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.

A new state-owned insurance company?

Let me say two things first, before asking a question about the new state-owned KiwiAssure insurance company that David Cunliffe proposed as a new Labour policy over the weekend.

First thing is, none of us was born yesterday, we recognise that politics is politics, and we know that you don't expect to see detailed economic analysis in a speech to a party conference of why a new policy was thought up. You may not see any economic basis at all for some policies, and a good deal of the rationale was more nationalistic than anything ("Labour will confront the challenges of an insurance industry that is no longer Kiwi-owned", with the aim of "local ownership that keeps profits here").

Second thing is, I'm very pro-competition. I spent more than 12 years at the Commerce Commission, where the Commerce Act required us "to promote competition in markets for the long-term benefit of consumers within New Zealand", and I was minded that way even without the crack of the legislative whip. So I generally look pretty kindly on ideas that aim to improve competition and consumer choice, keep suppliers efficient, and keep costs down for buyers, which are among the stated objectives of KiwiAssure.

Currently, according to Mr Cunliffe, service from the insurance industry "we know from painful experience has not met Canterbury’s needs", whereas "Just as KiwiBank gave us a customer-focused, low cost Kiwi-owned bank, KiwiAssure will give everyone a choice for better service, competitive premiums and local ownership that keeps profits here...And like KiwiBank, it will offer customers an alternative and raise the bar across the insurance industry".

I suppose what's missing for me, thus far, is this: where's the solid evidence that the insurance industry is indeed non-competitive and inefficient?

Now, I know that it's not going to be an easy judgement to make: assessing whether an industry is genuinely competitive, as opposed to collusive or sleepy, is always a tricky exercise. But so far I haven't seen any good evidence put on the table that would convince me there's a screamingly obvious competition problem.

Premiums going up (if they are going up, which they likely are after the Canterbury and Wellington earthquakes) doesn't cut it as evidence on its own. Premiums can go up (and down) for all sorts of genuine, market-driven reasons. You don't start state-owned avocado farms just because avocados have hit $3 in the veggie shop.

For another thing, there look to be quite a lot of players: I counted 96 companies with full licences on the Reserve Bank's register of licensed insurers, and if the Insurance Council can be said to represent the bigger ones, then there are 29 companies on the Council's membership list. The number of players isn't, obviously, a slam dunk indication that there is lots of competition, and if the data in this article, Doubts cast on KiwiAssure's influence, are correct, then there's certainly one quite large player (IAG, which includes AMI, NZI, and State) with some 40% market share. So it's not a case of 29 (or 96) equals fighting it out tooth and nail. It's possible there could be some sort of cosy or dozy oligopoly operating, but normally, though, you'd expect an industry with that number of participants to be workably competitive.

The existence of the whole insurance broker industry is also somewhat suggestive that there are, indeed, competing companies offering different customer propositions. There are other interpretations (insurance is so complex you need professional help through the process), but on its face it looks as if there are people running around getting you competitive quotes from alternative providers.

What I'd like to see, and I've said so before - 'Competition to the rescue - again' - is that, if people feel that an industry is not competing for their business and isn't giving them the choice, prices and services they could reasonably expect, there should be an express power given to the Commerce Commission to look into it. You'd think they have the power already, but they don't, or at least not in any straightforward sense.

So let's see the evidence first. The policies can come second.

I'll drink to that

Last weekend I was browsing Jancis Robinson's wine column at the Financial Times, and discovered two interesting things I hadn't known from her latest article, 'Value judgments: my favourite wines selling for under £10'. Incidentally if you like her column, or the FT's mainline financial and economic coverage,  it's well worth either registering for free with the FT to get a monthly quota of articles, or subscribing, to get the whole online shebang, which is what I've done.

The first thing I didn't know was that New Zealand hosts what Robinson calls "the leading wine-price comparison site", high praise from a world wine authority. It's called Wine-searcher, and it is indeed very good. I can already feel a couple of cases of Côtes du Rhone coming on.

