The unsung heroes

Earlier this month, in a criminal case, the Federal Court of Australia pinged Kawasaki Kisen Kaisha Ltd (K-Line) A$34.5 million, the highest ever criminal cartel fine in Australia, though just adrift of the highest civil penalty, Visy's A$36 million in 2007.

K-Line was the second Japanese shipping company to have its collar felt for the longstanding rort of rigging the cost of shipping Japanese cars to Australia, following the earlier criminal conviction and A$25 million fine for NYK Line (see 'The Shipping News'). The K-Line judgment is here (handy hint - you can safely skip paras 86 through 169).

The only reasonable response to the fine is, jolly good. This fell squarely within the 'hard core' kind of cartel conduct that criminalisation was intended to punish and deter, complete with the usual cloak and dagger contrivances. NYK had had a version of Maxwell Smart's 'cone of silence', and K-Line had "reports ... often marked with words to the effect of “Confidential. Dispose of after Reading”. You can imagine some hapless manager in Tokyo trying to eat the files as the lads from Japan's Fair Trade Commission arrived.

The only smidgen of mitigation that, as an economist, you might feel for them is that, as the judge noted

41 ... the market for ocean transport service for roll-on, roll-off cargo was characterised by high capital costs with ‘lumpy’ investment, meaning that capacity could not be smoothly adjusted in response to demand.

42    The market was also characterised by long investment lead times. That was because the length of time required to commission and build a specialised car, or car and truck vessel was approximately two to three years per vessel. Such vessels were also not generally available for short term lease or charter, though in some instances space on vessels was made available between particular carriers pursuant to space chartering arrangements

But workably competitive markets are inventive enough to come up with licit solutions to these kind of problems. One is long-term 'take or pay' contracts, as you see every other day in (for example) the commercial property market, where developers line up leasing precommitments before they turn the first sod.

Lawyers should probably have a look at the bits of the judgment that discuss the extent of K-Line's cooperation with the ACCC, as described in the agreed statement of facts. The judge at [193] pointed to the "rather general and anodyne nature of some of the facts recited in it" and at [341] said it was "a statement of facts which appears to have been the product of detailed discussion and agreement between the respective legal teams. The result is a lengthy and detailed document which has no doubt been carefully crafted as a result of the negotiations, but which is nonetheless rather unhelpful in a number of important respects. The Court is left in the rather unenviable position of having to decipher and draw inferences and conclusions from that rather bland and sanitised document". You can be too clever by 'arf, in other words.

Other than that, there isn't too much to take away from the sheeting home of a particularly large, global and brazen cartel.

Except for two unsung heroes at K-Line.

One pops up at [79], where we read that "The Car Carrier Business Group General Manager was particularly distrusted by some NYK and Mitsui employees because he would sometimes compete aggressively for market share and on occasion attempt to depart from agreements reached with the other carriers" (he subsequently got sat on).

The other appears in [81], where "a Manager in one of the regional teams in the Car Carrier Business Group proposed to the Managing Executive Officer of the Car Carrier Business Group that K-Line should consider ceasing its communications with other carriers because such communications were risky for K-Line and its employees and K-Line should focus on having a strong sales force" (he - almost certainly a he - was ignored).

Well done, guys. And hopefully for their companies' sakes there aren't honest New Zealand executives in the same ignored and sidelined boat. Cartel criminalisation goes live in New Zealand from April 2021.

In denial

The first edition of the new Household Labour Force Survey came out yesterday, and there have been some strange reactions.

At first I agreed with Grant Robertson, Labour's finance spokesman, when he said that it wasn't right that people looking for jobs solely over the Internet aren't being counted as unemployed. In today's world, that is indeed a daft approach, as I said at the time when Statistics NZ was running its (very useful) seminars around the country about the new-look HLFS. It's particularly odd, since this definition, which as Robertson correctly said has the effect of making unemployment look lower than it really is, came from the UN's International Labor Organization, which is emphatically not a labour-hostile institution with an agenda of concealing unemployment: it is, as its website says, "devoted to promoting social justice and internationally recognized human and labour rights".

But I was then surprised, and dismayed, to see Robertson casting aspersions on the motivation of Statistics NZ, which justifiably took exception. We don't need the quality of public discourse getting nudged further into the mud.

I was also surprised by commentators who took the line that, because the new survey contained methodological changes, we could not be sure that employment grew at all in the second quarter. At face value, the HLFS had shown a 58,000 rise in employment in the June quarter compared with March, but as Stats said (here) "part of this increase reflects improvements to the redeveloped HLFS alongside any real-world increase in employment this quarter".

