken out from under the shelter of the Airport Authorities Act ("permissive legislation designed for a time when airports (and indeed airlines) were state-owned and operated and therefore allows airports to ‘set prices as they see fit’") and policed more toughly by the Commerce Commission ("the light handed regulation of airports has failed and heavier handed regulation is required. Air NZ advocates the use of the negotiate / arbitrate provisions from the Commerce Act").

Good luck keeping both those balls in the air, lads!

Follow the money...

I know I've said it before, but there really are so many business surveys around these days that even dedicated economy-watchers can't keep track of all of them. Inevitably some slip under the radar.

One you might have missed (and I came across it only accidentally while foraging a while ago for something else on the bank's website), is the quarterly ASB Kiwi Dollar Barometer. It's well worth having a look at: it's quite a decent sized survey (390 firms with turnover of at least $1 million) of businesses' exchange rate expectations and their forex hedging plans.

The latest one came out last week. The headline result was that businesses (averaging out both importers’ and exporters’ views) expect the Kiwi dollar to peak against the US$ around the 81 cent mark  in the March ’14 quarter, and to decline to 76.5 cents by the end of next year. Currency forecasting, many would say, is a complete waste of time, and perhaps these businesses' expectations will prove just as wide of the mark as any other forecaster's. But I doubt it.

For one thing, consensus forecasts across wide groups tend to do better than a single guy with his spreadsheet.

And for another - and this, to me, was the really interesting bit - the businesses are putting their money where their mouths are, as this graph shows.

Notice that the percentage of importers planning to hedge has hit a new high: in real time, with real dollars, import businesses are increasingly taking out protection against the Kiwi dollar falling.

You might wonder (as the ASB economists did) why the proportion of exporters planning to hedge also ticked up a bit in this latest survey - if they really believed the Kiwi dollar is going to fall, they'd be planning to do less hedging. The ASB team commented that "It is likely the recent strength in the NZD has seen exporters look to protect themselves against further increases in the NZD, even if their core view is that the currency will ease over the year ahead".

I think this is absolutely right, because I've seen this happen before. Years ago I worked for a forex consultancy business in London, and our customer list looked like a hospital ward: every corporate in Europe that had run into financial grief appeared to be on our books as clients. Why? Because they were already in such a difficult position that the last thing they wanted was to have forex losses on top of everything else.

And that's where Kiwi exporters are right now. They might believe the Kiwi dollar is going to fall - but they can't live with the risk that it might tighten the screws even further on them with another bout of appreciation.

No surprises from the Bank

I'll summarise quickly because the media and the bank economists are already all over it, but the guts of this morning's Monetary Policy Statement from the Reserve Bank was straightforward and as expected: "it is becoming unnecessary to maintain the OCR at 2.5 percent, with GDP growth becoming increasingly self-sustaining. The Bank's assessment is that ... growing demand and inflation pressure should warrant a withdrawal of stimulus beginning in 2014" (p5). The Bank's forecasts have the 90 day bank bill rate rising from 2.7% currently to 3.8% by this time next year and to 4.6% by December '15.

Rising interest rates might sound like bad news (at least to borrowers), but let's note the big picture, which is a strong economic outlook. Here's the Bank's forecast for unemployment.

Anything interesting in the details?

A few things. The Bank reckons that its LVR loan restrictions will take between 1% and 4% off the rate of house price inflation - okay, that's a wide and uncertain band, and it's early days, but if we take the mid-point as a guess, 2.5% off house price inflation is a pretty big impact.

The Bank also played with a scenario where world commodity prices don't actually come off their current high levels, but hold up and even press on a bit more (see Box C on pp24-5). Good news for New Zealand, sure, but a mixed bag for the RB. Higher incomes from fancy export prices boost the economy and domestic inflation pressures (bad news for the RB) but the high commodity prices also likely lead to a higher Kiwi dollar (which restrains the economy and dampens inflation, good news for the RB). Net effect? The net upward pressures on inflation mean that interest rates would need to rise more than the RB currently plans, as shown below.

While it's mostly a benign outlook, there's still one thing that bothers me. I've blogged about it before, but here it is again in its latest version.

It's that forecast for non-tradables inflation, the cost pressure that arises in those parts of the economy not facing import competition. Yes, you'd expect it to pick up as spare capacity gets used up: that's an understandable cyclical process. But it might also rise for structural reasons: inflexibility, insufficient domestic competition, a 'cost plus' mentality. If we do get lumbered with domestically sourced inflation of close to 4%, let's hope it's wholly or largely cyclical.

When regulation moves the market

There was quite a useful series of answers to questions in Parliament yesterday - I'm tempted to add, "for a change" - when Bill English was asked about his recent statements about the impact of regulatory decisions (the Commerce Commission's impact on Chorus being the biggie).

When Peter Dunne asked Bill English about the view that his statements could be seen as "code for seeking to nobble the Commerce Commission", he replied, "that is simply not the case. If one thinks of the Commerce Commission as the referee, it applies the rules as it finds them, and we need to do a health check on what the rules are that it is applying". And replying to a supplementary question from Peter Dunne, he also said "The commission will be free to continue as an independent statutory body, as it always should, just as the Government is free to look at the rules that the Commerce Commission applies".

I totally agree. The issue is the rules. There are those who think that the real issue is that the Commission has gone off the rails in how it's been applying the rules: it's not. I can't see that at all.

You might think that I have an instinctive pro-Commission viewpoint, given that I sat on the Commission for over a dozen years, but I'm perfectly capable of disagreeing with it. While I was there, I formally dissented (a rare event) on the Commission's valuation approach to Auckland Airport's asset base, and since I've left I've criticised some statistical jiggery-pokery it was tempted to use in the UBA benchmarking. But on the Chorus process I don't see anything materially wrong with how the Commission went about it, either with process (draft, consultation, submissions, updates on its thinking, clear and logical reasons in its final decision) or with substance. It closely followed the terms and the spirit of the Telco Act.

Incidentally, this morning's High Court's judgement on how the Commerce Commission applied Part IV of the Commerce Act to regulating electricity lines businesses, is also evidence of the Commission playing with a straight regulatory bat (see, for example, 'Vector loses key elements of Com Com challenge' in the Herald).

If you don't want abrupt changes to local regulated prices, then don't ask the Commission to set local prices based on overseas ones that may be much lower.

