The clock ran out

This week's 'mini Budget' was certainly down the minier end of mini, and understandably so. While I sympathise with a bias for action, and there was also a political commitment to be honoured, by the time the coalition was settled and portfolios allocated, there just wasn't enough time left on the clock to pull everything together and produce an up to date and internally consistent mini-thingie and its accompanying Half-Year Economic and Fiscal Update (HYEFU). As the HYEFU notes (p9) its forecasts were put to bed on November 6, but after that it lists a slew of events (notably the new government and its policies, and some important data releases including that weaker than expected September quarter GDP number) that haven't been able to be fully factored in. We'll have to wait for the Budget Economic and Fiscal Update (BEFU) next year for a complete and up to date view.

That said, there were a couple of interesting bits of analysis in the HYEFU. One important issue is whether the economy is still at or above capacity - if it is, there might still be lurking inflation risks emanating from domestically traded but supply constrained goods and services, if it isn't, then we might start looking ahead to eventual RBNZ easing. Here's the HYEFU take: it's reasonably encouraging from an inflation-pressure perspective. On its 'output gap' calculations, Treasury reckons we'll be going from 1% above capacity in June '23 to roughly at-capacity (-0.1% below potential output) in June '24 and to clearly below (-1.0%) potential output by June '25.

That all depends, though, on whether you can get a good handle on potential output - the maximum level of GDP growth we could manage on a sustainable basis - and I don't envy the Treasury analysts their task ("There is considerable uncertainty surrounding the degree of excess demand in the economy" - HYEFU p14). One big uncertainty is how much of the recent immigration-superpowered increase in labour supply feeds into what GDP it will produce. Another is likely productivity growth, which recently has been all over the place, as the graph below shows, and it would be a brave person who claimed to know where it was going next. You'd think there might be a chance that post-Covid business practices (working from home, greater flexibility, less command and control), might be about to deliver some kind of productivity payoff, but then again maybe not: after all, over the 13 years in the graph, we've only managed to eke out a 0.3% a year productivity gain, and only a small part of it came in the most recent few years.

Finally, for me one of the most important bits in any HYEFU or BEFU is the degree to which the fiscal policy stance is stimulatory or contractionary, and whether the stance matches with the state of the business cycle (a 'pro-cyclical' stance, making booms even boomier and downturns even gloomier, being the trap to avoid). Here's the latest stab at the 'fiscal impulse', the degree to which underlying fiscal policy is looser or tighter than the year before.

To me, and accepting that some of the spend was in response to North Island weather events, the fiscal policy stance for the 2023-24 year was inappropriately procyclical. In June '23 the unemployment rate was only 3.6%: the economy didn't need a fiscal boost. And it also put fiscal policy at odds with the tightening stance of monetary policy, which had started to apply the brakes from late 2021 and pressed harder and harder through 2022 and into this year. Monetary policy needs mates, as they say, but it ended up dancing alone.

Looking ahead, the economic outlook is not that flash: over June '23 to June '25, HYEFU expects GDP growth at a relatively slow 1.5% a year pace, and unemployment to rise from 3.6% to 5.2%. That'll be a tricky environment to be thinking about taking 2.4% of GDP out of aggregate demand (the estimate of the fiscal impulse for 2024-25). The new government will need to be careful not to turn a slowdown into something worse.

Competition and the coalition of chaos

Sounds like a Harry Potter movie doesn't it, and I couldn't resist using it as a title even though, for all the critical "coalition of chaos" knocking, there's actually a fair degree of overlap of policy ambition among the coalition troika, at least when it comes to the regulation and competition issues you and I are interested in.

To save you having to read them, I've worked my way through the two coalition agreements, National/NZ First and National/ACT, and picked out where competition and economic regulation might be up for a rethink under the new government. There's the odd regulatory thing I don't know about (for example, both ACT and NZ First want to junk the Therapeutic Products Act 2023, whatever that is) but otherwise this is a reasonably complete listing of what's likely to be in play. It's possible that some of the ideas in National's 100 point economic plan might yet see the light of day, too, so I've covered that as well.

I've included some personal comments: your opinion may vary.

One thing that commentators on the coalition agreement haven't picked up on is that in the 'Preamble' to both coalition agreements there's a reference to "introducing more choice and competition into social service provision". In practical terms the main immediate outcome is likely to be in education - the ACT agreement features "Reintroduce partnership schools and introduce a policy to allow state schools to become partnership schools" and "Explore further options to increase school choice and expand access to integrated and independent schools including reviewing the independent school funding formula to reflect student numbers" - but as a wider pro-competitive principle it's a good policy stance to start with. Monopoly public sector 'take it or leave it' provision is unlikely to be the best option of meeting everyone's needs. Cushy private sector incumbency doesn't work too well either, of course: while I can't see that it's made it into any of the coalition's priority lists, I quite liked National's proposal (number 47 in its 100 point plan) to "Allow KiwiSavers to invest in more than one provider, driving innovation, boosting competition and putting downward pressure on fees".

Stepping through the NZ First agreement:

"Establish a select committee inquiry into banking competition with broad and deep criteria to focus on competitiveness, customer services, and profitability" - I'm not hugely impressed by this, partly because the Commerce Commission is already part-way through its personal banking services market study and I can't see the point of duplication (accepting that the Commission's terms of reference may have been a bit narrow in the first place), but also because I don't think a select committee is the right forum. There's too much opportunity for grandstanding and for ritual oppositionism, while select committees are overwhelmed as it is and I don't see them being resourced well enough to handle a project of this size. Better options would be to either expand the Commission's market study or go the royal commission route: the Aussies made a lot of progress with their 'Hayne Commission'. But in any event bank CEOs and their teams and advisers can expect to be facing the third degree in some forum or other in coming months.