The second thing I discovered, and this is where we veer back into the world of economics, was that Wine-searcher has apparently done a seriously large-scale study of price dispersion on the internet (250,000 US wine prices, 74,000 UK wine prices). I couldn't find the study itself on Wine-searcher's site, so I'm reliant on Robinson's summary of it, which was: "Wine-searcher’s analysis found that it was not uncommon in 2003 for US retailers to charge up to 50 per cent or even 100 per cent more than the middle price; now, thanks to greater transparency, this is virtually unheard of. According to Wine-searcher: “In the past it was relatively common for merchants to charge 25 per cent more than their competitors. Currently only 6.5 per cent of merchants in the US and 6.2 per cent in the UK try to charge 25 per cent or more over the median price whereas historically these percentages were 27.1 per cent and 12.7 per cent respectively".

Robinson comments that "there is less gouging today than there used to be", and I'm sure she's right. In theory, suppliers charging more like each other doesn't necessarily mean that the market's become more competitive: near-identical prices are as consistent with near-perfect collusion as they are with near-perfect competition. But it's rather unlikely that there has been global collusion amongst multiple retailers across many, many different wine prices, and much more likely that consumers are getting a better deal as increased transparency has reduced the capacity of sellers to quote exorbitantly out-of-line prices.

This was one of the things that was supposed to happen as the internet became more popular, but it's taken a while to arrive. When I went to the AEA meeting in Washington in January 2003, there was a session on price dispersion and price convergence over the internet, and (as I remember it) the gist was that, at that stage, online prices were, somewhat surprisingly, just as disperse as the bricks and mortar ones. This is consistent with Wine-searcher's finding that there was still widespread price dispersion at that time.

I've been trying to find studies of pricing of other goods and services over the internet, to see if the same pattern of reduced price dispersion and better deals for consumers holds true outside the world of wine. So far, it's been an uphill struggle. If anyone can point me to good research in this area, I'd appreciate hearing from you.

And the wholesale price of your internet plan will be...

Today the Commerce Commission released its final decision on the UBA service (the wholesale cost a would-be internet service provider will have to pay Chorus to use the electronic gizmos that handle internet data).

The Commission based its decision on what the same service costs in some countries overseas ("benchmarking"), in practice ending up with the Swedish price, though the Danish price also went into the mix. The Commission settled on $10.92 per customer per month: add on the $23.52 the would-be provider needs to pay for access to the copper lines to the customer's premises (the 'UCLL' service), and the total wholesale cost of the line (UCLL) and the gear (UBA) will come to $34.44 a month.

Originally, in its draft decision last December, the Commission had suggested a lower total cost ($32.45, made up of $23.52 for UCLL plus $8.93 for UBA). This had turned the government incandescent: it looked as if the government-funded fibre-based network wouldn't get the uptake the government wanted, because copper would be so comparatively cheap. In August, in an update paper, the Commission had corrected some errors, as I described here, and the total proposed price had risen to $33.43 (still $23.52 for UCLL, but now $9.91 for UBA).

Chorus has taken it hard, but today's decision seems to me to be a highly sensible outcome.

For one thing, it's lower than the $44.98 a month Chorus charges at the moment, as it should be. The previous way of setting the price ("retail minus") tends to be over-generous to an incumbent owner of infrastructure. If that wasn't known to investors in Chorus - who have been peeved that its share price has been whacked by these regulatory developments - well, it should have been, or mostly should have been.

For another thing, it's lower, but not massively lower, than the entry-level wholesale price ($37.50) that would-be internet service providers will pay to access the fibre-based internet network, again as it should be. The fibre-based service is faster, and the slower copper-based service ought to be cheaper to buy. So far the government is saying very little, but if I were the government at this point, I'd be tempted to declare victory and go home.

