Thursday, 17 August 2017

Timely cooperation

Collaborative working groups are a necessity in many industries: if you want your luggage transferred from one airline to another, or exam results at one university credited to another, or a gizmo to work in a USB port, you're going to rely on the backroom folks who have got together and worked out the protocols that make it all happen. Consumers unambiguously benefit.

Industry associations can sometimes go over the (not always obvious) line between consumer-friendly collaboration and producer-friendly collusion. The latest in the gun may be technology working groups in the German car industry, which are alleged to have colluded on collectively introducing cheaper but less effective technology to control diesel engines' exhaust. The airlines went too far when they colluded on air cargo surcharges. And it was interesting to note that the Commerce Commission's latest Competition Matters conference had a session on 'The anti-competitive potential of industry groups', possibly signalling that they've become an issue of greater interest locally, too.

But as a reminder of the large amount of welfare-enhancing cooperation that well-meaning working groups can achieve, here's a question for you: where did the time zones in the US come from?

A lot of people tend to assume it must have been the guv'mint. But as this plaque on the corner of La Salle Street and Jackson Street in Chicago reminds us, it was actually entirely the work of the private sector. The US railroads got together on the site of the plaque on October 11 1883, agreed on four time zones each an hour apart, and implemented the whole thing five weeks later on November 18. As soon as they did, it became immediately obvious that this was a hugely sensible idea, and everyone else, including the federal and state governments, fell in behind.

Can you imagine a modern western government managing to do anything as effective as quickly as the railroads did? As it was, it took the US government more than 34 years to formally ratify what the railroads arranged in five weeks.

Welfare economists are fond of 'Pareto optimality', but real life examples tend to be hard to find. I'd like to propose the US time zone setting: there can't have been anyone much inconvenienced by dropping the old system, and uncountable numbers of people had their lives simplified.

Saturday, 12 August 2017

Economics by walking around

You can read all the official data and reports you like, but I reckon nothing quite beats the insights you get from a spot of Economics By Walking Around - though an alternative interpretation is that I never quite switch out of my economics day job, even on holiday. Either way, and based on my first visit to the US in a long time, here in no particular order are what I found.

The US economy's doing fine - One of the things I always look out for in any country is the 'help wanted' signs in the windows: they're an excellent indicator. My trip wasn't a representative sample (San Francisco, Seattle, Portland, Chicago) but the short answer is, 'Now Hiring' signs were all over the place. The official labour market data for July came out when I was there: 209K new jobs, a rise in the participation rate, and a drop in the US unemployment rate to 4.3%, lower than ours.

You ain't seen nuthin' yet - all that hype about Uber and Airbnb and all those other online disintermediary threats to the established order? Believe it. They've become the new way of doing things. At the Navy Pier tourist trap in Chicago, for example, there are now designated pick-up points for Uber and Lyft (a competitor, and one we happily used). I wouldn't necessarily assume, as I think some investors do, that all of these markets are going to be network-effects-driven 'winner takes all': we found Lyft at least as good as Uber, and HomeAway better than Airbnb, and coexistence may be more likely than one-firm domination, or alternatively, they might default to one winner, but it may not be the current front-runner. And while investors could well be somewhat overexuberant, I can now see a bit more clearly why the sharemarket is prepared to pay 18.3 times expected earnings for the US IT sector. It's on a roll.

We are not alone - go to Seattle and Portland and you'll hear exactly the same sentiments about the housing market as you'll hear about Auckland's: first homebuyers can't get a look in, outsiders are buying up what's available, lower and middle income people can't buy homes near where they work (it's far worse again in San Francisco and the wider Bay area, and has been for some time). So we oughtn't think Auckland is a problem entirely unto itself: it's an outcome, like the US markets are, of generationally low interest rates, overall economic growth, regional concentration of growth sectors, demographics (including internal and external migration), and assorted supply constraints (notably planning and NIMBYs).