"Explore options to strengthen the powers of the Grocery Commissioner, to improve competitiveness, and to address the lack of a third entrant to remove the market power of a duopoly" - why not, especially in the area of supplier (i.e. grocery manufacturer) conduct. As the Grocery Commissioner recently said, "We are aware that a number of influential suppliers appear to be opting out of the RGRs’ [supermarkets'] wholesale offers and insisting on supplying direct to smaller retailers but at much higher prices, which is having a negative impact on retail competition". Whether the nuclear option of forced divestment to create the launching pad for a third entrant is on the table, who knows.

"Assess and respond to the impact that energy prices have on inflation including consumer led institutional improvements" - no, I don't know what that means, either, and it could be as innocuous as easier ways to switch suppliers to apply stronger competitive pressure (it works, as I experienced myself), or something along the 'New Reg' arrangement Australia has experimented with (described here), but it could also hint at a greater interest in control of retail prices.

"Investigate the threshold at which local lines companies can invest in generation assets" - my days of looking at requests for cross-sector involvements under the Electricity Industry Reform Act are long past, but insofar as I remember any of it, why not.

"Require the electricity regulator to implement regulations such that there is sufficient electricity infrastructure to ensure security of supply and avoid excessive prices" - seems reasonable, especially with the looming challenge of provisioning electric vehicles.

"Examine transmission and connection pricing to facilitate cost effective connection of new renewable generation resources, both on-shore and off-shore" - can't argue with that either, while hoping that it doesn't degenerate into the usual "you pay", "no, you pay" buckpassing.

"Require Medsafe to approve new pharmaceuticals within 30 days of them being approved by at least two overseas regulatory agencies recognised by New Zealand" (also word for word in the ACT coalition agreement) - as I understand it, a policy win for the New Zealand Initiative and/or its chief economist Eric Crampton, and wholly sensible. One of the bigger impediments across areas as diverse as building materials and medicines is the potentially anti-competitive barrier of unnecessarily high, or expensive, 'health and safety' non-tariff barriers, and we could usefully dismantle quite a few of them. In general we should efficiently free-ride on other respectable countries' testing or experience: I've always liked the idea, for example, of using overseas prices for telco services as a first sighting shot on what the local regulated price should be. Along similar lines National's 100 point plan had as number 32, "Strengthen competition for building materials with automatic approval for appropriately certified building materials from the US, Europe, the UK and Australia".

"Better recognise people with overseas medical qualifications and experience for accreditation in New Zealand" - same again. Unnecessary 'credentialism' and conveniently incumbent professional licencing 'gatekeepers' need to have their wings clipped. Same sentiment in the ACT agreement with its "Better recognise people with overseas medical qualifications and experience for accreditation in New Zealand including consideration of an occupations tribunal".

Turning to the ACT agreement:

"Legislate to improve the quality of regulation, ensuring that regulatory decisions are based on principles of good law-making and economic efficiency, by passing the Regulatory Standards Act as soon as practicable" - applehood and mother pie, and who'd disagree. Whether it would extend as far as a rethink of say Part IV of the Commerce Act, where I've always felt there may be less heavy duty alternatives to our rate of return regulation, we'll have to wait and see. And while it might be implicitly tucked into that "economic efficiency" reference, I'd like to see an explicit criterion in any eventual Act that would require any proposed regulation to be assessed for its impact on competition and consumer choice.

"Establish a new government department, required to assess the quality of new and existing legislation and regulation, funded by disestablishing the Productivity Commission and consolidating some regulatory quality work across the public sector where appropriate" - the country has not gone into mourning over the demise of the Productivity Commission (though as the productivity challenge hasn't gone away I personally would like to see something resurrected along the solid lines of the UK's Productivity Institute), and if the money is used to fund better regulation, why not. 

"In consultation with the relevant Minister, carry out regulation sector reviews, which could include the primary industries, the finance sector, early childhood education, and healthcare occupational licencing, in each case producing an omnibus bill for regulatory reform of laws affecting the sector" - a broad agenda which could encompass not just the benighted CCCFA (coming up next) but also ComCom's payments system regulation. Note too yet another welcome reference to tackling potentially overprotective professional qualification regimes.

"Rewrite the Credit Contracts and Consumer Finance Act 2003 to protect vulnerable consumers without unnecessarily limiting access to credit" (which also featured in the National Party's 100 point plan as number 48, "Cut financial red tape that is stifling investment, including significantly reducing the scope of the CCCFA which has restricted access to credit") - pretty much everyone accepts that successive tinkering with the CCCFA hasn't left us in a good place. Well-meaning attempts to protect the vulnerable ended up with lenders emptying people's waste baskets looking for receipts for Netflix subscriptions.

"Amend the Overseas Investment Act 2005 to limit ministerial decision making to national security concerns and make such decision making more timely" - completely reasonable. We already have one of the more restrictive overseas investment approval regimes by OECD standards, as shown in the graph below, and we need to lighten up if (among other things) we want another supermarket entrant or we want to attract some of the vast global pool of private equity money that's currently sloshing around looking for infrastructure opportunities (in particular for decarbonisation). We don't need any repeats of a Minister telling an overseas pension fund that they can't take a stake in a New Zealand airport. In the National Party's 100 point plan, they had as number 66 a very specific reason for liberalisation, "Amend the Overseas Investment Act and Income Tax Act to give investors certainty to invest in Build-to-Rent projects", which has since made it into the government's 100 day action plan, but hopefully the Overseas Investment Act will be freed up to benefit a wide variety of potential investors.

