Thursday 29 February 2024

Inflation and the output gap

Yesterday's Monetary Policy Statement from the Reserve Bank said (eg at p ii) that "a sustained decline in capacity pressures in the New Zealand economy is required to ensure that headline inflation returns to the 1 to 3 percent target": the economy needs to move from a hothouse above-capacity state (a 'positive output gap' with people trying to chase after scarce resources, driving up their prices) to a below-full-capacity state (a 'negative output gap', where resources are more available and less in demand).

Here's what the relationship that's being relied on has looked like over the past twenty odd years. It shows how the output gap has affected domestically-generated ('non-tradables') inflation. The numbers come from the underlying data supporting the Statement, which the RBNZ helpfully supplies as a spreadsheet. I've taken the impact of the 2010 GST increase out of the inflation data. I've also advanced the output gap by three quarters, which looks to be a good stab (tested by a couple of quick regressions) at the lag between the hot or cold state of the economy and subsequent heating up or cooling down of inflationary pressures.

It's a reasonably robust relationship (a simple regression had an R squared of 0.54) but it's obviously not infallible. In the mid 2000s for example the economy ran quite hot but non-tradables inflation never picked up, and the years immediately before Covid also saw the economy in reasonably good fettle without provoking the inflation genie. But that said, and especially when there are really large moves (the post GFC slump, the post-Covid fiscal and monetary policy fuelled boom), it holds up pretty well.

Two things struck me when I looked at the chart. One is that the RBNZ is projecting a large move in the output gap by historical standards. Peak to trough, the GFC setback amounted to a 5.8% of GDP swing, from 2.8% above capacity to 3.0% below it. The projected move in coming years is almost as large: a 5.5% swing from 3.9% above full capacity to 1.6% below. Maybe that will indeed happen as monetary policy continues to bite, fiscal policy very likely turns less supportive and strong net immigration swells the available labour supply. I wouldn't say it's an implausibly big or improbable ask to see a turnaround of that order, but getting on top of inflation is reliant on a pretty large change in economic conditions coming to hand.

The other thing that struck me is that if the output gap does indeed evolve as the RB expects, non-tradables inflation might even drop more than projected. My little regression says that if we get down to a negative output gap of -1.6%, non-tradable inflation (with a three quarter lag) would get down to 2.3%, a bit lower than the 3.0% the RBNZ anticipates. Or put it another way: the 3% or so non-tradables inflation the Bank expects is the sort of outcome you'd get if the economy was roughly at a Goldilocks zero output gap, neither too hot nor too cold. If we actually stay below that level (as the Bank thinks), non-tradables inflation could well recede more than currently anticipated.

Thursday 22 February 2024

The New Zealand Economic Forum - Day 2

We kicked off Day 2 with a keynote speech, "The monetary policy remit and two percent inflation", by Adrian Orr, governor of the Reserve Bank, delivered online (full text here or watch the video here) after Adrian came down with a late lurgy (a pity, as I'd looked forward to chewing the fat about the forthcoming NRL season with my fellow Warriors tragic).

Adrian Orr with one of his slides, showing that core inflation as it actually transpired over 2020-22 was stronger than the lower real-time estimates available when decisions needed to be made (with Waikato's Prof Matt Bolger as moderator)

Takeaways? Some sympathy for the RBNZ's (and other central banks') challenges over the past few years: Covid, where Adrian reasonably asked, which mistake did you most want to avoid in the high-uncertainty crisis, and the answer was too-tough policy that might aggravate a downturn, hence the almost universal let-it-rip of both fiscal and monetary policy; the Team Transitory/Team Core debate; the interruption to normalisation from the Auckland lockdown; the Ukraine; and a recent rise in household inflation expectations. 

Expectations - which are interlinked with people's trust in the competence of a central bank (what us older folks used to call 'credibility') - look high on the bank's agenda. I noted in the speech that while inflation has come down, "tackling the tail end of these persistent inflation pressures in the domestic economy remains key to achieving 2 percent inflation. Just how persistent these pressures might be depends on how factors, such as capacity pressures and inflation expectations, evolve going forward". Adrian was giving nothing away about the next monetary policy decision (February 28) but if I were in the room I'd be looking at the latest annual non-tradable inflation rate (5.9%) and wondering if those capacity pressures and expectations levels needed a further knock on the head.

Onwards to fiscal policy, first with a keynote from Caralee McLiesh, Secretary to the Treasury, followed by a panel discussion on 'Treasury and the state of the books'.

Caralee's speech doesn't appear to be up on the Treasury website, but you can get the gist of it from the excellent 'Economic and Fiscal Context Slide Pack' which was part of Treasury's Briefing to the Incoming Minister of Finance. A key point was that our fiscal deficit is structural, not cyclical: as Caralee said, it tends to be easy to loosen fiscal policy in a downturn, and a lot harder to wind back the spend in better times, and we've now reached the point where belated policy tightening is needed (we'd got the same message from Nicola Willis the previous day). "Difficult distributional decisions lie ahead": quite.

Treasury Secretary Caralee McLiesh speaking to our rise in net public debt

The 'State of the books' panel - Craig Renney from the CTU, Eric Crampton from the New Zealand Initiative, Sarah Hogan from the New Zealand Institute of Economic Research - may have been intended to have been a battle of "duelling economists", as one person put it, but it turned out to be a lovefest of harmony and mutual understanding which coalesced around the theme of the importance of getting the best value for money from the public spend. 

As Craig said, there's nothing inherently "right-wing" in demanding value for money and nothing inherently "left-wing" in spending the right amount. Sarah pointed to health as one area where we are not getting value for money: Pharmac (she said) may take its lumps from its critics, but on the other hand it is a rare example in the sector when it comes to revealing its prioritisation. Other areas are either not transparent, or may not even prioritise in the first place. Eric would like us to retreat from the post-Covid spending bloat, perhaps to the same share of GDP that the Wellbeing Budget of 2019 represented (core crown spending of 29.1% of GDP, compared to the 33.0% expected for 2023-24 in last year's Budget forecasts): one reason was that people would be less likely to sign up to future rainy day spendups if they see previous ones sitting there unpaid for. And all the panellists were very keen on a really rigorous framework of prioritisation and evaluation: as Craig put it, "Think hard, and then think hard again".

