Wednesday, 15 September 2021

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.

Wednesday, 8 September 2021

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.

Monday, 9 August 2021

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.

Wednesday, 30 June 2021

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".

Monday, 28 June 2021

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.

Wednesday, 26 May 2021

The Bank and the markets are on the same page

First thing you notice about today's Monetary Policy Statement?

Well, maybe the second thing, after the wholly expected news that the official cash rate or OCR will be staying where it is for quite a while yet, as (for example) all 13 folks surveyed on the Finder OCR preview page had anticipated.

The possibility of an OCR cut is now remote. The February Statement had said, "The Committee agreed that it remains prepared to provide additional monetary stimulus if necessary and noted that the operational work to enable the OCR to be taken negative if required is now completed". The April Review had said, "The Committee agreed that it was prepared to lower the OCR if required". And in this one? Any cut to the OCR has been taken out the back and quietly buried. Which makes complete sense: the futures market has already moved on and has been signalling no further cuts for a while now.

We're back to the good old days when the Bank published a projection for the OCR, rather than the notional "unconstrained OCR" construct it had been running with in recent Statements. And here it is.

As the Bank says (p17), "This projection is conditional, in that it communicates the policy path required to meet our monetary policy objectives subject to the economic outlook and the assumed impacts of other monetary policy tools", and it is not "forward guidance", or the Bank's formally tipping its hand about likely future moves, and if the outlook changes the projected OCR path will, too. But all that said, it's the best take we've currently got on what the Bank is likely to do next. It also agrees with what the markets were expecting, which was an OCR hike of 0.25% around the middle of next year and another one by the end of 2022..

On the Really Big Question that is bothering central banks right now - are current signs of inflationary pressure a signal of permanently higher inflation down the track, or will they go away as (eg) Covid effects wither away? - the Bank has come down largely on the temporary side: 

"The Committee discussed the risk that these one-off upward price pressures may promote a rise in more general inflation and inflation expectations. However, the Committee agreed that these risks to medium term inflation were mitigated by ongoing global spare capacity and well anchored inflation expectations" (p3), and

"we expect the broader impact on consumer price inflation to be moderate and temporary. Our projection assumes that goods supply-chain bottlenecks begin to ease in late 2021, and dissipate gradually over 2022. There are already tentative signs that the strong global demand for goods is abating, as easing of public health restrictions abroad is lifting demand for services such as eating out and travel. In addition, we expect labour shortages will lessen as border restrictions ease and more workers are able to come into New Zealand" (p28)

though if the Bank's wrong it will have to do something about it, or as it put it (p19), "there is some risk that the change in prices is more persistent and leads to ongoing inflationary pressure. Consistent with the [Monetary Policy] Remit, the MPC [Monetary Policy Committee] would be expected to respond to ongoing inflationary pressure if it were perceived as being inconsistent with the inflation target".

One bit of good news in the Statement is that while we are not in completely calm waters yet, some of the extreme risks around the economic outlook have dissipated: "Confidence in the outlook is rising as the more extreme negative health scenarios wane given the vaccination progress globally. We remain cautious however, given ongoing virus-related restrictions in activity, the sectoral unevenness of economic recovery, and the weak level of business investment" (p2). 

On Covid, the Bank is operating on the basis that "New Zealand is assumed to remain at Alert Level 1 or a lower level of restrictions over the projection ... Border restrictions are expected to begin to ease more broadly from the beginning of 2022. The majority of New Zealand’s adult population is assumed to be fully vaccinated by the end of 2021" (p34).

Thursday, 20 May 2021

Cyclical course-setting? Pretty good

Does the Budget set a sustainable course? Is it appropriately boosting or braking the economy? Short answer to both: yes.

Here's the 'true' or 'underlying' state of the Government's finances (from pp34-35 of today's Budget Economic and Fiscal Update) which uses the methodology I talked about the other day. The solid blue line shows the headline deficit, and the green line shows the underlying position when the headline figure is adjusted for the state of the economy. The thing to keep a watch on is the track of the underlying cyclically-adjusted balance, and from a sustainability point of view it is tracking as it should. It's gradually moving back towards balance, which is a good thing to do over the longer haul, but not disruptively quickly, which is the right thing to do in the still-unsettled short term.

The government is running ongoing deficits (cyclical and structural), so over the forecast period it is supportive all the way (it's adding more to the economy than it's taking out). But it's also useful to look at whether it's becoming more supportive, or less. That's estimated by the 'fiscal impulse', the change in the underlying cyclically-adjusted position from one year to the next (shown below).

