Have we got the same problems?

Earlier this week the LEANZ programme of Auckland seminars got a more than usually eminent speaker: Professor Sir Martin Cave, who among many other achievements is now chair-elect of the UK's energy regulator the Office of Gas and Electricity Markets (Ofgem).

Picture from http://www.martincave.org.uk/

He was on his way to Wellington to assist MBIE's Electricity Price Review, given his background as one of the members of the UK's extensive two-year review of the British electricity markets (for regulation uberwonks, all the source material you'll ever want can be sourced here, and for the rest of us the summary report is here). If I've got it right I think the invitation to New Zealand came from Vector, but in any event Vector certainly hosted the Auckland event, emceed as usual by Richard Meade. Well done, folks, LEANZ activities in Auckland and Wellington depend on business support.

The gist of what Martin said was that the review found the wholesale market was working tolerably well: there was room for some improvements but it generally got the green tick. The distribution (lines) businesses were already closely regulated. But the retail market - that was quite a different story. There appeared to be a large lump of captive customers, or if not captive, at least not interested in escape. As the summary says (p22), "72% said they had never switched tariff with an existing supplier, did not know it was possible, or did not know if they had done so". It will be no surprise that the incumbent retailers had them on expensive tariffs. The summary says (pp45-6) that

we estimated the detriment from excessive prices to the domestic customers of the Six Large Energy Firms to be about £1.4 billion [NZ$2.7 billion] a year on average over 2012 to 2015, the entire period for which we had data, with an upwards trend, reaching almost £2 billion [NZ$3.9 billion] in 2015. We consider this our headline estimate of the annual detriment arising from high domestic retail market prices.

In our discussion in Auckland, we had some difficulty getting our heads around this. In particular, why aren't the excessive returns from these passive victims competed away? To which the answer was, you can wave attractive offers in front of them till you're blue in the face, but They. Won't. Move.

Which leads to the next obvious question, why not? Many theories. Part of it appears to be down to the characteristics of the customers who have "disengaged". The review ran a big survey which found (p33) that "those who have low incomes, have low qualifications, are living in rented accommodation or who are above 65 are less likely to be engaged in the domestic retail energy markets against a variety of indicators of engagement". The already disadvantaged, as usual, fare worst.

There are also process explanations (p35): "there is some evidence indicating that the process of searching for an alternative supplier and successfully switching has been problematic for some customers. Significantly, the perception of the complexity and burden of the process appears to be worse than the reality, which may further dissuade domestic customers from shopping around and/or switching".

And if you accept all this - and for balance maybe you should read this piece which UK consultancy Oxera did for one of the Big Six, and which disputed the excess profits and argued that there might be perfectly rational  reasons for customers not to bother switching - the final questions we knocked about for a while were, what do you do about it? And have we in New Zealand got the same issues?

In the UK, they are pressing a number of buttons at once, trying to work on both the lumpen demand (eg by setting up an accessible database of non-switchers that will be easier to market to) and the excess profits from too-high prices. Legislation was passed in the UK last month to impose price caps, which will kick in this coming northern hemisphere winter.

That will help people with their bills, but price caps are a clunky bit of economic regulation that is generally not nearly as good as getting to the root of impediments to effective pro-consumer competition (though that's easy to say 11,000 miles away from the problems). You'd wonder - and we kicked this about a bit with Martin - whether you wouldn't be better off with transfer payments directly to the disadvantaged who have big power bills. A better-targeted version of our recent winter energy package would deal to the immediate affordability problems while leaving room for more market-oriented solutions to competition impediments.

Have we got the same issues? While we're not clones of our neighbours, it's interesting that the Aussies have something similar to the UK. The final report from the ACCC's Retail Electricity Pricing Inquiry, released last month, found (from the media release) that "It is clear that most households are paying far too much for electricity. In addition, some of the most vulnerable in our community are forced to struggle through freezing winters and scorching summers, with many others also having difficulty paying their bills".

