Let me say two things first, before asking a question about the new state-owned KiwiAssure insurance company that David Cunliffe proposed as a new Labour policy over the weekend.
First thing is, none of us was born yesterday, we recognise that politics is politics, and we know that you don't expect to see detailed economic analysis in a speech to a party conference of why a new policy was thought up. You may not see any economic basis at all for some policies, and a good deal of the rationale was more nationalistic than anything ("Labour will confront the challenges of an insurance industry that is no longer Kiwi-owned", with the aim of "local ownership that keeps profits here").
Second thing is, I'm very pro-competition. I spent more than 12 years at the Commerce Commission, where the Commerce Act required us "to promote competition in markets for the long-term benefit of consumers within New Zealand", and I was minded that way even without the crack of the legislative whip. So I generally look pretty kindly on ideas that aim to improve competition and consumer choice, keep suppliers efficient, and keep costs down for buyers, which are among the stated objectives of KiwiAssure.
Currently, according to Mr Cunliffe, service from the insurance industry "we know from painful experience has not met Canterbury’s needs", whereas "Just as KiwiBank gave us a customer-focused, low cost Kiwi-owned bank, KiwiAssure will give everyone a choice for better service, competitive premiums and local ownership that keeps profits here...And like KiwiBank, it will offer customers an alternative and raise the bar across the insurance industry".
I suppose what's missing for me, thus far, is this: where's the solid evidence that the insurance industry is indeed non-competitive and inefficient?
Now, I know that it's not going to be an easy judgement to make: assessing whether an industry is genuinely competitive, as opposed to collusive or sleepy, is always a tricky exercise. But so far I haven't seen any good evidence put on the table that would convince me there's a screamingly obvious competition problem.
Premiums going up (if they are going up, which they likely are after the Canterbury and Wellington earthquakes) doesn't cut it as evidence on its own. Premiums can go up (and down) for all sorts of genuine, market-driven reasons. You don't start state-owned avocado farms just because avocados have hit $3 in the veggie shop.
For another thing, there look to be quite a lot of players: I counted 96 companies with full licences on the Reserve Bank's register of licensed insurers, and if the Insurance Council can be said to represent the bigger ones, then there are 29 companies on the Council's membership list. The number of players isn't, obviously, a slam dunk indication that there is lots of competition, and if the data in this article, Doubts cast on KiwiAssure's influence, are correct, then there's certainly one quite large player (IAG, which includes AMI, NZI, and State) with some 40% market share. So it's not a case of 29 (or 96) equals fighting it out tooth and nail. It's possible there could be some sort of cosy or dozy oligopoly operating, but normally, though, you'd expect an industry with that number of participants to be workably competitive.
The existence of the whole insurance broker industry is also somewhat suggestive that there are, indeed, competing companies offering different customer propositions. There are other interpretations (insurance is so complex you need professional help through the process), but on its face it looks as if there are people running around getting you competitive quotes from alternative providers.
What I'd like to see, and I've said so before - 'Competition to the rescue - again' - is that, if people feel that an industry is not competing for their business and isn't giving them the choice, prices and services they could reasonably expect, there should be an express power given to the Commerce Commission to look into it. You'd think they have the power already, but they don't, or at least not in any straightforward sense.
So let's see the evidence first. The policies can come second.
Wednesday, 6 November 2013
Tuesday, 5 November 2013
I'll drink to that
Last weekend I was browsing Jancis Robinson's wine column at the Financial Times, and discovered two interesting things I hadn't known from her latest article, 'Value judgments: my favourite wines selling for under £10'. Incidentally if you like her column, or the FT's mainline financial and economic coverage, it's well worth either registering for free with the FT to get a monthly quota of articles, or subscribing, to get the whole online shebang, which is what I've done.
The first thing I didn't know was that New Zealand hosts what Robinson calls "the leading wine-price comparison site", high praise from a world wine authority. It's called Wine-searcher, and it is indeed very good. I can already feel a couple of cases of Côtes du Rhone coming on.
