Are you underwhelmed? I'm not

It would be fair to say that the Commerce Commission's recent market study into the supermarkets left the commentariat distinctly underwhelmed: Bryce Edwards' Political Roundup had a useful summary of the immediate reactions and its title - 'Supermarkets win in the end' - captured the general drift (there are some follow-up reactions in his next few days' Roundups, here and here). 

That's partly the Commission's own doing. Its draft report had canvassed some radical proposals - potentially extending to "the structural separation of the major grocery retailers’ wholesale and retail businesses" (at 9.35.2) and "the facilitation of entry by an independent grocery wholesaler" (at 9.35.3), maybe even a government-owned or government-supported one (at 9.68). These were always unlikely to survive as final recommendations: the Commission had said (of structural separation) that it (and, I'd suggest, the other radical options) "would only be considered if other options were not feasible, had proved ineffective, or did not appear likely to improve competition within the desired timeframe" (at 9.64). 

But despite the implausibility of a KiwiShop anytime soon, in the meantime some people's hopes had got raised, and as a process issue the Commission might usefully have a think about giving a clearer steer in its draft reports on where it is thinking of landing along the final recommendation spectrum. It does no good to get a reputation for Crying Wolf.

All that said, I don't go along with the apparently prevalent perception that the Commission's recommendations were not proportionate to the issues involved. They correctly seized on the main point: the first best solution to inadequate competition is new entry - think 2Degrees shaking up Telecom (as was) and Vodafone, or Jetstar giving Air New Zealand the hurry-up -  and they identified a range of obstacles (planning laws, restrictive covenants, the overseas investment regime, the alcohol licensing regime) that could and should be cleared to make entry feasible. Good faith wholesaling to a new entrant is a useful starting point (I'd expected a bit more on access to a wholesale market, after seeing where the petrol market study had landed), and a code of conduct was always a certainty, following Australia's lead, to help address duopsony market power against suppliers. 

That package, and the threat of something heavier duty at a three year review if the shape of competition isn't looking better, looked to me to be an adequate policy combo. And I don't share the general pearl-clutching about its supposed timidity, for two reasons.

One is that I'm not convinced that there was such an enormous problem to start with. For all the jumping up and down about extortionate profits by the New Zealand supermarkets, the rate of return on the average level of capital employed in the New Zealand supermarket trade is not that different to the rate of return on the capital employed in the overseas supermarket game, as Figure 3.4 (below) of the market study showed. To explain this away, you either have to say an average is meaningless (no it isn't), or that all the overseas supermarket markets are rorts, too (no they aren't).

Return on capital employed is the best measure of potentially ineffective competition, but for what it's worth other measures of profitability (canvassed on pp60-64 of the report) showed the same thing: "Our analysis shows that profit margins for New Zealand’s major grocery retailers are broadly consistent with the sample of overseas grocery retailers" (p60).

The international price comparisons paint a darker picture, but even then it is not as black as the comparisons with the rest of the OECD would suggest. I like the general approach of benchmark comparators - countries that in some rough and ready way are 'like us' - and when the Commission did that exercise, it found (in Figure 3.13, shown below) that we still looked a bit on the expensive side, but not as obviously out of step as the whole-of-the-OECD comparison showed.

So my general reaction is that the scale of the proposed recommendations needs to be measured against the size of the competition problem, and it is too easy to get carried away about the size of the problem.

My second thought about the proportionality of the Commission's response is that they stayed on the correctly conservative side of respecting the incumbents' rights to earn a return on their investments. Some of the commentariat, on the other hand, would have happily embarked on extensive structural surgery, even though, as the Commission rightly said (on p404), "The lack of any essential facility or natural monopoly characteristic means that grocery wholesaling is not the type of industry ordinarily

regarded as potentially amenable to such intervention".

The reality is that the two supermarket chains rolled out national chains of stores, organised the suppliers, built the loyalty card schemes, and in general successfully managed to establish large, logistically complex, wholesale and retail businesses. We may dislike it that at least for now we are on the receiving end of a duopoly, as we were pre 2Degrees, for example, but let's face facts. The incumbents did the initial hard yards. It's in the nature of commercial affairs that, for a time, the first people to roll out the infrastructure will reap the gains: indeed, in some industries it's the prospect of early-mover superprofits that propels the investment in the first place, à la Schumpeter.