If you don't want slow, expensive, complicated and uncertain price setting, then don't provide for the cumbersome machinery of the forward-looking cost-modelling exercise.

I emphasise if, because sometimes sharp drops in these prices are exactly what should happen, if (for example) local incumbents have been rorting the local consumer.

John Small in his post 'My Christmas deathwish for TSLRIC' over at his blog SmallTorque comes to much the same conclusion: "So we have hard-wired into the [Telco] Act some very significant risks for both investors and consumers. This is a recipe for very big and expensive fights, not to mention political lobbying around the fringes". I don't enthuse over John's suggested solution out of this position (a simpler version of rate of return modelling), and that's a debate for another day, but I think we're all agreed that if there are predictability problems here, it's not the Commission, it's the Act.

There's also the interesting question about why the Chorus decision appeared to come as such an unpredicted shock, when the Commission was following a publicly transparent requirement with a methodology that had been over the fences a few times already, as Clare Curran asked at Question Time.

Bill English said "That is actually a very good question from the member" - I agree - and went on to say that "It is a bit of a puzzle that sharemarkets, which are normally quite good at evaluating probabilities around price tracks, for instance, clearly got it wrong in this case, and maybe everyone else did as well. That is really the main reason why we are interested in doing a health check".

It's easy to point the finger with hindsight and say that people should have seen some pitfall looming - we'd all be rich if we had a dollar for every eventuality we never saw coming - but there's probably some truth in the view that investors and their advising analysts were more concerned with the operational side of the Chorus build (rollout costs, likely UFB uptake, and so on), and to some degree took their eye off the regulatory aspects.

As things have played out, the decision to get the Productivity Commission to look at 'Regulatory institutions and practices' is now looking more and more timely. And if they were to some degree blindsided before, it's clear that businesses and investors have been wising up to the potential ramifications of regulation, and have been putting in extensive submissions on the issues, which I'll cover in future posts.

A win for the ACCC - petrol will be dearer

Last week I posted about the increasingly difficult calls competition authorities are having to make about business behaviour, and I mentioned as an especially vivid example the ACCC's investigation into what the Aussies call "shopper dockets", petrol discount vouchers issued by the two big supermarket chains. When the petrol discounts get large, are they demonstrating vigorous competition between supermarkets, with large pro-consumer payoffs in the form of much cheaper petrol, or is the Aussie supermarket duopoly trying to drive third-party petrol retailers out of business?

I'd speculated that this was proving a tough one for the ACCC to call (their investigation was getting somewhat overdue, and my guess is that they were having a vigorous internal debate), when on Friday out popped a media release from the ACCC, 'Coles and Woolworths undertake to cease supermarket subsidised fuel discounts'. The key bits were a freeze of 4 cents per litre on discounts to the end of this year, and from next year a new regime where discounts (which could be greater than 4 cents) must be funded from the petrol business and not subsidised from the supermarket business. As the chair of the ACCC said, it's a win of sorts - "We’ve accepted the undertakings because they address the ACCC’s principal competition concerns and allow the matter to be resolved quickly and efficiently" - but it's also a big kick for touch on the substantive issue ("The ACCC’s investigation was nearing completion...although we had yet to make a decision in the matter").

Having declared victory, I'd guess the ACCC could well decide there's now no need to make a definitive conclusion on their investigation, and if they do flag it away, then I can understand their call from various perspectives, including not wasting the taxpayer's dollar on an investigation that is now moot for all practical purposes. Especially as the ACCC has also warned off any other (non-supermarket) organisations minded to get into the petrol discount game in any serious way.

At the same time I'd be disappointed if it all gets swept under the bed.

For one thing, it's usually better if everyone - business, consumers, the ACCC itself - know exactly where they stand. The supermarkets still say they were doing nothing wrong: you don't want to get into a highly uncertain multi-million-dollar legal stoush with your competition authority if you can help it, and the undertakings avoided one, but equally businesses oughtn't have to give up what they genuinely believe to be okay deals because it's too risky or expensive to prove that they are. And consumers ought to be given the full chapter and verse on exactly why their big petrol discounts have just been vapourised.

And for another, while it's a close call, I think the ACCC may be wrong.

Excellent presentations at the GEN conference

Yesterday we had a cracker of an annual conference from the Government Economics Network.
There have been individual star turns at previous conferences - notably Harvard Professor Raj Chetty's 2011 presentation, "The long term impact of teachers", which is one of the best, if not the outright best, economics speeches I've ever listened to (links here if you haven't come across it before) - but this year's conference had the highest overall standard of the three conferences run so far.

Professor John FitzGerald led off with "Contributions of economic analysis to policy making success and failures". John had the perfect professional background to talk to this, having spent a dozen years in Ireland's Department of Finance (he and I were colleagues there in 1976,  and I knew him socially around the Dublin traps in any event) before moving to Dublin's Economic and Social Research Institute (the ESRI). There's nothing he doesn't know about the use of economic analysis for policy in Ireland (where there were especially serious and instructive mistakes made), the UK and across the EU, and it showed.

He'd evidently also put in some time thinking about how his ideas would be relevant to New Zealand's circumstances. Keep an eye out for his speaking notes when they go up on the GEN website - they're well worth reading. One of the guys sitting near me had brought along a copy of John's ESRI working paper, 'Restoring Credibility in Policy Making in Ireland', which gives you a flavour of some of his ideas (as well as taking you through the near-death experience of the Irish economy).

John is one of the most articulate speakers you could hope to listen to - as Kim Hill, who was compering events, said, we'd have listened to him reading the phone directory - and it showed the value of choosing speakers with high communications ability.

Professor Anthony Scott of Melbourne  University's Institute of Applied Economic and Social Research followed him, on "The role of financial incentives in improving performance in health care". This was good stuff, too, though the state of play (as he summarised it) is that there are few rigorous studies of the links between incentives and changes in medics' behaviours (though what there is, seems to say that well-designed incentives can be material) and less again on the links between medics' behaviours and ultimate health outcomes.

One point I took away is that it can often be a good policy idea to incentivise improvements in quality, rather than achievement of absolute standards of quality. Absolute standards can throw superfluous rewards at the top performers (who are already over the absolute threshold) but be beyond the practical reach of the worst or the most dysfunctional performers. Improvements, though, can be made by anyone.