"Reform market studies introduced by the Commerce Amendment Act 2018 to focus on reducing regulatory barriers to new entrants to drive competition" - I can't say I like the look of this, for various reasons. For one thing, it's too early to be tinkering with a regime that's still new. More importantly, it looks as if it might be intended to limit the scope of future market studies solely to reducing regulatory barriers, which would be a mistake. There will be instances (such as the petrol stations) where the big competition issues are primarily ones of market power, not regulatory barriers, and the Commission shouldn't be barred from looking at them. It's arguable that the threshold test - "in the public interest" - for the Commission in s50 or the Minister in s51 to kick off a market study is too broad, but it's better than a threshold test that would be too narrow. On a more charitable reading, perhaps the "reform" will require the Commission to make sure that it uncovers all regulatory barriers in a study, but on the other hand they've been doing that quite well already (eg the thicket of resource consent, land planning and Overseas Investment Act hurdles to new supermarkets), so unfortunately the more uncharitable reading of an overrestrictive rollback looks the way to bet at the moment.

"Immediately issue stop-work notices on several workstreams, including Three Waters (with assets returned to council ownership)" - the 100 day action plan includes "Repeal Labour’s Three Waters legislation", so that's underway as a first step. What happens after that? National's 100 point plan had included (as number 68) "Restore council ownership and control of water assets, with strict rules for water quality and investment requirements" and (as number 69 in a welcome pinpointing of the current dynamic inefficiency debacle) "Introduce a requirement for water service delivery models to be financially sustainable, so that future generations don’t inherit outdated or failing infrastructure". Perhaps that can all be done under the remit of the current Water Services Economic Efficiency and Consumer Protection Act 2023, which installed ComCom as a sectoral regulator very much along the lines of its role as an electricity lines regulator (and which I'd presciently argued here was likely to be a better plan than Three Waters). Whether that will be timely enough - there's a rather leisurely timeframe in the Act for introducing regulation - or effective enough remains to be seen. ComCom can set investment paths, but with something like $150 billion worth of overdue maintenance to be paid for, it's still (however much you might like to stick it to councils for their previous pusillanimous water mismanagement) not obvious that they're in a financial position to pay for it.

Finally, there was a chance that a more business-friendly, deregulatory government might be minded to roll back some of the features of our existing competition regime. But nothing's been unwound, so that's something. On the other hand nothing's been advanced, either, even though the Commerce Act is now looking a bit shopworn. Understandably the negotiators had bigger things on their minds.

If I've missed anything, let me know and I'll happily update.

Here we go again

On August 23 the Aussie Treasurer Dr Jim Chalmers in a joint release with the Assistant Minister for Competition Dr Andrew Leigh announced a new competition review. It's meant to be a rolling rather than a one-off process - "A Competition Taskforce has been established in Treasury to conduct the review, which will be progressed over two years and involve targeted public consultation. It will provide continuous advice rather than a formal report" - assisted by an expert advisory panel including luminaries like the CEO of the Grattan Institute Danielle Wood and ex ACCC chair Rod Sims. Some initial topics have already been identified, including the ACCC's wish list for merger reform (which you can find here) and the prevalence of non-compete clauses in employment contracts.

I'd liked the pro-competition song Andrew Leigh has been singing when I heard him take to the mike at this year's RBB Economics conference: "All good stuff", I'd said, but in a rare moment of prescience I'd added, "whether the rest of the Albanese government shares Andrew's vision of being "pro-growth progressives" remains to be seen".

It's still unclear.  In July Aussie Transport Minister Catherine King decided not to allow Qatar Airways to operate more international flights. The competition review announcement had talked of building on "the Albanese Government’s existing efforts to boost competition" and tackling "cost of living pressures": King's decision, favouring a powerful and highly profitable incumbent, and helping maintain expensive air fares, didn't sit comfortably with either of those aspirations. In slight mitigation, the flight approval system King inherited is a rusty regulatory relic: governments should have been backed out of decision regimes like these years ago.

It didn't help that the ACCC hit the newly protected darling Qantas with a false, misleading or deceptive conduct lawsuit alleging that Qantas had advertised some 8,000 flights for sale that it knew it had already cancelled (press release here, concise statement of claim here). The ACCC chair Gina Cass-Gottlieb is gunning for an all-time-record fine of the order of quarter of a billion big ones. It's only allegation at this stage, but the reputational damage has hit home: as Qantas said on September 4, "The ACCC’s allegations come at a time when Qantas’ reputation has already been hit hard on several fronts", and the Qantas CEO decided to leave two months early. The Aussie government wasn't to know what lay down the pike, but with hindsight I'd guess it is now wondering why it risked supporting an unpopular corporate against the interests of the flying public.

We shouldn't gloat too much on this side of the Tasman when Aussie policies don't line up in a neat row: pots and kettles, for starters, and in any event our interests are best served by having a prosperous well-functioning polity next door, so let's get back to the nuts and bolts of competition policy. 

When I saw the announcement, I wondered why the Aussies were having yet another review - they seem to be on a regular 10-year cycle with the Hilmer review in 1993, the Dawson review in 2003, the Harper review in 2013, and now this one. My first reaction was that they risked a makework reinvention of the wheel - Harper seems like it was only yesterday - but on thinking a bit more about it, maybe they're right. A good example - it cropped up several times at this year's CLPINZ conference - is what, if anything, needs to be addressed if collaborative ventures between otherwise competing businesses are needed to transition to decarbonisation, as they might well be. It's become a more urgent issue now than it was back in Harper's day, partly because in the interim, too little has been done, on both sides of the Tasman, to make enough progress towards our international global warming commitments.

