Quick reactions to the Z/Chevron decision

The decision is out and it's pretty much as outsiders would have picked (and I should add I'm an outsider, not having advised any of the parties involved) - the likelihood always was (at least for petrol stations) that it would be either a clearance with divestments, or a decline, and we've ended up with a split decision, a 3:1 majority for clearance with divestments (19 petrol stations and 1 truck-stop), with one vote for a decline.

We don't have the full written decision yet, but the press release says the sticking point for the split decision was the possible increased risks of price coordination. The majority thought that "the loss of Chevron would make no material difference to this behaviour given its passive role in the market as a wholesale supplier. The likelihood of Chevron being an effective constraint on coordination in the future is low, even if sold in the future to another party". Dr Jill Walker in dissenting felt that "there is evidence of tacit coordination between petrol retailers in some regions, primarily where Gull is not present, and that this has contributed to increasing margins in the petrol industry" and that "the permanent removal of Chevron’s assets as an independent supply chain means its potential to disrupt coordination is gone and this behaviour would become more firmly entrenched post-merger".

I had three immediate reactions.

My first was that I was pleased to see a split merger decision: there haven't been many of them (the last one, from memory, was Ezi-Pay in 2012, which was a split decline). Yet the merger applications that come into the Commission these days tend to be complicated and borderline beasts, and frankly it would be very surprising if everyone invariably saw them the same way. For me split decisions suggest there there is indeed that "robust mix of viewpoints represented around the decision table" that I mentioned earlier this week.

My second was a quiet wonder to myself whether Australian and New Zealand attitudes to mergers (and arguably to competition issues as a whole) might be diverging: the majority were Kiwis, the dissenter the Aussie cross-appointee to the Commission. Could be entirely happenstance on the facts of this case, or it could be that the Aussies (rightly or wrongly) are taking a more hardball (or conservative, pick your own word) to competition risks. Sometimes the Aussies in my view go too far: I'm not yet persuaded, for example, that their actions to stop the supermarkets giving out very large petrol discount vouchers ('shopper dockets') were necessary. And some might argue that it's fine for the two jurisdictions to take different lenses to issues. All the same, it's probably best, if only to make trans-Tasman mergers more predictable, if there's a consistent perspective on both sides of the ditch. Perhaps there is, and the split-by-nationality is of no significance. Or perhaps there isn't, in which case it might be useful to explore how the two countries' regulators think about issues such as price coordination and the loss of potential disruptors, and how you assess economic evidence on the issues.

My third reaction is one that won't surprise readers of this blog, and that is the absurdity of the Commission's limited powers to look at the state of competition in markets. In this case, the Commission examined "whether coordination was already occurring in the retail [petrol station] market": it pointed out that even if it were, it may not be anything illegal, and that "The behaviours occurring in the retail fuel markets in New Zealand, such as price following, regional pricing differences and rising margins, can occur in both coordinated and competitive markets".

But it also said that "The majority of Commissioners consider it is possible, though not definitive, that coordination is occurring in some local markets. However, where they may have had the most concerns about coordination occurring post-merger, they consider the divestments remedy those concerns". Dr Walker, however, was not convinced: as noted above, she felt it was happening already.

The stupid thing is that this behaviour - potential, suspected, actual, benign, malign, whatever - only got examined because, fortuitously, a merger came in the Commission's window and triggered a look. The Commission has got no formal power to have a look off its own bat, even though it has a very good feel for where these coordination issues are likely to arise, and would know where to beat the bushes. I've gone on and on about the need for the Commission to be able to conduct 'market studies': it was already screamingly obvious that they should (assorted process issues can be dealt with), and this latest decision is yet more evidence why there's a problem. The government needs to get off its chuff and fix it.

An insider's view of mergers

Last night's LEANZ seminar, 'An Insider's Reflections on Merger Clearances', was a cracker. David Blacktop, the Commerce Commission's Principal Counsel, Competition, has seen merger proposals from both sides of the fence (he was at Bell Gully previously), and there's not a lot he doesn't know about the principles and the process.

First, David gave us some data. Currently the overall 'decline' rate from the Commission is about 10%, though if an applicant gets to the knotty 'letter of unresolved issues' stage (and 11 out of 54 applications ended up in that particular 'this is a really hard one' basket), the odds of a decline are about 50:50 (6 cleared, 5 declined), which is what you'd expect. Whether this is too low, too high, or just right is anyone's guess, but as there have been some people arguing that merger clearances (at least in the US) may have got too lax (as I discussed here and here) I asked him what you need to do, as a merger regulator, to guard against inbuilt biasses. His sensible answer was, ensure there's a robust mix of viewpoints represented around the decision table.

