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?