The second thing I discovered, and this is where we veer back into the world of economics, was that Wine-searcher has apparently done a seriously large-scale study of price dispersion on the internet (250,000 US wine prices, 74,000 UK wine prices). I couldn't find the study itself on Wine-searcher's site, so I'm reliant on Robinson's summary of it, which was: "Wine-searcher’s analysis found that it was not uncommon in 2003 for US retailers to charge up to 50 per cent or even 100 per cent more than the middle price; now, thanks to greater transparency, this is virtually unheard of. According to Wine-searcher: “In the past it was relatively common for merchants to charge 25 per cent more than their competitors. Currently only 6.5 per cent of merchants in the US and 6.2 per cent in the UK try to charge 25 per cent or more over the median price whereas historically these percentages were 27.1 per cent and 12.7 per cent respectively".
Robinson comments that "there is less gouging today than there used to be", and I'm sure she's right. In theory, suppliers charging more like each other doesn't necessarily mean that the market's become more competitive: near-identical prices are as consistent with near-perfect collusion as they are with near-perfect competition. But it's rather unlikely that there has been global collusion amongst multiple retailers across many, many different wine prices, and much more likely that consumers are getting a better deal as increased transparency has reduced the capacity of sellers to quote exorbitantly out-of-line prices.
This was one of the things that was supposed to happen as the internet became more popular, but it's taken a while to arrive. When I went to the AEA meeting in Washington in January 2003, there was a session on price dispersion and price convergence over the internet, and (as I remember it) the gist was that, at that stage, online prices were, somewhat surprisingly, just as disperse as the bricks and mortar ones. This is consistent with Wine-searcher's finding that there was still widespread price dispersion at that time.
I've been trying to find studies of pricing of other goods and services over the internet, to see if the same pattern of reduced price dispersion and better deals for consumers holds true outside the world of wine. So far, it's been an uphill struggle. If anyone can point me to good research in this area, I'd appreciate hearing from you.
The first thing I didn't know was that New Zealand hosts what Robinson calls "the leading wine-price comparison site", high praise from a world wine authority. It's called Wine-searcher, and it is indeed very good. I can already feel a couple of cases of Côtes du Rhone coming on.
The second thing I discovered, and this is where we veer back into the world of economics, was that Wine-searcher has apparently done a seriously large-scale study of price dispersion on the internet (250,000 US wine prices, 74,000 UK wine prices). I couldn't find the study itself on Wine-searcher's site, so I'm reliant on Robinson's summary of it, which was: "Wine-searcher’s analysis found that it was not uncommon in 2003 for US retailers to charge up to 50 per cent or even 100 per cent more than the middle price; now, thanks to greater transparency, this is virtually unheard of. According to Wine-searcher: “In the past it was relatively common for merchants to charge 25 per cent more than their competitors. Currently only 6.5 per cent of merchants in the US and 6.2 per cent in the UK try to charge 25 per cent or more over the median price whereas historically these percentages were 27.1 per cent and 12.7 per cent respectively".
Robinson comments that "there is less gouging today than there used to be", and I'm sure she's right. In theory, suppliers charging more like each other doesn't necessarily mean that the market's become more competitive: near-identical prices are as consistent with near-perfect collusion as they are with near-perfect competition. But it's rather unlikely that there has been global collusion amongst multiple retailers across many, many different wine prices, and much more likely that consumers are getting a better deal as increased transparency has reduced the capacity of sellers to quote exorbitantly out-of-line prices.
This was one of the things that was supposed to happen as the internet became more popular, but it's taken a while to arrive. When I went to the AEA meeting in Washington in January 2003, there was a session on price dispersion and price convergence over the internet, and (as I remember it) the gist was that, at that stage, online prices were, somewhat surprisingly, just as disperse as the bricks and mortar ones. This is consistent with Wine-searcher's finding that there was still widespread price dispersion at that time.
I've been trying to find studies of pricing of other goods and services over the internet, to see if the same pattern of reduced price dispersion and better deals for consumers holds true outside the world of wine. So far, it's been an uphill struggle. If anyone can point me to good research in this area, I'd appreciate hearing from you.