David also gave us some good data on timeliness. The time to process a decision has been rising - David joked that it coincided with his arrival, and I joked that it timed with my departure - but as David said, the simple 'average' across all applications of somewhere in the low 60s in working days (12 or 13 calendar weeks) doesn't really give you the proper flavour. Relatively straightforward ones get done in 43 working days (8-9 calendar weeks). 'Letter of issues' ones have the letter issued on working day 38, and get put to bed in a total of 71 working days (about 14 calendar weeks). The knottiest 'Letter of unresolved issues' ones have their letter issued on day 72, and take 107 days to a clearance and 108 days to a decline (with the extra day to get the reasons for the decline written up right), or some 21-22 calendar weeks.

There may be some internal resourcing issues - the regulation side of the Commission has been taking up a fair chunk of availability - but the most likely explanation (in my view) is that the longer time to a decision is largely the result of recent ones being both more complex and more borderline in their competition effects. The biggie currently inhouse - Z Energy/Chevron - rings both bells, and (assuming it comes out tomorrow as indicated a while back) it will have taken ten months from start to finish.

David also highlighted a somewhat unusual feature of some recent merger declines. Two of them were very similar - specialised businesses built up in provincial towns, with the owner looking to retire and sell the business in a trade sale. Trouble is, in many of these situations, the only trade buyer is highly likely to have a local monopoly. And the legal costs of getting to a decline will be disproportionate to the value of the business and the size of the local market.

So, what do you do? Should we have some minimum dollar threshold, below which the merger regulator will simply not be bothered - even if this leaves some provincial town paying over the odds in some (probably small, probably specialised) markets? Instinctively you think, that's not very equitable, but realistically you also realise that the costs of the full process are completely OTT for these situations. My own feeling, having been involved in some of these decisions, is that it's often going to be the case that over the longer haul there's only room (in a minimum efficient scale sense) for one provider in many of these towns, and that what looks like a merger of two to one is effectively bringing forward what was going to happen in any event. If an applicant supplies evidence showing that, across New Zealand, there's typically only one specialist provider in towns of that size, the merger regulator should be more ready to press the green button.

David raised a number of other interesting ideas. For example, do we have a sufficient range of potential remedies to cope with potential merger detriments, given that divestment is a blunt instrument? And where are we in terms of transparency and confidentiality? We ran out of time to get into that issue properly, but for what it's worth I think we could, without prejudicing commercial confidence, expose a bit more of the process, particularly around letters of outstanding and unresolved issues.

Another excellent LEANZ evening - and it makes me think (again) that the NZ Association of Economists could usefully have an equivalent series of seminars on other topics. Well done to all involved, and special thanks to James Mellsop and Will Taylor* at NERA for hosting the event. Let me know when you're opening some more Akarua Rua Pinot Noir.

*11/05/16 An earlier version got Will's name wrong. Apologies.

Links to the HLFS presentations

Yesterday I wrote about Statistics NZ's day seminar on the Household Labour Force Survey. Here are links to the papers I mentioned.

Stats' Diane Ramsay on the history of the HLFS
MBIE's David Paterson on the changing nature of the labour market
AUT's Gail Pacheco on the impact of minimum wages
Waikato's Bill Cochrane on the gender pay gap
Stats' Sharon Snelgrove on updates to the HLFS

I've tested the links, and they work, but sharing links via Dropbox files is on the frontier of my technology skill set, so please let me know if there are any issues.

Is market power on the march?

Last week I wrote about a piece in the Economist which made a case that corporate profits had become too big in the US - too big in the sense that the rise in profitability was more down to an unwelcome easing of competitive pressures (including through mergers of competitors), and a consequent rise in market power for incumbents, than down to any underlying efficiency gains or customer service improvements. My take was that if it's a potential issue for the US, it's potentially an even bigger issue for us if it's also happening here, as we're already an economy with high degrees of market concentration in various sectors. It would consequently be a good idea to see if we have (for whatever reason) become too relaxed about giving clearance to mergers, and have been allowing through ones that had actually resulted in a substantial loss of competitive pressure.

