Thursday, 17 October 2019

Gone

I've just finished John Gibney's A Short History of Ireland, 1500-2000 (Yale University Press, 2017). Near the end (pp236-7) he recounts how
The Republic of Ireland in the 1980s was a state gripped by a recession, burdened by a huge national debt, and ravaged yet again by emigration on a huge scale: more than sixty-one thousand people left Ireland in 1988 alone, with two-thirds of them departing for the United Kingdom ... The spectacular economic growth of the 1990s saw emigration, a traditional litmus test of Irish economic performance, reverse; Ireland instead began to receive immigrants ... The upsurge in the southern economy had an impact on the emigrant flow: young Irish people were staying at home during the boom, as there were now jobs to be had
So, how do we fare on that "traditional litmus test"? Here's the annual net flow of New Zealand citizens over the past 40 years or so. Over the period we lost very nearly 800,000 people, nearly all to Australia.


New Zealand's a great place from many perspectives, but let's not kid ourselves. We've been hopeless at closing the gap in the standard of living between here and Australia, which is the big driver behind that loss of 800,000 Kiwis. When it comes to the final verdict on our economic performance, people have voted with their feet. And how many people really believe that, under this government or its recent predecessors, there's been an urgency to turn it around?

Solutions in search of a problem?

Yesterday evening in Wellington the Law and Economics Association of New Zealand (LEANZ, here's its spiffy new website), put on its latest seminar, 'Regulating Big Tech: Key Findings from the ACCC’s Groundbreaking Digital Platforms Inquiry', presented by Morag Bond, Joint General Manager of the ACCC's Digital Platforms Branch. There'd been an earlier one in Auckland at lunchtime.

Morag (below) did a fine job, in front of a good crowd. That was partly down to the intrinsic appeal of the topic, and partly down to coordination between LEANZ, the New Zealand Association of Economists, and the Competition Law and Policy Institute of New Zealand, each of whom gave the heads up to their memberships. Nice one. And hat tip to Russell McVeagh Wellington, who generously hosted.


Morag's slides aren't up yet, so in the meantime, if you're not already familiar with it, here's the ACCC's page on the inquiry, which includes the press release, an executive summary, and the whole 619-page inquiry itself. If videos are your thing, here's the 37 minute press conference on publication day.

Overall, my feeling remains where it was when this territory was traversed at this year's ComCom conference: quite a lot of smoke, no clear fires. There are, to be sure, some issues that need investigation. One that should indeed bother merger regulators, for example, is the big incumbent platforms buying up fledgling businesses that might have morphed into credible competitors. It is of course (as Morag noted) open to an ACCC or ComCom to make that case now under our existing legislation, but the inquiry said it might help if the law was made more explicit. It recommended that
Section 50(3) of the Competition and Consumer Act 2010 (CCA) be amended to incorporate the following additional merger factors:
(j) the likelihood that the acquisition would result in the removal from the market of a potential competitor;
(k) the nature and significance of assets, including data and technology, being acquired directly or through the body corporate
Maybe that might help to stiffen the odd judge's spine, but the reality is that a rewording doesn't ease the underlying difficulty, which remains highly vulnerable to both Type 1 error (stopping the purchase of a non-challenger) and Type 2 (allowing the purchase of a real threat). You can see how Type 1 errors might happen when every venture capitalist behind a start-up is puffing to new investors that it is The Next Big Thing. And you might well threaten the pipeline of innovation if inventors of useful complementary technology are wrongly prevented from cashing out to the guys with the big chequebooks.

In dynamic industries, as a general principle it's probably best to do as little as needed. It's fine to ping clearly anti-competitive practices ("thou shalt have no browser but My browser") if you come across them, and Morag said the ACCC has five investigations underway. But beyond that, you are dealing with a high-speed industry with strong network effects, where bigness is almost inevitable and the most likely playbook is a Schumpeterian succession of temporarily highly-profitable near-monopolies. It's true, as Morag said, that Facebook is being somewhat disingenuous when it argues that someone might topple Facebook as readily as Facebook toppled MySpace, but that's the longer-term way to bet. If you're my age, you once wrote in WordStar and worked with data in Lotus 1-2-3: where are they now?

Sit back and let it evolve is likely to be a good default competition policy strategy from another perspective. If there are real issues, for example genuine consumer concerns over privacy or data sharing - and in my view it's not yet proven that enough consumers care about the current bargain they've struck -  I wouldn't underestimate the ability of markets to deal to them. Worried about the outfits tracking your every online move? Instal Ghostery: as I write it's telling me there are no trackers following the ACCC site, four tracking ComCom's, and 13 tracking mine. Hah! Worried about the trustworthiness of a site? Instal Web of Trust. And even the incumbents are beginning to realise that it's in their own longer-term interest not to push their luck: have a look, for example, at 'How to Set Your Google Data to Self-Destruct'.

The ACCC inquiry was required in its terms of reference to consider "the impact of platform service providers on the level of choice and quality of news and journalistic content to consumers", and the upshot was that the Australian public allegedly risks losing some worthwhile public interest coverage of (for example) local politics. This is because, as shown below in a chart from the Executive Summary,  online advertising has eaten the old media's classified advertising revenue, which means they can no longer afford proper "local beat" journalists and are forced to recycle cheaper celebrity gossip, clickbait, and grief porn (my words, not Morag's or the inquiry's).


But I wonder if citizen journalism and the rise of "digital natives" - media that have only ever existed online - are a better market-oriented answer than the taxpayer subsidies the ACCC recommended for coverage of local courts and local politics. As Morag mentioned, the barriers to entry for new media have dropped enormously, enabling that "long tail" of small pockets of interest to be accommodated. Even in relatively niche areas, all of us now read expert, informed, committed media, from all ends of the spectra of opinion, that didn't exist a few years back. If local politics matters to people, and it does to some, it's highly likely someone will rise to the challenge unprompted.

Maybe I'm wrong, the North Shore Times will fall over, and the deliberations of the Hibiscus and Bays Local Board will be lost to posterity. I doubt it, but yet again, the better course is to see how it plays out before jumping to 'solutions'.

Friday, 11 October 2019

In the eye of the beholder

There's been a lot of focus on what looks like a large $7.5 billion fiscal surplus in the fiscal year just ended. Part of it, as Treasury explained in the financial statements for the year, is due to various one-offs, which in a nerdy fiscal policy wonk sort of way, I'd thought I'd have a look at.

I didn't come across anything earth-shattering, although personally - and this'll show why accountancy is not my forte - I wouldn't have put any of the revaluation gains arising from a change in how the rail network is valued into the surplus, which is, after all, the "operating balance excluding gains and losses". But as explained on p15, the surplus includes $2.6 billion of "Reversal of prior year impairments that impacts OBEGAL". Never mind.

Along the way I came across something interesting, and it's this. Down the back of the statements you can see the value placed on the government's ownership interest in three electricity generators, Genesis, Mercury and Meridian. The Auditor-General's audit report says (p35) that "As outlined in Note 16, the electricity generation assets, which are at least 51% owned by the Government, are valued at $17.2 billion at 30 June 2019. The valuation of these assets is carried out by specialist valuers because of the complexity and significance of the assumptions about the future prices of electricity, the generation costs, and the generation volumes that these assets will create".

Note 16 shows that the specialists' valuations are based on the net present value of future earnings (give or take), and that's fine. But then I wondered, why don't the accounts just use the market price? Maybe modern accounting policy doesn't support the approach, though I seem to remember that post the GFC, there was a move to have more investments and liabilities "marked to market", i.e. valued at what they'd actually fetch rather than on some notional basis that might flatter the real-life value of investments or minimise the real-world cost of liabilities.

So here are the valuations at market price as well as the valuations on the government's books.


The valuations on the fiscal books are (unless I've got my calculations wrong) uniformly higher than what the financial markets say. There's nothing sinister about that: I'd guess the financial accounts are required by the accounting standards framework to follow some acceptable valuation methodology, and this is how the cards have fallen.

