Tuesday, 19 September 2017

Big discount! Get it here!

This year's Competition Law and Policy Institute of New Zealand annual workshop is coming up on Saturday October 14 in Auckland. It's got a class act of topics and speakers, as you can see from the programme and the bio of the keynote speaker, Timothy Cowen, who among other things has been heavily involved in the big EU case against Google, and who will be speaking on 'Curbing Big Data/ Big Tech: Lessons from Europe on misuse of market power, anti-competitive agreements and remedies against this growing worldwide digital-age problem'.

Now, academics and students, listen up. Do you know of students, or are you one, who would benefit from the workshop? CLPINZ has a new and heavily discounted student rate to make the workshop more accessible to students of competition law and policy. It's - wait for it - 75% off the standard non-CLPINZ-member rate, and brings the student cost down from $900 to an affordable $225. Sorry, there's no discount off CLPINZ membership, or off the after-workshop dinner if people would like to go, but the conference itself is now much more within reach of a student budget.

You'll want to take it up, won't you? So email CLPINZ@conference.nz to get the discount code, and register here. See you at the workshop.

Thursday, 14 September 2017

Another part of the house price story

Housing is understandably high on the political agenda at the moment. But amidst all the blame-seeking and potential policy responses, one of the big drivers of our high house prices seems to be largely ignored, in part because it doesn't give the pollies any room to point the finger at their opponents.

The reason it doesn't is because it's a circumstance almost completely out of our own hands: the cost of our longer-term fixed rate mortgages is very low by historical standards, and that's almost completely because of international trends. We essentially import world bond yields - as the RBNZ's economists documented here - plus a risk premium for being New Zealand, and the banks onlend to fixed rate borrowers at that rate plus a commercial margin.

Here's a chart of current benchmark (10 year) bond yields across a range of the developed economies, using data from the Financial Times.


Long term interest rates are unusually low mainly because four of the major central banks - in the US, the Eurozone, Japan and the UK - have been keeping them very low by buying bonds (sending their price up and hence their yield down), a policy often known as 'quantitative easing' or QE. It's been part of their plan to give post-GFC monetary policy more oomph: traditionally, central banks have only bothered with short-term interest rates, whereas QE also gives them a good deal of control over longer term ones as well. Low yields in the QE countries have had knock-on effects on yields in non-QE ones like Switzerland.

And 'unusually low' doesn't even begin to describe the outcome. There are now literally trillions of dollars' worth of bonds (some US$9 trillion according to the FT) trading on negative yields: you pay the borrower for the privilege of investing in its debt. You can see in the chart, for example, that the Swiss and Japanese governments can borrow money for as long as 10 years where the investors end up paying the government. Just this week the Austrian government raised five year debt at a 'cost' of -0.165% a year.

We know that our own central bank is keeping short-term rates low - "Monetary policy will remain accommodative for a considerable period" as the latest policy decision put it - and that has been one of the elements in the recent price boom. As floating rates linked to the RBNZ's policy dropped, and household incomes kept growing, there was a surge in mortgage serviceability, which has been one of the big moving parts in the consequent boom in prices. But you knew that.

What's been less emphasised if that even if the RBNZ hadn't cut short term rates to where it has, the rest of the world's central banks dealt us substantially lower longer-term fixed rate mortgages in any event. And that boost to the demand side of the market isn't going away anytime soon. In the US the Fed is getting close to easing back on the scale of its QE (still buying bonds, but not as many), and the Bank of England and the European Central Bank may start heading the same way later this year or (more likely) next, while Japan looks set to keep its current QE going into the indefinite future. Whatever unwinding of QE that eventually materialises is going to be a slow, careful, gradual, medium-term process. There could well be local five year fixed rate mortgages around the 6% mark for quite a while yet.

There's another element to this imported easy monetary policy. Around the world there's been what the investment professionals have been calling "the hunt for yield" or, in more purple moments, "the craze for yield". The traditional widows-and-orphans assets of money in the bank and government bonds have been yielding little or nothing (indeed, US$9 trillion worth of less than nothing). So even conservative investors have been forced either to swallow the unattractive terms on their usual fare - this week Austria sold €3.5 billion of bonds with a hundred year maturity on a preposterously low 2.1% yield - or instead to head into income-yielding assets like property that offer something better.

The local  investor is making the same calculation. Even at current high prices you can still get a 3.5% to 4.0% rental yield on an Auckland house, according to the (very useful) data compiled by interest.co.nz. It's not what a conservative investor would normally be looking for from an investment property, but it beats the bank deposit and government stock alternatives. In our own little way we've got the same hunt for yield: it's not as extreme as in some places  - as the graph shows, our bond yields haven't dropped to Japanese or Eurozone levels - but it's another part of the picture.

And if you think the link between loose overseas monetary policy and New Zealand house prices sounds like the abstract reasoning only an economist could come up with, then you haven't paid enough attention to the Irish house price boom and bust. Ireland, which had been growing like topsy, was gifted eurozone interest rates that were too low for its circumstances. House prices exploded.