The "duelling economists": Craig Renney, Eric Crampton, Sarah Hogan, with (on left) panel moderator Waikato's Prof Anna Strutt

Then we got a panel on 'Infrastructure: Unclogging the arteries', a topic close to my and I'd guess every other New Zealander's heart, given the increasingly shabby state of virtually all the infrastructure we use, from hospitals, classrooms, and roads to those infamous three waters. I drove down to Hamilton from outside Warkworth. The good news is that Warkworth to the approaches to the Harbour Bridge went fine (thanks to the new Puhoi motorway extension, even if it took forever to build), and Drury to Hamilton was fine (thanks to the new Waikato Expressway, also remarkably protracted). The bad news was that the intervening Harbour Bridge to Drury stretch remains an absolute nightmare, undoing a fair amount of the Puhoi/Waikato benefits, and the throttleneck looks like staying that way for some considerable time. There's a huge deferred bill looming: one speaker mentioned the Infrastructure Commission's estimate that we will need to spend $30 billion a year for the next 30 years.

Alison Andrew, CEO at Transpower, told us that while the current transmission grid is in good shape, (a) most of it was built in the '50s and '60s and is getting to its use-by and (b) there's an opportunity to green the country through electrification, but we will need 22 gigawatts of generation (and associated transmission) compared to today's 10 gigawatts. She didn't say it, but I personally wondered why the Commerce Commission regulates Transpower in 4-5 year bites, rather than over a longer-term horizon. Chris Joblin, CEO at Tainui Group Holdings, said it wasn't so much unclogging the arteries that's needed, but more like a double or triple bypass after being on the fags since the '70s: we just haven't being looking after our infrastructural health. And when we do bestir ourselves,  the consenting takes forever: he mentioned that it took 17 years to get Tainui's inland port at Ruakura (just beside Waikato University, as it happens) up and running. Among the issues: we look for perfection, which causes procrastination, and we load too many objectives onto projects, blowing out the costs and causing further rethinks. And Nick Leggett, CEO at Infrastructure New Zealand, agreed that we need to get our project management process right: we can occasionally rise to the occasion but mostly we're bad at it.

In passing, if the planning and project mismanagement omnishambles gets your goat, too, you'll like Daryl McLauchlan's piece for Democracy Project, 'Unjarndycing the State'. And if you'd like a piece on how we might do better, here's one I prepared earlier for Acuity magazine, 'Getting results'.

Life's too short, so I'll just pass briefly over the final two sessions. 'Climate & Weather: So what happens if we don't curb emissions?': answer, bad stuff,  and for some of the same reasons that our infrastructure record is so poor. As Sir Brian Roche said, we make a virtue of recovery from disasters, but we don't provide for preparedness in the first place. If 'value for money' was a recurring theme of the Forum, 'dynamic inefficiency', not investing enough to keep the show on the road, ran it a close second.

And in 'Fintech Futures: The end of cash?', no, cash is not dead, with the RBNZ's Karen Silk reminding us of why we still use it (full and final settlement, in privacy, plus benefits when, say post-Gabrielle, the ATMs and EFTPOS go down). And on the fintech side, we've had some successful financial innovation - we heard from Brooke Roberts, co-CEO of one of the successes, Sharesies - and while Brooke hoped that we will eventually have a global fintech come out of New Zealand, it's generally not as easy to get things up and running as it is in, say, Australia. Shane Marsh, cofounder of DOSH, also wondered about us falling behind. In my mind, I've always thought of New Zealand as a digitally advanced place - we were using EFTPOS for everything when our friends and rellies in Ireland, the UK or the US were still writing cheques - but the world's moved on, and we haven't. In Shane's view, our payments landscape is now well behind the rest of the world and even behind some of the 'developing' world .

Matt Bolger, Pro Vice-Chancellor of the Waikato Management School, sent us on our way with an uplifting message. While it's tempting to think that today's rate of change is unprecedented, Matt said we shouldn't get so up ourselves: how do we compare, really, with the generations who went through the Great War, the Depression, fascism and communism, and World War Two? And despite our current inability to plan properly for tomorrow's challenges, maybe he's right that we shouldn't get overwhelmed, and we should stay optimistic. It would be nice to think that New Zealand Economic Forum 2025 will be able to document that we're getting more of a grip on the issues that face us.

Wednesday 21 February 2024

The New Zealand Economic Forum - Day 1

The University of Waikato's New Zealand Economic Forum 2024, on the theme of 'A briefing to the incoming government', kicked off in Hamilton last Thursday with a speech by Finance Minister Nicola Willis (below).

Nothing headline-making, but solid stuff: I liked the aim to lift our growth rate by removing go-slow regulation, the plan to have fast one-stop consenting for major projects, and to have more 'social investment', meaning prioritising social spending on the groups most at risk of being stuck in persistent disadvantage. In Q&A, someone asked about investment plans: there's apparently going to be a coordinated 30 year pipeline of projects, and about bleeding time. There are decision-making models maintained in the public sector that let you assemble optimal investment portfolios, and they badly need to be deployed, however belatedly, to make our infrastructure spend all that it can be. Chatting to another attendee afterwards, he wondered if the benefits and costs you need to feed into those models were reliable enough to avoid garbage in, garbage out results, but anything's got to be better than the lack of coordination we've had up to now.