The Aussie "let's have another rethink" approach contrasts with our more piecemeal approach to the Commerce Act. We haven't stood still: within the Act itself, off the top of my head I can think of the new prohibition against anti-competitive grocery covenants in s28A, the change to s36, the provisions in ss48 through 51E on market studies, and the introduction of the whole of the Part IV regulatory apparatus, and outside of the Act we've introduced rafts of ancillary competition-relevant legislation (most recently the Fuel Industry Act 2020, the Grocery Industry Competition Act 2023, and the Retail Payments Act 2022, on top of earlier dairy, electricity and telco legislation). Put that way, the case pretty much makes itself for a reasoned review in the round of where we've got to, how it all works together (or doesn't), and what remains to be done. 

And if we're minded to have a high altitude rethink, I for one wouldn't be averse to a free ride on the Aussies' coattails if they improve their regime to meet the latest challenges. Yes, we're not them, and they're not us, but a lot of the problems are common. We could have saved ourselves several years of expensive navel-gazing if, day one, we'd simply pirated their post-Harper revision of their competition law to deal better to abuse of market power. If they come up with any more bright ideas in the next couple of years let's steal those, too.

Coordinating in the dark

While laid up at home with a very belated case of Covid - we're okay, thanks for asking - I thought I'd use the downtime to read the IMF's latest report on New Zealand. I'm tempted to add the traditional "so you don't have to". While you don't expect an airport novel, even economists' eyes will glaze over when they find pieties like "The OCR [official cash rate] path should be calibrated to developments in the economy, including external shocks and fiscal and other policy responses". Well, duh.

Cheap shots aside, you can't argue with the big macro conclusion - we've overheated, and fiscal and monetary policy need to brake the economy: "With exemplary management of the pandemic, New Zealand recovered faster than most other advanced economies. This supported activity and, together with generous fiscal and monetary support, resulted in strong investment and consumption. But this came at the cost of overheating against capacity constraints exacerbated by restrictions on labor movement due to border closures, and disruptions in global supply chains". 

You could argue that the RBNZ has done its bit, but that Treasury hasn't. As the graph below shows, we have a largeish positive (i.e. stimulatory) fiscal impulse in the current 2023-24 fiscal year, when if everything was nicely coordinated fiscal policy would also be tightening. Given the Auckland floods and Gabrielle I'm happy enough to cut some (but only some) slack in the circumstances and trust (hope?) that the fiscal largesse will unwind in coming years. It's also true, as Oscar Parkyn, New Zealand's alternate director at the IMF, points out in an accompanying statement, that "While the fiscal impulse is estimated to be positive in the current fiscal year, the authorities [i.e. the New Zealand government] note that near-term fiscal impulse forecasts are highly uncertain", and maybe there won't have been an unhelpful 1.8% of GDP boost to an already overstretched economy when the final beans are counted. All that said, some of the discretionary measures in the 2023 Budget, or other programmes that could have been put on the back burner, really ought to have been deferred till a more cyclically opportune time

The Executive Board assessment in the report - "Directors underscored the importance of careful calibration of the fiscal and monetary policy mix to rebalance the economy and help address long-term structural needs" - is surely right. And I'm not convinced we have a good institutional mechanism to make that happen and to expose the consequences of fiscal and monetary policy not pulling together. If Joe and Joan Public had been told that you can have your Budget goodies, but your mortgage is now going to 6% rather than 5%, how impressed would they have been?

Elsewhere in the report, the Executive Board said that "Compiling a monthly inflation index would enhance the effectiveness of monetary policy", and it crops up in various places: in the staff report (para 19), "During the consultation, the RBNZ flagged the need to improve data and real-time information to aid monetary policy decisions and highlighted the lack of monthly consumer price data as an important gap. The lack of a monthly CPI series makes New Zealand an outlier among advanced economies and is holding back a timelier formulation and assessment of monetary policy. A review of the financial resources of the RBNZ is ongoing" and (para 20, in the government's response), "Stats NZ is examining the possibility of publishing more price data on a monthly basis to enable more timely monitoring of inflation developments but noted that a monthly CPI series would require additional resources".

Sadly, we have form here. When Covid hit, we discovered we didn't have timely enough data on how the economy was tracking, and we started on a mad scramble in the middle of a crisis to develop some ('Getting real', 'Getting even more real'). Two years later along comes the worse outbreak of inflation in 30 years, and do we have the statistics to help us best cope with the latest challenge? No we don't. In our current and deeply strange ordering of statistical priorities, the Stats database can tell us what we spend monthly on imports of 'Preparations of vegetables, fruit, nuts or other parts of plants' from Bulgaria*, but it can't tell us our own country's monthly inflation rate.

Just over a year ago the Aussie Bureau of Statistics got with the plot and started its 'Monthly CPI indicator'. We saw its value yesterday when the latest number (4.9% for July) came in below the expected 5.2% - useful new info all round, with reactions across numerous markets. Here? We're still twiddling our thumbs.

*$46,015 in May

CLPINZ 2023

 After a rapid scramble to reorganise the schedule following the last minute loss of the planned keynote speaker, the 34th annual workshop of the Competition Law and Policy Institute of New Zealand (CLPINZ) successfully got underway in Wellington over the weekend.

Top of the bill - promoted at short notice from the previously planned 'fireside chat' session, and very much appreciated for their willingness to step up and help out - were Commerce Commission chair John Small, on 'The future of antitrust', and Andy Matthews of Matthews Law as commentator. CLPINZ chair Anna Ryan of Lane Neave chaired the session.