The best answer to this sort of situation is to help third and fourth players get into the game, especially when the first two have the advantage of Stiglerian barriers to entry: obstacles that new entrants have to surmount that the incumbents didn't (notably the limited availability of land zoned for supermarkets once the incumbents had got their share, and the restrictive and exclusive covenants inhibiting further grocery store development). Dismantle those, and then let's see what a Costco or an ALDI can do.

Reinventing the wheel?

In the armoury of regulatory interventions you might reach for to fix a market problem, I'd normally rank the Part 4 regime in our Commerce Act just above dosing with ivermectin and roughly on a par with sacrificing goats to Baal. I'd try everything else first.

But to my own surprise I'm beginning to wonder if it mightn't be a better answer to the Three Waters hoohah than the current "take the water assets away from councils and give them to four bigger entities with a convoluted governance structure".

There are various things going on in the water policy space, and no doubt conservation and Māori perspectives are at play, too. But if the big policy problem in water is (and I think it is) what economists like to call dynamic inefficiency - councils aren't minded, and/or able, to invest enough to keep the water assets in serviceable nick over the longer haul, hence iffy reservoir capacity (Auckland), poisonous water (Havelock North), pipes bursting in the CBD (Wellington) - then maybe it's time to deploy Part 4, or at least part of it, before creating whole new superstructures.

The bit of Part 4 that looks particularly fit for purpose is the 'information disclosure' regime. It's already been applied, for example, to electricity lines businesses: for lines businesses owned by local consumer trusts, who are in the same governance ballpark as water assets owned by councils, it's the only bit of Part 4 that typically applies (the rest of the lines businesses are required to disclose, too, but are also subject to a revenue control regime). Information disclosure can be a great way to surface whether an incumbent utility is not investing enough to keep the lights on, or the water flowing, over the long haul.

Here's an example of what's disclosed: it shows some of the 2020 data for Vector, which happens to be the lines network where we live. If you're interested in your own locality, head to this page, and click on your local network on the map. It'll bring up the option of downloading a pdf with all the data for your place. There's a lot more beyond the graphs shown below, and you'll also find that each lines company is compared with its peers.

Vector's lines and cables are in good nick. Only a very small proportion is 'Over generic age', and in any event Vector's planned spending on replacement is well above the minimum required to keep the network in good shape.

Some of its switching gear is getting a bit long in the tooth, but again Vector has it in hand and plans to spend well above the minimum required to keep them chugging along. From a dynamic efficiency point of view it's all good. 

You could easily imagine requiring all the water entities being asked to provide the corresponding data, which would stand a very good chance of zeroing in on the problem areas. Some of the councils, for example, are declining to join the proposed new four-entity regime because they say they're managing just fine, and that's a perfectly fair point to make: an information disclosure regime along these lines would prove their case.

And if there's a problem how would you go about fixing it? As it happens, we've got a worked example of that, too. It's  Aurora, which to give it its due is in the process of fixing things, but which was starting from a very bad place as far as maintenance of its lines network went. 

Aurora is the Dunedin Council owned network that serves Dunedin, central Otago, and Queenstown Lakes. As the Commerce Commission said here (p7) in March, "Aurora’s ageing network has been inadequately maintained due to underinvestment going back many years. As a result, it is providing an increasingly less reliable service to consumers. The average number and duration of outages has risen significantly over the past 10 years and would continue to worsen if action is not taken". Sound like the water problem? It does, doesn't it.

And the answer is a form of revenue control (Aurora is council owned, rather than consumer trust owned, so falls under the revenue control regime). The Commerce Commission has approved a 'customised price path' or CPP for Aurora, which will allow it to raise $563 million over the next five years to spend on bringing its network up to scratch. 

As the Commission said (p5), "Our decision on Aurora’s capital spending reflects our view that it has largely made the case for the increased investment". Because it's such a big ask starting from where they were, the price increases will be phased in (p5): "To help mitigate the impact of increased bills on consumers we have decided to cap Aurora’s total line charge revenue over the five-year CPP period. Annual increases will be limited to approximately 10% per year plus or minus any changes from the Consumer Price Index (CPI) forecasts we have used". Something similar might well be needed for the water entities most behind with their upkeep.

My question is: if we've already got a policy regime that looks pretty useful at diagnosis (information disclosure) and treatment (a costed and funded remediation programme) for electricity lines businesses (and gas pipelines, plus airports are under info disclosure), who do we need to re-invent the wheel for water?