The next two topics - agriculture and health - weren't my thing, but they had their moments. In agriculture, I'd never heard of AgriZeroNZ before: "A partnership between the New Zealand government and major agribusiness companies, we're helping farmers reduce emissions while maintaining profitability and productivity". Good stuff. In health, I heard a lot of sense from Professor Des Gorman. He said that we don't have a 'health' system, we have a disease and injury management system, paid for on annual levels of activity, which is self-evidently not ideal. He argued for a better 'tight, tight, loose' system focused on value for money: it would be tight in defining the health outcomes you'd like to see, tight in measuring what providers actually achieve, but loose or agnostic about what sort of providers you use. For those who would cry 'privatisation' of the public health system, his answer is that the system is largely private already, notably including your local GP practice. And for those worried about those dreadful private providers making a profit, in a competitive value-for-money system the answer is, "They're delivering more for less. What bit don't you like?".

After lunch we had a choice of 'Demographics are history' or 'Running tax differently', and my inner nerd chose tax. Graham Scott (gamely filling in for the unavoidable late withdrawal of Max Rashbrooke, also contactable here) reminded us that tax has its own comparative advantage - it has things it can and cannot do - and threatening to load it with multiple policy aims risked taking us back to the bad old days when we had a mad patchwork of specific sales taxes and other distortions and complexities. PwC's Sandy Lau was mostly happy with things as they are, though wondered if we need capital gains taxes, if only to reduce our currently disproportionate reliance on personal income tax. And Victoria's Professor Lisa Marriott's main point was over enforcement: she felt genuinely ratbag behaviour wasn't being sufficiently prosecuted by the IRD. Not only were people getting away with malfeasance, tax compliant businesses were being put at a competitive disadvantage relative to the scofflaws.

The session on 'Social investment: What difference will it make', led to a strong consensus that (a) there is a large group of people who suffer from persistent disadvantage (b) current social policy isn't cutting the mustard (c) by finding out what these people most need we can get better much better results especially if we focus on value for money from what we do and (d) we should regard what we do as an investment in people rather than as a cost. As Merepeka Raukawa-Tait put it, the time for wasted spending is over. Subsequent speakers pointed to a dramatically successful example that Maria English gave us, where providing tailored housing to a particular person saved nearly all of the very expensive 100 nights a year they'd previously been spending in a hospital bed. The session made complete sense to me, and I was quietly bemused how the winds have changed since Bill English (Maria's dad) championed this very approach, and got roundly rubbished for it.

My initial reaction to 'Trade: Dealing with a divided world' left me worrying: there's been an end of the "golden weather" of increasingly free and rules-based trade. Now there's fragmentation, rules flouting, disempowerment of the World Trade Organisation, protectionism, and 'security' concerns (real and paranoid). It very much felt like the trade front of Cold War II. MFAT's Vangelis Vitalis replied to my downbeat tweet that "I hope the conclusion left you feeling  more positive, i.e. we have a plan, agency, new options & advantages in key markets and are determined to protect and defend our hard won benefits through FTAs", and that we are showing "Policy entrepreneurship in international trade policy". He'd mentioned, for example, us successfully taking Canada on about their dairy trade protectionism. All fair comment, and it's good to know we're fighting our corner, but it's still a trickier wicket to bat on than it was before.

And the day wrapped with a session chaired by Steven Joyce on 'Monetary policy: Controlling what we can control'. Grant Spenser, ex deputy governor at the Reserve Bank, reminded us that the RBNZ, when it last reviewed how it had been going, found nine things it could work on, and wondered how they were getting on with them: he also noted that there appeared to be quite a blowout in operational spending and in headcount over the past six years. He also wanted to see more of a challenging culture at the Monetary Policy Committee from the independent members. I totally agreed: Australia's moved in that direction recently as well, with a boost in expertise and a requirement that independent members put their view into the public domain at least once a year. Bryce Wilkinson revisited some of the territory he'd covered in his publication co-authored with Graeme Wheeler, 'How central bank mistakes after 2019 led to inflation',  reminding us that monetary policy everywhere was relied on as being more of an exact science than it actually was, and that central banks made very poor inflation forecasts, even though that was their day job. Bryce said the global financial markets had also missed what was developing. And Henry Russell found himself in something of the spotlight given that the ANZ Bank had just made a big off-consensus call that the RBNZ would hike rates again (two moves of 0.25%), its reasoning being that the RBNZ had indicated back in November that it had little tolerance for any upside inflation risks, but they looked like they were getting some.

The monetary policy panel: Henry Russell (ANZ Bank), Bryce Wilkinson (Capital Economics / The New Zealand Initiative), Grant Spencer (ex RBNZ, Victoria University), Steven Joyce at the lectern

There was a really interesting discussion after the speakers' opening remarks, including around the ANZ forecast of hikes to come. Bryce thought that interest rates were now where they out to be on a Taylor Rule basis, and also that money supply growth had slowed down to very little growth at all (the latest 'broad money' measure, for example, is up only 3.6% on a year ago), both of which argued against hikes. Grant felt that with inflation already down quite a bit, maybe it would be better to hold and stay at current rates for a bit longer to see what happens. Henry, however, said that arguably a global disinflation supporting tailwind has blown out, that domestic inflation is still not good and might surprise on the upside again, and that while the pricing indicators in the ANZ business survey have stabilised, it was an open question whether they had stabilised at a level consistent with the RBNZ's inflation target. Policy issues raised but unresolved for another day: whether unconventional monetary policies (like quantitative easing) had been worth it; how monetary policy should respond to supply shocks; and whether the RBNZ ought to be both the setter of monetary policy and the financial prudential authority. Evidence from overseas is mixed, and against the canonical practice of economists having an answer to everything, I can't say I've got any clear opinion, either.