John Small and his chosen topics; Andy Matthews commenting

John noted a swing in the intellectual competition policy pendulum, with a strong trend of more regulation for competition which had started twenty years ago with the Telco Act and has more recently extended to petrol, groceries and retail payment systems: on petrol, he noted that there were some retail "issues", a conclusion you'd tend to agree with after reading the latest quarterly petrol market monitoring report. He signalled that there is likely to be more ComCom activity against restrictive practices, an area which he accepted had been underdone to date, with the likes of retail price maintenance, anti-competitive covenants, cartels - the leniency programme is still "ticking away" - and in the fulness of time the revised s36 provisions against abuse of market power likely to see more playtime. He said that the NZ merger guidelines were due for review in any event, and noted that they're also a hot issue in other jurisdictions (notably in the US and Australia). And he put some emphasis on how ComCom plans to engage with its various stakeholders: "efficiency-based playing nice", as he put it, preferably relying on soft power (such as guidelines) and on "direct, respectful engagement", and avoiding litigation if possible, but going there if ultimately necessary.

Andy agreed that there had been a pronounced trend towards regulation for competition since around 2001 when there had been a "Big Bang" away from the previous reliance on light-handed, or no, regulation, and there could be a big payoff from the latest regulatory initiative, on consumer data rights, which could make competition in banking, for example, more effective. He also agreed with John's view that consumer law can be effectively used to complement competition policy, with for example significantly higher Fair Trading Act penalties over time providing a stronger incentive to be more consumer-friendly. And although the zeitgeist has moved to more hands-on interventionist competition policy, Andy reminded us that (a) the new and globally high-profile FTC/DoJ guidelines are just that, guidelines, and don't change the underlying law, and (b) regulation is all very well, but the first best option is always likely to be more effective competition, as we notably saw when a third mobile telco rolled out its gear.

Session 2 was "The most environmentally friendly carbon neutral CLPINZ session ever! Or is it?". In other words, the currently controversial area of "greenwashing", making misleading claims about the greenness of a business's products, activities, positioning or performance. The speaker was Charlotte Turner, senior associate, climate risk governance with MinterEllison in Melbourne, commentator was Kirsten Mannix, acting general manager - fair trading at ComCom, chair Bradley Aburn from Russell McVeagh. Charlotte referenced a web-scraping survey of the increased prevalence of green-focused claims, Kirsten referenced another which found an alarmingly high (~40%) proportion of potentially misleading claims. It's self-evidently an area with the potential to bite careless people: that said, as Charlotte said, the fundamentals haven't changed, and there are still well-established tests for 'deceptive' and 'misleading' even if the field they're being applied in is relatively new. And as Kirsten reminded us, one of the established principles is that 'intention' is not the point: being misleading will always put you on the wrong side of the law. You may well have read ComCom's own 'Environmental Claims Guidelines: a guide for traders', but might also like to follow up on some references Charlotte provided that originated with ASIC, the Aussie financial markets regulator: 'How to avoid greenwashing when offering or promoting sustainability-related products', and 'REP 763 ASIC’s recent greenwashing interventions'.

Session 3, 'Section 36: What can we learn from the Australian experience?', gave us incisive insights into how our s36, now amended to be in line with Australia's equivalent s46, will go in trying to deal to abuse of market power, given that our previous formulation of the law had proved ineffective. Chaired by Jennifer Hambleton,  it featured two very good speakers - Simon Muys from Gilbert + Tobin in Melbourne and Ed Willis from the University of Otago - and even though the 10 cases commenced under the new law in Australia have yet to go the full legal distance, and in some cases are still cantering towards the first fence, we got good ideas on what we might reasonably expect here. While some (including me) had hoped we might have got to a simpler place, compared to the counterfactual complexities of our old s36, both speakers agreed that litigating the new s36 will not be any simpler, just different (though, thankfully, more intellectually coherent). Establishing anti-competitive purpose, and establishing anti-competitive effect, will remain tricky, which is a bit of a disappointment to those of us who had hoped the Australian 'effects based test' would cut through more easily to the chase, and market definition looks to be at least as  crucial as previously. 

Simon Muys (L) and Ed Willis (R) reflect on the jurisprudence around abuse of market power

Session 4 was 'The Next Gen' session, a new CLPINZ idea aimed at showcasing some of the talent coming through the younger ranks of the competition and regulation community, and was chaired by NERA's Will Taylor. Left to right below, we got Sophie Vinicombe, solicitor at Russell McVeagh, talking about Ticketmaster antitrust claims in the US (what looks in retrospect to have been a very poor merger clearance); Sophie Harker, senior solicitor at Chapman Tripp on collaborating with competitors in emergencies like Covid; Luke Archer, principal investigator, Commerce Commission, on competition and sustainability; and Jono Henderson, consultant, NERA, on self-preferencing in digital markets (eg when a Google search throws up Google-associated products ahead of others'). All good topics, all well handled, and (going by people's reactions and the discussion at the CLPINZ AGM) I'd guess a 'Next Gen' session is going to be an ongoing feature of future workshops.