The Aussies have also gone for price controls: the ACCC recommends "Abolishing the current retail ‘standing’ offers (which are not the same between retailers), and replacing them with a new ‘default’ offer consistent across all retailers, set at a price determined by the Australian Energy Regulator".

And while we haven't seen anything definitive yet from our own inquiry, its latest process update to stakeholders says that "we have already identified common positions on some key areas. A notable example is that some consumers are genuinely unable to afford such basics as heating their homes, and that something must be done to help them".

That's suggestive that we're broadly in the same area, too, though I'll wait to see the evidence, and I also think there's a good chance that we may have made a better go of publicising and facilitating switching than either the UK or Australia with initiatives like the Electricity Authority's WhatsMyNumber. If we have a problem, though, I hope we don't default to price caps as the easy to reach for answer. Make the market work better is the first best option: go elsewhere only if you have to.

More good books - April 2017

A history of Britain's Census may not be many people's first idea of a good read, so you'll be pleasantly surprised by Roger Hutchinson's The Butcher, the Baker, the Candlestick Maker: The story of Britain through its census, since 1801. It's full of interesting themes and 'fancy that' detail: the 1841 census, for example, was the first to record people's names and ages (the previous ones were effectively just enumerations), but among the details it got wrong was Queen Victoria's birth date ('about 1821') when in fact it was 1819. As Hutchinson says (pp60-1), "If the national census could consistently get wrong the personal details of the Queen of Great Britain and Ireland and future Empress of India, what hope had anybody else?".

But that's to do the early census takers a bit of an injustice. In the days when the IT infrastructure was paper, pens and horses, the early censuses got the job done remarkably quickly: first results from the census of March 1 1801 were published in June 1801, and 600 pages of summaries and abstracts in December 1801. I doubt if we could manage the same today. Our technology has improved out of all recognition, but so have assorted deadweight managerial costs and, especially, mission creep. You should see the form that our census enumerators will be using in 2018 to record answers to the religion question, which includes at its most detailed level 167 different 'Religions', 'Beliefs' and 'Philosophies', including Satanism, Maoism, and the Church of the Flying Spaghetti Monster (aka Pastafarianism).

Some of the recurrent themes remain highly topical. The late 19th century influx of Jews from eastern Europe, as documented in the 1891 census, got the racists slavering: as the author says (p225) "Right-wing populists denounced an 'alien invasion' which was apparently taking British jobs from British workers. Ratepayers were, according to the Manchester Evening Chronicle, being bilked of excessive poor relief" (the rates-financed social welfare of the day), just like today's incoherent reactions where immigrants are supposedly both stealing jobs and bludging on the dole. An inquiry as part of the 1901 census, however, found that in the archetypal Jewish refuge, the East End of London, "The proportions of indoor Paupers [i.e. totally destitute and reliant on workhouse relief] among the general population and among the European Foreigners were 15.1 and 1.7 per 1,000 respectively" (p233). And among those damn job stealers were people like Michael Marks (first counted in the 1891 census), who had the temerity to go on and build Marks & Spenser. Shouldn't be allowed.

We've moved on from that, haven't we? Then you read on Wikipedia that in the 2011 UK census, "Other new questions involve asking migrants their date of arrival and how long they intend to stay in the UK; respondents also required to disclose which passports they held". But no doubt that's all intended to inform sound policy analysis. In any event, you'll find yourself following Hutchinson down all sort of interesting historical side alleys, and learning a fair amount of economic history on the way. It's a good read.

I try to stay in touch with Aussie politics, and my latest foray is David Marr's Faction Man: Bill Shorten's Pursuit of Power, a short portrait of the Australian Labour Party leader that is an updated and extended version of a 2015 Quarterly Essay. Shorten has made it to the top of Labor via the Australian Workers' Union, where he was initially an organiser, then National Secretary from 2001 to 2007, when he became a federal MP. I knew next to nothing about Shorten before this book, which broadly makes the case that he is a rough-house player of Australia's factional politics, with little commitment to any settled philosophy beyond self-advancement: a Paul Keating without a programme. I'll be interested to learn more beyond this initial worrying impression.

