Future plans, past tragedies

I'm no fan of regional development as a policy priority - a remote sparsely populated country of five million people ought to be putting its energies into agglomeration benefits, not into dispersion inefficiencies - and still less of how we're executing it. But that said, I'm not sorry Dunedin's the latest winner drawn from the Lucky Dip bag ('Dunedin projects secure multimillion-dollar Provincial Growth Fund investment'). It would be one of my agglomeration corridors anyway, plus it's a surprisingly interesting place, as I've posted before ('On holiday? In DUNEDIN??').

Over the Labour Day weekend we went to the Dunedin Art Gallery which was hosting a near-definitive exhibition of Frances Hodgkins. We explored the thriving café scene - particularly good coffee at Heritage, and lovely raspberry and coconut cake at Perc - and had fine Chinese food at Papa Chou's. In Dunedin you have to visit the University Book Shop, where I bought Binyamin Appelbaum's The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society (purchases are not endorsements), followed by a fossick in the Hard to Find bookshop, where I added to my First World War collection with John Terraine's 1963 military biography, Douglas Haig: The educated soldier.

The Great War kept intruding. Just to remind you of the seismic scale of the war for New Zealand, in the foyer of the wonderful Railway Station I read the plaque commemorating the Dunedin staff of New Zealand Rail who died in the war. Guess how many, just from one company's staff, in one city*. Or see the West Taieri war memorial across the road from the deservedly popular Wobbly Goat café in Outram (try the pinwheels), with the desperately sad pattern of multiple names from the same families. On the one small monument are three Sprotts, two McLeods, two Whites.

In the middle of nowhere we detoured from a day's fishing at Lake Mahinerangi to the Old Waipori cemetery, where there is a memorial (pictured below, with his image from Discovering Anzacs) to Wilfred Victor Knight, the first reported New Zealand casualty at Gallipoli. Knight came from Waipori, since submerged by the hydro lake, went to Otago Boys High, and was working on the Sydney trams when war was declared on August 4 1914. He signed up on August 22, made his will in his pay book on April 25 1915, and died probably on April 27. He was 25.

* 56. Bear in mind that the population of New Zealand was only one million at the time. Multiply by five to get an idea of a proportionate loss today.

How competition deals to wage discrimination

"Increased competition in the business marketplace", I wrote in a post last year ('How competition benefits women's pay'), "is one of those ideas that neatly hit both equity and efficiency objectives. The equity outcome is obvious: the efficiency payback is that output rises as the previously underutilised female workforce gets to pull its proper weight. And what's true of women is very likely also true of other groups that would otherwise face relatively uphill going in the labour market".

And as it happens, along comes a bit of evidence that my supposition about "other groups" is indeed correct, and it comes from four researchers in Belgium. Their 'Wage Discrimination Based on the Country of Birth: Do Tenure and Product Market Competition Matter?' examined wage discrimination in Belgium against immigrants, and was able to use a bunch of linked employer-employee datasets to uncover what was going on. Among other things they looked at whether the degree of competition in the markets Belgian businesses operate in made any difference to the degree of wage discrimination immigrants face.

Overall, after controlling for a whole battery of firm and employee characteristics, immigrants in Belgium earn 6.1% less than EU-15 natives (the EU-15 is the old core EU before Austria, Finland, Sweden and, later, a swathe of largely eastern European countries joined). Asians (which in this context means, I think, the likes of Indians and Pakistanis) fare worst, with wages 17.5% lower than natives, and east Europeans do badly, too, with wages 12.0% lower.

But what happens if you look at the degree of competition the employing businesses face? In theory, or at least in the well-known theory associated with Gary Becker, discriminating employers don't get to indulge their prejudices in strongly competitive markets. If they try, they'll get eaten by the more efficient companies who hire solely on productivity.

The researchers tried four different measures of competition, and compared wage differentials in the most competitive top-third on each measure versus the wage differentials in the medium to low competition businesses. The result?

the magnitude of wage discrimination against migrant workers decreases and becomes generally non-significant when firms operate in highly competitive product market environments. These findings are robust to the use of four different product market competition indicators and are in line with Becker’s theory, according to which discrimination is present only in firms operating in lower product market competition environments (p20)

Apparently, there isn't a lot of other research knocking around about the beneficial impact of strong product market competition on employers' ability to wage discriminate, but what there is points the same way as this Belgian study. As the researchers put it

Peoples and Saunders (1993) and Peoples and Talley (2001) have studied the impact of the deregulation of the trucking market and of the public-transit bus sector privatization, respectively, on wage discrimination against black truck/bus drivers in the US. They concluded that the increased competition resulting from market deregulation and privatization significantly lowered the wage gap between white and black truck/bus drivers. More recently, Ohlert et al. (2016) studied wage discrimination against migrants in Germany in relation to the level of competition in the product market ... the authors found that increased competition in the product market is likely to decrease the unexplained wage differentials between native and migrant workers (p7)

It is understandable that people concerned about wage discrimination might see markets as the unregulated problem, rather than the efficient answer. But in this case a competitive market is your friend. The more employers are forced by vigorous product competition between them to hire as efficiently as the other guys, the more the profit motive of the employers gets the result you want: their own self-interest will lead them to hire on ability, not on surface attributes.

Rings a bell, doesn't it*.

*"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages". 

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'.

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?.

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?').

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.