And it's like buses - right after the Economist, along comes the Council of Economic Advisers (CEA) in the US saying much the same thing in their 'issue brief', 'Benefits of competition and indicators of market power'. It's not a hard or a long (14 pages) read, but if life's too short you'll find a pretty good summary here, from the Stigler Center at the University of Chicago Booth School of Business. It also covers President Obama's consequent executive order, asking the American public sector to come up with specific ideas that would boost competition.

Where I've got to, after reading this latest effort and some of the sources it references, is that I'm in the same place as I was before. There's suggestive but (as yet) nowhere near knock-out evidence for the US, but if it's even a realistic prospect there, we need to be on our guard here that we haven't got a more severe case of it, and in particular that we aren't making the condition worse by inadvertently nodding through mergers that will reduce competition.

Let's look at some of the evidence. The CEA led off with this.

I
Well, yes, concentration is up, but often not to levels that ought to be in the least bit worrying: these are revenue shares for the top 50 companies combined, and they're often at entirely non-threatening levels. The CEA had to start somewhere, I suppose, but you'd need something a lot stronger to get to "there's a problem" territory.

The CEA do however reference some studies at a market level (which is the right frame of reference) which suggest it's happening there, too, and sometimes to levels that would indeed give you pause for thought. And other folk tend to find the same general trend, for example this paper on listed US companies concluded (p33) that

the decline in the number of industry incumbents is associated with remaining firms generating higher profits through higher profit margins. The results suggest that the increase in profit margin cannot be attributed to increased efficiency but rather to increased market power. Second, mergers in industries with a decreasing number of firms enjoy more positive market reactions, consistent with the idea that market power considerations are becoming a key source of value during these corporate events. Finally, firms in industries with a declining number of firms experience significant abnormal stock returns, suggesting that considerable portion of the market power gain accrues to shareholders. Overall, our findings suggest that despite popular beliefs, competition could have been fading over time

Of course, if you buy the idea that market power is on the rise, there could still be a bunch of reasons for it other than competition regulators not catching the anti-competitive impact of mergers, including (as both the Economist and the CEA mentioned) increased regulatory barriers to entry. It could be technology, for example: this graph from the CEA shows the already most profitable companies becoming even more so. But note that the acceleration in the top performers' ROE starts to take off mid-1990s, just when all the internet-enabled stuff started to take off. Are these the Googles of this world, and/or the companies outside the IT sector that made the best use of the new technologies?

And the CEA piece also shows that the US regulators have not been asleep at the wheel. The chart below shows that the US competition authorities have, rightly, been spending more of their time on the big (above US$1 billion) mergers than they used to. Proposed mergers ("Hart-Scott-Rodino transactions") over about US$78 million get notified to them: the regulators start "second request investigations" if they think there might be competition issues. In 2000, some 6% of proposed mergers were US$1 billion or more, and they accounted for about 25% of the push-backs from the regulator. In 2014, the big ones made up about 14% of all mergers, but were responsible for nearly 50% of the regulators' queries. If anything, you could make the case that the regulators had been spending a disproportionate amount of their time on the smaller stuff in 2000, and have got their act together since. They could, of course, still be letting "too many" through, but it's not obviously for want of kicking the tyres in the first place.

Where does this leave New Zealand and our policies and practices?

First of all, there's the law, and the Commerce Commissioners have got to call it as they see it, merger application by merger application. If they're "satisfied" that there's no substantial lessening of competition - that's the legal threshold - then it's game on. But, almost by definition these days, the proposals that come in the door are knotty. Getting to "satisfied" isn't easy. And to get there, I think Commissioners and their staff advisers would want a good deal of info to hand on trends in New Zealand corporate profitability and industry structure - what sort of 'natural experiments' are we seeing, for example when the third player in a market falls over, leaving just two? - and in particular they'd want to know what had happened when mergers "like" this one went through in the past. Against this background, ex post analysis of previous merger decisions is crucial.

Which, by the way, is also where Gary Rolnik, one of the professors at the University of Chicago's Booth School, has got to. No, there's (as yet, anyway) no smoking gun that excessive concentration and anticompetitive mergers are the issue: "these claims need more empirical studies before we can conclude, like The Economist, that for S&P 500 firms these exceptional profits derived from undue market power are currently running at about $300 billion a year, equivalent to a third of taxed operating profits, or 1.7 percent of GDP". But there's a real risk they might be: "the growing anecdotal evidence from many industries and the persistence of high profits margins in the face of stagnant growth and growing inequality deserves serious consideration".