Speaking of adding fuel to flames, why would you increase subsidies for first home buyers? As an elementary bit of sketching supply and demand curves on the back of a shopping receipt would show you, the only immediate effect of subsidising the demand for something in fixed supply is to raise its price by the full amount of the subsidy. And it's not only ineffective, it's regressive - a straight transfer from the taxpayer (including all the low earners who pay tax from dollar one) to the house owner. In the longer run, it fattens the margins from housing development, so it could encourage more supply (assuming the binding constraint isn't land-use planning or construction capacity, and it might be), but in the long run we have all joined the bleeding choir invisible, we have snuffed it, we are no more. As a short-term policy it's worse than useless.

But that's this election for you. I'd thought we'd got past the worst of elections as they used to be, but this all-party lollyscramble, with its side dishes of daftness and deceit, is pure 1970s.

Wednesday, 6 September 2017

Competition is good for women's pay

Motu's recent paper 'What drives the gender gap', has rightly got a lot of attention: full marks to its authors Isabelle Sin, Steven Stillman and Richard Fabling. Motu has gathered a broad selection of the coverage here and if you haven't yet read the piece for yourself then here's a longish executive summary and the whole caboodle. And if you want the whole thing boiled down to 17 syllables, Motu's executive summary haiku said
Women are paid less,
but aren’t less valuable.
We blame sexism.
There's one aspect that hasn't caught much of the headlines, however, and that's the link between how competitive a marketplace a business is in, and the extent of gender discrimination it goes in for. In sum, the link is strong, and it means that if an industry is more down the monopoly end, women get treated even worse than usual.

As the paper reminds us (page 27),
Starting with [Nobel Prize winning economist Gary] Becker (1957), the argument has been made that taste discrimination [i.e. discrimination in the negative sense we use in everyday English] cannot persist in a perfectly competitive product market because firms that discriminate will lose money compared to those that do not and will be driven out of the market. This has led a number of papers to focus on the relationship between product market competition and discrimination.
The corollary to that however is that if markets aren't competitive, there aren't the same pressures on employers to make most efficient use of their staff, and can afford to pander to whatever prejudices they've got without taking much of a hit to the bottom line.

Does this happen in real life? When I was a financial journalist in Tokyo, one American banker told me that he had the pick of the Japanese labour market, because Japanese banks strongly preferred to hire men for the important jobs, leaving him a clear run at the best women graduates. Conversely I remember a Japanese banker proudly showing off his state of the art foreign exchange dealing room, and telling me that "Yes, we've got 23 people here - 17 dealers, and six women".

In New Zealand, Motu devised a measure of how competitive each industry is (if you're of the wonkish tendency, I'm about to add a technical footnote - here it is * - and the rest of us can now carry on). While they were at it, they also devised measures of how much skilled labour each industry uses, and how tight the labour market was for each industry at any point in time, which they needed to try to sort out different explanations for the gender wage gaps.

And with that out of the way, here's what they found (page 31):
There are a number of key findings. First, industry-years with a one standard deviation more skilled workforce have a gender wage-productivity gap that is 19.2 percentage points higher if they have the mean level of product market competition and difficulty hiring. Second, this gap is doubled if the industry-year is one standard deviation less competitive, or is eliminated if the industry-year is one standard deviation more competitive than average. Third, this additional effect of lower levels of competition is eliminated if the industry-year has a one standard deviation higher difficulty in hiring. Overall, we find that the gender wage-productivity gap is larger in industry-years with higher skilled workers, lower levels of product market competition, and more competitive hiring markets ['competitive' in this sentence means lots of people looking for jobs].
Let's unpack this a bit. Firms with an unusually high level of skilled workforce pay men a stonking 19.2% more than women for the same productivity contribution to the business. That's on the basis that the firm is in an industry that is about average for the level of competition going on in the sector, and also when the labour market in that sector at the time is nothing unusual. That's a whole story in itself.

But look again at that second finding. That already large pay difference is doubled - doubled! - if there's lots less competition among businesses in the sector. However the large difference goes away completely - to be consistent, completely! - if there's lots more business competition. It also goes away completely if a tight labour market is holding employers' feet to the fire and forcing them to make gender-blind hiring decisions, which is what you'd expect. We routinely see employers, for example, hiring more people from minority groups when there's been a sustained business cycle and hirers can no longer pick and choose the way they might have done.

There are people who don't like competition - the hand-wringing types who don't like the Schumpeterian real world and who'd prefer collaboration or cooperation. Get real, folks: if women want fairer pay, one highly effective approach would be to use markets to work for them. Insist on gales of competition in every industry (and, incidentally, support initiatives like the Commerce Commission being allowed to look at the competitive state of play). That way, there'll be fewer guys with cozy jobs in dozy industries ripping you off - because you'll have the real choice of going to his competitor and getting what you're worth.

* The measure of competition comes from a principal components analysis (love it as a technique) run over four measures of competition from the Business Operations Survey (eg firms reporting no competition, or only one or two competitors), plus a capital/labour ratio. Personally I can't see the relevance of the capital/labour ratio to competition or (excess) profitability - airlines for example might well have a high capital/labour ratio because of the planes but I'm not sure that tells me a lot about whether the airline game is competitive or hyperprofitable - but in any event their measure of competition (the first component) has stronger links with the competition measures than with the capital/labour ratio, so that's all right.