If there was a drop-off during the day, it was the panel discussion on "Future strategies - how can enhanced economic analyses help shape more effective policies?". Panel discussions are always a bit of a risk, and this one just didn't fizz. Maybe there wasn't much more to say on this after John's presentation, maybe it was just one of those things where the conversation didn't get its own momentum going, but it any event, despite everyone's efforts, I don't think it gelled.

But then things picked up again with two terrific presentations on methodology.

Dr David McKenzie, lead economist at the Development Research Group within the World Bank's Finance and Private Sector Development Unit, gave a presentation on "The value and use of randomized experiments to learn about employment and productivity policies" which first went through the rationale for randomised experiments and then showed us how three had worked out in practice.

One was the randomised use of wage subsidy vouchers for women graduates of community colleges in Jordan (ineffective - employment temporarily picked up while the subsides were available, and then dropped back to square one). One was randomised access to vocational training courses in Turkey (marginally effective on employment - it worked when the courses were provided by private sector trainers who faced stiff competition in the training market. Funny, that). And the third was randomised introduction of modern management practices into Indian textile manufacturing (very effective - a 20% increase in total factor productivity relative to a control group).

And we finished up with Professor Adam Jaffe, Director of Motu Economic and Public Policy Research, talking about "Regression discontinuity made easy" (according to the conference flyer - I think he headed his actual speech with something else which I didn't keep a note of, but the topic was the same in any event). You'd have to think this would be one of the more forbidding presentations, right up there with "Oxidative Phosphorylation For Beginners", and would be a tough challenge either to deliver or to listen to. It turned out to be a marvel of exposition - the most technical of topics laid out with an lucid explanation of how it works; why, when and how you could use it; and a comparison between it and randomised experiments, so it happily dovetailed with David McKenzie's presentation.

This was a really good day all round. Full marks to the organising sub-committee in particular, and to GEN's executive in general.

For serious telco addicts only

You know what UBA is, and UFB? You got the whole initial pricing principle/final pricing principle thingie sussed? You can recite s18 of the Telco Act? Okay, we're good to go.

So. Chorus is taking the Commerce Commission to the High Court over the Commission's UBA pricing decision. It's not always the best idea to fire all the weapons you have, and there's now more expense, uncertainty and delay, but never mind: at least Chorus had the grace to take a "more in sorrow than in anger" tone, and who knows, if the rest of us were sitting around the Chorus management table, maybe we'd have pressed the legal button, too.

We haven't seen the details of Chorus's suit: maybe they haven't been finalised yet. All we have got to go on is this Chorus press statement, which gives a brief if rather disjointed description ("the limitation of two benchmarked countries despite the specific factors set out in section 18 and 18(2A)") of the grounds Chorus might have for challenging the Commission's decision.

But even without knowing the details, I rate Chorus's chances of success at low, and here's why.

My guess is that, perforce, Chorus's suit will focus on s18(2A) of the Telecommunications Act, the bit that says,

"(2A) To avoid doubt [often a warning marker, by the way, that what comes next will significantly increase the uncertainty of meaning], in determining whether or not, or the extent to which, competition in telecommunications markets for the long-term benefit of end-users of telecommunications services within New Zealand is promoted, consideration must be given to the incentives to innovate that exist for, and the risks faced by investors in new telecommunications services that involve significant capital investment and that offer capabilities not available from established services".

The government, at one point, was certainly taking the line that s18(2A) was legalese for, "We, the government, are telling you, the Commission, not to set low copper-based prices that will impede take-up of the fibre-based UFB", and no doubt Chorus will be saying something similar.

So here's why I think the Chorus case will struggle.

One, the Commission is only required to "consider". It clearly did. If this suit goes the distance, then there'll be some very clever lawyers dancing on the head of the "consider" pin and on the adequacy and extent of "considering". I think the Commission will scrub up okay on those sorts of adequacy and extent arguments. And at the end of the day it's a consideration, not a mandatory over-riding instruction, and it looks to me that the consideration test was met.

Two, the Commission was simultaneously told to follow quite a prescriptive price-setting process - the "initial pricing principle" of discovering a particular set of overseas prices, and using them as a benchmark. This was clearly the main thing it had to do, though with a weather eye out for considerations like s18(2A).

Personally, I think s18(2A) was a largely incoherent overlay over the initial pricing principle: you can't ask a regulator to (a) set prices at the level overseas and (b) set prices so as not to cause trouble with local UFB prices. But if you're obliged to make the best of the statutory hodge-podge you've been given, as the Commission was, then in my view its major responsibility was to do the benchmarking (the whole scheme of the Act, for years, has been based on this initial pricing/final pricing process), and where any discretion might be available (eg picking points within a benchmark range), then it should try and incorporate s18(2A). As the Commission did.

I've been wrong before when I've had a go at guessing how the Commission's litigation, and litigation against it, might pan out. No doubt I'll be wrong again from time to time.

But I don't think this is one of those times.

Crime, victimless crime, or no crime at all?

The latest American Economic Review CD arrived in the PO box the other day, and it had an article that reminded me of just how difficult it can be to distinguish competitive from anti-competitive behaviour.

If you've never paddled in this particular pool before, your first thought might be that the job can't be as hard as all that. Standover intimidation of the minnows by the dominant incumbent, hard core cartels, dirty tricks employed against potential new entrants - should be easy to spot, right? Especially as these days there's often a treasure trove of internal corporate e-mails to shed light on what was going through people's minds at the time.

Well, no, actually. I'd say that a range of behaviours are increasingly becoming more difficult to characterise, often because economic theory has been coming up with new ways of analysing and interpreting them.

And it's not just behaviours that fall under Section 36 of the Commerce Act ("Taking advantage of market power") that are difficult to make a call about. While there often important issues at stake in s36 cases, as anyone unfortunate enough to get caught up in one of these things knows they can often be a complete toss-up, and Section 36 cases, when they hit the courts, are infamously arbitrary. In the Pink Batts case*, for example, it went to a penalty shoot-out in the House of Lords, with three judges seeing it as Carter Holt's right to compete vigorously and two judges seeing it as unlawful predatory pricing to drive a new entrant from the market.

Rather, the difficulty extends across a whole range of behaviours. And it's further complicated by the fact that sometimes new theorising leads you to think that formerly unacceptable practices are actually okay from a competition viewpoint, and sometimes it goes the other way, with new theory suggesting that formerly okay things can actually be problematic for competition.