But it's an interesting outcome. It's intriguing that the markets don't think the generators are worth what the valuers' approach shows. Now, it may be that the answer to any valuation question depends on the context of the question: a valuation to establish a regulatory asset base, for example, may have its own imperatives. But even so, you look at the two sets of numbers, and you're tempted to ask, who's right? What does one approach know that the other doesn't?.

Friday, 4 October 2019

Good stuff

Little did I know, when I got antsy the other day about where the electricity price review had got to, that Dr Megan Woods, the Minister of Energy and Resources, was only days away from publishing the review's final report and responding to it (all the relevant documents - government decision, Cabinet minute, final review report, and the earlier options paper - are here).

The review's got extensive media coverage so no need to reinvent the wheel here - in particular there's an excellent piece by Stuff's Tom Pullar-Strecker, 'A run down on the Government power plan', that ticks all the what-you-need-to-know boxes.

Overall the review team and the government have done a fine job. I don't find myself quibbling with much, even though some of the recommendations looked a bit counterintuitive at first. Banning "win back" counter-offers from incumbents - preventing them competing back, as it were - at first blush doesn't look supportive of the competitive process, but when you think about it a bit more it is necessary for competition to work at all in this area (the thought had crossed our minds when we made our switch). Similarly the ban on prompt payment discounts, which aren't the reward to consumers they appear but effectively act as regressive late payment charges on financially stressed households. The abolition of low fixed charge plans is in the same bucket: sounded like a good pro-consumer idea, turned out (among other things) to "unintentionally shift costs to households with low incomes and high electricity consumption" (final report, p62).

Increasing the ability of electricity retailers to hedge against price volatility is an especially useful idea. Normally both buyers and sellers of commodities like energy have a joint interest in a functional futures market ( a 'contract market' in the sector terminology): they both see value in price predictability. Less so in our energy sector, when the availability of price insurance helps challenger retailers compete more effectively with the gentailers' own retail arms. Effective retail competition needs an effective hedging mechanism, and if market-making in a contract market needs to be imposed on generators, so be it.

Both regulators in this area - the Electricity Authority and the Commerce Commission - get some raps on the knuckles, particularly for lack of consumer engagement. The final report said (p12)
A frequent complaint we heard from consumers was that neither the Commerce Commission nor the Electricity Authority – but particularly the latter – listened to, or took account of, their views. Consumers need to see regulators making a concerted effort to understand their points of view. Nothing beats meeting people in person. It was disappointing, therefore, that neither regulator attended the stakeholder meeting in Te Kuiti convened by The Lines Company at our request. Both would have benefited from hearing residents’ stories, as well as understanding their expectations of regulators – the chief of which is that they focus on consumers’ long-term interests.
Oops. It hasn't helped that on several other fronts progress has been too slow. It's understandable that the Minister is now getting impatient. On the contract market, for example she said that "I want to be assured the fragility previously observed in the wholesale market at times of stress is not repeated in future, and I will make it clear I do not want to wait for a “better solution” that might never be found" (decision paper, para 96). She noted that "The Electricity Authority has been reviewing transmission pricing for more than ten years" (para 102). And she's prepared to bypass the Authority if it doesn't get on with the review recommendations (see paras 34-5).

The Authority, and the Commission, are independent agencies as the Cabinet decision recognises, and can't be told to jump to ministerial whim, and in general I'm no fan of expanding ministerial discretion in an already micromanaged and over-politicised economy. But our policymaking and regulatory processes are too slow, and on this occasion a bit of holding feet to the fire doesn't seem amiss.

Two final points. The proposed new Consumer Advocacy Council for the electricity sector could, as the decision says (para 40) "potentially be extended to cover gas, telecommunications and other utility services ... This is because consumers of those services, which are increasingly bundled with electricity, are also likely to lack an effective voice". It's not just the consumer voice issue: it's the sit there and be ripped off consumer inertia issue, too, which is liable to be just as prevalent in those sectors and which, to be honest, no country has really got its head around. The Brits and the Aussies have been equally befuddled ('Have we got the same problems?'). An early task for the Council should be to reach for some industrial strength behavioural economics research.

And finally, as both the review and the government's response acknowledge, the energy hardship some households are experiencing isn't so much down to locally high electricity prices - the review said (p1) that "residential prices on average ranked 10th lowest among 35 OECD countries in 2017" - as locally inadequate incomes to pay them. It would be nice if this, and successor, governments showed the same urgency to get on with raising living standards as they have in reforming the electricity business ('Are we serious?').

Tuesday, 1 October 2019

Are we serious?

Every couple of years the OECD updates its Going For Growth reports, which are meant to be its best policy advice to governments on how to raise living standards. Or at least that's how it used to be: the focus up to 2017 was exclusively on productivity and incomes, but in 2017 it widened to include social inclusiveness and, in this latest iteration, brought in environmental sustainability as well. Worthy causes, to be sure, and there are of course interlinkages with productivity and incomes, but I'd have preferred if they'd kept Going For Growth as a productivity instruction manual. Especially for its New Zealand readership, given that our low productivity performance is something we self-evidently could use a bit of focused help with.

Not, I suspect, that Going For Growth has much of a New Zealand readership. Neither the 2017 version ('Take advice? Moi?') nor this latest one appears to have got much mainstream or social media attention. So if you're not one of the select policy tragics who've had a look, here are the OECD's five priorities for New Zealand (if this whets your appetite here's the full country report):
  1. Reduce barriers to FDI [foreign direct investment] and trade and to competition in network sectors. Non-transparent screening, barriers to trade facilitation and competition in network sectors deter investment and hinder the competitiveness of downstream firms [in this bit they mean the 'barriers' to extend to 'barriers to competition']
  2. Improve housing policies. Restrictive land-use policies reduce housing supply responsiveness to demand, accentuating price increases when demand rises
  3. Reduce child poverty. Child poverty is higher than in the top performing countries. It has adverse effects on children’s health and development.
  4. Reduce educational underachievement among specific groups. Students from Māori, Pasifika and vulnerable socio-economic backgrounds have much poorer education outcomes than others
  5. Raise effectiveness of R&D support. Relatively low public funding of business R&D contributes to below average R&D intensity
Four of these were on the 2017 priority list, too (number 3 is a new one reflecting the new focus on social inclusiveness), and the implementation record since 2017 has been distinctly patchy. There was no action taken at all on number 1, for example. Number 2 continues to be a national scandal, and I see in today's DomPost that it's not just Auckland, either: "Wellington City has consented fewer buildings this year, its waiting list for social housing has spiked sharply, and its rental crisis is on par with Auckland's". The only achievement the OECD records on number 4 is the Sir Humphrey Appleby "appointment of a taskforce". Number 5 is the one recommendation where there has been anything like a respectable response: the current government has, for example, run with the recommendation to "make the tax credit refundable so that firms that are not yet profitable can benefit".

It's hard to see why we haven't followed up what looks like a reasonably uncontroversial list of targets and tactics (although the anti-trade nutters may jib at #1). They're almost certainly not enough to make huge inroads into our productivity problems, but they'd be a good start, and a couple of them (#3 and #4 in particular) would be worth doing in their own right, even if they didn't have spillover productivity effects on the talents of our workforce.

There is one possible explanation, albeit a depressing one. In the economics trade we call it "revealed preference": you can figure out what people value from what they actually do.  It could well be that successive central and local governments haven't put the priority they claimed on higher living standards. When it's come to having the national incomes to pay for modern healthcare, or rationing the expensive drugs, they've preferred rationing. When it's come to a choice between wealthy homeowners having an unobstructed view of a volcano, and poor families with young children sleeping in cars, they've been with the homeowners.

It would be nice of the OECD's 2021 scorecard showed a better rise to our livings standards challenge. But I won't be holding my breath.

Monday, 30 September 2019

Did it work?

A year ago, in the interest of making competition work, we switched our electricity supplier ('We take the plunge'). And now that we've got a year of bills from our NewCo, we can compare them with what our OldCo used to charge. Here's how it worked out.