Win some, lose some

From the outside the Commerce Commission's Fair Trading Act case against Bunnings always looked a difficult one, and I can't say that I'm hugely surprised that Judge Gibson in the Auckland District Court found for Bunnings on all 45 allegations. You can find the decision here on the Commission's website (though it's one of those annoying pdf's that won't let you select blocks of text).

The judge found that consumers were unlikely to have interpreted Bunnings' ads in a literal way but rather, at [136], "would take into account the nature of the industry, the size of the stores, the number of SKU's [stock keeping units, individual items on the shelves] and the general impossibility of ensuring that on each day every SKU in Bunnings stores was the lowest price. Consumers would also consider the LPG [the lowest price guarantee, i.e. the well known "if you happen to find a lower price we'll beat it by 15%"] alerted them to the possibility that not every item in Bunnings may be the lowest price but providing a remedy to achieve that". 

The "if you happen to find a better price" wording was self-evidently fatal to any overly literal reading of Bunnings ads, so the alternative argument run by the Commission was that, even if you cut Bunnings some slack over the practicalities of trying to monitor how its own 62,000 SKUs compared with the many tens of thousands of its competitors' prices, they weren't in fact making a decent enough fist of it to be able to claim that their prices were generally lower than their competitors.

That fell over, too, because none of the comparative price surveys put before the court was statistically robust enough to be relied on. The Commission argued (as I would have) that none of these surveys may have been perfect on its own, but taken in the round they suggested such and such. This "triangulation" didn't impress the judge who at [141] took (my wording) a Garbage In, Garbage Out approach, which is fair enough when the standard of proof in the proceedings was "beyond reasonable doubt".

The Commission has taken it philosophically (response here). But it left me wondering: while this was formally a Fair Trading Act matter, was it also expressing a more Commerce Act based concern about lowest price guarantees?

What concern, you may well wonder: what could be more competitive and pro-consumer than propositions such as offering to beat a competitor's price? What sort of twisted logic would see any harm in that?

The alternative logic goes like this. Suppose a new model of Kindle comes out, and I advertise it at $299 plus a guarantee to match or better any lower price from a competitor. My competitor has also got a stock of the Kindles and is wondering what to do. She sees my ad, and (the argument goes) reckons there's no point in trying to undercut me, as it'll do her no good: I'll just match her, she won't win any extra sales, and we'll both be worse off. So she prices at $299 as well. End of price competition for the consumer.

And there are other ways the lowest price guarantee might work against consumers' interests. A shopper may see my lowest price guarantee, and conclude there's no point in shopping around. Knowing that I've defused at least some comparative price searching might encourage me to set a higher price in the first place.

None of this, by the way, applies to Bunnings. As you can see in the judgement at [35-6], they genuinely went out to do what it said on the tin. 

There might be cases of nudge nudge, wink wink, see you in the bar at the next trade fair, where the competition is more apparent than real. But it wouldn't be my default position on the likes of best price matching. If a company is going to some trouble to position itself as an "everyday low prices" supplier, chances are that's what's going on. Alongside Garbage In, Garbage Out, maybe another computer motto is the best take: What You See Is What You Get.

One never knows, do one

Yesterday the Economic Development, Science and Innovation Select Committee reported back on the Commerce Amendment Bill, and there was (at least from my perspective) one pleasant surprise.

First the big stuff. The proposed change to s36 of the Commerce Act, which deals with abuse of market power, has got the tick. We'll be shifting to Australia's "effects based" test and getting away from our current "take advantage" wording. 

For those whose eyes have just glazed over, it means that when a company with market power is brought before the courts for throwing its weight around in an anti-competitive way, the judges will stop asking, "Would a company otherwise just like this one, but without the market power, have done this? It would? No case to answer, get outta here". 

The problem with that line of reasoning, which follows on from the current s36 wording, is that it misses the essential point: when something is done by a company with market power, it may have different consequences compared to when a non-powerful company does it. To fix this, the new formulation will just look at the effects, or likely effects, and will stop speculating about what non-powerful companies might have done.

Under both the current s36 and the proposed new s36, clear anti-competitive purpose will also land you in court, as it should: if the e-mail trail shows "Hah! Competitors will never get a look in if we cunningly tweak the software", you'll still be bang to rights. In practice, the big bunfights in court over abuse of market power tend not to feature obviously incriminatory evidence of purpose, and tend to range over the effects battlefield, so the law change fixes up the important aspect.