This latest AER article, "Competition with Exclusive Contracts and Market-Share Discounts" (Vol 103, No 6, pp2384-2411) has a bit of both, with one behaviour found less anti-competitive than usually thought, but another pinged.

An open-minded people

Statistics New Zealand's Tuesday function on measuring well-being has got quite a bit of coverage - see for example this post from Matt Nolan and this one from Shamubeel Eaqub, both over at The Visible Hand in Economics, as well as my own summary.

I'll only add one more thing, and it's based on the leaflet, 'Social Well-being in New Zealand: Insights from the New Zealand General Social Survey 2012', that was put out on the attendees' tables. You can get your own copy here.

Reading the leaflet, I was struck by the finding that "80% of Wellingtonians agreed that immigration benefits New Zealand". Here's the source - it's actually from the 'Social Cohesion' findings of the 2008 General Social Survey, and it's the national results and not just Wellington. I gather the 2008 data will be updated with the 2012 results any day now.

Overseas, politicians have been pandering to the worst fears and lowest common denominators of their electorates - immigration is one of the most controversial and partisan political issues in the US right now, while any quick trek through the European media will show you the UK, French and German governments all trying to gummage up the free movement of people across the EU (they've got eastern Europe in mind, mainly). Some of this recent anti-immigration posturing is the bigger political parties trying to cut off even worse options, and prevent anti-immigration voters defecting to more extreme options (such as France's National Front). Even allowing for the realpolitik of the whole thing, though, it's all pretty discreditable.

So I was quietly chuffed to come across evidence that we, at least, are still open-minded, liberal, and decent people.

Will the Commerce Commission come out with higher broadband prices?

I'm not a client of Forsyth Barr, and so don't have access to its research reports. All I've got is press coverage (eg here and here) of their recent research note that (according to both press reports) says, that when the Commerce Commission comes to do a full cost analysis of Chorus's broadband service, as opposed to its initial, overseas benchmark based, costing, "Our analysis shows the commission will have underestimated the cost to deliver a nationwide broadband service in this country".
I haven't seen the analysis, and I don't know how deep it goes, and hence and otherwise I'm not saying it's outright wrong. But I'm sceptical.
To start with, it's a rather heroic exercise to try and foresee the final outcome of what everyone acknowledges (assuming it isn't bypassed by some other policy option) will be a massive, complex and lengthy modelling exercise, and which has plenty of room for important judgement calls along the way. Which is why people have generally shied away from going that route if they can help it. Be the analytical hero by all means - the more info that's out there for investors on how regulation works, the better, especially if it leads to fewer episodes of abrupt changes in share prices on "new" regulatory information. I'm just not convinced (admittedly from the outside and on limited information) that one can confidently make this call about the ultimate relativity of the final cost-based price and the initial benchmarked one.
And secondly, as I've posted a couple of times before, my personal experience after at least four sets of Commission regulation (interconnection, wholesale discounts, mobile termination and earlier stages of UCLL) is that the initial benchmarking stabs at likely New Zealand telco costs tend to be reasonably accurate and, importantly, live-able with by the parties involved. If anything, the benchmarked prices could be on the high side: this is especially true of the bits where there is rapid technological progress (eg in the gear used to supply UBA, or in wireless hardware and software). By the time you've finished the benchmarking and set a local price, overseas prices have dropped further again due to the newer whizbang technology.

Measuring well-being in New Zealand

As part of the International Year of Statistics, this morning our own Statistics New Zealand put on a breakfast function in Wellington, "Dollars and Sense: Social and economic perspectives on well-being in New Zealand", emceed by Radio New Zealand's Simon Morton. Despite the ungodly hour (7.15am) and a miserable Wellington morning, it was well attended.
Stats' Philip Walker led off, talking about some of the results from the 2012 General Social Survey (you can find the main results in Stats' August press release). His main point (for me) was the cumulative or multi-factor nature of both happiness and unhappiness: Stats has provided (and Philip bravely demonstrated live) an interactive tool where you can see how people's life satisfaction is linked to their health, income, relationship and housing, and you can see the cumulative impact of being okay across all four dimensions. Virtually nobody is dissatisfied with their lives if they're okay across all four factors.
Then we had lawyer Mai Chen, who talked mainly about the importance of social capital to a society's happy and productive functioning. One interesting idea was that social capital (things like trust) aren't fixed in stone: she wondered, for example, whether people's collective expectations around what governments ought to do, and how they do it, mightn't be changing, instancing the issue of potential compensation for the Pike River victims' families. It mightn't be a strict obligation on the government to pay out, and there are also ongoing social expectations that governments ought to be prudent managers of the public purse and not scatter cash to the four winds, but she sensed that there may well be a growing sense of moral (as opposed to strict legal) obligation developing in the community around both the substance and process of government behaviour.
Shamubeel Eaqub from the NZIER was up next, and his main points were that, first, the impact and benefits of the recent economic recovery have been unevenly spread, with higher-skill occupations in Auckland  in particular, and the construction trades in Christchurch, streets ahead of other areas, and, second, that there is generally not enough attention paid to the distribution dimension of aggregate macroeconomic data.
And finally we heard from Major Campbell Roberts from the Salvation Army, who echoed Philip's earlier point about the crippling effect of struggling with multiple disadvantages at once, which he illustrated with a description of the Salvation Army's typical clientele in South Auckland (female with children, Polynesian, poor, no-one in the household in full-time work, in growing debt, pressured by housing costs, and with mental health or substance abuse issues in the family). And he wondered why we couldn't get a clearer statistical view of this group, saying that "what is important to important people" tends to get covered in the official statistics, and that they don't cover enough of what is important to "unimportant" people.
At our table (economists mostly) we wondered about Major Roberts' point in particular: why isn't there a regularly published, in depth, longitudinal study of a large cross-section of the poorer end of the community? And could the Census form the basis of one? I'm told by Someone Who Tends To Know These Things that there is, indeed, a project underway to match data from one Census to the next to see what happened to individuals and households: more than that I don't know at this stage, but it'll make interesting reading if it ever gets done.
In the meantime Stats is publishing more about our social fabric: Liz MacPherson, the Government Statistician, announced that Stats has just put up a new web page showing the latest data across a wide range of social indicators.