Thursday 21 December 2023

The clock ran out

This week's 'mini Budget' was certainly down the minier end of mini, and understandably so. While I sympathise with a bias for action, and there was also a political commitment to be honoured, by the time the coalition was settled and portfolios allocated, there just wasn't enough time left on the clock to pull everything together and produce an up to date and internally consistent mini-thingie and its accompanying Half-Year Economic and Fiscal Update (HYEFU). As the HYEFU notes (p9) its forecasts were put to bed on November 6, but after that it lists a slew of events (notably the new government and its policies, and some important data releases including that weaker than expected September quarter GDP number) that haven't been able to be fully factored in. We'll have to wait for the Budget Economic and Fiscal Update (BEFU) next year for a complete and up to date view.

That said, there were a couple of interesting bits of analysis in the HYEFU. One important issue is whether the economy is still at or above capacity - if it is, there might still be lurking inflation risks emanating from domestically traded but supply constrained goods and services, if it isn't, then we might start looking ahead to eventual RBNZ easing. Here's the HYEFU take: it's reasonably encouraging from an inflation-pressure perspective. On its 'output gap' calculations, Treasury reckons we'll be going from 1% above capacity in June '23 to roughly at-capacity (-0.1% below potential output) in June '24 and to clearly below (-1.0%) potential output by June '25.

That all depends, though, on whether you can get a good handle on potential output - the maximum level of GDP growth we could manage on a sustainable basis - and I don't envy the Treasury analysts their task ("There is considerable uncertainty surrounding the degree of excess demand in the economy" - HYEFU p14). One big uncertainty is how much of the recent immigration-superpowered increase in labour supply feeds into what GDP it will produce. Another is likely productivity growth, which recently has been all over the place, as the graph below shows, and it would be a brave person who claimed to know where it was going next. You'd think there might be a chance that post-Covid business practices (working from home, greater flexibility, less command and control), might be about to deliver some kind of productivity payoff, but then again maybe not: after all, over the 13 years in the graph, we've only managed to eke out a 0.3% a year productivity gain, and only a small part of it came in the most recent few years.

Finally, for me one of the most important bits in any HYEFU or BEFU is the degree to which the fiscal policy stance is stimulatory or contractionary, and whether the stance matches with the state of the business cycle (a 'pro-cyclical' stance, making booms even boomier and downturns even gloomier, being the trap to avoid). Here's the latest stab at the 'fiscal impulse', the degree to which underlying fiscal policy is looser or tighter than the year before.

To me, and accepting that some of the spend was in response to North Island weather events, the fiscal policy stance for the 2023-24 year was inappropriately procyclical. In June '23 the unemployment rate was only 3.6%: the economy didn't need a fiscal boost. And it also put fiscal policy at odds with the tightening stance of monetary policy, which had started to apply the brakes from late 2021 and pressed harder and harder through 2022 and into this year. Monetary policy needs mates, as they say, but it ended up dancing alone.

Looking ahead, the economic outlook is not that flash: over June '23 to June '25, HYEFU expects GDP growth at a relatively slow 1.5% a year pace, and unemployment to rise from 3.6% to 5.2%. That'll be a tricky environment to be thinking about taking 2.4% of GDP out of aggregate demand (the estimate of the fiscal impulse for 2024-25). The new government will need to be careful not to turn a slowdown into something worse.

Friday 1 December 2023

Competition and the coalition of chaos

Sounds like a Harry Potter movie doesn't it, and I couldn't resist using it as a title even though, for all the critical "coalition of chaos" knocking, there's actually a fair degree of overlap of policy ambition among the coalition troika, at least when it comes to the regulation and competition issues you and I are interested in.

To save you having to read them, I've worked my way through the two coalition agreements, National/NZ First and National/ACT, and picked out where competition and economic regulation might be up for a rethink under the new government. There's the odd regulatory thing I don't know about (for example, both ACT and NZ First want to junk the Therapeutic Products Act 2023, whatever that is) but otherwise this is a reasonably complete listing of what's likely to be in play. It's possible that some of the ideas in National's 100 point economic plan might yet see the light of day, too, so I've covered that as well.

I've included some personal comments: your opinion may vary.

One thing that commentators on the coalition agreement haven't picked up on is that in the 'Preamble' to both coalition agreements there's a reference to "introducing more choice and competition into social service provision". In practical terms the main immediate outcome is likely to be in education - the ACT agreement features "Reintroduce partnership schools and introduce a policy to allow state schools to become partnership schools" and "Explore further options to increase school choice and expand access to integrated and independent schools including reviewing the independent school funding formula to reflect student numbers" - but as a wider pro-competitive principle it's a good policy stance to start with. Monopoly public sector 'take it or leave it' provision is unlikely to be the best option of meeting everyone's needs. Cushy private sector incumbency doesn't work too well either, of course: while I can't see that it's made it into any of the coalition's priority lists, I quite liked National's proposal (number 47 in its 100 point plan) to "Allow KiwiSavers to invest in more than one provider, driving innovation, boosting competition and putting downward pressure on fees".

Stepping through the NZ First agreement:

"Establish a select committee inquiry into banking competition with broad and deep criteria to focus on competitiveness, customer services, and profitability" - I'm not hugely impressed by this, partly because the Commerce Commission is already part-way through its personal banking services market study and I can't see the point of duplication (accepting that the Commission's terms of reference may have been a bit narrow in the first place), but also because I don't think a select committee is the right forum. There's too much opportunity for grandstanding and for ritual oppositionism, while select committees are overwhelmed as it is and I don't see them being resourced well enough to handle a project of this size. Better options would be to either expand the Commission's market study or go the royal commission route: the Aussies made a lot of progress with their 'Hayne Commission'. But in any event bank CEOs and their teams and advisers can expect to be facing the third degree in some forum or other in coming months.

"Explore options to strengthen the powers of the Grocery Commissioner, to improve competitiveness, and to address the lack of a third entrant to remove the market power of a duopoly" - why not, especially in the area of supplier (i.e. grocery manufacturer) conduct. As the Grocery Commissioner recently said, "We are aware that a number of influential suppliers appear to be opting out of the RGRs’ [supermarkets'] wholesale offers and insisting on supplying direct to smaller retailers but at much higher prices, which is having a negative impact on retail competition". Whether the nuclear option of forced divestment to create the launching pad for a third entrant is on the table, who knows.