Pretty good, eh? So there's not a lot of reason for you to be one of the 400,000 to 750,000 people who've never switched, is there? Off you go to Consumer New Zealand's Powerswitch or the Electricity Authority's What's My Number. Make the competitive process work for you.

Incidentally, that estimate of the very large number of people who've never switched came from the Electricity Price Review. As its website says, "Please note: the review delivered its final report to the Minister of Energy and Resources on 29 May 2019. The timing of its public release has yet to be determined".

Good policy development shouldn't be precipitate, but I'm leaning towards the view that four months is enough thinking time given that a range of options were canvassed and consulted on during the review process (if you've forgotten them, head to 'At A Glance', which is p3 here). It's getting time to see the report and the government's response.

Tuesday, 24 September 2019

CLPINZ 2019

Last weekend we had the 30th annual workshop of the Competition Law and Policy Institute of New Zealand, and to mark the CLPINZ anniversary we went back to Christchurch where it had all started (on August 11-12, 1990). We even had two of the original attendees (John Land and Alan Lear). Back then the inaugural workshop had spent a fair deal of its time on s36, abuse of market power - plus ça change, eh? Thirty years on we're almost on the cusp of junking our ineffective s36 and going the Aussie route, but we're not quite there yet.

The keynote speaker via video link was David Evans, chairman of Global Economics Group and co-author (with Richard Schmalensee) of the excellent Matchmakers: the New Economics of Multisided Platforms, which is a very good guide to two (or more) sided platforms. His topic was "The role of market definition in assessing anti-competitive harm in Ohio v. American Express", and his conclusion was that the US Supreme Court got it right in finding for Amex.

It was a top-notch presentation, but not everyone was convinced by the conclusion. I hadn't been, either, when I first encountered the Amex case. Amex was trying to defend the practice of "anti steering": shops who accepted Amex cards were contractually prevented from suggesting that customers taking out their Amex cards should or could use competitor cards like Mastercard and Visa (which were cheaper for the shop to accept). As blatant an anti-competitive contractual provision as you could find, you might think, and initially I thought so, too. But I changed my mind ('Two sides to the story') and I'm now with Evans.

From discussions at the workshop, however, some of my colleagues think it's a mistaken ruling, and let's not forget the court itself had split 5 - 4. One attendee sent me 'Why credit-card rules are anticompetitive', and you can find the formal economics here. And there are others who think that between Amex and the AT&T / Time Warner merger, the US Supreme Court has lost the pro-competitive plot: see for example 'Policy Failure: The Role of "Economics" in AT&T - Time Warner and American Express'.

I won't reprise the whole workshop: copies of the presentations will be going up on the website for members (you are a member, aren't you). I'd particularly recommend Professor Martin Richardson's paper on 'The role of lay members in court', which has a lot of useful stuff on what makes for a good expert economist witness. In the interim, if you're desperate for Evans' paper, you can find a version here.

Assorted takeaway thoughts:

- Chris Whelan from RBB Economics presented on 'Cutting edge tools in economics' and mentioned the upward pricing pressure arithmetic of vertical mergers, bargaining theory, machine learning, and an application of regression to separating "buy" trades from "sell" trades in financial markets (an issue that arose in an Aussie case alleging manipulation of short-term interest rates). On that occasion the regression approach was misapplied and fell over, and that's fair enough, but in my discussant paper I argued that regression is still the go-to workhorse tool for a great deal of empirical work outside competition cases, and there's a lot of scope to use it more than it has been (I was pleased to see interesting regressions pop up in the Commerce Commission's petrol market study)

- from the Fair Trading Act session on making unsubstantiated representations, I have to confess I didn't know that you had to be able to justify any advertising claims you make at the time you make them. Even if they're subsequently challenged and found to be true, you're at risk. I noticed that all the early prosecutions were about manufacturing (heat pumps, steel mesh, water filters): happenstance maybe, but it left me wondering about enforcement in the 70% of the economy that's made up of services

- cartel criminalisation goes live in New Zealand in 2021. The Commerce (Criminalisation of Cartels) Amendment Act 2019 does not distinguish between 'hard core' and other cartels, though a lot of us would hope that criminal sanctions would only apply to the more egregious ones. I learned from the presentation by Gilbert & Tobin's Elizabeth Avery that in Australia there's a mechanism (an understanding between the ACCC and the Commonwealth Director for Public Prosecutions) for sorting the worst from the less bad. I presume - hope? - that we'll do something similar

- in the electricity sector, there's a plausible scenario that we're going to need a big expansion of generation capacity to cope with the likes of cars moving from petrol to electric power. But I'm left wondering whether we can get our infrastructural and regulatory acts together to enable it to happen. And while we're on electricity, what's happened to the retail electricity pricing review?

- I'm now persuaded (rather belatedly) that prohibiting the Commerce Commission from accepting behavioural undertakings in the context of a merger makes little or no sense. Sarah Keene at Russell McVeagh has been arguing this for yonks, and did again at the workshop, and no doubt others have been pushing the barrow too, and I think it's correct. The Commission might well end up using the power sparingly, but it's better than not having the option at all

Christchurch itself was an eye-opener: there are more swathes of the CBD than I'd expected that are still vacant lots. A lot of reconstruction has already been done, and a good deal more work is underway, but there's still an awful lot left, as the cathedral in particular reminds us.


Friday, 20 September 2019

Let's get more active

By far the best single way to get unemployment down is to keep up a good run of economic growth at a robust pace. Not only does the unemployment rate go down, but the longer and stronger the expansion, the more it succeeds in bringing more marginalised groups into employment.

I've shown previous versions of the graph below: here's the up to date version, which shows (yet again) that less favoured groups suffer distressingly high rises in unemployment when the business cycle goes pear-shaped, but conversely a long expansion works its magic on everyone, even on those who tend to be on the outer. It's not perfect - rates of unemployment for some groups, notably Maori and Pasifika, are still too high - but the long post-GFC expansion has seen big falls in the unemployment rate across all groups..


Because growth alone will not deal to everything there's always a role for 'active' labour market policies that try to make the labour market work better. Residual unemployment for example could be down to things like skills mismatches: employers are looking for people with skills they don't have. Or it could be down to regional immobility: who's going to move from Northland to a job vacancy in Auckland given the cost of putting a roof over your head in Auckland? And there can be other mismatches preventing people willing to hire from signing the deal with people wanting to work.

There's a brilliant new bit of research out looking at active labour market policies, and which ones work. They're not just any old active policies: they're ones where there was a control group experiment, where you can see how those who went through the programme fared compared to those who didn't, which is how the researchers can tell if it made any difference. Here's the more readable version for the intelligent public - 'Understanding what works for active labour market policies', on the excellent Vox site - and full-blown policy tragics can get the more academic version here.

Here's the key result in terms of the impacts on earnings and employment:
If we focus on the median impact on earnings, wage subsidies and independent worker assistance ['Support to micro-entrepreneurs and independent workers'] show the greatest impact relative to the control group, with improvements of 16.7% and 16.5%, respectively. Vocational training programs have a median impact of 7.7%, while employment services show an almost negligible impact. The median impact on employment outcomes exhibits a similar pattern
Here's the graph they drew to show the results, though to be honest it's hard to see the scale of the impact with the vertical scale they've chosen to use.


They also discovered a variety of other things that make complete sense: "Individualised coaching or follow-up of the participants, training exclusively focused on a specific industry, and the provision of monetary incentives to trainees all correlate with better outcomes in vocational training programmes (the most frequent ALMPs in our dataset)", and, unsurprisingly, they also found that you get better outcomes when you run these programmes in good times rather than in the pits of a recession.

They also found (noting that cost data isn't uniformly available) that you get what you pay for. As the graph below shows, employment services programmes are cheap, but useless, while the most effective option, helping people to do their own thing, costs the most.


There's a lot we could learn from this. Currently we're down the wrong end of the OECD league ladder when it comes to what we spend on active labour market policies (as I discussed here). This research gives us a pretty clear steer on what we should do to up our game.

It's also left me wondering about our policy institutions. This research works because all over the world people have invested in randomised control trials - experiments where you try something out and compare it with what happens where it wasn't rolled out. But I can't think of many home-grown examples where we've had a go at economic policy field experiments: charter schools, maybe, but they got sat on.