Session 5, 'AI and Collusion: Unveiling the Challenges of Tomorrow', featured a bright idea by chair Ben Hamlin: have AI (in the form of ChatGPT) write both the blurb for the session and the biography of the speaker, James Every-Palmer, which ended up crediting James with everything short of the Nobel Prize in Economics (not to downplay his real achievements: let's hat-tip his involvement in the Lawyers for Climate Action NZ win in the High Court, forcing the government to roll back its poor plan to paper the country with cheap emission trading scheme credits). James was surely right to argue that there is a long list of potentially anti-competitive concerns, not only over facilitated collusive conduct, such as tacit algorithmic price-formation, but also over unilateral conduct (including predatory conduct, and anti-competitive tying and bundling) and further issues across a variety of non-price dimensions including quality and privacy. Me, I'm a tech optimist, and inclined to believe the benefits of modern platforms in aggregate far outweigh their downsides, but you have to expect that some of the powerful incumbents will from time to time push their luck too far.

And finally Session 6, 'Aotearoa New Zealand's Turning Point - Competition and Consumer Policy Implications', chaired by moi, featured Mayuresh Prasad from Deloitte Access Economics in Wellington. Mayuresh gets a big thank-you for stepping in at literally days' notice to fill the gap in the programme after John Small and Andy Matthews moved to the keynote slot. He showed us, first, some modelling of the costs and benefits of what we need to do to keep temperatures rising by no more than 1.5 degrees. In the graph below there's a period where we incur costs to put in place policies like carbon taxes and spend on new renewable energy (and hence our GDP on the green 'do something' track falls below our GDP on the orange 'do nothing' track). After a period - the 'turning point' of his title - we pull ahead of where we would have been otherwise, and Mayuresh put numbers on the initial costs and ultimate payoffs. The costs, for mine, looked a bit on the low side, but otherwise his modelling fits with other attempts along these lines which also show that we can indeed have our cake (a greener sustainable world) and eat it (have a higher standard of living). And secondly Mayuresh explored some of the competition and regulation policy implications, notably around facilitating the necessary collaboration for good stuff to happen, and in particular giving certainty early in the piece as to what is or is not permissible, as we don't have a lot of time to waste.

Don't forget the benefits

Scrutiny of mergers is on the increase, notably in the US, where new draft merger guidelines have been widely interpreted as a sign of a more activist competition regulator proposing to take a tougher line, but also elsewhere. In the UK, for example, one economist recently wrote a piece in the Financial Times pointing out that the CMA's merger decline rate has been rising in recent years ('The UK’s competition watchdog risks undermining business dynamism', possibly $). 

In this latest swing of the pendulum, it's getting harder to argue for the 'good' merger, where the merged entity produces efficiencies (typically cost savings) or other benefits, such as innovative synergies from a combo that's more than the sum of its parts, or creates a more effective competitor to an entrenched incumbent. And more critics are finding more reasons to ping supposedly 'bad' mergers which reduce competition and increase corporate market power.

By happenstance, along have come two pieces of work, reminding us not to forget the 'good merger' story.

First, two hat tips for unearthing the first piece. One goes to the always interesting 'Blog Watch' column which the University of Canterbury's Paul Walker (aka GrumpyMcGrumpyface on Twitter) writes for the New Zealand Association of Economists' Asymmetric Information newsletter (if you're the proverbial intelligent lay person who'd like some very well-written takes on local and international economic issues, sign up for Asymmetric Information here, it's free). And the other goes to the equally approachable Conversable Economist blog, run by Timothy Taylor. He's also the editor of the Journal of Economic Perspectives, which "aims to bridge the gap between the general interest business and financial press and standard academic journals of economics" and is a terrific explainer in plain (or plainish) English of current economic debates (it's also free to read online, start here). Taylor's 'Recommendations for Further Reading' in each issue are always worth a look.

In his latest (July) 'Blog Watch', Walker picked up on one of Taylor's blog posts in April, 'After that Big Merger, What Happened?'. Taylor had come across some research done by folks at the International Center for Law and Economics, 'Doomsday Mergers: A Retrospective Study of False Alarms'. They looked back at six high profile, highly contested US mergers: their bottom line was that "Our retrospective analysis shows that many of the alarmist predictions of the past were completely untethered from prevailing market realities, as well as far removed from the outcomes that emerged after the mergers". With only one, partial, exception, the mergers had actually been 'good' mergers, with pro-competitive pro-consumer effects, or as Taylor summarised it, the retrospective case studies "do show pretty clearly that dire predictions about ill effects of mergers need to be taken with a few spoonfuls of salt" (he also wondered whether the merger sponsors' claimed benefits were as oversold as the merger critics' claimed costs were, which is fair enough).

The only partial exception was a big merger in the beer industry, where post-merger prices for some of the mass-market beers did increase (average prices remained steady). But that had the happy outcome that it created a profitable opening for the craft brewers, who have taken increased market share. And if you'd had the choice between a now more expensive but decidedly pedestrian beer and a tastily hopped artisan American Pale Ale, you'd have switched, too.

The other piece of research, which I came across on the ProMarket blog, is some work done for the World Bank. The ProMarket write-up is 'Firm Consolidations Hurt Workers, But Likely Not Because of Market Power', and the original all the bells and whistles World Bank working paper is 'Firm Consolidation and Labor Market Outcomes', very short summary here and full pdf here.

The researchers were primarily concerned about the adverse employment consequences of mergers, and they were well placed to investigate them. They were able to use a big administrative database in the Netherlands which contained matched employer-employee data, so they were able to compare what happened to employees in acquired companies after some 1,000 takeovers in the Netherland over 2011-15, compared to what happened at very similar companies that weren't taken over.

It's true that takeovers led to job losses: "There is substantial job loss among the workers of target firms: in the four years after a takeover, workers at a target firm are 8.5% less likely to be retained at the consolidated firm compared to workers in the control firm. This lower retention rate translates into income loss ... These effects are long-lasting and are present even in the fourth year after the takeover" (pp1-2 of the World Bank paper). 

