Stagnation?

I've been reading Linda Yueh's The Great Economists: How Their Ideas Can Help Us Today.  It's a clever way of teaching the history of economic thought by imagining how the big names would have dealt with current issues. We get, for example, Ricardo looking at Trump's trade wars, and Keynes looking at post-GFC 'austerity'.

In the chapter on Schumpeter ("What would Joseph Schumpeter think about how contemporary companies and countries should innovate?"), I came across a remarkable quotation which bears on another of today's supposed problems, 'secular stagnation'.

This is popularly taken to mean, as its Wikipedia entry says, ""a condition of negligible or no economic growth in a market-based economy". Lawrence Summers, the former US Treasury Secretary, who is often credited with giving the idea its modern boost, says the Wikipedia version is "fatalistic" and not what he meant. He says he meant a more Keynesian notion: "the idea of secular stagnation is that the private economy — unless stimulated by extraordinary public actions especially monetary and fiscal policies and, or, unsustainable private sector borrowing — will be prone to sluggish growth caused by insufficient demand". But the downbeat version has taken root.

The idea in its fatalistic format, that we are moving into an extended period of slower growth or no growth, has always seemed to me to be completely off the wall. I don't believe that we are in some kind of diminishing-return world where the payoff from the next innovation is generally less than the payoff from the previous one. I don't believe that the latest rounds of invention - such the internet and the digital revolution more generally - are in any way less momentous than their industrial and chemical and electrical predecessors. And I strongly suspect that GDP as currently measured, despite statisticians' best efforts to capture changes in its quality, is hugely underestimated. We're producing far more, properly accounted for, than the doomsayers think.

I think it's far more likely that we in the earliest stages of a huge transformation of modern economies and societies where we are only beginning to see the impact of new innovations, let alone the further payoffs that will come from the interplay and recombination of our new technologies. "Ideas having sex", as Matt Ridley put it in his excellent book, The Rational Optimist.

The stagnation believers are, in my view, akin to someone thinking that the factory system had done its dash by 1800, or that modern business methods had peaked with Ford in the 1920s. In the middle of one of the most vibrantly inventive periods of all time, we are supposed to believe that growth is running into the sands?

It's extremely implausible. It's also at odds with some of the other doomsdays the pessimists worry about. You can't believe that the robots are going to take all our jobs and think that technological change has stopped having a big impact. And It's also an enormously bad guide to policy, if it takes you down the road of thinking that the big issue is fighting over a fixed pie, rather than growing the pie.

In any event, the quotation in The Great Economists that caught my eye was this. Schumpeter felt that the Classical economists - Smith, Ricardo, Mill - had missed what was going on round them. In his History of Economic Analysis he said:

Those writers lived at the threshold of the most spectacular economic developments ever witnessed. Vast possibilities matured into realities under their very eyes. Nevertheless, they saw nothing but cramped economies, struggling with ever-decreasing success for their daily bread.

The Classical economists were wrong then. The latest crop of stagnationists are wrong now.

My tuppenceworth

Today I fronted up to the Transport and Infrastructure Select Committee to speak to my submission on the proposed new 'market studies' powers. The Commerce Commission by the way was two slots ahead of me in the queue: you can read its submission here.

Quick gist: I'm all for market studies, and have been for ages as regular readers (both of you) will know. We're the outlier these days in not allowing our competition authority to have a proactive look at potential competition problems, and we should join the international best practice pack. I'm in favour of the Commerce Commission having the power to initiate them off its own bat, as well as Ministers asking the Commission to do them. So I'm on board with the broad provisions of the Commerce Amendment Bill.

I have suggested three small improvements, though. As I posted about Tuesday's LEANZ panel on market studies, I think there's a consensus that the threshold for firing the starting gun on a market study is too low. At a minimum the Minister or the Commission should be required to tell us in more detail why they're bothering. You could add a formal requirement to consult on the terms of reference (though I'm pretty sure the Commission would take at least informal soundings before going live). One MP asked me if the requirement to consult on the terms of reference mightn't tie up the whole process in judicial review till kingdom come, and maybe that's right, but it has to be possible to design something cheap and cheerful and appeal-proof that would kick the tyres properly before going live.

The second improvement was providing for the possibility of a conference on a draft market study. I'm a big fan of the conference process: properly managed it can lead to useful debate and enlightenment. At the moment the Bill provides for submissions on a draft study: maybe implicitly (it's been suggested to me) it already allows for a conference. But in any event I've suggested making it clear.