My feeling is that we're too fond of the over-dirigiste 'one size fits all' approach. And our chronic political oppositionism makes both the public service and the decision-making politicians far too wary of experiments that might go wrong - even when they might hold valuable information about what works and what doesn't. There's too high a political price to pay for what will be pilloried as 'failure', and it's hindering finding out what might or might not make a real difference to those hardest to get into work. We should move on: it's time to join the adult policy world.

Friday, 6 September 2019

Those high petrol prices - another view

There's a graph, Figure 3.8 on page 82, in the Commerce Commission's petrol market study that's puzzled me. And not for the first time: it also puzzled me when I first saw an earlier version of it, in MBIE's 2017 go at an inquiry into the petrol industry (where it was Figure 4 on p3). Here is ComCom's one.


It shows the price at the pump of a litre of premium petrol in a wide range of higher income countries, standardised by being converted into US dollars. Eyeballing the graph, you see New Zealand is there at roughly US$1.47. At the exchange rate of the time (March quarter '19) of 68 US cents, the price converts into NZ$2.16, which looks right. All good.

Because the price at the pump is heavily affected by local taxes, for competition policy purposes you need to focus on the price ex taxes, which is shown in blue in the graph. New Zealand does not show to advantage, with the third highest petrol price. Cue song and dance about how bad we are.

But what's been puzzling me is the weirdness of the country rankings. Your first inclination is to go looking for some underlying explanatory patterns - transport costs from major oil fields or refineries? - but it's hard to spot any. The three countries at the top - Mexico, Korea, us - are as odd an assortment as you'll ever see. The three at the bottom - Slovenia, Chile, Finland - don't obviously have much in common, either.

The ordering could of course reflect differences in local competitive intensity. You look at Mexico's top billing, for example, and you wonder about Pemex, a state owned monopoly up to 2013 which still has nearly three quarters of the petrol stations. You wouldn't know about the rest of them without some intensive investigation along our own Commerce Commission's lines.

But I'm also wondering whether the somewhat jumbled pattern mightn't partly reflect the fact that the petrol prices have been converted into US dollars at market exchange rates, rather than at purchasing power parity (PPP) exchange rates.

If this whole 'which exchange rate to use' thing isn't your bag, let's backtrack for a moment. If you're comparing, say, the price of an Apple i-Pad Pro 11" Wi-Fi 256GB, you'll find it's on Amazon at US$799.99 and you'll find it's NZ$1648 at JB Hi-Fi. At today's exchange rate (63.7 cents) the Amazon one costs NZ$1256. Good deal cheaper in the US.

But market exchange rates are fickle beasts and move around a lot. Because an iPad is expensive locally today doesn't mean it mightn't be locally cheap next Tuesday if the Kiwi dollar were to fall sharply against the US dollar over the weekend. You shouldn't be drawing any long-term policy conclusions about iPads - or petrol - on the basis of an exchange rate that might make a fool of you in no time.

Which is why these international comparisons are more normally done on a different basis. Supposing you went out and bought a wide bundle of stuff in the States, and it cost you US$100,000. You do the same in New Zealand, and it costs you NZ$150,000. It would then be fair to say that US$1.00 has the same buying power as NZ$1.50. In that case you wouldn't be in the least bit surprised if a litre of petrol cost US$1 in the States and NZ$1.50 here: that's just what you'd expect, because anything that costs a US dollar in the States is on average likely to cost NZ$1.50 here, as we discovered on our shopping expedition.

Long story short, people making international comparisons tend to use that US$1-equals-NZ$1.50 exchange rate, called the purchasing power parity rate (obvs). And here's what happens when you do that same chart of ex tax prices in blue above, but at that PPP rate instead. I've used the latest (2018) PPP rates as calculated by the OECD (you can find them if you fossick here).


In New Zealand's case, the pre-tax petrol price doesn't change much. It was around 77.5 US cents before (again eyeballing the number from the ComCom graph, as I'm not going to pay the €900 the International Energy Agency wants for the exact data). At the March quarter market exchange rate of the time, 68 cents, that was NZ$1.14. The PPP exchange rate wasn't very different: it was 67.6 cents. So our local price translated into US$ at PPP was 77.1 US cents, rather than the 77.5 US cents price you get at market exchange rates. Same diff.

But other countries' prices move around quite a lot when their PPP rates are used instead of their market exchange rates. And the end result is that our relative position drops quite a bit. We were third highest out of 33 on a market rate basis: on a PPP basis we're 14th out of 33. There's a bit of imprecision here, as I've used eyeball data rather than precise ones, so I wouldn't obsess over whether it's 14th or 13th or 15th*. This PPP ordering also makes a bit more intuitive sense than the market rate one: the bottom three, for example (now Norway, Finland, Iceland) look like a more coherent bunch.

There are still good reasons for having a market study look at the petrol market: those rates of profitability that ComCom found, in particular, need some explaining.  But one conclusion from this exercise is that I wouldn't get carried away by the "we're one of the dearest in the OECD" line of argument.On this, entirely conventional, alternative way of making the comparison, we're a little bit on the expensive side of middle of the pack.

*If you want to see the data I've used, and maybe check I haven't got the wrong end of any sticks, it's here (assuming I've got Dropbox working right).

Monday, 26 August 2019

By the numbers

There's a really neat bit of dataviz gone up on the Productivity Commission website, which has a go at showing different measures of the intensity of competition in the various sectors of the New Zealand economy. The Commission has had an interest in competition as it surmises - I'd say correctly - that the intensity of competition (or lack of it) may have something to do with our national productivity (or lack of it).

The story starts with the Commission getting Motu's Dave Maré and independent researcher Richard Fabling to look at the links between the intensity of competition and productivity outcomes, an exercise they published as 'Competition and productivity: do commonly used metrics suggest a relationship?'. As part of that exercise they first had to get the underlying dataset scrubbed up, an exercise they describe in brief here; their full paper is here.

The competition and productivity data that Maré and Fabling collated form the basis of the dataviz. It's the work of data wizzes Aaron Schiff and Harkanwal Singh, who have taken the data on competition and created the Competition Explorer.  There's an accompanying paper, 'Competition in New Zealand: highlights from the latest data', which you'll be relieved to hear "is aimed at non-specialist (and non-economist) readers", and which explains that it "provides a consistent set of competition measures for 39 industries for each year between 2001 and 2016".

Have a play with the Explorer. By default you start at the 'About' tab, which shows you the measures: yer standard Hirschman Herfindahl Index of concentration; price to cost margins (in two flavours, broadly similar); profit elasticity, which measures the responsiveness of profits to changes in variable costs and which should be higher in more competitive industries (again in two flavours, but the 'fixed effects' version is the one with legs); and subjective measures of self-reported levels of competition in their neck of the woods as told by businesses to Stats' Business Operations survey. Once you've got your head around the measures head for either 'Home' or 'Measures' and you're underway.

In principle this measurement of the strength of competition is a good idea. I liked it before, when the Productivity Commission was doing its services inquiry ('Yes, you can measure competition'), and again when the Electricity Commission had a go at trying to figure out whether electricity retailing was more or less competitive than other parts of the retail sector ('Measuring the degree of competition'). We all need to know whether markets are workably competitive, and I'm a big believer in using data imaginatively wherever possible.

But there's no getting away from the conundrum that it's hard to do. Maré and Fabling did the sensible thing: when you have a whole bunch of indicators, each of which is likely related in some way to the intensity of competition, you can feed the lot of them into the principal components sausage machine and see if the various data series reflect some underlying common driver. As it happens, the exercise turned up two* common underlying threads, one linked to market structure and one linked to profitability, which was promising.