And the wholesale price of your internet plan will be...
Today the Commerce Commission released its final decision on the UBA service (the wholesale cost a would-be internet service provider will have to pay Chorus to use the electronic gizmos that handle internet data).
The Commission based its decision on what the same service costs in some countries overseas ("benchmarking"), in practice ending up with the Swedish price, though the Danish price also went into the mix. The Commission settled on $10.92 per customer per month: add on the $23.52 the would-be provider needs to pay for access to the copper lines to the customer's premises (the 'UCLL' service), and the total wholesale cost of the line (UCLL) and the gear (UBA) will come to $34.44 a month.
Originally, in its draft decision last December, the Commission had suggested a lower total cost ($32.45, made up of $23.52 for UCLL plus $8.93 for UBA). This had turned the government incandescent: it looked as if the government-funded fibre-based network wouldn't get the uptake the government wanted, because copper would be so comparatively cheap. In August, in an update paper, the Commission had corrected some errors, as I described here, and the total proposed price had risen to $33.43 (still $23.52 for UCLL, but now $9.91 for UBA).
Chorus has taken it hard, but today's decision seems to me to be a highly sensible outcome.
For one thing, it's lower than the $44.98 a month Chorus charges at the moment, as it should be. The previous way of setting the price ("retail minus") tends to be over-generous to an incumbent owner of infrastructure. If that wasn't known to investors in Chorus - who have been peeved that its share price has been whacked by these regulatory developments - well, it should have been, or mostly should have been.
For another thing, it's lower, but not massively lower, than the entry-level wholesale price ($37.50) that would-be internet service providers will pay to access the fibre-based internet network, again as it should be. The fibre-based service is faster, and the slower copper-based service ought to be cheaper to buy. So far the government is saying very little, but if I were the government at this point, I'd be tempted to declare victory and go home.
I'm also pleased to see that the Commission flagged away the flakey idea it floated in its August update paper, when, they say today [52 - I'm quoting paragraph numbers here and later], they "set out an approach that would potentially extend the plausible range beyond the observed benchmarks". As they note today, "A number of parties were critical of this approach", which is putting it mildly: it was statistically naff.
The Commission has given it away, though, I have to say, rather begrudgingly. "The Commission remains of the view [they say at 53] that inferring a larger plausible range is a conceptually valid exercise of the IPP [Initial Pricing Principle, i.e. this whole exercise of benchmarking using overseas prices as a first stab], particularly where there are a small number of benchmarks" - well, no it isn't, actually, as professional statisticians who submitted to them pointed out - before finishing up with, "However, as we have not ultimately applied that approach in this determination, we have not responded to these aspects of submissions". Face saving? Sure. Got to the right place in the end? Absolutely.
I'm also pleased to see that three more countries (Belgium, Greece, Switzerland) were used as a rough and ready cross-check on the price set by using just Denmark and Sweden, even though the three countries did not strictly meet the criteria for being used as formal benchmarks themselves. There's a lot to to be said for being roughly right than precisely wrong.
And I thought setting the price point higher rather than lower within the benchmark range was right, too.
It's true that as Covec said [227], "the [adverse] effects on consumers [from a higher rather than a lower price] are certain but the effects on incentives to invest and incentives to migrate from copper
are uncertain". The Commission's answer [228] was that "We recognise the greater uncertainty of benefits but believe these uncertainties need to be considered against the potential negative consequences of setting the price too low. This could harm competition in the longer-term due to a loss in dynamic efficiencies", and [231] "we accept in principle that the risk to dynamic efficiency of a low access price is asymmetric and that the balance of risk favours setting a price that errs on the high side". This has been a central theme of all the regulatory telco decisions, and I think it's on the right track.
The Commission based its decision on what the same service costs in some countries overseas ("benchmarking"), in practice ending up with the Swedish price, though the Danish price also went into the mix. The Commission settled on $10.92 per customer per month: add on the $23.52 the would-be provider needs to pay for access to the copper lines to the customer's premises (the 'UCLL' service), and the total wholesale cost of the line (UCLL) and the gear (UBA) will come to $34.44 a month.