Now, the researchers are, properly, concerned about this long-term adverse impact on those hit by involuntary job loss: my two best answers (which I've championed here before) are, at a macroeconomic level, maintaining as hot a labour market as you can run without triggering inflation, and, at a microeconomic level, 'active' labour market policies that make it easy to retrain, upskill, or go self-employed. Stomping on anti-competitive constraints in the labour market, like non-compete clauses, wouldn't go amiss, either.

But that said, the employment restructurings they are bemoaning are what in the competition policy game we would call efficiencies: they're cost savings, and as the researchers discovered, cost savings of a very specific kind. They found that if lab technician Kath in the acquired company is paid more than lab tech Rita in the acquiring company, Kath tends to get laid off. They also found that if there are lots of accountants in the acquired company, but the acquiring company already has lots of accountants, too, then the acquired accountants tend to get laid off. 

It makes complete sense, and it's likely to be a ubiquitous feature of mergers everywhere, not just in the Netherlands: if you were running the acquirer, you'd very likely act on similar lines. It's hard on Kath, and hard on the accountants, but the merged entity ends up more productive. And that's without thinking of any other efficiencies that may be on the table. Sure, for competition policy purposes, it's the net outcome that matters, and in any given case efficiencies may well be outweighed by detriments, but it would be silly to start from a viewpoint that efficiencies are nebulous or unlikely. A better starting presumption is that there are very likely to be at least some.

The Dutch example also got me thinking about what the New Zealand data might show. The Netherlands may well have a good administrative database, but so does New Zealand: indeed I'd hazard a guess that ours is top tier by international standards. Formally, it's the 'Integrated Data Infrastructure', or IDI: Stats calls it "a large research database. It holds de-identified microdata about people and households. The data is about life events, like education, income, benefits, migration, justice, and health. It comes from government agencies, Stats NZ surveys, and non-government organisations (NGOs). The data is linked together, or integrated, to form the IDI. The IDI complements the Longitudinal Business Database (LBD), which holds linked microdata about businesses. The two databases are linked through tax data".

At one point, access to the IDI was overtightly corralled, and not enough was being done to exploit its potential value. Now, it's being increasingly mined to good purpose: this year's NZ Association of Economists' conference featured a variety of IDI-based projects. AUT's Gael Pacheco and her team, for example, were able to follow (anonymised) Kiwi students who had done badly on the international PISA tests of numeracy and literacy to see what their subsequent employment, health, and justice system outcomes had been (as you'd expect, not good).

So why hasn't someone had a look at the effects of takeovers? It's all very well for supporters of mergers to claim benefits, and critics to claim costs, and the Commerce Commission to appeal to first principles of economics, but wouldn't we get more informed decisions if the question was, how does this proposed merger line up with what we empirically know about New Zealand mergers in general?

The RBB Economics conference is back

After the Covid-induced hiatus since its 2019 conference, RBB Economics got back on track last week with its traditional face to face conference in Sydney. It was good to be able to schmooze again, and you never know who you'll meet: this time round I bumped into Lilla Csorgo, who's back in our part of the world as the about-to-be ACCC chief economist.

The first panel session was 'Reflections from the agency, judiciary, and private practice'. It featured the CEO of the ACCC, Scott Gregson (somewhat oddly, the ACCC doesn't list bios of its senior staff on its website but here's the 2020 media release about his appointment as COO, upgraded to CEO in February '22) on 'Pursuit of a strategic enforcement model – the ACCC’s journey'; King & Wood Mallesons partner Peta Stevenson on 'Those who do not learn from the past are doomed to repeat it – is the ACCC doomed?'; and the Hon Justice John E Middleton AM KC on 'A more demanding judiciary emerging?', all moderated by RBB Economics partner George Siolis.

Scott took us through a history of the evolution of the ACCC from an essentially reactive complaints-driven collection of regional offices to an integrated national outfit with a more purposive agenda. Looking ahead, and he said these would be modest rather than massive moves, he expects that while a penalty-based regime will still be central, there's likely to be more focus on remediation and redress (good); that the ACCC will be driven more by market data and intelligence (as is everybody else these days); and that it will aim for better measurement of performance (always a tough job for anyone in the services game).

(Left) George Siolis kicks things off; (right) the panel for the first session, Scott Gregson, Peta Stevenson, Hon Justice John Middleton

Peta walked back a bit from what she called her "click bait" title - no, the ACCC is not doomed - and focused on the performance-measurement element. Some purported measures based on levels of ACCC outputs or activities may well be problematic: higher numbers of cartel prosecutions, for example, could easily be a result of more cartels operating rather than less, and could well mislead people into thinking that the actual desired outcome (cartel deterrence) had been achieved. Better measures might be found by rerunning the likes of the University of Melbourne 2011 survey of public awareness of cartels. And John explored some of the remediation and redress issues: the "demanding" bit of his address referred to judges demanding clearer and more convincing reasons why they should go along with agreed penalties, especially around whether they are appropriate to the degree of harm involved.

The second session, 'Reflections on policy (1)', was a pre-taped address by Dr Andrew Leigh, Assistant Minister for Competition, Charities and Treasury (and incidentally a Harvard PhD and ex economics professor at ANU), on 'No Competition, No Progress'. He pointed to evidence of rising market concentration, higher company markups, declining job switching, and declining start-ups as a percentage of total firms (when you look at firms with employees, and not just ex-employees going out as one-man-band consultants, not that, ahem, there's anything wrong with that). He made a good case that effective competition policy can combat these productivity-sapping developments, and that the post- Hilmer-report competition reforms had been one of the reasons supporting an Australian productivity boom in the 1990s. All good stuff: whether the rest of the Albanese government shares Andrew's vision of being "pro-growth progressives" remains to be seen, but it's a good thing to aim for.