But subsequent attempts to see how these competition indices affected productivity did not find a lot. One explanation, as the Productivity Commission said in its 'Cut to the Chase: Competition and productivity' write-up of the research is that
this does not necessarily mean that competition and productivity are unrelated but could reflect the fact that changes in competition over the period studied have not been particularly pronounced, meaning any effect of competition changes on firm productivity has been masked by other sources of time variation in productivity.
Another, though, as the Commission and the various researchers acknowledge, is that measures of competition within industries will not necessarily reveal what you are really interested in, which is competition within markets. It's possible that an industry might be homogeneous enough to be a market, but it's generally not going to be the case. Sometimes an industry - like Professional, Scientific and Technical Services - is going to be so diverse that data based on it are going to be a jumble of the many markets within it (eg for lawyers and accountants, who may be lumped together in the same industrial sector but are very rarely in the same market for competition purposes).

So: interesting stuff, but still a work in progress. We may not yet have been able to unearth many of the likely real links between competition and productivity, but it will be worth banging on with the search. And the Productivity Commission's competition proposals (from pp5-6 of the 'Cut to the Chase' publication, and based on their earlier services sector report) are good standalone ideas in any event:
● addressing search and switching costs, including better support for comparison websites, dealing with unfair contract terms, promoting switching facilities and portability;
● addressing occupational regulations, including the role of professional bodies in supporting competitive entry to the market and the merits of certification regimes as opposed to those based on registration; and
● continuing to refine competition law, including Section 36 relating to the misuse of market power and its interpretation.

*Strictly speaking three, but the third did not explain much.

Wednesday, 21 August 2019

How'd it go?

You'll have seen the key takeaways from the Commerce Commission's petrol market study:
many fuel companies appear to be achieving a level of profitability in New Zealand that is persistently higher than what we estimate a reasonable return would be in a workably competitive market ... The core problem, in our view, is that an active wholesale market does not exist in New Zealand. This is weakening price competition in the retail market (Executive Summary, X10-11)
and you can follow up on the details in the full report.

Most people, rightly, will be concerned with the substance of the report, but us competition geeks also have an interest in the market study process itself, especially as this was the first use of the Commission's new market study powers. So, how'd they go?

Overall, I'm impressed. They've self-evidently done a ton of work on this in effectively just six months. Occasionally I've been critical of how some of the Commission's work would stack up, from a productivity point of view, against a top rank commercial economic consultancy. Not this time. I was especially impressed by the work done in Attachments B though E on estimating profitability. And amongst all the other stuff they tackled it was good to see regression analysis applied, too: in a world of ever bigger torrents of data, the opportunity to deploy econometrics to useful effect is growing all the time. If this productivity partly reflected the tight deadlines, on Parkinson's Law lines, then let's keep whipping the Commission along. But I'm also pretty sure it reflects the team (Commissioners and staff) raising their game.

And the heap of data the Commission had available makes another point: you're not going to get meaningful answers to any potential competition questions unless the folks involved have a clear mandate to fossick where they need to, have the powers to collect the data and other information they need, and have the resources to process what they find (contrary to some asinine political reaction about spending a million dollars of the taxpayers' money). MBIE's petrol inquiry in 2017, despite the fine people they recruited to do it, had ticked none of those boxes adequately: the Commission's did. The case for market studies, as set up under Part 3A of the Commerce Act, is now closed.

Another thing I noted was the willingness to put out work-in-progress analysis with a "this is where we've got to, whatcha reckon?" tag. That's progress too: you don't want to put out shoddy stuff, but you don't want to be unnecessarily perfectionist, either. On this showing, the 80:20 rule is getting more of a look-in at 44 The Terrace. It's not without its own challenges, and no doubt the Commission's lawyers are several steps ahead of me in dealing with how you allow adequate consultation if some of these provisional findings get changed between the draft report and the final one, but the "it's looking as if this is how it's going down, are we right or wrong?" approach has a lot going for it, including the clear signal of open-mindedness.

That's another thing: this study looked a balanced exercise. It's easy (trust me) to see 'problems' everywhere when you're a regulator: to the man with a hammer, everything looks like a nail. But I thought the report, correctly, said the right things about the efficiency of the petrol companies' infrastructure, their retail innovations on the forecourt, and the inadvisability of jumping to inadequate-competition conclusions just because companies are profitable.

The other thing I'd wanted to see was a firmly remedy-oriented approach (assuming there were problems identified). No complaints there, either: head straight to Chapter 8 if that's your thing. I may be reading too much into 8.6 - "A number of the options are directed at industry participants who may be best placed to implement them. Others are of a regulatory nature that the Government
may consider instead of, or alongside, those market options" - but if the sense, or hint, is that the industry can get to a better place through enlightened self-interest improvements rather than anything more heavily-handed regulatory, jolly good.

On the substance of the report? So far I've only given its 424 pages the once over lightly, but it looks a generally plausible set of findings, even if not what people on the street were likely expecting as the big issue (some kind of tacit leader-follower price coordination). One thing that is nagging me, though, is the extent to which our local business cycle may be partly responsible for the reported petrol company profitability. Here, for example, is a chart (from page 326) showing a measure of profitability (return on average capital employed) for both the New Zealand petrol companies and a group of overseas comparators.


It looks, doesn't it, like profitability everywhere took a knock through the GFC, but recovered afterwards - fairly early on here at home, only in the last few years overseas. You see the same cyclical pattern in local importer margins, too, if you look at Figure 2.4 on page 28. I'm not saying that a relatively good post-GFC cyclical expansion here in New Zealand explains everything away, but at the moment I'm left wondering whether at least some of the profits reflect generally benign economic conditions as much as anything, and, if so, how that should be incorporated into the analysis.

Friday, 9 August 2019

The unsung heroes

Earlier this month, in a criminal case, the Federal Court of Australia pinged Kawasaki Kisen Kaisha Ltd (K-Line) A$34.5 million, the highest ever criminal cartel fine in Australia, though just adrift of the highest civil penalty, Visy's A$36 million in 2007.

K-Line was the second Japanese shipping company to have its collar felt for the longstanding rort of rigging the cost of shipping Japanese cars to Australia, following the earlier criminal conviction and A$25 million fine for NYK Line (see 'The Shipping News'). The K-Line judgment is here (handy hint - you can safely skip paras 86 through 169).

The only reasonable response to the fine is, jolly good. This fell squarely within the 'hard core' kind of cartel conduct that criminalisation was intended to punish and deter, complete with the usual cloak and dagger contrivances. NYK had had a version of Maxwell Smart's 'cone of silence', and K-Line had "reports ... often marked with words to the effect of “Confidential. Dispose of after Reading”. You can imagine some hapless manager in Tokyo trying to eat the files as the lads from Japan's Fair Trade Commission arrived.

The only smidgen of mitigation that, as an economist, you might feel for them is that, as the judge noted
41 ... the market for ocean transport service for roll-on, roll-off cargo was characterised by high capital costs with ‘lumpy’ investment, meaning that capacity could not be smoothly adjusted in response to demand.
42    The market was also characterised by long investment lead times. That was because the length of time required to commission and build a specialised car, or car and truck vessel was approximately two to three years per vessel. Such vessels were also not generally available for short term lease or charter, though in some instances space on vessels was made available between particular carriers pursuant to space chartering arrangements
But workably competitive markets are inventive enough to come up with licit solutions to these kind of problems. One is long-term 'take or pay' contracts, as you see every other day in (for example) the commercial property market, where developers line up leasing precommitments before they turn the first sod.

Lawyers should probably have a look at the bits of the judgment that discuss the extent of K-Line's cooperation with the ACCC, as described in the agreed statement of facts. The judge at [193] pointed to the "rather general and anodyne nature of some of the facts recited in it" and at [341] said it was "a statement of facts which appears to have been the product of detailed discussion and agreement between the respective legal teams. The result is a lengthy and detailed document which has no doubt been carefully crafted as a result of the negotiations, but which is nonetheless rather unhelpful in a number of important respects. The Court is left in the rather unenviable position of having to decipher and draw inferences and conclusions from that rather bland and sanitised document". You can be too clever by 'arf, in other words.

Other than that, there isn't too much to take away from the sheeting home of a particularly large, global and brazen cartel.

Except for two unsung heroes at K-Line.