As well as being the intellectually correct thing to do, the new s36 will harmonise our law with Australia's, which is helpful given the presence of so many companies on both sides of the ditch.

The National members on the Committee didn't agree: they felt that "firms with market power risk liability for unforeseeable future consequences, leading to overly-conservative decision making on their part". That's fair enough: reasonable people across many jurisdictions have struggled with finding the right definition. But for mine (and it's been the Commerce Commission's view, too), the current law was broken, and couldn't do what it was meant to. 

That's a bit of a worry in an economy with its fair share of concentrated industries, where there is scope for the 600 pound gorillas to drive the smaller apes away from the bananas. That said, big companies generally play fair, and stand-over corporate bullying doesn't come along all that often, but when it does, you want to be able to deal with it. The new s36 is well worth trying.

And that pleasant surprise?

I'd made a submission to the Committee and somewhat cheekily, I'd included an off-topic idea that while they were looking at other changes to the Commerce Act

One not included, but worth adopting, would be to reinstate the former section 63 of the Commerce Act (repealed in 1990) which had allowed the Commission to issue provisional authorisations. The value of this ability has been shown in Covid circumstances in Australia, where the Australian Consumer and Competition Commission (ACCC) has made excellent use of its ability to respond quickly to authorisation requests. The Commerce Commission under recent NZ Covid legislation temporarily had this power: it should be made permanent

And blow me down if the Committee didn't run with it and agree:

there may be situations where the need for authorisation is time sensitive. Recognising this, the COVID-19 Response (Further Management Measures) Legislation Act 2020 created a temporary ability for the Commerce Commission to issue “provisional authorisation” to an applicant ... We believe that the changes made by the COVID-19 legislation should be made permanent. COVID-19 has demonstrated that there may be compelling public interest reasons to authorise conduct before the full procedure for deciding an application can be completed. Making this permanent would improve the Act’s administration (p3)

Which (despite my simultaneous complete failure to convince the Committee to put better bounds around the Commerce Commission's proposed information-sharing powers) is a good example of why people should put in submissions. You may be tempted to think, what's the point: don't. A good Select Committee will genuinely kick the tyres, as this one did, and in the background the Committee will have expert policy assistance from the relevant Ministry (in this case, MBIE), and if your idea has legs, there's a fighting chance it'll get a decent hearing.

Sterny McSternface

Something's set them off. 

I've just noticed that at the end of last month the Commerce Commission came out with a stern "anti-collusion reminder to businesses supplying essential services". There was a nod towards the exigencies of Covid - "some businesses able to operate under level 4 restrictions may need to cooperate to ensure New Zealanders continue to be supplied with essential goods and services" - but the bulk of the message, and its clear overall tone, was that some businesses could have been tempted to overstep the mark. 

When the "reminder" includes how whistle blowers can dob in a cartel, and finishes up with a paragraph pointing out that cartel behaviour is now a criminal offence, you get the strong feeling that the Commission is not a happy bunny.

Which brings us back to an oddity of the first lockdown in 2020 ("What if they threw a party..."). 

Then - and again now - there were all sorts of Covid-related stresses on businesses: on supply chains, on resources, on lenders and landlords trying to respond to the predicaments of their lockdown customers. In many cases, cooperation would have been in the public interest: hospitals, for example, might agree on which patients should go where, to help manage capacity for Covid ICU beds. Supermarkets might jointly use scarce lorries to get stuff into the shops.

In Australia, the ACCC got lots of requests along those lines, and was, rightly, authorising herds of them, and, importantly, it was doing it very quickly to meet the urgent need. It wasn't being silly about it - the authorisations  tended to come with controls to make sure they were limited to the Covid issues at hand - but it was chucking them out the window at a rapid rate. Last month, for example, it rolled over its interim authorisation of  "temporary and limited coordination between the ABA [Australian Banking Association] and participating banks to defer loan repayments and waive certain banking fees for small businesses impacted by the pandemic". Absolutely.

Normally, our Commission can't do these quick fixes (daftly, its power to issue provisional authorisations was taken away years back, for reasons nobody can now recall). But, while there is an "epidemic period", as there is now, it can, under emergency legislation whacked through last year (details here).

But here's the thing. 

Nobody's turned up and asked for one. Which is distinctly odd. We have had the same stresses the Aussies had, but lots of authorisations there, none here. Qué?