It is technically angels-on-the-head-of-a-pin true that the HLFS doesn't tell us whether there was "any real-world increase in employment". But to try and make the case that there really wasn't any is complete cobblers. Absolute arsehats.

For one thing, Stats had earlier published the June quarter results from what used to be a separate Quarterly Employment Survey publication and is now part of an overall Labour Market Statistics release. It isn't on all fours with the HLFS one (for example it misses very small businesses, and agriculture) but it is another valid perspective on employment, and it showed that the number of full-time equivalent employees rose by either 0.3% (seasonally adjusted measure) or by 0.6% (the 'trend' measure) in the June quarter.

For another, every single business survey tells us that employment is growing. The latest employment components of the BNZ/BusinessNZ Performance of Manufacturing Index, the BNZ/BusinessNZ Performance of Services Index, and the ANZ's Business Outlook survey are all showing growth in employment. Here's the ANZ one.

So it's time to stop playing silly buggers with the data and to stop denying the undeniable: employment is growing. That's it.

The other interesting thing in the new HLFS was a new 'underutilisation' measure, which adds up the officially unemployed, the underemployed, those looking for work but not quite ready to take it up, and those not "actively" seeking work but who would like a paid job and are available (which includes those Internet-browsing people, who aren't being "active" enough, apparently, to fit the official definitions).

Measures like these are often politically abused - "Sure, the unemployment rate has gone down, but see, there's all these other people..." - but it's still an interesting concept, as this Stats publication (pdf) explains. And it's one where we can see (here) how we're travelling by international standards (give or take - it's the picture from last December, as not every country has up to date figures).

To be honest, I'd thought we would show to greater advantage than 'a bit better than the OECD average': cyclically, the economy has been doing well by international standards, so you wonder how (for example) the sluggish Japanese economy is to the left of us. Perhaps the answer is demographics: there may simply be very few warm bodies left unemployed in the relatively aged Japanese population, compared with our younger structure. It's less of a surprise, though, that our relatively flexible labour markets have produced better outcomes than the sclerotic institutional arrangements in France, Italy, Greece and Spain.

But we have one blot of our own (shown below) that badly needs fixing. I don't have any immediate answers, beyond the traditional liberal nostrum of more, and better, training and education. Hopefully others have more ideas: either way, this can't be allowed to go on.

Time to revisit "hard core" cartels

Earlier this week the European Commission fined four truck makers €2.93 billion (NZ$4.6 squillion at the current exchange rate). A fifth, the German company MAN, wasn't fined because it ratted the others out, and under the Commission's cartel leniency policy (and our own Commerce Commission's), the first company in the door to renege on the others gets off any fine (though it and its cartel mates remain exposed to civil suits for damages). A sixth company, Swedish based but Volkswagen controlled Scania, didn't settle with the Commission and is being pursued separately. Full details here.

This was your classic "hard core" cartel - secret, prolonged (14 years), deliberate, and significant. As the European Competition Commissioner said

there are over 30 million trucks on European roads, which account for around three quarters of inland transport of goods in Europe and play a vital role for the European economy. It is not acceptable that MAN, Volvo/Renault, Daimler, Iveco and DAF, which together account for around 9 out of every 10 medium and heavy trucks produced in Europe, were part of a cartel instead of competing with each other.

The European Union hasn't criminalised cartels, meaning that executives can't be jailed. Member countries weren't prepared to give the Commission the authority, and have gone their own ways: some have chosen the criminalisation route (the UK, Ireland), most haven't. But if ever there was a European case where executives needed to have their collars felt, this was it.

By coincidence, a couple of days earlier the ACCC announced that NYK, the Japanese shipping company, had pleaded guilty to criminal cartel conduct involving the shipping of vehicles from Japan to Australia in 2009-12. It's been a while coming: this was the first criminal case since the Aussies criminalised cartels in mid 2009. We don't know who the other alleged parties to the cartel are. We don't know if anyone at NYK is packing their toothbrush.

When I see cases like these, I can't help thinking - again - that we made the wrong decision last December in flagging away cartel criminalisation in New Zealand. I've posted before that "Hard core" cartelists are criminals and what our response should be: Let hard core cartels off the hook? Nah.

Bear in mind that I'm a bleeding-heart raised-in-the-Sixties liberal, and I'm hard to convince that we should imprison people for anything short of grievous bodily harm or broadcasting reality TV programmes. Bear in mind, too, that I'm generally pro business, strongly pro markets, and slow to buy into heavier regulation or enforcement without an industrial strength, convincing, evidence-based case. But when these genuinely "hard core" cartels crop up, even I am prepared to reach for the handcuffs.