One pops up at [79], where we read that "The Car Carrier Business Group General Manager was particularly distrusted by some NYK and Mitsui employees because he would sometimes compete aggressively for market share and on occasion attempt to depart from agreements reached with the other carriers" (he subsequently got sat on).

The other appears in [81], where "a Manager in one of the regional teams in the Car Carrier Business Group proposed to the Managing Executive Officer of the Car Carrier Business Group that K-Line should consider ceasing its communications with other carriers because such communications were risky for K-Line and its employees and K-Line should focus on having a strong sales force" (he - almost certainly a he - was ignored).

Well done, guys. And hopefully for their companies' sakes there aren't honest New Zealand executives in the same ignored and sidelined boat. Cartel criminalisation goes live in New Zealand from April 2021.

Sunday, 28 July 2019

I've been to a conference

The Commerce Commission's biennial 'Competition Matters' conference has wrapped up. Here are some of my takeaways: where the road forked for parallel sessions, I went the economics / competition / regulation route rather than the law / fair trading / consumer protection path, so if you prefer that end of the world you'll probably need to watch the recordings of those sessions (they're not up on the Commission site yet, but can't be far away).

If there was an overarching theme, it was Big Data and all that new digital economy stuff. Repetitive though it sometimes can be to be reminded, again, of the ever-increasing pace of change, the reality is that we are indeed in the early stages of one of those transformative technologies that alter how entire societies behave and work. It's right up there with the printed book and the car. My main takeaway was that, if you subscribe to the traditional 'is there a problem / what's causing it / can we fix it / ought we' policy model, competition analysts everywhere are largely at sea. They haven't satisfactorily got over the first fence, let alone the rest of the course, or as the Singapore Commission's Han Li Toh put it more formally, we're all still looking for "adequate evaluative tools".

For what it's worth, I could easily be convinced that the net benefits of the new technologies massively outweigh any costs, and some of of the scaremongering reminds me of the comparable 'make a man walk with a flag in front of it' response to the arrival of the car. By all means ping any of the big players if you can indeed find them guilty of the same sort of rort a steelmaker might get up to (though we're not even sure enough on issues like market definition to be able to do that), but otherwise from a competition policy point of view I'd be very loath to jump to premature controls of any kind, let alone the heavy duty structural separation ideas that are being floated on the American presidential campaign circuit. Maybe I'll change my mind when I eventually get round to reading the UK's Furman report ('Unlocking Digital Competition') and/or the ACCC's doorstopper 'Digital Platforms Inquiry', summary here, which appeared as the conference was underway, but for now count me among the anti-competitive agnostics.

I was very encouraged by what's been called 'NewReg' regulation, the idea that panels of consumer representatives can be given authority to strike product quality agreements with regulated businesses. At the moment for, say, our electricity lines businesses, we default to things like frequency or duration of power outages, on the assumption that regularity of supply is the key quality characteristic in consumers' eyes. But it mightn't be. They might care more (and did, in the case of AusNet, the Melbourne area lines business where this got a trial) for how quickly a company cleans up after things like power surges, or whether they can easily get hold of someone at the company when they need to talk to them about something.

When the consumer panel wandered - like "curious chooks" as its chair put it - across the whole of the lines business, they found heaps of things that could easily be made to work better for consumers. It reminded me, in a good way, of the management fad a few years back for 'process reengineering'. Remarkably, they found improvements that would both benefit consumers and save AusNet money, which is a remarkable illustration of the general proposition that monopolists can be very dozy indeed when not challenged (I don't mean that to be especially critical of AusNet, who after all embraced this NewReg trial and ran with it). I'd say there is clear room for this to be at least a complement to our current 'building blocks' regulation, and in an ideal world a replacement for it. And I also wonder about the community trusts who run some of our lines businesses, and are hence exempt from price control on the assumption that the community ownership structure will constrain monopoly power. How effective have they actually been in that curious chook role? Or have they been [insert your favourite harmless animal metaphor here]?

Market studies - the first one isn't far away now, with the draft petrol study maybe two to three weeks away. For the sake of the new regime, this first one needs to go well, and not just on the technical market analysis stuff but also on how it is sold to its various audiences. One of the things that the very experienced Roger Witcomb, former chair of the UK Competition Commission, emphasised was that market studies need government support, and while you don't want independent authorities like our Commission pandering to the current public service please-the-pollies zeitgeist, this first one needs to hit all the appropriate persuasiveness buttons.

Roger also stressed being remedy focused from early on, accepting that you don't necessarily know, day one, how a study is going to unfold. In our regime, the Commission doesn't have any market study enforcement powers, and maybe that's broadly right and best left to the pols. Commissioner John Small mused, though, about whether it would be useful for our Commission to have a power to initiate binding codes of conduct, along ACCC lines: that might well be a useful extension (either in the market studies context or more generally). And speaking of remedies, it's useful that (ahem) some of us helped get s51E into the law ("The Minister must respond to the final competition report within a reasonable time after the report is made publicly available") to stop the minister sitting on the Commission's recommendations.

The big keynote speeches were very solid. Dr David Halpern on behavioural insights convinced me (and others, going by coffee urn chats) that competition analysis needs to look hard at how consumers actually behave in the real world rather than relying solely on the old utility maxing within constraints we default to. Dr Howard Shelanski on competition intervention in markets likely confirmed us in our existing views on price controls (ick) and line of business regulation (meh) but opened our minds to potential greater use of access regulation. And Ed Willett left us with some warm fuzzies that we've rolled out fast fibre-based broadband better than the Aussies have, and also raised the possibility that maybe some of the old rationales for telco regulation may not apply any more. If I'm sitting at home with a choice of copper, fibre, and three mobile networks selling fixed wireless (in turn based on competitive backhaul markets), where's my regulatory problem?

Assorted other snippets: it is indeed probably worth kicking the tyres harder when looking at vertical mergers, though, on the other tack, if you're looking for the paper that Martin Cave cited, pointing to the unexpectedly widespread efficiency benefits of vertical mergers, it's 'Vertical Integration and Firm Boundaries: The Evidence'. And despite Dr Darryl Biggar's emphatic 'No' to my question about whether electricity lines businesses should be let play in the solar and battery markets, I think I'll remain open to it for now, if only for pragmatic get the damn thing done reasons.

Finally, the panel on 'Why does competition really matter?' looked at how the work of regulators sits with the broader national wellbeing agenda as set out, for example, in Treasury's Living Standards Framework. I didn't warm to one bit of it: there was, I thought, a bit of unnecessary economist self-flagellation. It's not (in my humble) true that economists in general have been mesmerised by GDP and monetary costs and benefits, and oblivious to soft outcomes they couldn't measure, nor that competition authorities have also been blind to them. Look at (for example) the Commission's decision on NZME / Fairfax, where by far the biggest moving part was the likely loss of media plurality in the civic marketplace (as I discussed here).

But the rest of the panel's ideas were spot on. If you look at two of New Zealand's biggest challenges - productivity (low and sticky), and poor outcomes for too many at the bottom end of the heap - making competitive markets work properly helps on both fronts. Stronger competitive pressures could do a useful Schumpeterian job of clearing out our disproportionately long tail of low productivity firms (as the Productivity Commission's Murray Sherwin noted). And on the equity front, it's inevitably the most vulnerable who fare worst when the anti-competitive fix goes in.

Wednesday, 17 July 2019

Save some dollars at CLPINZ. Oh, and watch a video

Roll up, folks, you've only got till Friday to get the early bird rate to attend this year's Competition Law and Policy Institute workshop. Full details here.

You're big enough to read the workshop programme for yourself, but I'd just like to point out that there's one very impressive name indeed on the agenda - David Evans, co-author (with the equally eminent Richard Schmalensee) of Matchmakers: The New Economics of Multisided Platforms (Harvard Business  Review press, 2016). Sooner or later, as a competition/regulation economist or lawyer, you're going to have to get your head around two-sided and multi-sided markets. This is where you should start: highly recommended.

Want to hear what the man actually sounds like? Here you go: this is a video I used on a training mission to a developing economy competition authority. It's Evans on using the hypothetical monopoly test for market definition. Not bad, eh?