This looks pretty reasonable, too. There was an appropriately huge increase in fiscal support in the June '20 year, to the tune of just over 6% of GDP. The degree of support is being eased back a bit in the current June '21 year, and that makes sense, as the Covid downturn wasn't as bad or as long as expected, and the rebound has been faster and stronger than first thought. 

You could make a case that the forecast increase in fiscal support in the June '22 year isn't necessary from a cyclical point of view: we're looking at a period of expected GDP growth of 2.9% (current '20-'21 year), 3.2% ('21-'22), and 4.4% ('22-'23) which doesn't add up to the strongest case for revving up the degree of fiscal stimulus. 

On the other hand, the unemployment rate at June '22 is expected to be 5.0%, and there is an argument (explicitly made by the Aussie Treasurer Josh Frydenberg in his Budget earlier this month) that you should keep the fiscal pedal to the metal until the unemployment rate has a 4 at the front. So no biggie either way, and at least the years beyond '21-'22 show an appropriate ongoing unwinding of the Covid-era fiscal stance.

In terms of setting the best fiscal course, on the left lay the lure of buying everything in the toyshop, on the right an "I'm more fiscally responsible than you" austerely fast return to surplus. This Budget has steered pretty well through those extremes.

Wednesday, 19 May 2021

Small issue, little interest, move along

Last week I turned up (by video) at the Economic Development, Science and Innovation Select Committee to have my say about the Commerce Amendment Bill: supporting reform of s36 (abuse of market power), suggesting that the Commerce Commission should be able to issue quick-fix provisional authorisations like the ACCC can, and arguing against the information sharing powers being proposed for the Commerce Commission.

Very few people seem to care about the information sharing issue. There were 29 submission on the bill but on my count only 5 of them raised the information sharing powers. 

They were the Commission (for); Edward Willis of the University of Auckland Law School ("tentative support, subject to some reservations"); Malcolm Harbrow (Twitter's Idiot/Savant and No Right Turn blogger), who wanted to make sure the new provisions weren't used to subvert application of the Official Information Act (good idea); and Russell McVeagh and me (both opposed). Russell McVeagh in their executive summary say "Such expansion of powers will disincentivise businesses from voluntarily providing information to the Commission to the detriment of the current levels of efficiency in the discharge of the Commission's significant number of functions", and I agree, though I also have wider issues, as I said in my submission.

So: not many people care. And maybe it really is no biggie. At the Committee hearing the Commission sang quite a good "we're all public sector entities trying to work together" song, and I can imagine that hitting the spot. And to be fair it has guidelines (the relevant bits are pp33-4) which set a reasonably high threshold for sharing information. 

The guidelines say that "Other than as provided for in the specific situations discussed below we do not share evidence with other New Zealand or overseas law enforcement or government departments or entities". The specific situations are: joint investigations; Fair Trading Act sharing with the FMA and Takeovers Panel (allowed for in that Act); where there might be serious fraud (allowed for under the SFO's Act); where there might be serious criminal offending (sharing with the likes of the police); where there might be a serious threat to public health or public safety (whatever agency is relevant); and assisting overseas regulators the Commission has a cooperation agreement with (allowed under various Acts including the Commerce Act).

That's all sensible and desirable, and if the Commission carries on along those lines, and you'd expect it to, all good. But the problem is that the proposed legislation doesn't replicate those high standards. It just says (proposed s99AA) that 

(1) The Commission may provide to a public service agency, a statutory entity, or the Reserve Bank of New Zealand any information, or a copy of any document, that the Commission—

(a) holds in relation to the performance or exercise of the Commission’s functions, powers, or duties under this Act or any other legislation; and

(b) considers may assist the public service agency, statutory entity, or Reserve Bank in the performance or exercise of its functions, powers, or duties under this Act or any other legislation

That opens a very large door: "Any information ... that ... may assist" a public sector entity is a far looser criterion than the serious criminal offending, or serious threat to public safety, that the Commission under its present guidelines would need to see before it was prepared to share. 

Ed Willis is his excellent submission (more judicious than my own coathanger tackle) said, and I'm with him, that 

it would usually be expected that processes for the protection of relevant interests and the promotion of transparency would be incorporated into the statutory drafting itself rather than being left to the Commission to work out in practice. That said, the real issue here is one of appropriate balancing. The Committee may wish to question the Commerce Commission directly about the anticipated procedures it will employ to ensure any information sharing under the new provisions is appropriate and fit-for-purpose. Only if the Committee is satisfied with the Commission’s response should it recommend that the Bill be enacted in its current form (p5)