Why the Kiwi dollar is so high

Last Friday John McDermott, the Reserve Bank's Head of Economics, gave a speech, 'Understanding the New Zealand exchange rate'. Most of the media coverage focussed on John's idea that the best way to get the Kiwi dollar down from its current overvalued level is to increase our domestic savings rate. None of the coverage, though, appears to have reproduced an interesting graph (below) that John had included, and which in turn is an updated version of the results found in a 2012 Analytical Note from the RBNZ, 'Kiwi drivers: the New Zealand dollar experience'.

The red line is the real exchange rate (i.e. the exchange rate after allowing for relative inflation differentials with our trading partners - you can think of it as our export price competitiveness if you like), expressed as a percentage deviation away from its long-run average. So the first take-away point, obviously enough, is that yes, the (real) Kiwi dollar is unusually high.

The second take-away point is that two factors (those green and blue contributions) explain virtually all of the Kiwi dollar's high value (I know, I know, and John said so too, strictly speaking these are correlations and not necessarily causation, but I'm quite happy to believe the causation story, too).

The green one is the biggie, and that's the unusually high level of world commodity prices. No surprise there - and that makes for the next take-away point, which is that barring any unexpected shock to world economic activity (and to China's in particular), high world commodity prices and the high Kiwi dollar aren't going away anytime soon. Which is consistent, by the way, with some other RBNZ research - 'New Zealand’s short- and medium-term real exchange rate volatility: drivers and policy implications' - which found (p2) that "Departures of the exchange rate from its longer-run trend can be quite large and prolonged".

The blue contribution is 'Relative real house price inflation', but before you get on your high horse and start thinking, "It's all those blasted [insert your least favourite foreign bogeymen here] buying our houses - that's what's killing our exporters", what's actually happening here is that the house price inflation measure is standing in effectively as a proxy for the expected strength of domestic demand. In one hit it's capturing elements of expected demand, expected inflation, and expected interest rates. You'd also conclude that nothing is going to change on that front either, any time soon.

As John said, in one sense the Kiwi dollar isn't overvalued - from one perspective, as the graph shows, it's pretty much where you'd expect to find it, given our commodity export prices and the strengthening economy - but from other important perspectives (notably, rebalancing the economy more towards exports), it is. From those perspectives, it needs to be substantially lower - but on this evidence, I can't see it happening anytime soon.

Try this three-question quiz

Question 1
What happened to income inequality across the OECD between the mid-1990s and 2010?
A. Inequality increased
B. Inequality stayed the same
C. Inequality decreased

Question 2
What happened to income inequality in New Zealand between the mid 1990s and 2010?
A. Inequality increased
B. Inequality stayed the same
C. Inequality decreased

Question 3
Income inequality in New Zealand between the mid 1990s and 2010...
A. Started lower than in the OECD as a whole, and increased to higher than in the OECD as a whole
B. Started lower than in the OECD as a whole, and increased to much the same as in the OECD as a whole
C. Started higher than in the OECD as a whole, and increased to even higher than in the OECD as a whole
D. Started higher than in the OECD as a whole, and decreased to much the same as in the OECD as a whole
E. Followed some track other than A, B, C or D

(Off topic) The Dallas motorcade

There's been any amount of coverage of the Kennedy assassination on this, its 50th anniversary. Some of it has been enlightening, much of it nutter conspiracy rubbish. If you've been tempted by the conspiracy coverage, get your head back together and read 'Killing Conspiracy'.

It's only the tiniest of footnotes to the great sweep of history, but I have one small point I'd like to throw into the mix.

I'd been watching a documentary (originating, I think, from RTE, Ireland's public broadcaster), about President Kennedy's visit to Ireland in June, 1963. It became evident, first of all, that Kennedy's visit to Ireland was very much his own idea. The State Department handlers hadn't been so keen: they were still nursing grievances over Ireland's neutrality in the Second World War (and I don't blame them), and his political advisers didn't see much upside either (the Catholic and Irish-American votes were in the bag anyway). But he insisted (shades of President Bush Senior's "I'm the President of the United States and I don't have to eat broccoli if I don't want to").

The second thing that emerged from the documentary was that, somewhat to Kennedy's surprise, he was having a good time. He probably hadn't expected to, or not much. Part of his original motivation was purely political, even if the marginal benefit was low. Part of it was a superpower putting itself on display. None of that, however, necessarily made for a fun time for him personally, especially as his minders were going off their trolley with the touchy-feely access to Kennedy during the visit: security arrangements were primitive to non-existent for all four days of his visit.


But things began to perk up for him. He must have been gratified at the huge crowds that turned out for his motorcades. And they really were huge - proportionately, much bigger than the sort of reception he'd got on the famous 'Ich bin ein Berliner' visit to Germany he'd made just before coming to Ireland.

I was one of them. On June 26 1963 I was watching from the window (in the picture) as President Kennedy's motorcade turned right off Dame Street and came down Parliament Street, past the Sunlight Chambers where my father worked at the time. It illustrates the lack of security: I was a good deal closer to Kennedy than Oswald was to be five months later.

And then another element also kicked in for Kennedy, the personal 'where did I come from' quest. And that last bit, as the visit went on, came to be important for him, as you can see in particular from archive footage of his visit to County Wexford. He was a famously good schmoozer in the first place - in recent years, the best before Clinton - and it's not easy to tell when his reactions were artifice and when they were genuine, but the film from the time strongly suggests that for all its stage-managed hokum, the connection with his homeland came to mean something personal to him.

Fast forward to Dallas. Apparently, Texas Governor Connally had advised against an open-car motorcade through Dallas. He was obviously right, with the benefit of hindsight. But Kennedy at the time didn't agree. Maybe he'd have made the same call even if he'd never been to Ireland: the early Sixties were a simpler time with less of today's anxiety over terrorist attacks. But I also wonder if the warmth he'd experienced in Ireland (and Germany) hadn't lulled him into thinking that only good things could happen from driving, effectively unprotected, through cheering crowds.

We're doing pretty well, according to the OECD

The OECD's just released its latest Economic Outlook, which you can read online for free here.

We've scrubbed up pretty well. If you like the numbers, here they are (courtesy of the blogger's invaluable friend, the Windows Snipping Tool). Personally I think their unemployment rate forecasts are a bit too cautious, but quibbles aside we're looking at a couple of good years ahead.

