An OCR cut isn't dead after all

Every economist polled before today's Monetary Policy Statement (eg here and here) said there'd be no change to the Official Cash Rate (OCR). Quite a few (including me) thought it's unlikely that any further cuts are on the table (and that the option of going to a negative OCR might even be taken off the table by the Reserve Bank); that the next move will be up (likely preceded by winding back some of the unconventional monetary policy tools); but that it's still necessarily a longish way away. Personally I was also wondering what weight the Bank would place on the December higher than expected inflation rate and the very much lower than expected unemployment rate.

The OCR did indeed stay at 0.25%. Taking it to zero or into negative territory has not, however, taken off the table: quite the contrary. The Statement said (p3) that it's now operationally do-able ("the operational work to enable the OCR to be taken negative if required is now completed") and the minutes of the latest policy meeting said (p6) that "The Committee agreed that it was prepared to lower the OCR to provide additional stimulus if required". There was even a section on pp26-7 headed "A zero or negative OCR would provide additional monetary stimulus, if required" and went into how it might work out in practice.

Adrian Orr was asked at the media conference about the pre-MPS expectation that a lower OCR might be sidelined: he said the bank prefers to maintain a full suite of options against whatever might befall down the track. Fair enough: personally I was starting to wonder whether a lower OCR catalyst might be the need to defuse any unwanted appreciation in the Kiwi dollar. 

The Bank is rightly being cautious on reading too much into the December numbers: "How long the recent recovery in inflation and employment can be sustained is highly uncertain ... Our baseline scenario for the economy, while starting from a stronger position than assumed in November, is subdued. Significant monetary stimulus remains necessary to confidently and sustainably meet our inflation and employment objectives" (p7). 

So there will be "a prolonged period of time to pass before these [inflation and employment] conditions are met" (p6) and "Meeting these requirements will necessitate considerable time and patience" (p3). How long? The Bank publishes a measure called the "unconstrained OCR"* which has a go at measuring the overall degree of stimulus: its latest one (p41, reproduced below) shows the existing level of stimulus increasing just a tad during the rest of this year, but gradually becoming less stimulatory (though still strongly supportive) through 2022 and into 2023. When will monetary policy be back at "neutral"? If (as Figure 6.4 on p50 suggests), a "neutral" OCR is something like 2%, chances are that we won't see one till 2024 or beyond.

There's usually some interesting one-off stuff in each Statement. There's a box (pp19-21) on current conditions in the Māori economy, and this new visualisation (p14) of conditions in the labour market, which does a nice job of bringing together the various ways you might look at the market to figure out how close you are to maximum sustainable employment. 

*In the May 2020 Statement, p11, it had said that "the Reserve Bank used a projection of the OCR to highlight the level of monetary stimulus needed to achieve our inflation and employment objectives. A fall in the OCR projection relative to the previous Statement meant that more policy stimulus was needed. We have had to modify this practice given the Monetary Policy Committee’s forward guidance on the OCR out to early next year and the use of alternative monetary policy instruments. We have opted to publish an unconstrained OCR ... This demonstrates the broad level stimulus needed to achieve the Reserve Bank’s monetary policy objectives, much like the OCR projection demonstrated in the past"

You probably got ripped off, too

I'm involved with a training programme for an overseas competition agency, and we've been going through the law and economics of cartels: I've been talking about the detriments they cause. As it happens, there's a recent spectacular example of how bad they can be.

One of the gurus of cartel documentation has been John Connor, emeritus professor at Purdue and a senior fellow of the American Antitrust Institute. In 'Twilight of Prosecutions of the Global Auto-Parts Cartels', he's written about one of the biggest cartels ever (amounts cited are US dollars):

At last count 18 jurisdictions vigorously prosecuted this supercartel, which demonstrated exceptional duration, global reach, size, and injuriousness. Estimates for affected commerce of the Auto-Parts supercartel range from $3.2 to $5.0 trillion. There are few reliable estimates of overcharges, but averaging the few preliminary estimates suggests that injuries are in the range of $0.6 to $1 trillion (p1)

That's a pretty impressive level of overcharges, exacted from 17 different car manufacturers from around the turn of the millennium though to late 2009, when the cartels started to get rumbled. Chances are, if you bought a car in the 2000s, you're one of the vast number of victims yourself. Depending on what criterion you use, this was either the largest or second largest grouping of related cartels ever found.

Connor reproduced this picture, originally from a European Union enforcement announcement, showing just how many different components of a car got targeted by the cartels. Basically everything but the engine, the transmission and the bodywork got rorted. If the 'wire harnesses' rings a bell, that's one where the ACCC got involved: the Japanese company pinged in that case unwisely decided to appeal their fine, with appropriately karmic results.

There's a great deal of stuff to take away from this example, one being that companies can be too hard-nosed at bargaining for their own good: "Did the assemblers [the carmakers] push too hard on price reductions in the early 2000s, and thereby trigger supplier collusion to cope with an existential threat?" (p1). It's not a defence, and it doesn't even take us very far into tout comprendre c'est tout pardonner territory, and you shouldn't blame the victims, but (like the Lodge case here at home) you do wonder whether the damn thing would ever have happened in a more reasonable world.