"Assess and respond to the impact that energy prices have on inflation including consumer led institutional improvements" - no, I don't know what that means, either, and it could be as innocuous as easier ways to switch suppliers to apply stronger competitive pressure (it works, as I experienced myself), or something along the 'New Reg' arrangement Australia has experimented with (described here), but it could also hint at a greater interest in control of retail prices.

"Investigate the threshold at which local lines companies can invest in generation assets" - my days of looking at requests for cross-sector involvements under the Electricity Industry Reform Act are long past, but insofar as I remember any of it, why not.

"Require the electricity regulator to implement regulations such that there is sufficient electricity infrastructure to ensure security of supply and avoid excessive prices" - seems reasonable, especially with the looming challenge of provisioning electric vehicles.

"Examine transmission and connection pricing to facilitate cost effective connection of new renewable generation resources, both on-shore and off-shore" - can't argue with that either, while hoping that it doesn't degenerate into the usual "you pay", "no, you pay" buckpassing.

"Require Medsafe to approve new pharmaceuticals within 30 days of them being approved by at least two overseas regulatory agencies recognised by New Zealand" (also word for word in the ACT coalition agreement) - as I understand it, a policy win for the New Zealand Initiative and/or its chief economist Eric Crampton, and wholly sensible. One of the bigger impediments across areas as diverse as building materials and medicines is the potentially anti-competitive barrier of unnecessarily high, or expensive, 'health and safety' non-tariff barriers, and we could usefully dismantle quite a few of them. In general we should efficiently free-ride on other respectable countries' testing or experience: I've always liked the idea, for example, of using overseas prices for telco services as a first sighting shot on what the local regulated price should be. Along similar lines National's 100 point plan had as number 32, "Strengthen competition for building materials with automatic approval for appropriately certified building materials from the US, Europe, the UK and Australia".

"Better recognise people with overseas medical qualifications and experience for accreditation in New Zealand" - same again. Unnecessary 'credentialism' and conveniently incumbent professional licencing 'gatekeepers' need to have their wings clipped. Same sentiment in the ACT agreement with its "Better recognise people with overseas medical qualifications and experience for accreditation in New Zealand including consideration of an occupations tribunal".

Turning to the ACT agreement:

"Legislate to improve the quality of regulation, ensuring that regulatory decisions are based on principles of good law-making and economic efficiency, by passing the Regulatory Standards Act as soon as practicable" - applehood and mother pie, and who'd disagree. Whether it would extend as far as a rethink of say Part IV of the Commerce Act, where I've always felt there may be less heavy duty alternatives to our rate of return regulation, we'll have to wait and see. And while it might be implicitly tucked into that "economic efficiency" reference, I'd like to see an explicit criterion in any eventual Act that would require any proposed regulation to be assessed for its impact on competition and consumer choice.

"Establish a new government department, required to assess the quality of new and existing legislation and regulation, funded by disestablishing the Productivity Commission and consolidating some regulatory quality work across the public sector where appropriate" - the country has not gone into mourning over the demise of the Productivity Commission (though as the productivity challenge hasn't gone away I personally would like to see something resurrected along the solid lines of the UK's Productivity Institute), and if the money is used to fund better regulation, why not. 

"In consultation with the relevant Minister, carry out regulation sector reviews, which could include the primary industries, the finance sector, early childhood education, and healthcare occupational licencing, in each case producing an omnibus bill for regulatory reform of laws affecting the sector" - a broad agenda which could encompass not just the benighted CCCFA (coming up next) but also ComCom's payments system regulation. Note too yet another welcome reference to tackling potentially overprotective professional qualification regimes.

"Rewrite the Credit Contracts and Consumer Finance Act 2003 to protect vulnerable consumers without unnecessarily limiting access to credit" (which also featured in the National Party's 100 point plan as number 48, "Cut financial red tape that is stifling investment, including significantly reducing the scope of the CCCFA which has restricted access to credit") - pretty much everyone accepts that successive tinkering with the CCCFA hasn't left us in a good place. Well-meaning attempts to protect the vulnerable ended up with lenders emptying people's waste baskets looking for receipts for Netflix subscriptions.

"Amend the Overseas Investment Act 2005 to limit ministerial decision making to national security concerns and make such decision making more timely" - completely reasonable. We already have one of the more restrictive overseas investment approval regimes by OECD standards, as shown in the graph below, and we need to lighten up if (among other things) we want another supermarket entrant or we want to attract some of the vast global pool of private equity money that's currently sloshing around looking for infrastructure opportunities (in particular for decarbonisation). We don't need any repeats of a Minister telling an overseas pension fund that they can't take a stake in a New Zealand airport. In the National Party's 100 point plan, they had as number 66 a very specific reason for liberalisation, "Amend the Overseas Investment Act and Income Tax Act to give investors certainty to invest in Build-to-Rent projects", which has since made it into the government's 100 day action plan, but hopefully the Overseas Investment Act will be freed up to benefit a wide variety of potential investors.

"Reform market studies introduced by the Commerce Amendment Act 2018 to focus on reducing regulatory barriers to new entrants to drive competition" - I can't say I like the look of this, for various reasons. For one thing, it's too early to be tinkering with a regime that's still new. More importantly, it looks as if it might be intended to limit the scope of future market studies solely to reducing regulatory barriers, which would be a mistake. There will be instances (such as the petrol stations) where the big competition issues are primarily ones of market power, not regulatory barriers, and the Commission shouldn't be barred from looking at them. It's arguable that the threshold test - "in the public interest" - for the Commission in s50 or the Minister in s51 to kick off a market study is too broad, but it's better than a threshold test that would be too narrow. On a more charitable reading, perhaps the "reform" will require the Commission to make sure that it uncovers all regulatory barriers in a study, but on the other hand they've been doing that quite well already (eg the thicket of resource consent, land planning and Overseas Investment Act hurdles to new supermarkets), so unfortunately the more uncharitable reading of an overrestrictive rollback looks the way to bet at the moment.