There's not a lot of advice for us, either (not that these Outlook updates tend to carry a lot for the smaller OECD economies). Keep up the good work on getting the fiscal accounts in order, monetary tightening should begin soon (we know, every forecaster and his dog has the Reserve Bank raising the cash rate in the first half of next year), and don't let house prices get any further out of hand (we know that, too).

Especially (as you can see if you navigate to Table A1a on p70 of the online document - it's too big to reproduce in full here), which shows that we are one of the four countries with the largest increase in real house prices since the start of 2000. In fact, by a small margin we've got the highest increase (+87.6%), just ahead of Canada (+86.5%), Norway (+85.7%) and Australia (+79.4%).

The other thing that's a bit disquieting from Table A1a is that we've also had the third largest rise in relative unit labour costs over the same period (again our comrades on this one are Norway, Australia and Canada). I'm sure that most if not all of the deterioration in relative competitiveness is down to a higher exchange rate, and isn't down to runaway domestic costs (our latest labour costs index, for example, showed only a modest increase). But in any event exporters are going to find exporting somewhat of a struggle until the Kiwi dollar gets down to more comfortable levels.

Another good book

It's taken me a while to catch up with it - I gather it won awards and was on shortlists of best business books of the year when it was published in 2005 - but I've finally read Pietra Rivoli's The Travels of a T-Shirt in the Global Economy: An economist examines the markets, power and politics of world trade.

It's been worth the wait.

Rivoli, a professor of finance and international business at Georgetown University, has written what she calls "a story about globalization", noting that while "stories are out of style today in business and economic research", they play a bigger and useful role in other disciplines.

On this evidence we could do with more economics stories. This is a good one, tracing Rivoli's T-shirt ("white and printed with a flamboyantly coloured parrot, with the word "Florida" scripted beneath") from the cotton grown on a family cotton farm in Texas, through to the yarnmaking, spinning, cutting and stitching together in China, back to the US for the printing and retailing, and finally to Tanzania and its second-hand clothes ("mitumba") markets.

Along the way you'll learn a lot about economic history and economic development (the cotton mills have often played a lead role in countries' industrialisation and in the original Industrial Revolution) and about the politics of trade policy. As she notes, all the "markets" bar the final second-hand clothing one are heavily distorted by protectionism in buyer countries (especially in the US with its domestic cotton subsidies and its quotas and tariffs) and restrictions on functioning markets in supplier countries ("cotton farmers in West Africa are embedded in a system that exposes and impoverishes them...not only does this steep discounting [i.e. the rip-off price farmers get from the state-owned buying board] impoverish the farmers and enrich the state, but the exclusion from the markets created by the A/B [pricing] system gives the farmers no incentive to improve quality", pp54-5).

She is very good on the politics of protectionism, and how the US cotton industry has been so good at it. "Remarkably", she says (p51), "US government subsidies under the cotton program - approximately $4 billion in 2000 - exceed the entire GNP of a number of the world's poorest cotton-producing countries, as well as the United States' entire USAID budget for the continent of Africa". And she quotes research from the US International Trade Commission: "Using the USITC's most conservative estimates, 2002 textile and apparel quotas cost $174,825 per job saved....The costs of protectionism are not only high in dollar terms, they represent a regressive tax, which falls disproportionately on the lower-income workers that the regime is designed to protect". Indeed, there's a whole chapter ("Perverse Effects and Unintended Consequences of T-Shirt Trade Policy") on the cock-ups and harm done by textile protection.

Rivoli started with an economist's belief in the merits of free trade, and it's not shaken by the end of the journey: "Since completing my travels, I have come to believe in a moral case for trade that is even more compelling to me than the economic case" (p214). But she's also sympathetic to any activist working to improve working conditions at the bottom of the world textile manufacturing heap, as long as she (the activist) remembers "to appreciate what markets and trade have accomplished for all of the sisters in time who have been liberated by life in a sweatshop, and that she should be careful about dooming anyone to life on the farm" (p215).

This book is balanced, it's readable, it's right. If you're ahead of me and have read it already, great. If not, it's well worth a go.

We overpay, too

Last week I posted about some new research from European Commission economists showing the existence of pay premiums in a range of EU countries in favour of public sector employees relative to private sector employees, which did not disappear when the compositional nature of the two workforces was corrected for (the public sector, for example, tends to have more-educated people on board). Like for like, the public sector paid more, sometimes substantially so.

Perhaps naively, my first guess about New Zealand (what I might call my "prior", if "prior" means knowing nothing at all about the local issue or its literature) was that we might not replicate the typical EU pattern, and I asked if anyone knew whether there was local research on the topic.
And Eric Crampton over at Offsetting Behaviour did - thanks, Eric.

Eric had blogged about the issue two years ago, referencing two papers by Prof John Gibson at Waikato, one based on 2005 data and the other looking at 2003-07.

The result, I'm afraid, is that we appear to have a public sector pay premium, too. The first paper found (p63) that "Taking account of a wide range of worker characteristics and attitudes, job attributes, and the effects that jobs have on workers and their family life, there appears to be a pay premium of 17-21%, which is not due to compensating differentials". And the second one found (quoting from the Abstract) that "Comparing with observably similar private sector workers shows that public sector workers have received a pay premium that has grown in each year, from almost zero in 2003 to 22 percent in 2007". You might well think that the expanding premium had something to do with the government of the day: I could not possibly comment.

I introduced Gibson's results by saying that we "appear" to have a public sector premium. The reason I'm a little cautious is that the "like for like" comparisons between public and private sector jobs aren't quite as comprehensive as they might be (due to data limitations, nothing to do with how Gibson went about it). The European Commission research was able to correct for different occupations and different levels of managerial responsibility, whereas the Gibson comparisons weren't (the closest was a 'years of education' criterion, which could be a rough proxy, but isn't the genuine article). I wonder if anyone's minded to have a go at an update, with newer data sources - Statistics New Zealand has now got very extensive linked employer-employee datasets that you'd think would allow a very fine comparison of public and private sector pay for comparable work.

Why does any of this matter?

For starters, efficiency reasons: there's no reason for us to be throwing taxpayers' dollars out the window for work that's being overpriced. Especially on this scale: the premium is a really big number. Just looking at the core public service alone (government departments and the like), a premium of 20% across the wage bill is in the region of $600 million (44,500 FTEs at an average base salary of $68,561 adds up to a payroll of $3.05 billion, going by the numbers in the latest Human Resource Capability Survey from the State Services Commission).