And if you're into corporate strategy, you might want to think twice about all that financial engineering cleverness. You can't be rorted if you've vertically integrated that component. Divest it, though  - free up capital and all that good stuff - and you've opened up some vulnerabilities:

Perhaps it is no coincidence that collusion against GM began soon after it sold its Delco-Remy division in 1994, against Toyota after DENSO no longer supplied a majority of output to Toyota, etc. Any financial cost savings resulting from divestment may have backfired. Second, by delegating manufacturing of minor inputs (say, 2% or 3% of total material inputs) to ostensibly unaffiliated suppliers, the OEMs ['original equipment manufacturers', i.e. the carmakers] suffer a substantial loss of information about manufacturing costs and a consequent loss of bargaining power over price (p16)

The main takeaway from the cartel, though, is the ineffectiveness of the fines. We know the theory: if there's a 100% chance of being detected, a fine equal to 100% (or more) of the overcharging will deter; if there's a 20% probability, then a fine of 500% (or more). What actually happened here?

There are few reliable estimates of the size of overcharges for these cartels, and more are desperately needed, but averaging the few preliminary estimates suggests that injuries are in the range of $0.6 to $1 trillion. Even if monetary penalties rise to double the current $20 billion, cartel deterrence or cartel dissuasion is highly unlikely (p30)

Which does get you thinking about the alternative sanction of criminalisation - sending executives to jail - which we are about to introduce from April. In egregious cases like car parts, you can see why people would well reach for it. But as someone from the socially liberal end of town, I have two reservations.

Here's the first one (data from this Statista page, and originally compiled here). We're already well down the wrong end of this international comparison: we're just about the last country in the world that ought to be thinking about putting even more people in jail. 

And here's the other:

Unlike typical international cartel prosecutions in the past, few of the individuals held accountable by antitrust authorities in Auto Parts have been CEOs, COOs, or CFOs of their parent companies or even their subsidiaries ... Rather, they have held titles like sales manager, director, marketing manager, or department head of units below the corporate VP level (p27).

When we eventually press the criminalisation button, I hope we don't make the car parts mistake - jailing some midlevel functionaries, but letting the big fish swim free.

Good books 2021

Over the summer holidays we like to blob out and read, and I've caught up with some great titles.

In economics, top of the list are two excellent books, Zachary D Carter's The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes; and Matt Ridley's How Innovation Works. I've also enjoyed Daniel Markovits' The Meritocracy Trap (and in the same area I've got Michael Sandel's The Tyranny of Merit: What's become of the common good? lined up); and next on the runway will be Robert Skidelsky's What's Wrong with Economics? A primer for the perplexed. Tim Harford's How to Make the World Add Up: Ten Rules for Thinking Differently About Numbers focuses on the behavioural biases we bring to statistics, and is likely to prompt you to have a go, if you haven't yet, at Daniel Kahneman's fascinating Thinking Fast and Slow.

In biography, I hugely enjoyed Fredrik Logevall's JFK: Volume 1, 1917-1956, where the story reaches JFK's (in retrospect fortunate) failure to get the Democratic vice-presidential nomination in 1956 and his decision to go for the big one in 1960. Volker Ulrich's second volume, Hitler: Downfall, 1939-1945, necessarily has more military history than the politics and personalities of the previous Hitler: Ascent 1889-1939, but is also a good read. We've been blessed with some great biographies in recent years: try Ron Chernow's Grant (Ulysses S, that is), or Charles Moore's three-decker biography of Margaret Thatcher.

In politics, I defy anyone not to enjoy Sasha Swire's ringside view of the Cameron years, Diary of an MP's Wife. Still in the UK, both Gabriel Pogrund and Patrick Maguire's Left Out: The Inside Story of Labour Under Corbyn, and Tom Bower's Boris Johnson: The Gambler, are well worth reading. Anne Applebaum's Twilight of Democracy: The Failure of Politics and the Parting of Friends will get you thinking about the origins of polarisation, populism and demagoguery, and dovetails nicely with Ian Dunt's How To be a Liberal.

And in history I'm well into Ritchie Robertson's enormous The Enlightenment: The Pursuit of Happiness 1680-1790, and when that's finished I'll be starting Katja Hoyer's Blood and Iron: The Rise and Fall of the German Empire 1871-1918. If you've any nostalgia for hereditary rule, Martin Rady's The Habsburgs: The rise and fall of a world power will put you right. While you're wandering around central Europe, try Richard Fidler's The Golden Maze: A biography of Prague. 

After all that highbrow fare, I confess my fiction tastes run to private eyes and the more intelligent espionage thrillers. This summer's haul included the third in Glen Erik Hamilton's Seattle-based Van Shaw series, Every Day Above Ground, Peter Hanington's A Single Source (an oldstyle BBC Radio journalist gets caught up in illicit arms smuggling during the Arab Spring), Henning Maskell's After the Fire (he's best known for his Inspector Wallender books, this is a one-off), and Liz Moore's A Long Bright River (Philadelphia policewoman on trail of someone killing young women,and her drug addict sister is one potential target). I'm halfway through Cecilia Ekbäck's very well written The Historians, set in the murky politics of WW2 Sweden.

I'm a big fan of the physical book. I like the heft, the shape, the smell of a new book. Our house is stacked with them. So I've had to be dragged kicking and screaming to the idea of a Kindle. But now that I'm there, I have to say, it's terrific. See a good review, and you can have the book on your Kindle a few minutes later. It's great on a plane or anywhere else bulk comes into consideration. While I'll never begrudge the price of a good book, and I'm still reading both physical and digital versions, the Kindle price for the e-version is quite handy, too.  And if your partner's sleeping habits aren't synchronised with yours (ours aren't), with a backlit Kindle you can keep reading in bed when the lights are off.