We need to know, too. I can think of a lot worse projects for (say) our Productivity Commission to turn its mind to.

Happy birthday, dear survey...

It's not often a statistical survey has a birthday celebration, but yesterday Statistics NZ had a 30 year anniversary do at AUT to celebrate the Household Labour Force Survey (the HLFS) getting underway in 1986. Stats brought along copies of the very first HLFS data announcement: it had a well-written press statement that has stood the test of time pretty well, though the tables will take you back to the era of dot matrix printers and what looks like Lotus 1-2-3 output (children, ask your parents).

Diane Ramsay from Stats took us through the history of the HLFS. There could have been, should have been, an HLFS in 1979 - the Department of Labour and the then Statistics Department had done a feasibility study and recommended one - but the Muldoon government, with characteristic incompetence and contempt (my comment, not hers), decided it couldn't afford one. The Labour party, on the other hand, recognised that a proper measure of employment, unemployment, underemployment and participation is a fundamental piece of information in an open democracy, and got the HLFS going in 1986.

And so here we are today, with the HLFS pretty much as it was day one. It's one of the biggies for the financial markets, right up there with GDP and the CPI, but as the various presenters showed, the long set of consistent data has also been enormously useful over that time to investigate all sorts of social and economic issues. Dave Paterson from MBIE, for example, explored a number of trends over that time - notably the large rise in the labour market participation rate of women, how the various business cycles had different regional impacts, and what the forecast demographic profile of the workforce looks like and its implications for aggregate economic growth and productivity.

AUT's Gail Pacheco - a fellow Warriors tragic - summarised her research papers (written with various colleagues) on the impact of changes in the minimum wage. This is one of the red-hot economic policy topics in the US (and elsewhere) at the moment, and to be honest I wasn't aware that there was equivalent research in New Zealand. Turns out, Gail said, that by international standards we have a relatively high minimum wage relative to the median income, so our results happen to be especially relevant to people overseas thinking of whacking up their minimum wage (like this month's US$15/hour moves in New York and California). If you're interested in the topic, best read Gail's output properly rather than rely on my takeaway, but in one study where she focussed on employment effects where the minimum wage was a binding constraint, she found negative effects on teenagers and minorities, which is what I would have expected.

Gail and Waikato's Bill Cochrane used the HLFS, and an occasional supplement run alongside it, the Survey of Working Life, to look at the gender pay gap. It has been narrowing, but it's still there, and even after throwing a battery of control variables at it to allow for different occupational distributions and everything else that might be a plausible explanation, there's still a 10% gap left unexplained. Is that big or small? Well, as Bill said (and I'd endorse as the father of a working daughter), why don't you leave 10% of your income at the door when you leave, and see if it feels small to you.  The Herald's social issues editor, Simon Collins, had the gumption to come along to the day, and you can find his coverage here.

The other news was that, after 30 years. the HLFS is getting a bit of a remake and a refresh, though not so as to cause any major inconsistencies and series breaks - there'll be an element of 'backcasting' if needed to put the old data on all fours with the new. Fuller details here. As Sharon Snelgrove of Stats explained, some of the changes reflect different ways of doing things today (looking for jobs over the internet, for example, rather than in the job ads in the newspapers), and some are aiming at new data (such as union membership, or being part of a collective bargaining agreement). When people respond that they'd like more hours of work, they'll now be asked, "how many?", so we can get a volume measure of underemployment.

Three technical details I found interesting.

One, the HLFS rotates out one-eighth of the survey panel every quarter. The same rotation process appears to have caused real issues for the Aussies and the volatility of their monthly employment data, so I asked the Stats folks if ours were likely to go off the rails. The answer was, it's hard to know, as there's quite a lot of volatility in the employment data anyway, and it's not that easy to figure out how much might be due to some non-representative oddity of the new one-eighth intake. But their rough-and-ready feel was, no.

Two, immigrants have recently been one of the big components of growth in the labour force: do we know anything about their employment experience? Short answer, no, not in the short-term anyway: the HLFS is designed to exclude anyone who has been been in New Zealand for less than a year.