I've been having a good run with fiction. Top of the list is debut author Jane Harper's The Dry, a riveting and extraordinarily well written novel about murders in rural drought-ravaged Australia: even if you're not normally a crime/murder reader, make an exception for this one. I came to Jonas Jonasson backwards - I read his later Hitman Anders and the meaning of it all ahead of his earlier (and now filmed) The 100-year-old man who climbed out the window and disappeared - but they're both good, though hard to categorise (black comedy? satire on modern Sweden?). If time's short, try Hitman Anders and see if you like the style. And I very much enjoyed David Thorne's East of Innocence, where an ex City of London lawyer is now reduced to scraping by in Essex and gets involved with police brutality and the local Essex hard men.

In 'more of the same but just as enjoyable', there's the fourth (Silk Chaser) in Peter Klein's series about an Australian professional better on the horses who finds himself caught up, Dick Francis style, in industry shenanigans, this time the serial murders of 'strappers' (horse grooms). And there's the latest (Tatiana) in Martin Cruz Smith's series about Russian police investigator Arkady Renko, where an investigative journalist falls foul of the Russian powers that be.

Good intelligence/espionage novels can be hard to find, so you might want to try Alan Judd's series about a chap making his way up through the British security service. I've finished Legacy and am half-way through Uncommon Enemy, with Inside Enemy still to come. And then there's the ever reliable Gerald Seymour's latest, Jericho's War, about a semi-officially-sanctioned raid on high value Al Qaeda targets in the back blocks of Yemen. All good stuff. And let's hope that one of the great maestros of the genre, Alan Furst, gets his mojo back into top gear this year.

Don't be too 'asty

The government has tapped the brakes on migration flows, for what commentators have assessed as essentially political reasons (see, for example, Duncan Garner on Stuff or Fran O'Sullivan in the Herald). 

But as Fran said, "The balancing act that Key has to apply is how he gets across the fact that New Zealand is dependent on immigration and ensures the doors to skilled people remain open". And that's getting a bit trickier, as some data today suggested we may be more imminently dependent on ongoing strong immigration flows than you might imagine.

The data were in the latest BusinessNZ/BNZ Performance of Services index, which showed the services still growing at a handy pace, though a tad less strongly than in August. In its commentary, the BNZ has flagged the possibility that difficulty in finding staff could be starting to hold firms back from continuing  to expand. In the graphs below, the bank has juxtaposed the composite index covering both services and manufacturing (the 'PCI') with GDP growth - there's usually a close fit - and said there's "the hint, from the PCI, that growth may be slowing". And below that, it put up the latest readings from the NZIER's Quarterly Survey of Business Opinion, which as the NZIER said, showed that "Firms report increased difficulty in finding labour, and this may have limited the extent to which firms could increase headcount over the past quarter. The difficulty in finding labour is particularly acute for skilled labour, with shortages at levels not seen since December 2007".

Sure, migration is a touchy issue in a lot of places right now, and one's that's backing generally economically responsible governments into places they wouldn't normally go: in the UK, for example, the Conservative government recently flirted with the tackily unpleasant idea of "naming and shaming" British companies that hire people from overseas (they've since had to backtrack). 

All I'd observe (as I've said before) is that the labour market is rather tighter than you would think from a 5.1% unemployment rate. Mucking about with the supply of staff from overseas might make political sense. But if it threatens to get in the way of the already limited ability of businesses to find the people they want, it's not likely to be economically costless.

Then and now

I've just finished the second volume, Everything She Wants, of Charles Moore's authorised biography of Margaret Thatcher. It covers 1982-87, and it's excellent. Whatever your political views are - and many people will be starting from a strong opinion about her -  you're likely to end up with a more balanced view. The first volume, Not For Turning, was equally good, and won multiple industry prizes.