I hope it's not because businesses think the Commission will be too slow, and by the time they get the slip of paper the bananas will have rotted on the wharf. And you can see why they might think that: in the normal course of affairs, the Commission doesn't exactly sprint through authorisations. Yes, they can be complex propositions where estimating the benefits and costs is hard, but even in relatively straightforward ones - like the HP one it's just given the green light to - it takes its own time. It had the issues identified in a commendably quick fortnight. And then it thought about them for four months.

It doesn't help that we're in a chicken and egg situation: without evidence of a quick response, businesses may flag away applying, but if there are no applications, the Commission can't show it can indeed hop to it when needs must.

Or maybe it's just the Kiwi way: we tend to be relatively informal and to muck in even before any contract is signed, and maybe there is socially useful cooperation going on and to hell with the paperwork. 

Let's hope it's one of those relatively benign reasons. Because if some businesses have used Covid to price fix, then they deserve anything the Commission throws at them - not to mention the risk of a PR disaster.

The future is hybrid

The Competition Law and Policy Institute of New Zealand (CLPINZ) held its 32nd annual workshop in Wellington over the weekend. As is the norm these Covid-plagued days, it was a 'hybrid' event, with people having the option of attending in person or online: the Commerce Commission's going the same way later this year, and the NZ Association of Economists ended up there perforce, when Day 1 of their conference got away in person but Day 2 fell foul of a Wellington lockdown and was rescheduled online.  

My guess is that even when Covid is gone, we'll stick with the hybrid model: there will always be takers for both options, and (let's face it) the online option makes for much cheaper overseas speakers. Plus the technology is in the bag: Charlotte Emery and her Conference Innovators team did a fine job successfully juggling speakers from Washington DC, Brussels, Sydney and Melbourne, as well as hosting online attendees from Australia and New Zealand. Hat-tip, too, to workshop dinner venue Dockside: confit duck, twice-cooked pork belly, and dark chocolate torte worked for me.

The big opening keynote, chaired by Lane Neave's Anna Ryan, was the University of Chicago's Dennis Carlton on merger retrospectives. This wasn't Dennis's first CLPINZ rodeo - he gave the keynote at CLPINZ #21 in 2010 - and it was great to have him back as one of those heavy academic hitters who can put economics across in plain English and whose analysis is informed by getting his head around real world cases (he was involved in Air New Zealand / Qantas, for example). Dennis said that competition authorities obviously ought to look back and see how their merger decisions played out, but they should focus not just on the market pre- and post-merger, but also, in the interest of upping their game, on how well their modelling and analysis at the time actually played out later. One of his examples was US airlines, where six big airlines merged down to three (Delta/Northwest, United/Continental, American/US Airways): you'd guess (well, I would, anyway) that this would not be good for the travelling public, but in the event his econometrics showed quite clearly that "these mergers have been pro-competitive, with no significant adverse effect on nominal fares and with significant increases in passenger traffic as well as capacity".

Commentator, NZ ComCom chief economist Lin Johnson, spoke about local merger experience. My takeaway was that it could be a temptation to be overoptimistic about the prospect of expansion, entry, re-entry, or imports effectively constraining the merged entity. For overseas constraints, like new entry or import expansion, it's particularly important to make sure that new entry is indeed on the strategic agenda of the mooted entrant, and that (even if willing to come in) world market conditions don't make other options elsewhere more attractive. And it's worth checking the sensitivity of would-be import expansion to small changes in exchange rates. And both Dennis and Lin talked about the importance of thinking ahead about the sort of data you'd like to have about post-merger outcomes.

Next up, chaired by Russell McVeagh's Troy Pilkington, we had John Land on 'Anti-trust and IP' (i.e. intellectual property), with Russell McVeagh's Petra Carey as commentator. The argument was that proposed changes to s36 of the Commerce Act (moving to an 'effects' test for abuse of market power) and to s45 (repeal of the provision whereby merely enforcing your patent rights didn't put you foul of s36) could end up interacting in an unhelpful way. The risk is that perfectly unexceptionable commercial patent-licensing, which could even be efficient and pro-competitive, could be miscast as having the effect of constraining competition. If I were the Economic Development, Innovation and Science Select Committee, which will let us know its views on the Commerce Amendment Bill in mid September, I'd be tempted to rethink repeal of s45.