Originally, in its draft decision last December, the Commission had suggested a lower total cost ($32.45, made up of $23.52 for UCLL plus $8.93 for UBA). This had turned the government incandescent: it looked as if the government-funded fibre-based network wouldn't get the uptake the government wanted, because copper would be so comparatively cheap. In August, in an update paper, the Commission had corrected some errors, as I described here, and the total proposed price had risen to $33.43 (still $23.52 for UCLL, but now $9.91 for UBA).
Chorus has taken it hard, but today's decision seems to me to be a highly sensible outcome.
For one thing, it's lower than the $44.98 a month Chorus charges at the moment, as it should be. The previous way of setting the price ("retail minus") tends to be over-generous to an incumbent owner of infrastructure. If that wasn't known to investors in Chorus - who have been peeved that its share price has been whacked by these regulatory developments - well, it should have been, or mostly should have been.
For another thing, it's lower, but not massively lower, than the entry-level wholesale price ($37.50) that would-be internet service providers will pay to access the fibre-based internet network, again as it should be. The fibre-based service is faster, and the slower copper-based service ought to be cheaper to buy. So far the government is saying very little, but if I were the government at this point, I'd be tempted to declare victory and go home.
I'm also pleased to see that the Commission flagged away the flakey idea it floated in its August update paper, when, they say today [52 - I'm quoting paragraph numbers here and later], they "set out an approach that would potentially extend the plausible range beyond the observed benchmarks". As they note today, "A number of parties were critical of this approach", which is putting it mildly: it was statistically naff.
The Commission has given it away, though, I have to say, rather begrudgingly. "The Commission remains of the view [they say at 53] that inferring a larger plausible range is a conceptually valid exercise of the IPP [Initial Pricing Principle, i.e. this whole exercise of benchmarking using overseas prices as a first stab], particularly where there are a small number of benchmarks" - well, no it isn't, actually, as professional statisticians who submitted to them pointed out - before finishing up with, "However, as we have not ultimately applied that approach in this determination, we have not responded to these aspects of submissions". Face saving? Sure. Got to the right place in the end? Absolutely.
I'm also pleased to see that three more countries (Belgium, Greece, Switzerland) were used as a rough and ready cross-check on the price set by using just Denmark and Sweden, even though the three countries did not strictly meet the criteria for being used as formal benchmarks themselves. There's a lot to to be said for being roughly right than precisely wrong.
And I thought setting the price point higher rather than lower within the benchmark range was right, too.
It's true that as Covec said [227], "the [adverse] effects on consumers [from a higher rather than a lower price] are certain but the effects on incentives to invest and incentives to migrate from copper
are uncertain". The Commission's answer [228] was that "We recognise the greater uncertainty of benefits but believe these uncertainties need to be considered against the potential negative consequences of setting the price too low. This could harm competition in the longer-term due to a loss in dynamic efficiencies", and [231] "we accept in principle that the risk to dynamic efficiency of a low access price is asymmetric and that the balance of risk favours setting a price that errs on the high side". This has been a central theme of all the regulatory telco decisions, and I think it's on the right track.
Friday, 1 November 2013
Another good LEANZ event
We've been having a good run with recent LEANZ events in Auckland, and last night's was no exception: Ed Willis from law firm Webb Henderson gave us a fine presentation on 'Promoting quality regulation' which was well attended and stimulated a lot of active discussion.
Ed, who describes himself as possibly the only person in New Zealand who is "passionate" about regulation (and he might be right, but that's OK), went through some of the tests for what good regulation would look like, instancing both Treasury's checklist - which you can look up for yourself in this Treasury paper - and a somewhat similar and equally useful paper I hadn't come across before, from the UK's Department for Business Innovation and Skills, 'Principles for Economic Regulation'.
Ed instanced two regulatory schemes as practical examples - the Overseas Investment Act, and the recent telco policy review - and his main points (on my reading) were two.