And then there are the fiscal stabilisation issues. Like a lot of other western governments, we're trying to get our fiscal affairs back into order. If a public sector pay premium exists on this scale, then reducing it could be a more preferable way of helping to balance the books than (say) outright cuts in services valued by the public. In fact, we may be headed in this direction de facto: quite a few outfits around the public sector are being held to baseline budgets for the next three years that are frozen in nominal dollar terms. That doesn't prevent further public sector pay increases, but it makes them harder to concede and facilitates eroding the premium.

Overgenerous public sector remuneration can also be on the of the ingredients to walk you into fiscal problems in the first place. I mentioned last week that the European Commission research found that the fiscally challenged PIIGS (Portugal, Ireland, Italy, Greece, Spain, and it's my PIIGS terminology, not the Commission's) all showed up badly for overpaying the public sector. Since then I've read a European Central Bank working paper, 'The public sector pay gap: in a selection of Euro area countries'. It's not quite as recent as the Commission research, and doesn't cover as large a sample (10 countries rather than 26), but it found exactly the same thing (p21) : "Notable differences emerged across countries, with Greece, Ireland, Italy, Portugal and Spain exhibiting higher public sector premia than other countries".

It's no comfort then to observe that even on a low-ball estimate of the public sector premia in the PIIGS (the ones in Table 9 of the ECB paper), they ranged from 10.9% (Portugal) to 17.2% (Spain). They're lower than the numbers Prof Gibson found for New Zealand.

Hot stuff

My weekend 6-pack of Old El Paso Jumbo Tortillas ("Great for Burritos, Fajitas & Wraps") came with this warning.

Who'd have guessed?

Could it happen here...

I was fossicking on The Irish Economy site, mostly to follow-up on the news that Ireland plans to come off the IMF/EU life-support machine next month, and I came across a post by Trinity professor Philip Lane, 'Public-Private Wage Gaps: EU Evidence'. This in turn took me to the source paper, a European Commission Economics Paper, 'The gap between public and private wages: new evidence for the EU', which is summarised here and available in full as a pdf here.

Here's the key finding.

Start with the bottom line. Reading left to right, the first column, 'Total difference', is the percentage difference between wage rates in the public sector and the private sector across the whole European Union. On average wage rates are 10.5% higher in the public sector (or were, anyway, on these 2010 numbers). The second column is how much of this premium can be explained by a vector of the usual suspects - education levels, age, occupation, level in the managerial hierarchy and what have you. As it happens, 6.9% of the EU-wide public sector premium of 10.5% can be explained by these compositional effects. And that leaves the third column, the 'unexplained' part of the premium, which I'm going to interpret as the extra wages you get merely for being in the public sector.

I've highlighted Ireland in yellow. Enough has been said already about the fiscal indiscipline of Irish administrations during the Celtic Tiger days, so I won't belabour it, but I will just observe that the Irish were the most profligate in the entire EU for overpaying public sector staff (by 21.2%), edging out Cyprus (20.9%) and Luxembourg (20.4%). It's noticeable, too, that all the PIIGS showed the same pattern of showering largesse on the public sector - Portugal (PT, 11.9% premium), Ireland (IE, 21.2%, as we saw), Italy (IT, 10.5%), Greece (GR, 8.2%) and Spain (ES, 15.1%).

You might conclude that the fix is wage cuts (as the Irish have since done) or at least a prolonged wage pause in the public sector until the premium is eroded by increases in the private sector. As the authors note, though, it's not that straightforward. There are systematic patterns to the overpayments: as they say (p28), "although a positive wage gap is found for public sector workers, this is mainly
concentrated on lower-skilled workers, typically occupying lower job positions", which in turn means that "fiscal consolidation measures aiming at reducing the public wage bill may find difficult trade-offs between the efficiency and equity goals".

Two thoughts.

One, I suspect the wage premium is only part of the EU overpayment picture, and if the full compensation package of relatively cushy job security, relatively generous pension arrangements, and contractual pay increases based on tenure* rather than performance were included, the comparison would tip even more in favour of the public sector.

And two, of course, you wonder, could it happen here? My first guess is, possibly not. If we're "most like" the UK in our arrangements, then maybe not - the UK shows as paying people marginally less (-1.3%) in the public sector (though that excludes the notoriously good pension deal many UK public sector staff enjoy). And anytime I've been involved in employment decisions in the New Zealand public sector, there have typically been attempts made to do a genuine like-for-like comparability exercise with what the job would pay in the private sector.

Those appointments, though, tended to be at the more senior levels, and on the EU showing, that's not typically where the gravy train is. It's lower down.

So it's still an open question. Anyone know of any evidence?

*As an aside, my father, a lifelong Irish public servant, once tried to prevent one of those payments (an "increment", in Irish civil service jargon) to one of his non-performing staff. It nearly caused a constitutional crisis.

How do you kill this zombie?

On Monday evening the chairman of the Australian Prime Minister's business advisory group gave a speech, 'Working with government to drive economic growth and a thriving business sector' to the Committee for Economic Development of Australia, CEDA. And it included this:

"In this regard [the challenge of Australia becoming more internationally competitive], it may be timely to review Australia's competition laws. It is clear, in a global sense, we are lacking economies of scale and that Australian companies find it hard to acquire the necessary critical mass in a small domestic market without running up against trade practices issues. If we are not ultimately to become a branch economy, the opportunity for Australian companies to become national champions at home must be considered by re-balancing the interests of consumers and businesses. To do otherwise is to encourage companies to shift to more friendly domiciles, sell to foreigners, or, if all else fails, to close their doors".

Other folk - most memorably John Quiggin in his book, Zombie Economics: How dead ideas still walk among us - have written about zombie theories that, however misguided, mistaken, illogical or outdated, live on and on and on.

Of all the zombie theories, this "national champions" zombie is the one that I would most enjoy burying at a crossroads at midnight with a garland of garlic around its neck and a silver stake through its heart.

Is there a sliver of truth in it? Maybe. Has the sliver turned septic and infected the rest of the body of the argument with dangerously noxious toxins? Yes it has.

The whole thing, apart from the manifest self-serving of the corporates who subscribe to it, has a core implausibility. We're supposed to believe that the way to create more competitive companies is to give them a less competitive home market where they can rort their own fellow citizens without having to worry about the fundamental drivers of creating an attractive product offering. Give me a break.