And three, I was reminded - well, got into a bit of an argy-bargy about it, really - about the very tight definition of unemployment. To be unemployed in an HLFS sense (which in turn is a definition set by the International Labour Organisation)

A person must be actively seeking work and available to work in the reference week to be classified as unemployed. ’Actively seeking work’ means an individual must use job search methods other than looking at job advertisements – for example, contacting a potential employer or employment agency. Previously, responses that specified using the internet to seek work were captured in an ‘other’ category and consequently classified as ‘active seeking’

My beef is that if I were an unemployed economist, and keen to get a job, I might very well turn to Seek or whatever, enter 'economist' in the keyword box, read the options, and flag them away if there's no fit. That, for me, has all the look and feel of an unemployed person actively looking for work. But not for the HLFS (nor other ILO-compliant surveys). I won't feature in the unemployment stats, though I will be in what is called 'the potential labour force', which makes up one part of the 'underutilised' labour force (the unemployed, the underemployed, and the potential labour force).

So my reaction is that I think I won't be quite so hung up on the headline unemployment rate in the future, and I'll pay a bit more attention to the underutilisation rate, as will Stats itself: "As part of the new outputs released from the June 2016 quarter, Statistics NZ will include the underutilisation rate as a key statistic".

Well done to all involved - Stats really does go the extra mile to connect with its users.

A hypothetical question

Suppose an overseas supplier of video on demand services is annoyed that customers in other countries are using Virtual Private Networks (VPNs) to access its domestic catalogue. Those customers are perfectly happy to pay the supplier's domestic pricing, and they're doing so because the supplier's service in their own countries is limited and/or more expensive.

Suppose now that the overseas supplier gets together with (say) credit card companies, and together they agree that the card companies will not process the customers' payments to the VPN companies.

If any of this were to affect New Zealand customers, do you think it would be "a contract or arrangement ... containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market"?

The future of telco regulation

No doubt you've seen all the coverage of the government's high level decisions on regulation of the telco sector from 2020 onwards (if not, the media release is here, the once-over-lightly summary is here and if you want to mainline the hard stuff go here).

It's a good set of decisions, though a lot of detail is yet to come, and there'll be another round of consultation on options. The big (and expected) decision is that both fibre and copper based internet services will be regulated as utilities, in much the same way as electricity lines businesses are today. That changes the way copper based internet is priced today, and properly so - as I argued here, the 'TSLRIC' model for pricing copper was good for one purpose (enabling efficient competitors to get into the game) but not adequate for regulating a copper provider's above-normal profits.

The media reaction is all over the new 'utility' model. But there's one part of the decisions that hasn't been picked up much, and here it is:

However, there is also the option for a more light-handed ‘backstop’ regime. The threat of regulation combined with requirements to release financial and cost information could work as an effective incentive to keep prices at reasonable levels. While this isn't the Government’s preferred approach at this time, we will be interested in discussion on this point. 

I think this is an option that should be explored further. I'm not sure that an information disclosure plus hidden knuckleduster regime would cut it on its own - it might, and maybe existing practice could be strengthened, but the precedents to date aren't great - but there very badly needs to be some intermediate, simpler, faster, less complex and less expensive alternative to the 'building block' model of utility regulation that's being proposed.

The regulatory regime would be much better if, for example, there was an 'RPI minus X' option somewhere along the way - where suppliers are allowed to raise their prices by the Retail Price Index (this is UK terminology originally, so that would be our Consumer Price Index), less some amount 'X', a plausible enough guess at what sort of productivity and efficiency gains the supplier can wring out of the business.

There's nothing inherently wrong with the 'building block' approach. Arguably, it gets closer to a supplier's 'true' costs and profits than anything else. Applied fairly and consistently, it can form a good basis for an effective regulatory compact between regulator and regulatee, and can protect consumers from profiteering. But as anyone who's had anything to do with the process knows, it's a beast of a thing to construct and maintain (or even understand, in its thornier thickets). If we end up there, we end up there, but we should really put some serious effort into intermediate or alternative options - particularly as, at some point, we as a four and a half million people economy ought to start using more "cheap and cheerful" policy regimes, rather than the industrial strength superstructures a US or a UK can afford.

A final comment: the government is keen on keeping competition up to the mark in the mobile market, and is thinking about things like mandating the price competitors pay to access incumbents' mobile towers. And it said

We will consult further on encouraging sharing of infrastructure, and making sure the Commerce Commission has the tools it needs to investigate the market.