One, people can get confused between criticising the quality of regulation and disagreeing with the social policy intent of it. There'd be a lot of people (well, me anyway) who'd regard much of the policy intent behind the Overseas Investment Act as xenophobic, protectionist, and inefficient, for example, though that doesn't necessarily mean that the poor devils trying to implement the damn thing aren't making a halfway decent job of what's been dumped on them.
Two, sometimes regulation is trying to serve multiple and possibly mutually inconsistent purposes at once, which describes the telco policy review in a nutshell. You're unlikely to be able to satisfy everyone - if you want cost-based (and therefore probably lower) pricing for the copper network, you're going to upset the folk who don't want cheaper copper-based internet services getting in the way of the national benefits to be had from moving to a fibre network.
Ed was also pretty hot about the importance of transparency and accountability in regulatory frameworks, and who could argue.
In the context of accountability, could I give a nod to the folks at the Commerce Commission who have been doing the odd post-decision review of merger decisions, to see if things actually panned out the way they had thought at decision time? I know, there are folks who argue that the methodology for doing this kind of exercise is not up to scratch, and especially not if you're going to try and do a cost-benefit analysis and put $ numbers on the value of decisions, but I think that even a qualitative scan, with hindsight, of whether you got the main trends and factors right, is absolutely a step in the right direction.
Finally, thanks to NERA for generously hosting last night's event.
Ed, who describes himself as possibly the only person in New Zealand who is "passionate" about regulation (and he might be right, but that's OK), went through some of the tests for what good regulation would look like, instancing both Treasury's checklist - which you can look up for yourself in this Treasury paper - and a somewhat similar and equally useful paper I hadn't come across before, from the UK's Department for Business Innovation and Skills, 'Principles for Economic Regulation'.
Ed instanced two regulatory schemes as practical examples - the Overseas Investment Act, and the recent telco policy review - and his main points (on my reading) were two.
One, people can get confused between criticising the quality of regulation and disagreeing with the social policy intent of it. There'd be a lot of people (well, me anyway) who'd regard much of the policy intent behind the Overseas Investment Act as xenophobic, protectionist, and inefficient, for example, though that doesn't necessarily mean that the poor devils trying to implement the damn thing aren't making a halfway decent job of what's been dumped on them.
Two, sometimes regulation is trying to serve multiple and possibly mutually inconsistent purposes at once, which describes the telco policy review in a nutshell. You're unlikely to be able to satisfy everyone - if you want cost-based (and therefore probably lower) pricing for the copper network, you're going to upset the folk who don't want cheaper copper-based internet services getting in the way of the national benefits to be had from moving to a fibre network.
Ed was also pretty hot about the importance of transparency and accountability in regulatory frameworks, and who could argue.
In the context of accountability, could I give a nod to the folks at the Commerce Commission who have been doing the odd post-decision review of merger decisions, to see if things actually panned out the way they had thought at decision time? I know, there are folks who argue that the methodology for doing this kind of exercise is not up to scratch, and especially not if you're going to try and do a cost-benefit analysis and put $ numbers on the value of decisions, but I think that even a qualitative scan, with hindsight, of whether you got the main trends and factors right, is absolutely a step in the right direction.
Finally, thanks to NERA for generously hosting last night's event.
Wednesday, 30 October 2013
A tale of two cities
Grant Spencer, Deputy Governor at the Reserve Bank, gave a speech, Trends in the New Zealand housing market, to the Property Council earlier this month, and I have to confess that I've only just got round to reading the full thing. I'd seen the press coverage (for example Reserve bank boss backs loan rules in the Herald), which had focussed on the LVR points in the speech, and I'd wrongly assumed that there wasn't much else in the speech.
So, belatedly, I'd recommend reading it. It makes the point, in particular, that "The underlying issue in the New Zealand housing market is a shortage of supply. In Christchurch there is a specific housing shortage as a result of the earthquake-damaged housing stock. In Auckland, the shortage has been growing over a much longer period, with weak or declining rates of house building since 2005", as shown in the chart below.