From an economist's point of view, it's interesting to look back on the economic policy of thirty years ago. One particularly striking aspect was the bizarrely uncoordinated way of running fiscal policy, or as the book puts it (p185)

Under the British system, the Budget is not a Cabinet decision, though the Cabinet is perfunctorily consulted and informed before it is unveiled to Parliament. It belongs exclusively to the Chancellor [of the Exchequer], and 'The only person the Chancellor is obliged to consult is the Prime Minister'

Some other aspects of fiscal policy also looked questionable. One of the motivations for asset sales was the cosmetic effect of appearing to reduce the fiscal deficit by counting the sales proceeds as current revenue - a bad practice. And monopolies such as British Telecom (BT) were sold off to maximise the sale price, with inadequate controls on subsequent profiteering. Not that the UK was alone in taking the money and running - as recently as 2002, the Australian government sold off Sydney Airport on terms which effectively prevented any rival airport getting underway.

The big UK Budget set-pieces also reminded me that once-a-year adjustment of revenue and spending looked odd even back then, and has become even more anachronistic since. There may be some reasons why you can't adjust fiscal policy day-by-day (people would have some difficulty staying on top of their tax owing, as would the IRD in collecting it), but on the other hand there's been a big step forward in automating the likes of payroll systems over the past thirty years, and some of the supposed constraints on more frequent than annual tax or spending changes may well have dropped away. And there's certainly no good reason why (say) increased infrastructure spending has to wait till May 16 (our Budget date this year) for the starter's pistol to go off.

Monetary policy was relatively primitive. Early on the Thatcher government set out on a tough anti-inflation squeeze - my first mortgage, which I took out in the UK in 1979, was on a fixed 14% rate - and ran policy by trying to manage one or more of the monetary aggregates (typically 'sterling M3'). But Goodhart's Law kicked in, and Chapter 13 consequently deals with 'The death-knell of monetarism'. Monetary policy as we mostly know it today - with an independent central bank and an inflation-targetting regime - didn't arrive in the UK till 1997, under an incoming Labour government with more modern ideas.

Not that everything back then was ramshackle. The UK took a trick with a politically adroit way of allocating shares in British Telecom - "Everyone applying for 400 shares or fewer got 100 per cent of what they sought. Those who applied for 100,000 shares or more got nothing" (p198) - which sat nicely with the 'popular capitalism' aim of the sale, and which might be worth revisiting if we ever get round to future privatisations (that 45% stake in Kiwibank, maybe?).

And the Thatcher government (belatedly) came up with regulation for the likes of BT that was state of the art, including Professor Stephen Littlechild's 'RPI minus X':

This was not supposed to be the ultimate answer to the monopoly problem, but was more of a stop-gap measure until sufficient competition developed. As matters turned out, however, it stopped a great many gaps, and became a regulatory model for other privatizations (p196)

I think it can still plug a great many gaps, and I'm not sure we (and other countries) are doing a better job with highly complex and expensive 'rate of return' alternatives.

I was also reminded of the then closed, snobbish, sexist nature of the City of London, where a provincial, middle class woman with a science degree like Margaret Thatcher was, not to put too fine a word on it, outright despised:

[Cecil] Parkinson recalled meeting her returning from lunch at a big bank before her first victory in 1979. 'They had given her hell. She was very depressed. I said: "Don't worry; they'll vote for you, and they'll forget it". "They may", replied Margaret, "but I won't"' (p215)

Final words to the inimitable Denis Thatcher who was accompanying Mrs Thatcher at a Commonwealth conference in India:

At this conference, Denis's irritation with the physical arrangements boiled over. During the leaders' 'retreat' in Goa, there were constant power cuts. He emerged on the balcony of the chalet allotted to the Thatchers and bellowed: 'This place is very high on the buggeration factor' (p548n)