I'm hoping the last bit of that sentence means that the government is finally getting its head around the desirability of the Commerce Commission being able to have a proactive look at the state of competition in any given market - a "market studies" power, in the jargon. I've been banging away at this for ages - my latest efforts are here and here - as have others (notably our Productivity Commission). Hopefully this latest telco exercise has finally nailed the absurdity of the country's competition watchdog not having the legal authority to do a key element of its job.

Are mergers going too far?

A few weeks ago the Economist ran a leading article, 'The problem with profits' (here's a link, but it may be paywalled). It argued that

The naughty secret of American firms is that life at home is much easier: their returns on equity are 40% higher in the United States than they are abroad. Aggregate domestic profits are at near-record levels relative to GDP

It also said that

incumbent firms are becoming more entrenched, not less...Our analysis of census data suggests that two-thirds of the economy’s 900-odd industries have become more concentrated since 1997. A tenth of the economy is at the mercy of a handful of firms—from dog food and batteries to airlines, telecoms and credit cards. A $10 trillion wave of mergers since 2008 has raised levels of concentration further

and argued for a policy response:

take aim at cosseted incumbents. Modernising the antitrust apparatus would help. Mergers that lead to high market share and too much pricing power still need to be policed

I ran the numbers myself on the level of US profits relative to US GDP, and here they are (using the excellent FRED database). Pre-tax profits (the red line) tend to be the headline number, but the better measure is after tax profits with statistical adjustments for stock valuation and depreciation (the green line).

On one measure, profits as a share of GDP had been in long-term decline from the early 1950s up to about 2002-03, on the other (better) measure profits had been steady over the same period, but they both agree that profits have indeed taken off since. The GFC made only a temporary dent, and the drop in recent quarters may be equally transient as it reflects the impact of plunging energy prices on the US energy sector (notably on the 'fracking' industry) and it too may well dissipate if oil prices continue to firm. Overall, yes, the profits share has risen to a historically high level.

The hypothesis that overlax, Type 2 error, policing of mergers - allowing ones through that have ended up substantially lessening competition - isn't proven. But the possibility that it might be, ought to give competition authorities serious pause for thought. It's possible that economic and judicial thinking on mergers has indeed swung too far in the pro-merger direction. 

At one point in the US it had been right down the other, Type 1 error end, disallowing mergers that were extremely unlikely to cause any competition issues: classic errors of that kind had included the Brown Shoe case in 1962 and the Von's Grocery case in 1966. In the grocery one, Von's and its intended merger party would have had 7.5% of the highly unconcentrated Los Angeles market between them. Since then, opinion has evolved, less weight is put on pure market share numbers, and more, rightly, on whether there will be still be effective constraints on the merged entity post-merger. Mergers reducing four market participants to three, or three to two, will still receive intense scrutiny, as they ought, but they can get the tick today in a way that would have been unthinkable fifty years ago. Even two to one may get approved in exceptional cases.

But it may be time for a rethink, especially because (as the saying goes) you generally can't unscramble the eggs if you've mistakenly let an anticompetitive merger go through. And the downside risks are probably a bit higher in New Zealand since a fair few of our markets are fairly concentrated already. As it happens, there's a particularly good example in the pipeline right now, with Z's proposed purchase of the Chevron petrol stations. It's a doozie, or, as the Commission put it in November, "The merger application is complex and involves a number of markets throughout the fuel supply chain. We have identified and notified Z Energy of several areas that we are continuing to investigate...Further work is also required to investigate the retail supply of petrol and diesel, as there are a number of retail sites where, if the merger proceeded, few options would remain for consumers". I wasn't in the least bit surprised that in December the Commission gave it itself another four months to mull it over (the indicative decision date is now April 29). It's a tough one.

If it's indeed the case that merger authorities risk erring down the Type 2 end - and we may be at particular risk because of the structure of our economy and its Z/Chevron decision points - then it gives added force to the arguments for evaluating merger decisions after the fact. There are some folk who say it can't be done, mainly because (they argue) you can't tell what the counterfactual would have been if the merger had not gone ahead. I'm not among their number, and neither, latterly, is the Commerce Commission, which, as I noted here, has creditably gone back and looked at how they've been turning out.