Leopards and spots, Japanese style

Here's a potted (though I think fair) summary of the current consensus view on Japan: Prime Minister Abe's got his "three arrows" (monetary expansion/reflation, fiscal stimulus, structural reform), he's successfully fired the first two, but the third is still sitting in its quiver.

There's certainly evidence that the first two are working. The Economist's latest (October) poll of international forecasters has Japan growing by 1.8% this year, and 1.6% next year, and price deflation is being turned around, with consumer prices expected to be essentially stable this year (+0.1%) and to rise by 2.2% next year.

What's somewhat bothering me, though, is that second arrow of fiscal stimulus through public works. And not for the reason you might have expected (the wisdom of running more deficits when already heavily indebted).

What's bothering me is the likely gross inefficiency of the spending. And maybe what it says about the underlying ethos of the Abe administration.

Now, I know that from some perspectives (eg immediate job creation) it doesn't matter what the money is spent on. As Keynes put it, "If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again...there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing" (General Theory, p129).

More sensible, indeed - but that's not what the Abe administration is doing. It's gone the old bottles route: more roads to nowhere that aren't needed, more civil engineering works that achieve nothing of lasting worth.

It's straight back to the worst practices of the Liberal Democratic Party, when the construction companies and the LDP were deeply in each others' pockets, when rivers got paved over, and bridges and motorways to nowhere were built everywhere.

Here's an illustration of how bad it has been. Earlier this year the McKinsey Global Institute and the McKinsey Infrastructure Practice published a fine report, Infrastructure productivity: How to save $1 trillion a year, well worth reading in its own right. Along the way, though, the McKinsey folk came up with this.

Spot anything strange about the relative scale of Japan's spending on roads?

So what this says to me is that, when given the option of what to spend the fiscal stimulus on, the LDP went straight back to what they used to do in the bad old days before the electorate chucked them out in 2009.

And that's a worry on two fronts. Unproductive 'scratch my back' pork-barrel deficit spending was one of the things that got Japan into its mess in the first place. And if it is indeed an unreconstructed LDP we are seeing, as beholden to special interests as it ever was, then I wouldn't get too optimistic about the prospects for the third arrow of structural reform.

Is bad news the only news?

Last night I watched  the BBC World News, on Sky. And it had a major hooha about sharp falls in the Japanese stock market. The big news, apparently, was that the Nikkei had had a substantial fall - they talked about 5%, though the index data at the close weren't to hand, and in the event it was a less newsworthy but still largish  fall of 3.4% (opened at 14,072.9, closed at 13,589.03) - and the programme went on to note that, having hit a five week low, the Nikkei's weakness was causing alarm and unrest in the rest of  the Asian markets. No doubt the other news channels were running similar items.

Talk about something that is literally true, yet unbalanced.

Six months ago (its closing level on November 30 '12) the Nikkei was at 9,446.01. Since then, and even after this latest 'dramatic' fall, it is up by 43.9%. If this is a weak market, please, Oliver-like, could I have more.

Was there equivalent coverage when the market was rising? Were the TV channels as diligently reporting large gains as they have been in reporting large losses? For example, in the space of six days, 2nd to 8th of April)the Nikkei went from 12,003 to 13,193, a gain just shy of 10%. Were last night's handwringers celebrating back then? Cue for a Tui style: yeah, right. Investors becoming massively better off is, apparently, not news.

Irrespective of thoughts about media posturing, what's really going on?

The Japanese market had run hard and run strong. It had some good reasons for it. The new Abe government decided that it wanted substantially more spending on infrastructure, very low interest rates for even longer, and a much lower exchange rate (the whole 'Abenomics' thing). This big reflationary impetus greatly improved the short-term prospects for Japanese GNP growth and for Japanese corporate profits. A big rise in the equity market was entirely consistent with this new set of policy settings.

Did the equity market overdo things? I'd say, very likely. The Japanese share market is not the most transparent or above board of the world's equity markets, and a semi-organised over-ramp of share prices wouldn't have surprised me in the least. And even in less - let's call it collegial - markets, asset prices are well known to have tendencies to overshoot the levels that the fundamentals might justify. In some sectors of the Japanese market (and most notably the property and property development companies) share prices had, to use a technical economic term, gone mad.

The real news, in short, is that an extraordinarily strong equity market had got a bit irrationally exuberant, and needed to be a bit more realistic.

Was that too hard for the media to say?