Wednesday, 26 June 2019

Spot the good guys

Trade wars are top of mind for those interested in the macroeconomic outlook. As our own Reserve Bank said in today's monetary policy review, " A drawn out period of [trade] tension could continue to suppress global business confidence and reduce growth". And it's not just the US vs China stuff, bad as that is, but it's all over the place, as the World Trade Organisation pointed out a few days ago under the heading 'WTO report shows trade restrictions among G20 continuing at historic high levels'.

Out of casual interest I had a fossick through the WTO's trade database, which among other things counts the prevalence of trade barriers. Here's an interesting result.


We're not angels all the time, but at least on this criterion New Zealand scrubs up well by not adding much to the current protectionist rackets. And full marks to MBIE and the National-led government who in 2017 drew the teeth of the worst of these anti-dumping rorts, by amending the law so that consumers got a look in before anti-dumping duties get imposed. 

Here's the press release at the time, and if you're a trade policy tragic the new public interest test can be found in s10F(2) of the amended Trade (Anti-dumping and Countervailing Duties) Act 1988. It reads: "Imposing the [anti-dumping] duty is in the public interest unless the cost to downstream industries and consumers of imposing the duty is likely to materially outweigh the benefit to the domestic industry of imposing the duty".

Personally I'd have put the onus the other way around - "Imposing the duty is not in the public interest if the costs to downstream industries and consumers are likely to materially outweigh the benefits to domestic industry" - but hey, in these more trade-hostile days, I wouldn't quibble too much about wording. When you get a pro-consumer public interest test in trade law, take it and run.

It's happened again

It's easily done. A company decides to get out of a line of business, and sells the operation to someone else. A business decides to flag away retailing and stick to wholesaling, and sets up an exclusive retail arrangement with a distributor. A company buys another company in the same line of trade. All perfectly normal and (barring an acquisition of a competitor that would create substantial market power for the new combo) perfectly fine from a competition policy perspective.

But then the parties "jump the gun", as the jargon puts it. They start tidying their affairs - mutually agreeing things - before the divestment / distribution agreement / merger has actually gone into effect. That's where they risk falling foul of s27 of the Commerce Act (arrangements lessening competition) or, worse, s30 (price fixing). And things can really go pear shaped if the proposed divestment / agreement / merger falls over, as it can easily do. Now you can find yourself swinging in the wind when the Commerce Commission comes calling and wants to know why you're colluding with what is still an independent competitor.

The latest to find this out the hard way ($825K fine and $100K costs contribution) is Milfos, which among other things sells milk quality sensors and dairy herd management software (Commerce Commission press release here, High Court judgement here on the Commission's site). A proposed exclusive distribution agreement eventually turned to custard but the two companies involved went on coordinating the price of the milk sensors in the interim anyway.

It's not yet a full-blown Thing, but this has become one of those areas where a bit of probably not explicitly malign carelessness can now walk you into a heap of trouble. Nobody wants to be jumping at every imaginable legal risk, but it's now clearly advisable to add something else to the checklist when you're thinking of divestment or acquisition. If you'd like some more background info on what to look out for, have a read of what happened in a recent Australian case ('Too harsh?') which was cited in this latest Milfos episode, or on the wider general topic of gun jumping you might like 'Jumping the gun'.

The other thing that's started to pop up more in mergers is failure to get clearance from the Commission for potentially problematic ones. We went years without seeing the Commission sally forth and challenge a merger, and then there was a sudden blizzard of them in 2018 ('They're like buses'). Fortunately, most of them (listed here) have gone away with no further action, and to date only one has been pinged, and deservedly so ('Naïve? Casual? What?'). Two are still live.

I say "fortunately" because I like our system of voluntary notification of mergers. Most other developed countries have some sort of compulsory merger notification regime: we don't, and I like it that way. I wouldn't want it to fall over, which it assuredly would if it's discovered that merger parties are routinely trying to do an end run around it.  As a small economy,  we're already got at least our fair share of micromanagement superstructure: we don't need another dead hand process on top.

Wednesday, 19 June 2019

Are we ready?

The Budget came and went while I was overseas, and I've been catching up with the news and the coverage.

It's not surprising that a lot of the media and analyst attention was focused on the 'wellbeing' perspective: it's getting attention overseas, too, as in this thoughtful piece in the Financial Times ($?). It's equally unsurprising, though, that virtually nobody (as usual) has asked the simple Keynesian question, is the Budget expansionary or contractionary? Do its direct effects on government spending and taxation boost or brake the economy?

Here, buried (as usual) on page 15 of the 'Additional info', is Treasury's best guess at the answer. The 'fiscal impulse' is the effect of policy changes on aggregate demand, allowing for anything cyclical that might also be affecting tax revenues and government spending. A positive impulse is expansionary, and you can see that fiscal policy has been giving a decent 1%-of-GDP-ish boost to the economy in the June year just finishing. It's not doing a lot either way in the next couple of years, and then if policies stay as they are, it starts to modestly brake the economy over 2021-2 and 2022-3.


The last time we saw these calculations was at last December's 'Half Year Economic and Fiscal Update', or HYEFU, when they looked like this (I wrote about them here).


From a fiscal policy cycle-management point of view, the new profile makes a good deal more sense than the old one. In the old one, there was a stonking 2%-of-GDP fiscal boost in the 2018-19 year, when the economy didn't need it, nor was there any obvious reason why the brakes should have gone on immediately afterwards. The new pattern is rather more sensible: there's less of a pro-cyclical boost in this June year, and the brakes aren't getting applied in the coming June year.

It would be nice to think that this was a deliberate adjustment of fiscal policy to make it more attuned with the cycle, but it looks more happenstance than design. While there is a bit of extra spending in 2019-20 that helps draws the sting of the previously planned braking, otherwise it seems to be down to timing differences: spending didn't happen to the original timetable. Or as the official explanation puts it
The 2018/19 impulse is now estimated to be 1.1% of GDP compared with 2.2% forecast at the Half Year Update. This reflects changes in the expected timing of operating and capital spending. Some operating spending previously expected to take place in 2018/19 is now expected in 2019/20. Changes in the timing of spending and higher allowances announced at Budget 2019 see a broadly neutral impulse in 2019/20 compared with a -0.9% of GDP impulse forecast at the Half Year Update.
That's all understandable: we're all human, things always don't go like clockwork, and the incoming Coalition government didn't exactly have a fully worked-out policy programme when it first took the reins, so some slippage isn't a huge surprise.

But if you get biggish changes in the stance of fiscal policy happening by administrative accident rather than for proactive cycle-management reasons,  it does make you wonder how effective fiscal policy can be in dealing with cyclical ups and downs. You might well want to slow things down, for example, only to find the economy gets an unwanted boost from spending programmes kicking in late, or conversely find that planned fiscal boosts get undermined by slower than expected spending.

With monetary policy creeping ever closer to its practical limits, especially after the latest interest rate cuts in Australia and New Zealand, fiscal policy is necessarily going to have to do more of the heavy lifting to manage the business cycle in the next downturn, which may not be too far away if the Trump administration continues in brinkmanship mode.

As it stands, however, fiscal policy is vulnerable to large ebbs and flows that can dwarf any attempt at fiscal cycle control. We need to be able to do something more effective when - not if - the next downturn turns up. Ideally, 'shovel ready' infrastructure spending programmes that could be rolled out quickly would do the trick, but while they're not impossible to organise they're not a doddle either. An alternative would be quicker-to-work defibrillator fixes like "put $500 in every beneficiary's bank account", which we've shown we can organise (recall the recent winter heating top-ups to national super, for example).

I'd like to think there's someone in Treasury primed and ready to pull the Emergency Fiscal Boost lever. Am I wrong?

Friday, 14 June 2019

Competition papers coming up at the NZAE conference

The New Zealand Association of Economists annual conference is coming up (July 3-5) in Wellington, and if you're interested in competition issues there are some interesting papers due to be presented. You can find the current draft state of the full conference programme here and you can register to attend here.