Public transport can work - there are days when I throw up my hands at the mismanaged mess that is Auckland transport, including the day we got back and tried to get through the chaos that is Auckland's North Shore, on a rainy day, towards the end of rush hour, with the schools back. Yet there are cities in the States who have made the thing work. Import someone from San Francisco or Portland, give them plenipotentiary powers and $5 billion a year, and tell them to get on with it. Preferably including light rail.

Are we falling behind? 1 - we like to think we're a bit ahead of the curve when it comes to social policies, but we're just tiptoeing towards issues like cannabis when it's already completely legal in some US states: we saw highway billboards in Seattle, for example, plugging the Ganja Goddess brand ("Taking Seattle cannabis to a new high"). Similarly with the taxi over-regulation revealed by Uber: the US has got on with it, we're still working it through. And it would be an interesting question which country is now the more regulated overall. Random examples: you can buy melatonin (a jet lag/insomnia thing) in your US supermarket, it's more tightly controlled here; cigar stores haven't been hounded out of existence in the US; you can buy your spirits in a San Francisco supermarket, you can't here; and dogs are welcome everywhere (including supermarkets and craft breweries), and nobody dies.

Are we falling behind? 2 - America's now our biggest export wine market. Excellent: looks like we're making great headway. Only we're a one-trick pony (Sauvignon Blanc, 86% of all exports by volume) that may be peaking - in a supermarket I saw one of our Savvie brands pitched as "low price, high quality", not where you want to be - whereas the quality of the US product is rising by leaps and bounds (try some outstanding Oregon Pinot Gris sometime). Ditto their beer and (at long bleeding last) their coffee.

We're still ahead - we're not perfect, but we have a more effective safety net than the States does. Very public homelessness and untreated mental illnesses are everywhere, particularly in San Francisco. And we should make a takeover bid for Washington state, because we sure would work it harder than its current farmers do.

The pollies have lost the plot - are the US politicians addressing issues like the homelessness? No. On the wall at breakfast in our Chicago hotel were three huge TV screens, one each for CNN, Fox, MSNBC. All of them were broadcasting as their big story - welfare? growth? homelessness? - no, a nasty intra-conservative row about whether President Trump's National Security Advisor was conservative enough. At the same time the pols were trying to restrict ordinary families' insurance access to the world's most exorbitantly priced medical care. Everything you've read about the intensely partisan and deadlocked US political system falls short of the disgraceful reality.

One step forward, one step back - we did the tourist things, especially art galleries. On the plus side, US galleries no longer care whether you photograph the exhibits (other than ones that would be damaged by camera flashes), even the ones in special exhibitions (we did Munch and Gauguin). On the minus side, when are they going to install ticket-vending machines and get rid of the entrance queues? San Francisco's Museum of Modern Art, that means you. The problem is, they're addicted to price discrimination (oldies/students, residents/nonresidents, members/nonmembers) but they've forgotten about the costs of running it. The ferry from West Seattle to downtown Seattle, for example, dispenses tickets on an ATM honesty basis (you can pick the 'senior' option if you want), and the sky doesn't fall.

A word of caution - I spend a lot of my time in front of a computer screen, so I've got a large 17.1" screen laptop. But taking it through US airport security currently makes you a marked man. As well as the whole body scanner that everyone goes through, twice I got picked out for the full pat-down search and the chemical swabbing. No dramas in the end, they let me through, and I understand what they're worried about. Just be aware, if you bring your own laptop, it'll be a bit of a performance.

Friday, 11 August 2017

Three excellent economics books

The prospect of some long distance air travel prompted me to reach for something big and chunky from one of the many books on my bookshelf I've always meant to get round to. Eric Roll's A History of Economic Thought and George Sabine's A History of Political Theory - both unfinished since my undergraduate days - were in the frame, but I eventually settled on Robert Skidelsky's one-volume biography John Maynard Keynes 1883-1946: Economist, Philosopher, Statesman.

