Wednesday, 30 June 2021

What got snuck in

We only got through Day 1 of last week's NZ Association of Economists' annual workshop before the Plague shut us down, but it was interesting while it lasted (full programme here - there's a fair smattering of the papers available to download), and on the positive side at least we snuck one day in, unlike the total lockdown wipeout of 2020.

The first keynote was ecological economist Marjan van den Belt on 'Aoteanomics; A Vision for a Thriving, Just and Sustainable Aotearoa NZ' (brief abstract here). If you're a fan of, say, Kate Raworth's Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, then this was for you. I liked her emphasis on systems thinking/modelling that captures all the positive and negative aspects of any policy, and accounts for the inter-relationships between the various moving parts. 

But I didn't agree that economics as we all know and love it today isn't up to, or interested in, handling issues like climate change or other environmental degradation: you don't get far into an economics course these days without bumping into 'externalities' and how to deal with them. And she's what I might call a technology pessimist about the ability of technological change to get us out of the climate and pollution hole - "we can't efficiency our way out" as she put it - whereas I'd point to the likes of the plummeting cost of solar energy or indeed the speed with which Covid vaccines were developed. The last 20th / early 21st century is an odd time to be downbeat about inventiveness.

From the concurrent session options, I picked 'Auckland Council - Urban Economics'. The big takeaway for me was the work done by David Norman (the former chief economist for the Council) and his colleague, now acting chief economist, Shane Martin, on whether the planning constraints which apply inside the Rural Urban Boundary (RUB) are responsible for the very high prices of Auckland housing land when compared to land outside it. As an Auckland resident regularly gobsmacked by the price of land, I'd have been prepared to bet a reasonable amount of money that they did, but at least for now I've been disabused. After comparing like-for-like land (eg correcting for the value of closeness to amenities and a zillion other hedonic features) there's virtually no RUB factor, as shown below (from the version of the paper available on the Council's Economic Advice page).

After coffee it was time for Motu's Arthur Grimes on 'Reinterpreting Productivity: New Zealand’s Surprising Performance'. Well worth reading: while the stylised narrative is that New Zealand has gone to hell in a handbasket in terms of relative international performance over time, Arthur argued (pp22-3) that "The country enacted reforms in the 1980s and early 1990s that improved allocative efficiency as well as technical efficiency. The result has been one of the strongest performances of any developed country in the growth of sustainable consumption possibilities over the second 24 year period covered by our data" (i.e. the second half of 1970-2018).

In the afternoon the 'Household Economics' session had two papers looking at how extra tax credits and extended parental paid leave since 2018 had worked out (one paper is up, here): my overall impression was they made a difference (in a good way) but more could be done. Victoria's Norman Gemmell presented on behalf of his co-authors Nazila Alinaghi and John Creedy on 'Do Couples Bunch More? Evidence from Partnered and Single Taxpayers', which looked at the bunching of people's tax returns around marginal tax rate thresholds. 

There were questions from the audience suggesting that it looked like tax evasion: it isn't (or not necessarily), because (a) that's the way the tax system is, or as the paper says (p25) the system "imposes relatively weak constraints on intra-family income sharing" and (b) the income split is inherently arbitrary for self-employed couples. If one partner stays home to let the plumber in while the other goes out to meet a client, who's contributed what? It was also a reminder that while the all-knowing always-calculating homo economicus may be a caricature of how people behave, people aren't stupid, either, and are perfectly capable of making fine adjustments to their affairs to their own best advantage.

Finally I went to the 'Commerce Commission: Market outcomes in the retail fuel and electricity markets' session (natch). Quick hat-tip to the Commission and the NZAE - there were years when the conference carried little or nothing in the competition / industrial organisation / regulation space, but in the last few years it's had its own regular slot.

The Commission's Ben Harris and Imogen Turner spoke on 'Valuing the harm to consumers in electricity markets'. I'd imagined beforehand that this might have been a go at estimating how much people were missing out by being on inappropriate pricing plans, but it actually looked at the value consumers ascribe to not suffering power outages. Human nature being what it is, people say they'd be hugely put out by an outage inflicted on them. But when offered cold cash to accept an outage, they turn out to take a much lower amount. Funny that. Why does the Commission care? Because the valuation goes into the regulatory regime to prevent the risk of electricity lines companies overbuilding ('gold plating') their asset base and providing levels of reliability that consumers do not actually want. More positively, it feeds into an incentive system rewarding lines companies for better-than-expected outage performance.

Finally Commerce Commissioner John Small took us over 'Empirical analysis on the retail fuel market study' (the study itself is here) and as part of it reminded us of this graph.

The dotted lines are when Z Energy was publishing the 'MPP', "the price that is used at most of Z Energy’s retail sites in the South Island and lower North Island" (market study, p296). The Commission said that, while there could be other explanations, from the graph "it appears that average margins increased during the period when the daily MPP was published, and have levelled off or decreased since publication ceased ... The evidence therefore appears to support our conclusion that the retail market is
conducive to tacit coordination through price transparency and leader-follower pricing" (p298).

The petrol industry is getting close to the pointy end of implementing the recommendations of the market study (a wholesale market, liberalised wholesale supply contracts, publicising the price of 95 octane, and enhanced information provision). My guess would be that the Commission will wait and see how effective they've been, but at some point I'd bet that they will be combing the evidence to see if they've dealt to that "tacit coordination".

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