The more I think about it, though, the more I'm beginning to wonder whether an independent third party shouldn't do the job (or at least be co-opted into the Commission's evaluations). I've got a good deal of confidence in the Commission's people and processes, but even so it's generally not a good idea to make one of the players the referee. And if merger authorities everywhere have accidentally strayed into allowing too-big mergers, it probably needs someone outside the consensus groupthink to say so.

Then and now

I've just finished the second volume, Everything She Wants, of Charles Moore's authorised biography of Margaret Thatcher. It covers 1982-87, and it's excellent. Whatever your political views are - and many people will be starting from a strong opinion about her -  you're likely to end up with a more balanced view. The first volume, Not For Turning, was equally good, and won multiple industry prizes.

From an economist's point of view, it's interesting to look back on the economic policy of thirty years ago. One particularly striking aspect was the bizarrely uncoordinated way of running fiscal policy, or as the book puts it (p185)

Under the British system, the Budget is not a Cabinet decision, though the Cabinet is perfunctorily consulted and informed before it is unveiled to Parliament. It belongs exclusively to the Chancellor [of the Exchequer], and 'The only person the Chancellor is obliged to consult is the Prime Minister'

Some other aspects of fiscal policy also looked questionable. One of the motivations for asset sales was the cosmetic effect of appearing to reduce the fiscal deficit by counting the sales proceeds as current revenue - a bad practice. And monopolies such as British Telecom (BT) were sold off to maximise the sale price, with inadequate controls on subsequent profiteering. Not that the UK was alone in taking the money and running - as recently as 2002, the Australian government sold off Sydney Airport on terms which effectively prevented any rival airport getting underway.

The big UK Budget set-pieces also reminded me that once-a-year adjustment of revenue and spending looked odd even back then, and has become even more anachronistic since. There may be some reasons why you can't adjust fiscal policy day-by-day (people would have some difficulty staying on top of their tax owing, as would the IRD in collecting it), but on the other hand there's been a big step forward in automating the likes of payroll systems over the past thirty years, and some of the supposed constraints on more frequent than annual tax or spending changes may well have dropped away. And there's certainly no good reason why (say) increased infrastructure spending has to wait till May 16 (our Budget date this year) for the starter's pistol to go off.

Monetary policy was relatively primitive. Early on the Thatcher government set out on a tough anti-inflation squeeze - my first mortgage, which I took out in the UK in 1979, was on a fixed 14% rate - and ran policy by trying to manage one or more of the monetary aggregates (typically 'sterling M3'). But Goodhart's Law kicked in, and Chapter 13 consequently deals with 'The death-knell of monetarism'. Monetary policy as we mostly know it today - with an independent central bank and an inflation-targetting regime - didn't arrive in the UK till 1997, under an incoming Labour government with more modern ideas.

Not that everything back then was ramshackle. The UK took a trick with a politically adroit way of allocating shares in British Telecom - "Everyone applying for 400 shares or fewer got 100 per cent of what they sought. Those who applied for 100,000 shares or more got nothing" (p198) - which sat nicely with the 'popular capitalism' aim of the sale, and which might be worth revisiting if we ever get round to future privatisations (that 45% stake in Kiwibank, maybe?).

And the Thatcher government (belatedly) came up with regulation for the likes of BT that was state of the art, including Professor Stephen Littlechild's 'RPI minus X':

This was not supposed to be the ultimate answer to the monopoly problem, but was more of a stop-gap measure until sufficient competition developed. As matters turned out, however, it stopped a great many gaps, and became a regulatory model for other privatizations (p196)

I think it can still plug a great many gaps, and I'm not sure we (and other countries) are doing a better job with highly complex and expensive 'rate of return' alternatives.

I was also reminded of the then closed, snobbish, sexist nature of the City of London, where a provincial, middle class woman with a science degree like Margaret Thatcher was, not to put too fine a word on it, outright despised:

[Cecil] Parkinson recalled meeting her returning from lunch at a big bank before her first victory in 1979. 'They had given her hell. She was very depressed. I said: "Don't worry; they'll vote for you, and they'll forget it". "They may", replied Margaret, "but I won't"' (p215)

Final words to the inimitable Denis Thatcher who was accompanying Mrs Thatcher at a Commonwealth conference in India:

At this conference, Denis's irritation with the physical arrangements boiled over. During the leaders' 'retreat' in Goa, there were constant power cuts. He emerged on the balcony of the chalet allotted to the Thatchers and bellowed: 'This place is very high on the buggeration factor' (p548n)