Onwards to 'Economic regulation of water', chaired by Chapman Tripp's Simon Peart, with NERA's Will Taylor and Water New Zealand's CEO Gillian Blythe as speakers - Will laying out exactly what the regulatory issues are in the current programme of 'Three Waters' reform (drinking, storm, and waste), and the tools that might be used to achieve them, and Gillian giving us a lot of helpful background on how the industry operates. If this is all news to you (as it mostly was to me), then you'll find the reform proposals here, while Gillian pointed us to this very useful trove of water performance data. Sadly, the story hitherto is one of an immensely fragmented system with a chronic infrastructural deficit and periods of acute crisis (think Auckland's inadequate reservoirs, Havelock North's drinking water, Wellington's pipebursts). Incentives to foster dynamic efficiency have clearly either fallen down or are perverse (eg electoral incentives to keep the rates down today while the pipes burst tomorrow). The proposed consolidation into four national water service entities looks a useful first step: whether better dynamic incentives will kick in, though, isn't at all clear.

Session 4, chaired by Bell Gully's Glenn Shewan,  was on media bargaining codes, which took us into the competition issues of bargaining imbalances between the big social media platforms and the news media, and what, if any, compensation should be paid by the likes of Facebook and Google for the public good of news provision. King & Wood Mallesons' Wayne Leach took us through the system Australia has set up (it's Part IVBA of their Act), while we got New Zealand industry viewpoints from Stuff's Editor in Chief Patrick Crewdson and NZME's General Counsel Allison Whitney. Wayne posed a number of questions, with maybe the big one being whether competition law can, or should, be extended to solve all the world's ills. And while Patrick claimed not to be an economist, he nonetheless managed to reason his way exactly to where an economist would have got on externalities (tax negative externalities like conspiracism and fake news, subsidise positive externalities like non-partisan newsgathering).

If session 4 had wondered whether competition law has a role in regulation of digital platforms, session 5, chaired by DLA Piper's Alicia Murray,  wondered what, if anything, it could or should do to assist with rolling back climate change. Brussels based Jordan Ellison from Slaughter and May took us through how European competition law can in theory be compatible with firms' cooperating for environmental benefit: a 'carbon defence' would apply if, say, three firms collectively agreed on some action to eliminate X tonnes of emissions, and would be safe from challenge if the value of any subsequent price rise to consumers was less than the overall saving to society from the emissions saved. The commentator, principal economist Reuben Irvine of ComCom, reminded us of 'Sustainability and Competition - Note by Australia and New Zealand' (available, with other useful stuff, here), where the good news is that in both countries the definition of a net benefit is wide enough to encompass things like environmental payoffs (as, for example, it was also wide enough to accommodate the democratic value of media plurality in the mooted Stuff/NZME merger). We'd have less difficulty accommodating genuinely (net) beneficial cooperation than the Europeans might. That said, inter-competitor agreements shouldn't be the default, and businesses shouldn't be able to stop competing in the sustainability dimension of their product offerings without some vigorous tyrekicking.

And finally we got to 'Consumer data right and open banking', chaired by moi but with the heavy lifting on the session structure largely down to Will Taylor. Rosannah Healy from Allens in Melbourne took us through the Aussie experience with legislating for consumers' control over the assignment and use of their data: they've been up and running since 2017, while we're still at the stage of planning legislation for next year (you can read our policy decision here). And Josh Daniell, CEO of open finance platform Akahu (mission, "to empower consumers to gracefully control and leverage their personal data")  showed us what sorts of applications we are actually likely to see in New Zealand. The CDR is a really exciting development: in principle, it should reduce switching costs and enable new entry in sectors such as banking (typically one of the first cabs off the rank when CDRs get underway), electricity, and  telecommunications. In practice, it tends to take quite a bit of drawn-out sector-specific customisation, but I wouldn't underrate its potential to be a game-changer over the longer haul.

Two final thoughts. One was that the workshop would would have been good in any event, but got an extra boost from hearing from industry players like Gillian, Patrick, Allison, and Josh: at our table (a motley crew of economists, lawyers, officials and enforcers), we all felt we learned a lot from them. And the other, which emerged across various sessions, was that the Commerce Act is looking decidedly moth-eaten. There have been targeted reviews of bits of it (like the one that culminated in the current s36 proposals and the, overdue, ability for ComCom to conduct market studies), but when you look at the current inability of ComCom to establish industry codes (à la supermarkets inquiry), or to accept behavioural undertakings in mergers, or to issue interim authorisations as it used to be able to, or elsewhere (eg the clunky wording of the retail price maintenance sections), it looks like it's time for a vigorous spring clean.