Earlier this week I posted about Bill Rosenberg's presentation on "Low Wages: Is Competition a Factor", and Bill has pointed me to a paper scheduled for session 3.1 from the RBNZ's Christopher Bell on "Monopsonistic power in the New Zealand labour market".

Session 5.2 has the theme "Digital Markets and Competition Outcomes", and features three papers from ComCom economists: "Innovation in regulated and competitive industries" by Hristina Dantcheva;  "Airports regulation - evidence of the information disclosure regime working?" by James Marshall (I'll take a wild guess and say, the answer is yes); and "Assessment of competition in digital markets – challenges for economic analysis in the era of platforms, data and AI", by Michal Mottl.

Session 5.4, "Energy", has two papers I'll be especially interested in: "Identifying and estimating excess profits in the New Zealand electricity industry" from Victoria's Geoff Bertram, and "Petrol prices [still] rise and fall at the same speed as international oil prices" from Prince Siddarth at the NZIER.

There's also session 6.6, "Regulation and Industry", where the paper I'll be going to is "Retrospective Study on Stuff (Fairfax)’s Exits in the Newspaper Industry", a joint effort from AUT's Lydia Cheung and Geoffrey Brooke.

See you there.

Wednesday, 12 June 2019

Yet another reason why workable competition matters

A small but select audience turned out last night for the latest Auckland LEANZ seminar, featuring Bill Rosenberg, the Congress of Trade Unions' policy director and economist, on the topic of "Low Wages: Is Competition a Factor?". This was a reprise of a May presentation in Wellington which Bill gave in association with Peter Cranney, an employment lawyer at Oakley Moran: the May slides can be found here.

Maybe the topic is more of interest to a Beehive-focussed audience, but it's a pity more people didn't attend in Auckland, because Bill made an interesting case. Beforehand, I'd been afraid that he was going to have a go at attacking free (or at least workably competitive) markets, and I'd been sharpening my claws. Quite the opposite, as it happened: Bill's case might as easily have been titled, "Low Wages: Is Lack of Competition a Factor?". His argument was that businesses have accrued too much monopsonistic market power in the labour market, and for a variety of reasons, including as a side effect of increased market power in goods markets as 'super star' companies have emerged and (perhaps) merger policing hasn't been all that it might have.

Skewed labour markets are becoming A Thing in antitrust circles, and I suspect we're going to hear a lot more about them. Here for example is the peroration from a recent article (cited by Bill) in the Harvard Law Review:
Labor market power is ubiquitous and costly to society. It is bad for economic growth and equality, and fuels political conflict. Yet labor market power is generally ignored by antitrust authorities and never considered as a justification for subjecting mergers to scrutiny. This contrasts with the regulatory concern for product market power. We argue that this asymmetry is not justified by either legal doctrine or economic theory and suggest that the economic analysis of product markets regularly deployed in the scrutiny of mergers can easily be applied to the labor market (p600)
How you might address imbalances of market power in the labour market is the tricky bit. Maybe the generic competition law of the land has a part to play (on egregious use of no-poaching or non-compete agreements, for example), although as the Harvard Law Review article says, even in the litigious US it hasn't got very far. 

Bill's got a menu of other proposals (his slides 38-40). Two of them got the tick from me - raising productivity, and better support for people affected by disruptive job losses - and while I'm more ambivalent about the third route (a greater role for collective bargaining) it's possible that the Fair Pay Agreements Bill supports might deliver net benefits.

The real trick would be to pull off what Denmark's managed - retaining a high degree of employer hiring flexibility, while also providing a lot of support (eg through retraining) to displaced employees. We're not currently crash hot on the support side, as this OECD graph shows (original document here), whereas Denmark is tops.


These 'active' labour market policies also have something of a moral imperative to them. If you subscribe to the idea that freer global trade brings net national benefits (as it does), and you recognise that the overall benefits create winners and losers (as they do), then there's a good case for looking after those who have fallen in the overall victory. And there's also cold-eyed politics involved: if you don't help out,  the losers will turn on trade itself. Trump's election and the US ranking on the graph are no coincidence.

Well done Bill; thanks to Sasha Daniels from Spark who emceed the evening; and special thanks to James Craig and the team at Simpson Grierson who hosted the evening.

Monday, 10 June 2019

Pilgrimage and policy

It was mostly a mix of school reunion, family and social catch-up, genealogical research and all-purpose holiday, but a trip to Ireland and Scotland also allowed a side-outing pilgrimage to Adam Smith's grave in Canongate Kirkyard in Edinburgh. If you're ever minded to visit, go round the back of the church, and the grave is up against the wall of the church on the right hand side. I didn't notice it at first, but there is also a little trail of  'Adam Smith' plaquelets set into the grass that will take you to the right spot.


I wondered about the railing around the grave and the heavy duty lock: anti-market vandals? Like the nerk that scribbled anti-Smith graffiti on the yellow explanatory notice? Not so, said the formidably learned volunteer minding the church: she said it was quite common practice to rail a grave in the 18th century (Smith died in 1790). She'd also noticed that these days visitors to the grave tended to come from Europe rather than the UK, and her experience was that UK people tended to have very little knowledge of Smith: he had (she said) completely vanished from British school curricula.

I did my usual economics-by-wandering-around on the trip. Random observations:

Ireland's standard of living has pulled well away from ours. Comparisons are iffy because of big tax-domicile accounting changes to Irish GDP and an unusually large wedge between Irish GNP and Irish GDP, but it's safe to say that living standards per capita are now some 50% higher in Ireland than here. And it shows in things like the cars people drive and the quality of the houses. Ireland's no paragon of good policy or governance, it had an unusually nasty GFC, and it's got locational advantages we don't, but for all that it's clearly made a better fist of getting growth barrelling along than we have. Sure, GDP isn't everything, but if we had incomes at Irish levels we could afford a hell of a lot more wellbeing-enhancing initiatives.

There's no border between Ireland and Northern Ireland. One minute you're on the road from Letterkenny (in the Republic) to Londonderry (in Northern Ireland) and you're calculating in euros and driving to kilometre per hour speed limits, and the next you're thinking in pounds and observing miles per hour limits. That's it. No checks, no let, no hindrance - for now. This currently free passage is yet another of the potential casualties of the Brexit debacle, since the clowns running the process didn't join up all the dots (a commitment to the Republic as part of Northern Ireland peace talks to have no borders, versus the gaping hole in the customs and regulatory frontier with the EU that post-Brexit free passage would create, leading to various proposals for rickety 'backstop' fixes). But Brexit incoherence aside, hassle-free movement is a great idea. If countries like Ireland and Britain, despite sometimes prickly relations, can organise completely free movement, why can't Australia and New Zealand?

And on Brexit, if there's a hard no-deal Brexit, it's heavily odds on that Scotland will run a second independence referendum, and I wouldn't be surprised if it succeeded. Which might enable a more prosperous Scotland to do something about the state of its roads: years of false economy 'austerity' cutbacks to spending on road maintenance have left potholes everywhere (even on motorways).

There are indeed at least some limits to tourism. If you want to see one, visit the Giant's Causeway in Northern Ireland. It's an unusual geological feature, but considerably diminished by the hordes of people all over it (and it isn't even high season for visitors yet). We'll face similar issues in due course, and I don't think our new $35 a head levy on visitors is much of an answer to anything.

Some of our food exporters also face headwinds. There is a clear push, in the Irish and Scottish restaurant trades, both to explain where your ingredients have come from, and to use local providers. VisitScotland for example has an accreditation scheme which includes among its criteria, "Quality ingredients of Scottish provenance" and "Food miles kept to a minimum". 

Finally, coming back to Adam Smith, I hadn't known that since 2008 Edinburgh has a statue of him on its Royal Mile. The story of how it came about is told here, and well done all the organisations and individuals who planned it and paid for it. How much it is a statue of Smith, however, as opposed to a generic Important Person is in the eye of the beholder: for me, it could as easily have been a memorial to a sea captain. I'd like to have seen a book, and even if Smith is the father of the dismal science, would it have hurt to have shown him smiling?