"Immediately issue stop-work notices on several workstreams, including Three Waters (with assets returned to council ownership)" - the 100 day action plan includes "Repeal Labour’s Three Waters legislation", so that's underway as a first step. What happens after that? National's 100 point plan had included (as number 68) "Restore council ownership and control of water assets, with strict rules for water quality and investment requirements" and (as number 69 in a welcome pinpointing of the current dynamic inefficiency debacle) "Introduce a requirement for water service delivery models to be financially sustainable, so that future generations don’t inherit outdated or failing infrastructure". Perhaps that can all be done under the remit of the current Water Services Economic Efficiency and Consumer Protection Act 2023, which installed ComCom as a sectoral regulator very much along the lines of its role as an electricity lines regulator (and which I'd presciently argued here was likely to be a better plan than Three Waters). Whether that will be timely enough - there's a rather leisurely timeframe in the Act for introducing regulation - or effective enough remains to be seen. ComCom can set investment paths, but with something like $150 billion worth of overdue maintenance to be paid for, it's still (however much you might like to stick it to councils for their previous pusillanimous water mismanagement) not obvious that they're in a financial position to pay for it.

Finally, there was a chance that a more business-friendly, deregulatory government might be minded to roll back some of the features of our existing competition regime. But nothing's been unwound, so that's something. On the other hand nothing's been advanced, either, even though the Commerce Act is now looking a bit shopworn. Understandably the negotiators had bigger things on their minds.

If I've missed anything, let me know and I'll happily update.

Thursday 7 September 2023

Here we go again

On August 23 the Aussie Treasurer Dr Jim Chalmers in a joint release with the Assistant Minister for Competition Dr Andrew Leigh announced a new competition review. It's meant to be a rolling rather than a one-off process - "A Competition Taskforce has been established in Treasury to conduct the review, which will be progressed over two years and involve targeted public consultation. It will provide continuous advice rather than a formal report" - assisted by an expert advisory panel including luminaries like the CEO of the Grattan Institute Danielle Wood and ex ACCC chair Rod Sims. Some initial topics have already been identified, including the ACCC's wish list for merger reform (which you can find here) and the prevalence of non-compete clauses in employment contracts.

I'd liked the pro-competition song Andrew Leigh has been singing when I heard him take to the mike at this year's RBB Economics conference: "All good stuff", I'd said, but in a rare moment of prescience I'd added, "whether the rest of the Albanese government shares Andrew's vision of being "pro-growth progressives" remains to be seen".

It's still unclear.  In July Aussie Transport Minister Catherine King decided not to allow Qatar Airways to operate more international flights. The competition review announcement had talked of building on "the Albanese Government’s existing efforts to boost competition" and tackling "cost of living pressures": King's decision, favouring a powerful and highly profitable incumbent, and helping maintain expensive air fares, didn't sit comfortably with either of those aspirations. In slight mitigation, the flight approval system King inherited is a rusty regulatory relic: governments should have been backed out of decision regimes like these years ago.

It didn't help that the ACCC hit the newly protected darling Qantas with a false, misleading or deceptive conduct lawsuit alleging that Qantas had advertised some 8,000 flights for sale that it knew it had already cancelled (press release here, concise statement of claim here). The ACCC chair Gina Cass-Gottlieb is gunning for an all-time-record fine of the order of quarter of a billion big ones. It's only allegation at this stage, but the reputational damage has hit home: as Qantas said on September 4, "The ACCC’s allegations come at a time when Qantas’ reputation has already been hit hard on several fronts", and the Qantas CEO decided to leave two months early. The Aussie government wasn't to know what lay down the pike, but with hindsight I'd guess it is now wondering why it risked supporting an unpopular corporate against the interests of the flying public.

We shouldn't gloat too much on this side of the Tasman when Aussie policies don't line up in a neat row: pots and kettles, for starters, and in any event our interests are best served by having a prosperous well-functioning polity next door, so let's get back to the nuts and bolts of competition policy. 

When I saw the announcement, I wondered why the Aussies were having yet another review - they seem to be on a regular 10-year cycle with the Hilmer review in 1993, the Dawson review in 2003, the Harper review in 2013, and now this one. My first reaction was that they risked a makework reinvention of the wheel - Harper seems like it was only yesterday - but on thinking a bit more about it, maybe they're right. A good example - it cropped up several times at this year's CLPINZ conference - is what, if anything, needs to be addressed if collaborative ventures between otherwise competing businesses are needed to transition to decarbonisation, as they might well be. It's become a more urgent issue now than it was back in Harper's day, partly because in the interim, too little has been done, on both sides of the Tasman, to make enough progress towards our international global warming commitments.

The Aussie "let's have another rethink" approach contrasts with our more piecemeal approach to the Commerce Act. We haven't stood still: within the Act itself, off the top of my head I can think of the new prohibition against anti-competitive grocery covenants in s28A, the change to s36, the provisions in ss48 through 51E on market studies, and the introduction of the whole of the Part IV regulatory apparatus, and outside of the Act we've introduced rafts of ancillary competition-relevant legislation (most recently the Fuel Industry Act 2020, the Grocery Industry Competition Act 2023, and the Retail Payments Act 2022, on top of earlier dairy, electricity and telco legislation). Put that way, the case pretty much makes itself for a reasoned review in the round of where we've got to, how it all works together (or doesn't), and what remains to be done. 

And if we're minded to have a high altitude rethink, I for one wouldn't be averse to a free ride on the Aussies' coattails if they improve their regime to meet the latest challenges. Yes, we're not them, and they're not us, but a lot of the problems are common. We could have saved ourselves several years of expensive navel-gazing if, day one, we'd simply pirated their post-Harper revision of their competition law to deal better to abuse of market power. If they come up with any more bright ideas in the next couple of years let's steal those, too.