Grant said that "Low rates of building have led to a gradually increasing shortage of homes in Auckland" and that "A significant limitation on new home building in Auckland appears to be a scarcity of available land" due to restrictive planning rules. And he's realistically downbeat about the likelihood of the 13,000 new homes a year that are needed to be built in Auckland happening any time soon: "meeting the combined three year targets of Christchurch and Auckland would require a major mobilisation of national construction resources. In all likelihood, the build will be stretched over a longer period".
You might well wonder, if the big issue is on the supply side, why the Reserve Bank came up with its LVR rules. But Grant went on to say that the supply side of the market isn't the only thing that's happening: "the supply of houses is an important determinant of house prices – but it is only one side of the story. We have seen the shortage of homes in Auckland emerge due to low construction rates over many years. But house price inflation has accelerated only over the past two years, over the same period that credit conditions became easier and population growth picked up with stronger net inward migration".
There's not a lot they can do about the migration demand - which as I posted here is getting stronger all the time - but they have felt they've needed to lean against the easy-credit demand pressures a bit with the LVR rules: "Expanding housing demand through easy credit will do nothing to speed up the housing supply response [i.e. house prices are already so high that builders will still be incentivised to build new ones even if the RB reins in the market]. It simply adds to housing demand, pushes up house prices and makes housing less affordable"
.
I was also encouraged to see that the LVR rules have a use-by date: "As the imbalance between demand and supply is reduced, we will look to lift the LVR restrictions...We will be looking for clear signs that excess demand pressures have substantially reduced and that a removal of the restrictions will not result in a return of such pressures".
Overall I was left with the impression that our central bank's analysis of the housing market, and the responses it's come up with, look both reasonable in themselves - and a good deal closer to reality than what their counterparts in Australia are up to.
I've posted before - Someone else is developing a housing headache, too...- that I think at least parts of the Aussie housing market are clearly overheating. The median house price in Sydney has just gone over A$700,000 for the first time, and the median apartment price has cracked A$500,000 for the first time (both estimates from Australian Property Monitors). And while RBA Governor Glenn Stevens isn't too perturbed about the national Aussie housing picture - "My own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build, and that a price rise reversing an earlier decline probably isn't something to complain about too quickly...it has been a little too early to signal great concern", as he said in a speech yesterday - he is beginning to cast a beadier eye on some of the hot spots: "Investor participation in housing in Sydney, in particular, is becoming noticeably stronger. Over the past year, the rate of finance approvals for this purpose has increased by 40 per cent".
Even so, the RBA doesn't look minded to deal to what looks to me to be a market getting completely out of hand in places, and is staying in 'on your own heads be it' mode, or in the Governor's words, "lenders and borrowers alike would be well advised to take due care".
I wonder if that's adequate.
So, belatedly, I'd recommend reading it. It makes the point, in particular, that "The underlying issue in the New Zealand housing market is a shortage of supply. In Christchurch there is a specific housing shortage as a result of the earthquake-damaged housing stock. In Auckland, the shortage has been growing over a much longer period, with weak or declining rates of house building since 2005", as shown in the chart below.
Grant said that "Low rates of building have led to a gradually increasing shortage of homes in Auckland" and that "A significant limitation on new home building in Auckland appears to be a scarcity of available land" due to restrictive planning rules. And he's realistically downbeat about the likelihood of the 13,000 new homes a year that are needed to be built in Auckland happening any time soon: "meeting the combined three year targets of Christchurch and Auckland would require a major mobilisation of national construction resources. In all likelihood, the build will be stretched over a longer period".
You might well wonder, if the big issue is on the supply side, why the Reserve Bank came up with its LVR rules. But Grant went on to say that the supply side of the market isn't the only thing that's happening: "the supply of houses is an important determinant of house prices – but it is only one side of the story. We have seen the shortage of homes in Auckland emerge due to low construction rates over many years. But house price inflation has accelerated only over the past two years, over the same period that credit conditions became easier and population growth picked up with stronger net inward migration".