Eight hundred and fifty three pages later, I'm glad I did. It's a great book: intelligent, comprehensive, balanced. You'll know before reading the book that Keynes was right on two big things - German reparations after the Great War, 'Keynesian' demand management to avoid slumps - and instrumental in creating two institutions (the IMF and the World Bank) desperately needed post World War Two. These are well covered, as are other good calls (eg on the UK's poor decision to go back on to the gold standard in 1925) but you'll also discover that Keynes could be wrong on a lot else. He was, for example, as prepared to resort to protectionism in the Depression as the justly maligned Smoot and Hawley, and supported cartels as a device to prevent deflation (as did Roosevelt's 'New Deal'). His speech in Dublin in 1933 to the assembled Irish worthies pandered to their nonsensical 'self-sufficiency' programme. In a way, though, that reflected another of his great abilities: his willingness to adapt his message to the audience made him a formidable player of the British and international civil servant game, prepared to compromise and adjust to get the core of what he wanted through an often ignorant and hostile policy process.

A big theme of the book is his outstanding intelligence (albeit too often deployed in a brutal take-no-prisoners style): Bertrand Russell said in his autobiography (and requoted in the book) that Keynes' intellect was "the sharpest and clearest I have ever known. When I argued with him I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool". Others recognised it, too. At the formal dinner ending the Bretton Woods conference which created the Fund and the Bank, "as he [Keynes] moved slowly to the high table, stooping a little more than usual, white with tiredness, but not unpleased at what had been done, the whole meeting spontaneously stood up and waited, silent, until he had taken his place. Someone of more than ordinary stature had entered the room".

Another excellent book I've finished is the second edition of Economics for Competition Lawyers, by three of the people at Oxera, Gunnar Niels, Helen Jenkins, and James Kavanagh. For all I know, this is already the established font of all knowledge for lawyers required to come to terms with the black arts of competition economics, but if it isn't already, it ought to be: it's an absolutely first class textbook. It goes out of its way to make the economics accessible to non-specialists, and even economists will get a lot out of it. I wish I'd had it to hand sixteen years ago when I was first appointed to the Commerce Commission, and I'd say that every other Commissioner appointed since then would have felt the same way. Very few of us came to the Commission with a deep knowledge of the area - the economists tended to have serviceable general purpose economics rather than a specialty expertise, and the non-economists had little or nothing - and a comprehensive guide like this one is exactly what we all needed.

It covers everything you'll need to know, from the absolute basics of supply and demand through the core areas of market definition, market power, abuse of dominance, cartels, vertical restraints, and mergers to the design of remedies (often overlooked) and the quantification of damages, and finishes with a very useful chapter on 'The use of economic evidence in competition cases'. I found myself agreeing with virtually everything they said, with the exception of what I thought was an over-charitable view of 'pay for delay' agreements (where patent-holding pharmaceutical companies pay producers of much cheaper 'generic' drugs not to produce). There may well be cases, as they say, that are genuinely welfare-enhancing, but as I've argued before, it's generally not the way to bet.

But that's a minor quibble: this is a highly practical guide to a wide and complex field that takes you from ground zero to close to the cutting edge, and is thoroughly recommended. New Zealand, by the way, gets the odd look in: two cases are cited, Oh Bloody Eight Six Seven in the context of what the Baumol-Willig rule is all about, and Air Cargo (where the authors acted for the Commission) on the geographical dimension of market definition. If you missed it, by the way, the very last act in the Air Cargo market definition bunfight has just played out in the Australian courts.

There's a school of thought that says too much choice can bamboozle consumers, who'll resort to rules of thumb (possibly missing out on their best options) when confronted with menus that are too big to come to grips with. I'm not a great fan myself, but I saw the point when I got into Powell's City of Books in Portland, Oregon, the world's largest bookstore. Before my faculties melted down completely, however, I did manage to buy Niall Kishtainy's new book, A Little History of Economics. Kishtainy, a lecturer in economic history at the London School of Economics, has done a very clever thing: produced a 'what is economics all about anyway' book through the medium of a history of economic thought. It works a treat, and is also handsomely produced. If you wanted to get someone interested in economics, this should be high on your list.