Thursday 31 August 2023

Coordinating in the dark

While laid up at home with a very belated case of Covid - we're okay, thanks for asking - I thought I'd use the downtime to read the IMF's latest report on New Zealand. I'm tempted to add the traditional "so you don't have to". While you don't expect an airport novel, even economists' eyes will glaze over when they find pieties like "The OCR [official cash rate] path should be calibrated to developments in the economy, including external shocks and fiscal and other policy responses". Well, duh.

Cheap shots aside, you can't argue with the big macro conclusion - we've overheated, and fiscal and monetary policy need to brake the economy: "With exemplary management of the pandemic, New Zealand recovered faster than most other advanced economies. This supported activity and, together with generous fiscal and monetary support, resulted in strong investment and consumption. But this came at the cost of overheating against capacity constraints exacerbated by restrictions on labor movement due to border closures, and disruptions in global supply chains". 

You could argue that the RBNZ has done its bit, but that Treasury hasn't. As the graph below shows, we have a largeish positive (i.e. stimulatory) fiscal impulse in the current 2023-24 fiscal year, when if everything was nicely coordinated fiscal policy would also be tightening. Given the Auckland floods and Gabrielle I'm happy enough to cut some (but only some) slack in the circumstances and trust (hope?) that the fiscal largesse will unwind in coming years. It's also true, as Oscar Parkyn, New Zealand's alternate director at the IMF, points out in an accompanying statement, that "While the fiscal impulse is estimated to be positive in the current fiscal year, the authorities [i.e. the New Zealand government] note that near-term fiscal impulse forecasts are highly uncertain", and maybe there won't have been an unhelpful 1.8% of GDP boost to an already overstretched economy when the final beans are counted. All that said, some of the discretionary measures in the 2023 Budget, or other programmes that could have been put on the back burner, really ought to have been deferred till a more cyclically opportune time


The Executive Board assessment in the report - "Directors underscored the importance of careful calibration of the fiscal and monetary policy mix to rebalance the economy and help address long-term structural needs" - is surely right. And I'm not convinced we have a good institutional mechanism to make that happen and to expose the consequences of fiscal and monetary policy not pulling together. If Joe and Joan Public had been told that you can have your Budget goodies, but your mortgage is now going to 6% rather than 5%, how impressed would they have been?

Elsewhere in the report, the Executive Board said that "Compiling a monthly inflation index would enhance the effectiveness of monetary policy", and it crops up in various places: in the staff report (para 19), "During the consultation, the RBNZ flagged the need to improve data and real-time information to aid monetary policy decisions and highlighted the lack of monthly consumer price data as an important gap. The lack of a monthly CPI series makes New Zealand an outlier among advanced economies and is holding back a timelier formulation and assessment of monetary policy. A review of the financial resources of the RBNZ is ongoing" and (para 20, in the government's response), "Stats NZ is examining the possibility of publishing more price data on a monthly basis to enable more timely monitoring of inflation developments but noted that a monthly CPI series would require additional resources".

Sadly, we have form here. When Covid hit, we discovered we didn't have timely enough data on how the economy was tracking, and we started on a mad scramble in the middle of a crisis to develop some ('Getting real', 'Getting even more real'). Two years later along comes the worse outbreak of inflation in 30 years, and do we have the statistics to help us best cope with the latest challenge? No we don't. In our current and deeply strange ordering of statistical priorities, the Stats database can tell us what we spend monthly on imports of 'Preparations of vegetables, fruit, nuts or other parts of plants' from Bulgaria*, but it can't tell us our own country's monthly inflation rate.

Just over a year ago the Aussie Bureau of Statistics got with the plot and started its 'Monthly CPI indicator'. We saw its value yesterday when the latest number (4.9% for July) came in below the expected 5.2% - useful new info all round, with reactions across numerous markets. Here? We're still twiddling our thumbs.

*$46,015 in May

Wednesday 23 August 2023

CLPINZ 2023

 After a rapid scramble to reorganise the schedule following the last minute loss of the planned keynote speaker, the 34th annual workshop of the Competition Law and Policy Institute of New Zealand (CLPINZ) successfully got underway in Wellington over the weekend.

Top of the bill - promoted at short notice from the previously planned 'fireside chat' session, and very much appreciated for their willingness to step up and help out - were Commerce Commission chair John Small, on 'The future of antitrust', and Andy Matthews of Matthews Law as commentator. CLPINZ chair Anna Ryan of Lane Neave chaired the session.

John Small and his chosen topics; Andy Matthews commenting

John noted a swing in the intellectual competition policy pendulum, with a strong trend of more regulation for competition which had started twenty years ago with the Telco Act and has more recently extended to petrol, groceries and retail payment systems: on petrol, he noted that there were some retail "issues", a conclusion you'd tend to agree with after reading the latest quarterly petrol market monitoring report. He signalled that there is likely to be more ComCom activity against restrictive practices, an area which he accepted had been underdone to date, with the likes of retail price maintenance, anti-competitive covenants, cartels - the leniency programme is still "ticking away" - and in the fulness of time the revised s36 provisions against abuse of market power likely to see more playtime. He said that the NZ merger guidelines were due for review in any event, and noted that they're also a hot issue in other jurisdictions (notably in the US and Australia). And he put some emphasis on how ComCom plans to engage with its various stakeholders: "efficiency-based playing nice", as he put it, preferably relying on soft power (such as guidelines) and on "direct, respectful engagement", and avoiding litigation if possible, but going there if ultimately necessary.