There's not a lot they can do about the migration demand - which as I posted here is getting stronger all the time - but they have felt they've needed to lean against the easy-credit demand pressures a bit with the LVR rules: "Expanding housing demand through easy credit will do nothing to speed up the housing supply response [i.e. house prices are already so high that builders will still be incentivised to build new ones even if the RB reins in the market]. It simply adds to housing demand, pushes up house prices and makes housing less affordable"
.
I was also encouraged to see that the LVR rules have a use-by date: "As the imbalance between demand and supply is reduced, we will look to lift the LVR restrictions...We will be looking for clear signs that excess demand pressures have substantially reduced and that a removal of the restrictions will not result in a return of such pressures".
Overall I was left with the impression that our central bank's analysis of the housing market, and the responses it's come up with, look both reasonable in themselves - and a good deal closer to reality than what their counterparts in Australia are up to.
I've posted before - Someone else is developing a housing headache, too...- that I think at least parts of the Aussie housing market are clearly overheating. The median house price in Sydney has just gone over A$700,000 for the first time, and the median apartment price has cracked A$500,000 for the first time (both estimates from Australian Property Monitors). And while RBA Governor Glenn Stevens isn't too perturbed about the national Aussie housing picture - "My own view, thus far, has been that some rise in housing prices is part of the normal cyclical dynamic, that it improves the incentive to build, and that a price rise reversing an earlier decline probably isn't something to complain about too quickly...it has been a little too early to signal great concern", as he said in a speech yesterday - he is beginning to cast a beadier eye on some of the hot spots: "Investor participation in housing in Sydney, in particular, is becoming noticeably stronger. Over the past year, the rate of finance approvals for this purpose has increased by 40 per cent".
Even so, the RBA doesn't look minded to deal to what looks to me to be a market getting completely out of hand in places, and is staying in 'on your own heads be it' mode, or in the Governor's words, "lenders and borrowers alike would be well advised to take due care".
I wonder if that's adequate.
Thursday, 24 October 2013
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.
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.
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.
The Meridian float - a reality check
There has of course been the usual political finger-pointing going on since the just-got-it-away Meridian float. There's even some truth to some of it.
But it looks to me as if the real reasons for the lukewarm outcome are much simpler.
One, most families don't want their (limited) direct equity holdings to be all power companies. I know we didn't: we went for Mighty River Power, and enough is enough.
Two, we might have nonetheless have been persuaded, if MRP had been a roaring success. It hasn't been.
End of analysis.
One final thought, though, and I accept it's totally with the benefit of hindsight. Why the decision to do MRP first, and Meridian second?
If I had to take a guess, I'd bet someone said, "Let's test the waters with the smaller one, and if we can get that one off our hands, we can get the bigger one away". And if I'd been sitting around the table in risk-management mode, I probably would have gone along with it, too. As it transpired, I wonder if it wouldn't have been more cost effective to have done them the other way around: the cost of the sweeteners needed to get the second one away could well have been less.
As for getting Genesis away in the light of all this - I can't see the current sales process delivering a successful float any time soon.
But it looks to me as if the real reasons for the lukewarm outcome are much simpler.
One, most families don't want their (limited) direct equity holdings to be all power companies. I know we didn't: we went for Mighty River Power, and enough is enough.
Two, we might have nonetheless have been persuaded, if MRP had been a roaring success. It hasn't been.
End of analysis.
One final thought, though, and I accept it's totally with the benefit of hindsight. Why the decision to do MRP first, and Meridian second?
If I had to take a guess, I'd bet someone said, "Let's test the waters with the smaller one, and if we can get that one off our hands, we can get the bigger one away". And if I'd been sitting around the table in risk-management mode, I probably would have gone along with it, too. As it transpired, I wonder if it wouldn't have been more cost effective to have done them the other way around: the cost of the sweeteners needed to get the second one away could well have been less.
As for getting Genesis away in the light of all this - I can't see the current sales process delivering a successful float any time soon.
Tuesday, 22 October 2013
X marks the spot
A wee while back I posted a graph that Treasury had prepared showing the link between net migration and house prices. Yesterday we got the latest net migration numbers. So I've updated Treasury's graph: X is the annualised rate of net migration based on the last quarter.
Good luck to the RBNZ with this one.
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