I'm also pleased to see that the Commission flagged away the flakey idea it floated in its August update paper, when, they say today [52 - I'm quoting paragraph numbers here and later], they "set out an approach that would potentially extend the plausible range beyond the observed benchmarks". As they note today, "A number of parties were critical of this approach", which is putting it mildly: it was statistically naff.

The Commission has given it away, though, I have to say, rather begrudgingly. "The Commission remains of the view [they say at 53] that inferring a larger plausible range is a conceptually valid exercise of the IPP [Initial Pricing Principle, i.e. this whole exercise of benchmarking using overseas prices as a first stab], particularly where there are a small number of benchmarks" - well, no it isn't, actually, as professional statisticians who submitted to them pointed out - before finishing up with, "However, as we have not ultimately applied that approach in this determination, we have not responded to these aspects of submissions". Face saving? Sure. Got to the right place in the end? Absolutely.

I'm also pleased to see that three more countries (Belgium, Greece, Switzerland) were used as a rough and ready cross-check on the price set by using just Denmark and Sweden, even though the three countries did not strictly meet the criteria for being used as formal benchmarks themselves. There's a lot to to be said for being roughly right than precisely wrong.

And I thought setting the price point higher rather than lower within the benchmark range was right, too.

It's true that as Covec said [227], "the [adverse] effects on consumers [from a higher rather than a lower price] are certain but the effects on incentives to invest and incentives to migrate from copper
are uncertain". The Commission's answer [228] was that "We recognise the greater uncertainty of benefits but believe these uncertainties need to be considered against the potential negative consequences of setting the price too low. This could harm competition in the longer-term due to a loss in dynamic efficiencies", and [231] "we accept in principle that the risk to dynamic efficiency of a low access price is asymmetric and that the balance of risk favours setting a price that errs on the high side". This has been a central theme of all the regulatory telco decisions, and I think it's on the right track.

Another good LEANZ event

We've been having a good run with recent LEANZ events in Auckland, and last night's was no exception: Ed Willis from law firm Webb Henderson gave us a fine presentation on 'Promoting quality regulation' which was well attended and stimulated a lot of active discussion.

Ed, who describes himself as possibly the only person in New Zealand who is "passionate" about regulation (and he might be right, but that's OK), went through some of the tests for what good regulation would look like, instancing both Treasury's checklist - which you can look up for yourself in this Treasury paper - and a somewhat similar and equally useful paper I hadn't come across before, from the UK's Department for Business Innovation and Skills, 'Principles for Economic Regulation'.
Ed instanced two regulatory schemes as practical examples - the Overseas Investment Act, and the recent telco policy review - and his main points (on my reading) were two.

One, people can get confused between criticising the quality of regulation and disagreeing with the social policy intent of it. There'd be a lot of people (well, me anyway) who'd regard much of the policy intent behind the Overseas Investment Act as xenophobic, protectionist, and inefficient, for example, though that doesn't necessarily mean that the poor devils trying to implement the damn thing aren't making a halfway decent job of what's been dumped on them.

Two, sometimes regulation is trying to serve multiple and possibly mutually inconsistent purposes at once, which describes the telco policy review in a nutshell. You're unlikely to be able to satisfy everyone - if you want cost-based (and therefore probably lower) pricing for the copper network, you're going to upset the folk who don't want cheaper copper-based internet services getting in the way of the national benefits to be had from moving to a fibre network.

Ed was also pretty hot about the importance of transparency and accountability in regulatory frameworks, and who could argue.

In the context of accountability, could I give a nod to the folks at the Commerce Commission who have been doing the odd post-decision review of merger decisions, to see if things actually panned out the way they had thought at decision time? I know, there are folks who argue that the methodology for doing this kind of exercise is not up to scratch, and especially not if you're going to try and do a cost-benefit analysis and put $ numbers on the value of decisions, but I think that even a qualitative scan, with hindsight, of whether you got the main trends and factors right, is absolutely a step in the right direction.

Finally, thanks to NERA for generously hosting last night's event.