What got snuck in

We only got through Day 1 of last week's NZ Association of Economists' annual workshop before the Plague shut us down, but it was interesting while it lasted (full programme here - there's a fair smattering of the papers available to download), and on the positive side at least we snuck one day in, unlike the total lockdown wipeout of 2020.

The first keynote was ecological economist Marjan van den Belt on 'Aoteanomics; A Vision for a Thriving, Just and Sustainable Aotearoa NZ' (brief abstract here). If you're a fan of, say, Kate Raworth's Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, then this was for you. I liked her emphasis on systems thinking/modelling that captures all the positive and negative aspects of any policy, and accounts for the inter-relationships between the various moving parts. 

But I didn't agree that economics as we all know and love it today isn't up to, or interested in, handling issues like climate change or other environmental degradation: you don't get far into an economics course these days without bumping into 'externalities' and how to deal with them. And she's what I might call a technology pessimist about the ability of technological change to get us out of the climate and pollution hole - "we can't efficiency our way out" as she put it - whereas I'd point to the likes of the plummeting cost of solar energy or indeed the speed with which Covid vaccines were developed. The last 20th / early 21st century is an odd time to be downbeat about inventiveness.

From the concurrent session options, I picked 'Auckland Council - Urban Economics'. The big takeaway for me was the work done by David Norman (the former chief economist for the Council) and his colleague, now acting chief economist, Shane Martin, on whether the planning constraints which apply inside the Rural Urban Boundary (RUB) are responsible for the very high prices of Auckland housing land when compared to land outside it. As an Auckland resident regularly gobsmacked by the price of land, I'd have been prepared to bet a reasonable amount of money that they did, but at least for now I've been disabused. After comparing like-for-like land (eg correcting for the value of closeness to amenities and a zillion other hedonic features) there's virtually no RUB factor, as shown below (from the version of the paper available on the Council's Economic Advice page).

After coffee it was time for Motu's Arthur Grimes on 'Reinterpreting Productivity: New Zealand’s Surprising Performance'. Well worth reading: while the stylised narrative is that New Zealand has gone to hell in a handbasket in terms of relative international performance over time, Arthur argued (pp22-3) that "The country enacted reforms in the 1980s and early 1990s that improved allocative efficiency as well as technical efficiency. The result has been one of the strongest performances of any developed country in the growth of sustainable consumption possibilities over the second 24 year period covered by our data" (i.e. the second half of 1970-2018).

In the afternoon the 'Household Economics' session had two papers looking at how extra tax credits and extended parental paid leave since 2018 had worked out (one paper is up, here): my overall impression was they made a difference (in a good way) but more could be done. Victoria's Norman Gemmell presented on behalf of his co-authors Nazila Alinaghi and John Creedy on 'Do Couples Bunch More? Evidence from Partnered and Single Taxpayers', which looked at the bunching of people's tax returns around marginal tax rate thresholds. 

There were questions from the audience suggesting that it looked like tax evasion: it isn't (or not necessarily), because (a) that's the way the tax system is, or as the paper says (p25) the system "imposes relatively weak constraints on intra-family income sharing" and (b) the income split is inherently arbitrary for self-employed couples. If one partner stays home to let the plumber in while the other goes out to meet a client, who's contributed what? It was also a reminder that while the all-knowing always-calculating homo economicus may be a caricature of how people behave, people aren't stupid, either, and are perfectly capable of making fine adjustments to their affairs to their own best advantage.

Finally I went to the 'Commerce Commission: Market outcomes in the retail fuel and electricity markets' session (natch). Quick hat-tip to the Commission and the NZAE - there were years when the conference carried little or nothing in the competition / industrial organisation / regulation space, but in the last few years it's had its own regular slot.

The Commission's Ben Harris and Imogen Turner spoke on 'Valuing the harm to consumers in electricity markets'. I'd imagined beforehand that this might have been a go at estimating how much people were missing out by being on inappropriate pricing plans, but it actually looked at the value consumers ascribe to not suffering power outages. Human nature being what it is, people say they'd be hugely put out by an outage inflicted on them. But when offered cold cash to accept an outage, they turn out to take a much lower amount. Funny that. Why does the Commission care? Because the valuation goes into the regulatory regime to prevent the risk of electricity lines companies overbuilding ('gold plating') their asset base and providing levels of reliability that consumers do not actually want. More positively, it feeds into an incentive system rewarding lines companies for better-than-expected outage performance.