And I'm pleased that at least some of the Australian business media are having none of it, as in 'PM's top adviser trapped in a time warp', an opinion piece from the Sydney Morning Herald.

What really worries me, though, and also worried the Herald columnist, is that this line of thinking is re-stirring just when the Australian government is embarked on a bottom-up review of Australia's competition law. I don't currently have any good feel for the politics of it - anyone closer to it might care to throw in a comment or two - and I don't know whether the pollies are minded to tighten the law to deal more harshly with the usual suspects (banks, energy companies, supermarkets) or to loosen it to enable this "critical mass" guff. If it's for loosening, then from a competitiveness point of view, Australia is going to score a spectacular own goal.

And I'm also worried that this Australian zombie carries a communicable disease, which our pollies could easily catch.

Why not here?

You may have seen, last week, that Blockbuster, the American chain of video rental shops, decided to close the last 300 still open: it's been widely covered (for example here on Bloomberg), with quite a few commentators saying it was about time (as in 'Blockbuster is closing all of its video rental stores. Good riddance', on Yahoo! News).

Blockbuster, which at one point had 9,000 stores, wasn't much loved. Various people have commented on its limited range (other than multiple copies of the latest big hits), dreary stores, poor service, and overpriced extras (like popcorn), and the few times I used them in the States, I felt the same way.

Quite a few people also blamed Blockbuster for decimating the specialist, independent video stores, much like Amazon and the other e-booksellers have got it in the neck for dealing to that interesting little bookshop you used to go to.

But it wasn't its general unloveliness that did Blockbuster in. It was, first of all, Netflix's video-by-mail service (like our Fatso), and, more recently, the digital streaming of videos. And you can see why: online video on demand is cheaper (no bricks and mortar for the supplier, no getting the car out to go to the video shop for the buyer), faster, and offers an easily searchable and larger catalogue. Those of us out in the 'long tail' (I like French films) can find and view what we like.

Or at least we can if we live in the US. Here in New Zealand, we're well behind the curve. Yes, there's some online stuff available from the free-to-air channels and (in a rather limited selection) from Sky. And yes, Quickflix has entered the market, but judging by its current offering it's either early days or (if this is all the range they're going to offer) not a compelling proposition.

I try not to see market failures all over the place: for the most part, markets work pretty well to give us what we want. But I'm at the least bemused by the current state of play of video on demand in New Zealand. When what is completely routine in overseas markets is still the rarity here, you begin to wonder if we haven't got some kind of roadblock preventing or delaying the local deployment of a proven and popular technology overseas.

What a terrific outcome

Yesterday's employment and unemployment numbers were awesome, and defied even the most determined begrudgers to undermine them, though Radio New Zealand did its best by simply ignoring them in its 7.00am news bulletin this morning, preferring more important national items like the cost of insurance for maraes and Winston Peters' sniping at our chance of a Security Council seat at the UN.

The ever dependable Brian Fallow covered the data well at the Herald. His piece, 'Economic upswing flows into jobs', in particular pointed out that the unemployment rate fell, even as the participation rate rose. In other words, despite more people opting to join the labour force, there were more than enough new jobs to go round and still see the numbers unemployed going down.

Some critics like to say, "Aha! But this doesn't count the underemployed!", such as people working fewer hours than they ideally would have liked. That's right. But even on that score the latest numbers show things turning for the better: the underemployment rate, as opposed to the unemployment rate, dropped from 4.4% last September to 4.2% this September (you've got to use annual comparisons because the quarterly underemployment data aren't seasonally adjusted).

Another good outcome was what happened to the 'NEET' rate. This is mainly relevant to younger people, as it's the 'Not in Employment, Education or Training' rate (unemployment rates make less sense as a measure, as many young people tend not to be in the labour force in the first place). On that measure, which I rate as one of the more important social indicators, it's again all good. The NEET rate for all 15-24 year olds dropped to 11.4% in September, from 12.1% in June (it's seasonally adjusted, so the quarterly comparison is kosher), and is markedly down on the 13.4% of a year ago.

Despite all this good news, there's still been some attempt to have a beat-up on what looks like a lowish rise in pay. It's true that the 1.6% rise in what's called 'the labour cost index' over the past year isn't a huge rise. But that understates what's actually happened to folks' actual earnings.

The labour cost index is essentially what's happened to the rate of pay for a particular job. It doesn't include increases people might have got for working longer hours, or merit or performance bonuses, or the impact of promotions, or of people moving from one job to a better paying one. For that, you need to know what's happened to 'average ordinary time hourly earnings'. That's up by a more respectable 2.6% over the past year - not dancing in the streets material, I know, but still handily ahead of inflation over the past year (1.4%).

It doesn't usually get a lot of coverage, but there's also a table included in the labour market data that shows how we're faring by international comparison (using a standardised definition of unemployment). Here it is.

We're doing pretty reasonably, though not outstandingly, by OECD standards. There are 34 OECD members in this graph, and we rank 13th. I suspect we'll improve our ranking: I've highlighted Australia in green (5.8% on this basis), and it's pretty clear that we're going to overtake them, as consensus forecasts have the Aussie unemployment rate rising and ours falling.

Germany shows up to advantage, 7th in this group, with 5.2% unemployment. You might think this reflects well on how Germany's conducted its affairs (both at a business and policy level). You might be surprised, then, to discover that in recent weeks some of the blogosphere's heavyweights have climbed into Germany, essentially saying that they're exported their problems to the rest of the Eurozone. If you're interested, you could start with 'The real problem with German macroeconomic policy', or with Martin Wolf's critical piece in the FT, 'Germany is a weight on the world'.

Form your own views, but if the question is, should Germany be more like (say) France, or should France be more like Germany, I know which camp I'm in. Germany's got an efficient labour market, and France doesn't, and the social consequences of France's poor policy are enormous. 

Last month I read in the French business paper Les Echos about the latest annual survey put out by a French organisation that promotes the employment of younger people - '47 % des jeunes diplômés en 2012 sont sans emploi un an après', it said, '47% of young graduates in 2012 are without a job a year later'. And of the 53% that were employed, 30% were on short-term contracts, because of the employment 'protection' legislation that makes employers reluctant to take on full-time permanent staff. 

'Structural reform of the labour market' isn't exactly a snappy electioneering phrase, but in France's case it would go a long way to tackling appalling levels of youth unemployment and making proper use of the talents of its qualified young people.