Andy agreed that there had been a pronounced trend towards regulation for competition since around 2001 when there had been a "Big Bang" away from the previous reliance on light-handed, or no, regulation, and there could be a big payoff from the latest regulatory initiative, on consumer data rights, which could make competition in banking, for example, more effective. He also agreed with John's view that consumer law can be effectively used to complement competition policy, with for example significantly higher Fair Trading Act penalties over time providing a stronger incentive to be more consumer-friendly. And although the zeitgeist has moved to more hands-on interventionist competition policy, Andy reminded us that (a) the new and globally high-profile FTC/DoJ guidelines are just that, guidelines, and don't change the underlying law, and (b) regulation is all very well, but the first best option is always likely to be more effective competition, as we notably saw when a third mobile telco rolled out its gear.

Session 2 was "The most environmentally friendly carbon neutral CLPINZ session ever! Or is it?". In other words, the currently controversial area of "greenwashing", making misleading claims about the greenness of a business's products, activities, positioning or performance. The speaker was Charlotte Turner, senior associate, climate risk governance with MinterEllison in Melbourne, commentator was Kirsten Mannix, acting general manager - fair trading at ComCom, chair Bradley Aburn from Russell McVeagh. Charlotte referenced a web-scraping survey of the increased prevalence of green-focused claims, Kirsten referenced another which found an alarmingly high (~40%) proportion of potentially misleading claims. It's self-evidently an area with the potential to bite careless people: that said, as Charlotte said, the fundamentals haven't changed, and there are still well-established tests for 'deceptive' and 'misleading' even if the field they're being applied in is relatively new. And as Kirsten reminded us, one of the established principles is that 'intention' is not the point: being misleading will always put you on the wrong side of the law. You may well have read ComCom's own 'Environmental Claims Guidelines: a guide for traders', but might also like to follow up on some references Charlotte provided that originated with ASIC, the Aussie financial markets regulator: 'How to avoid greenwashing when offering or promoting sustainability-related products', and 'REP 763 ASIC’s recent greenwashing interventions'.

Session 3, 'Section 36: What can we learn from the Australian experience?', gave us incisive insights into how our s36, now amended to be in line with Australia's equivalent s46, will go in trying to deal to abuse of market power, given that our previous formulation of the law had proved ineffective. Chaired by Jennifer Hambleton,  it featured two very good speakers - Simon Muys from Gilbert + Tobin in Melbourne and Ed Willis from the University of Otago - and even though the 10 cases commenced under the new law in Australia have yet to go the full legal distance, and in some cases are still cantering towards the first fence, we got good ideas on what we might reasonably expect here. While some (including me) had hoped we might have got to a simpler place, compared to the counterfactual complexities of our old s36, both speakers agreed that litigating the new s36 will not be any simpler, just different (though, thankfully, more intellectually coherent). Establishing anti-competitive purpose, and establishing anti-competitive effect, will remain tricky, which is a bit of a disappointment to those of us who had hoped the Australian 'effects based test' would cut through more easily to the chase, and market definition looks to be at least as  crucial as previously. 

Simon Muys (L) and Ed Willis (R) reflect on the jurisprudence around abuse of market power

Session 4 was 'The Next Gen' session, a new CLPINZ idea aimed at showcasing some of the talent coming through the younger ranks of the competition and regulation community, and was chaired by NERA's Will Taylor. Left to right below, we got Sophie Vinicombe, solicitor at Russell McVeagh, talking about Ticketmaster antitrust claims in the US (what looks in retrospect to have been a very poor merger clearance); Sophie Harker, senior solicitor at Chapman Tripp on collaborating with competitors in emergencies like Covid; Luke Archer, principal investigator, Commerce Commission, on competition and sustainability; and Jono Henderson, consultant, NERA, on self-preferencing in digital markets (eg when a Google search throws up Google-associated products ahead of others'). All good topics, all well handled, and (going by people's reactions and the discussion at the CLPINZ AGM) I'd guess a 'Next Gen' session is going to be an ongoing feature of future workshops.


Session 5, 'AI and Collusion: Unveiling the Challenges of Tomorrow', featured a bright idea by chair Ben Hamlin: have AI (in the form of ChatGPT) write both the blurb for the session and the biography of the speaker, James Every-Palmer, which ended up crediting James with everything short of the Nobel Prize in Economics (not to downplay his real achievements: let's hat-tip his involvement in the Lawyers for Climate Action NZ win in the High Court, forcing the government to roll back its poor plan to paper the country with cheap emission trading scheme credits). James was surely right to argue that there is a long list of potentially anti-competitive concerns, not only over facilitated collusive conduct, such as tacit algorithmic price-formation, but also over unilateral conduct (including predatory conduct, and anti-competitive tying and bundling) and further issues across a variety of non-price dimensions including quality and privacy. Me, I'm a tech optimist, and inclined to believe the benefits of modern platforms in aggregate far outweigh their downsides, but you have to expect that some of the powerful incumbents will from time to time push their luck too far.

And finally Session 6, 'Aotearoa New Zealand's Turning Point - Competition and Consumer Policy Implications', chaired by moi, featured Mayuresh Prasad from Deloitte Access Economics in Wellington. Mayuresh gets a big thank-you for stepping in at literally days' notice to fill the gap in the programme after John Small and Andy Matthews moved to the keynote slot. He showed us, first, some modelling of the costs and benefits of what we need to do to keep temperatures rising by no more than 1.5 degrees. In the graph below there's a period where we incur costs to put in place policies like carbon taxes and spend on new renewable energy (and hence our GDP on the green 'do something' track falls below our GDP on the orange 'do nothing' track). After a period - the 'turning point' of his title - we pull ahead of where we would have been otherwise, and Mayuresh put numbers on the initial costs and ultimate payoffs. The costs, for mine, looked a bit on the low side, but otherwise his modelling fits with other attempts along these lines which also show that we can indeed have our cake (a greener sustainable world) and eat it (have a higher standard of living). And secondly Mayuresh explored some of the competition and regulation policy implications, notably around facilitating the necessary collaboration for good stuff to happen, and in particular giving certainty early in the piece as to what is or is not permissible, as we don't have a lot of time to waste.