And the final improvement is that Ministers would be required to respond yay or nay to Commission recommendations in a market study, within a tightish timeframe: I've suggested 60 working days. I don't see the point of spending perhaps $1.5 million a pop on these things only for the study to moulder in a Ministerial cupboard.

I got some questions. One was related to the Commissioners being both decision-makers and the board of directors: the logic was that there aren't many checks and balances on what they can get up to, and maybe it might be better to leave the instigating power with Ministers, who might face greater accountability constraints. I didn't see that as much of a risk. The Commission's governance arrangements are a bog standard way of running competition authorities, and if you look across the ditch at the ACCC, which has the same set-up, you don't see any difference between the kinds of studies the ACCC starts rolling and those that Ministers do.

I got an interesting question about whether the Aussie market studies had made any difference at the end of the day. Mostly yes, was my answer, for example in improving the bargaining position of small suppliers dealing with the market power of big buyers (eg dairy farmers at the bottom of a supply chain totem pole with the supermarket duopoly at the top and the reasonably concentrated dairy processing factories in the middle). But not always: the ACCC, for example, hasn't been happy that its ideas for getting beef farmers a better deal at the stockyard sales haven't got much traction. And in some areas (eg the ACCC's ideas on buyers of new cars getting more choice of repairers) it's too early to tell.

Bottom line, a scheme exactly like that proposed in the Bill has been running with no problems and some achievements across the ditch, and it's time we did the same. End of.

How will market studies work?

Last night we had the latest LEANZ event in Auckland - a panel discussion on the 'Commerce Commission's new market studies power: how should it (not) be used?'.

The panel was chaired by our genial host for the evening, Andy Glenie of Andrew Creagh Lai, and comprised Peter Wilson, principal economist for the NZIER and one of the authors of MBIE's 2017 petrol pricing study; Glenn Shewan, special counsel and a specialist in competition and regulation at Bell Gully; Chris Bowden, senior legal counsel at Air New Zealand and who advises primarily on competition and regulatory matters; and yours truly. The event was organised by AUT's Richard Meade, who had also been an author of the MBIE petrol report. It followed an earlier Wellington session on the same topic.

There was quite a meeting of minds on some of the issues. Without putting words into people's mouths, I'd say that we were relaxed about the proposal to let the Commerce Commission do market studies on its own initiative rather than only at a Minister's direction. For one thing, it is more likely to be a measured response to potential competition issues rather than a politician's scratch at an electorally handy scab. For another, as one audience member suggested, an independent Commission might be more ready to take on politically well-connected industries. Only afterwards (as you do) did I think of the ACCC's 2017 inquiry into new car retailing: the Aussie pols continue to protect the new car dealers, but the ACCC found dubious anti-consumer arrangements, especially around repairs.

We also all felt the kick-off needs more refereeing. Whoever starts a study - the Minister or the Commission - ought to be required to say, in some detail, what they think the problem is that is worth expending the taxpayers' resources on. At the moment there's only an "in the public interest" test, which one panellist correctly called "vacuous". I especially liked the idea put up by a couple of my panel colleagues that there should be public consultation on the terms of reference, which, as well as being a democratic way of going about things, would help to identify exactly what the issues might be and help prevent scope creep.

It also became clear that there might need to be some further thinking done about the uses of market data gathered for a market study. From the audience, for example, John Land asked whether the data would be available for, say, later s27 or s36 cases, or for later mergers in the market studied? I'm generally of the view that, except in rare cases, data gathered for one purpose shouldn't be used willy-nilly for another, but even if you stuck to that "Chinese walls" approach, it's still hard for Commissioners or staff to "unknow" what they know.

Tomorrow I'm off to the Transport and Infrastructure Select Committee to talk to my submission on the Commerce Amendment Bill, which among other things provides for the new market studies power. If you're wondering (as I was) why Transport and Infrastructure has ended up as the venue, rather than Economic Development, Science and Innovation (which normally handles competition issues and is, for example, the Select Committee looking at cartel criminalisation), the answer seems to be that the Bill also provides for potential changes in how airports might be regulated, which puts it more within Transport and Infrastructure's purview.

I'll put up my own submission after I've talked to the Committee: the process seems to be that submissions are being published after submitters have fronted up. So far there aren't many on the Select Committee website from the usual competition suspects: the only one thus far is Russell McVeagh's. I don't agree with their proposal to limit initiation only to the Minister, but I certainly found myself in agreement with their ideas - along the panel's lines - for a tighter process around the initiation of a study and around its terms of reference.

Well done to the organisers and especially to the hosts, Andrew Creagh Lai: without business support LEANZ seminars won't happen, so thanks again. Though members' subs help too: head here.