Then came 'Reflections on policy (2)' on the broad theme of 'The shifting mandate of competition policy in Australia and globally'. We heard from Tom Leuner, Executive General Manager, Mergers, Exemptions and Digital at the ACCC (sorry, no web link or bio obviously available), White & Case partner Belinda Harvey, and Minter Ellison partner Katrina Groshinski, moderated by RBB principal Chris Hart.

Tom (disclaimer - his views, not necessarily ACCC's) referenced the debate about whether merger enforcement globally had become too lax (he pointed to this joint report from the CMA, the Bundeskartellamt and the ACCC). Looking forward he expected that merger policing would need to involve more focus on: non-price effects (such as on quality or privacy); effects on potential competition (the whole 'killer acquisition' thing); upstream markets facing downstream monopsonists; vertical mergers and potential foreclosure problems (very few challenged in the US recently, but more a live issue in Australia); and the process of dynamic competition, even if the analysis is necessarily qualitative. People tend to make a song and dance about how hard it is to judge whether some currently fringe start-up has the potential to be the Next Big Thing. My feeling (which I put to Tom) is that there are private equity and venture capital types who are 24/7 all over these start-ups and could well (given their skin in the game) have a pretty good sighting view of a start-up's eventual evolution. Don said that they do pick up on the valuations being paid for start-ups as an indicator of how big their idea is, which is fair enough, but I still wonder if there is some further information lurking unused.

Belinda endorsed what Tom said, in particular picking up on the importance of protecting dynamic and potential competition, but she also wondered whether in a newfound tougher global merger approach, there weren't risks of 'big' being regarded as 'bad' irrespective of the efficiencies a merger might bring or of a big company's success in meeting customer needs. She also wondered how protecting nascent competitors from incumbent acquirers would play out: it could reduce the incentives for start-ups to form in the first place if their most likely cash-out, to one of the big guys, gets taken off the table.

Katrina accepted that there is a global move of scepticism about big companies and where we've ended up - she instanced Bernie Sanders' book It's OK to be Angry about Capitalism - and that there's a view that ever bigger companies are a standing reproach to merger underenforcement. But she too wondered about going too adventurously down that road: big can be beautiful (the indirect reference was to E F Schumacher's Small is Beautiful) if efficient. On a separate topic, she said that competition policy needs to be at the centre of Australian decarbonisation: it might yet get sidelined (e.g. to allow room for government acquisitions of energy assets), but the risk would be that you end up with an economically inefficient greening transition.

And finally we came to 'Reflections on NSW Ports', a recent Full Federal Court decision. Speakers were Sarah Lynch, Special Counsel at Gilbert+Tobin, RBB principal Chris Whelan, and Michael Borsky KC, Ninian Stephen Chambers, List A Barristers. Sarah took us through the factual matrix of the case and Chris took us through some of the economic issues.

The genesis of the case was interesting. I think it would be fair to say that the then chair of the ACCC, Rod Sims, had got so exasperated at Australian states maximising the value of their privatisations, by means of arrangements (in his view) providing anti-competitive protection for the assets being sold, that he'd had a gutsful (an earlier example had got on my wick, too). The ACCC duly took on provisions that it said protected the container depot monopoly of Ports of New South Wales: their privatisation had included a clause whereby Port of Newcastle, if it entered the container port game, would have to compensate the incumbent New South Wales ports (Port Botany and Port Kembla) for business lost to the upstart Newcastle challenger. The arrangement, the ACCC argued, acted as an anti-competitive barrier to Newcastle giving the container business a go.

Unfortunately once the ACCC had clambered out of the trenches, it ran into the barbed wire of Crown immunity (the state of New South Wales could do what it liked, as its privatisation decisions were outside the purview of the Competition and Consumer Act, and the immunity also extended derivatively to Ports of NSW).  While still tangled in the wire it was mortar bombed by failing to establish anti-competitive purpose (the court preferring the simple story of a financial purpose, namely an arrangement that the buyers would get the value of the monopoly they were paying good money for). And it got raked by the judges' machine gun fire on effect: they reckoned that the provisions made no difference, as it was very unlikely that Port of Newcastle would in fact get into the container trade. Chris had wondered, given the 50 year term of the lease the purchasers were buying, how confident you could be that Port of Newcastle would stay out of the game for such a long period: on the other hand, the state of New South Wales (likely for solid economic efficiency reasons) had made it clear that it was only interested in allowing sequential container port development, with Port Kembla second in the queue when Port Botany eventually reached capacity.

The ACCC's reaction is here. The good news is that despite the lengthy and expensive defeat, the ACCC's intervention probably helped to get to a better place: the compensation arrangement was eventually rescinded. The bad news, for mine, and accepting that the courts cleared Ports of New South Wales in this case, is that Crown immunity could leave too much scope for future anti-competitive rorts. Michael Borsky usefully reminded us that the Harper report recommended that competition law ought to be extended to cover more of the activities of various levels of Australian government: at p282 it said that "Through its commercial transactions entered into with market participants, the Crown (whether in right of the Commonwealth or the States and Territories, including local government) has the potential to harm competition. The Panel considers that the NCP [National Competition Policy] reforms should be carried a step further and that the Crown should be subject to the competition laws insofar as it undertakes activity in trade or commerce". That looks a sensible view.