Finally Commerce Commissioner John Small took us over 'Empirical analysis on the retail fuel market study' (the study itself is here) and as part of it reminded us of this graph.

The dotted lines are when Z Energy was publishing the 'MPP', "the price that is used at most of Z Energy’s retail sites in the South Island and lower North Island" (market study, p296). The Commission said that, while there could be other explanations, from the graph "it appears that average margins increased during the period when the daily MPP was published, and have levelled off or decreased since publication ceased ... The evidence therefore appears to support our conclusion that the retail market is

conducive to tacit coordination through price transparency and leader-follower pricing" (p298).

The petrol industry is getting close to the pointy end of implementing the recommendations of the market study (a wholesale market, liberalised wholesale supply contracts, publicising the price of 95 octane, and enhanced information provision). My guess would be that the Commission will wait and see how effective they've been, but at some point I'd bet that they will be combing the evidence to see if they've dealt to that "tacit coordination".

So far so good. What next for fiscal policy?

If the Plague had indeed broken out big time last week in Wellington, it would have taken out a high proportion of the country's economists.

No, don't be like that, and put that champagne back in the fridge - fingers crossed, our Sydney visitors don't appear to have spread the pandemic here. But if they had, there was a combo of the Treasury / Reserve Bank workshop on fiscal and monetary policy in the wake of Covid (Tuesday), and the annual shindig of the New Zealand Association of Economists (Wednesday and Thursday, though Thursday got cancelled when Level 2 was brought in). Just about everyone with an interest in macro policy and economic research were all in the same lecture halls at Vic - a very short virus-exposed walk from Rydges Hotel, one of the 'locations of interest'.

Tuesday's workshop (full programme here) kicked off with a keynote, 'New challenges for macroeconomic stabilisation policy: The role of fiscal policy', from Treasury Secretary Caralee McLiesh. What I took away was that we've done well through Covid: as she said (p3) "Overall these [supportive monetary and fiscal policy] interventions, alongside a health response that successfully eliminated COVID-19 in New Zealand, have been effective in supporting the New Zealand economy, which has outperformed our forecasts since the beginning of the pandemic". By international standards we've ended up in a good place, and pushed the fiscal lever hard to get there, as these graphs from her speech show.

Fiscal policy fired up quickly (even if a begrudging part of me wants to add "for once"), and got the support out in literally hours, in some cases, to applicants for wage subsidies. And there's been a corresponding re-assessment of how well fiscal policy can help stabilise an economy against cyclical shocks, with our wage subsidies and the Australians' and Americans' cheques-in-the-mail approaches all clearly effective, and in a timely way.

The supposed pre-Covid consensus that monetary policy was the best cycle stabilisation tool and that fiscal policy would be too lumbering to do any good, has been rather overstated. It was never that clearcut: monetary policy, after all, famously operates through long and variable lags, so isn't necessarily the quick fix some folks touted, and fiscal policy isn't always on a 'turn the first sod in twenty years' Transmission-Gully-style timetable. But in any event the new consensus is that they can both be deployed to good effect early in the piece.

Some commentators see a new, bigger role for fiscal policy as potential over-reach. Michael Reddell in his blog piece on the workshop, 'Fiscal policy in the wake of Covid', felt that "When a half-baked loaf is finished cooking it can be a fine thing, but this loaf seems to need a lot more work before New Zealanders should be rushing to embrace a much more active role for fiscal policy or a lot more public debt". The NZ Initiative's Eric Crampton in 'Govt making the case for higher levels of debt for longer' said that "If the core of the public sector is happy with higher debt levels, despite clear failures in ensuring that funded projects pass any reasonable cost-benefit assessment, greater prudence is needed in how that debt is issued". 

The exact scale and scope of future fiscal activism is still in sum very much up in the air, though if McLiesh is right, and we are indeed headed into a world of permanently lower interest rates, then I hope one outcome is that we pull finger and get on with the overdue infrastructure we need and which have now become significantly cheaper to finance. Which I've been saying for at least the last five years ('A once in a generation opportunity'). 

In  any event you don't have to just sit there and take what's dealt to you in the fullness of time. Treasury is reviewing our macroeconomic frameworks, and you'll get your chance to put in your tuppence worth. There's an e-mail address at the site if you want to get involved.