Monday 30 June 2014

On holiday? In DUNEDIN??

Last week I posted that I was going to be away on a week's holiday in Dunedin, which prompted an incredulous here, to put people straight, are 10 great things about Dunedin.

  1. The cafĂ© and restaurant scene. For cafes, we liked Nova in the Octagon, Perc in Stuart St, and The Good Oil in George St with two fine atmospheric paintings by Sam Foley, one shown opposite. On the restaurant side we had a big night out in Two Chefs. Great friendly service in all of them (and in the retail shops more generally) 
  2. The architectural heritage - and not just the Railway Station, but all over. Dunedin did very well in the second half of the 19th century from the gold rush and the meat trade, and the architectural legacy of the period is everywhere (unlike some other cities I could mention...). Plus Dunedin's a relatively compact size for exploring
  3. The City Art Gallery. Good rotation of the permanent collection - which includes a nice Monet (opposite), a charming Tissot and a good Sidney Nolan - and generally interesting exhibitions, though the current ones didn't do so much for me. On the other hand the last time I was there they had a great exhibition of Gregory Crewdson
  4. The Otago Settlers Museum, a day's worth of fossicking in itself. Much more interesting than the relatively content-free Te Papa
  5. Book shops. I've been a long time fan of the University Bookshop, and this time round came across the Hard to Find Bookshop in Dowling St.
  6. The yellow-eyed penguin reserve at Penguin Place on the Otago peninsula.
  7. The local Emerson's beer is widely available on tap
  8. Walking - we had an excellent bush walk, from Bethune's Gully to the top of Mt Cargill. Lots of native birdsong, extensive views at the top
  9. The night-time view over Dunedin from the monument at the top of Signal Hill
  10. Free WiFi in the centre of town.

Any downsides? It can be cold - it was put-another-log-on-the-fire-and-mine's-a-large-Talisker-thanks when we were there - and the one way road systems may well have been the source of Arrow's Impossibility Theorem. But otherwise it's all good. Give it a go, sceptics!

PS Seems some itinerant economist appears to have wandered into that Foley painting...

Can you trust the wage gap data?

Last week Dr Jackie Blue, the Equal Employment Opportunity Commissioner at the Human Rights Commission, came out with a report which included the finding that "Women in the public service are paid on average 14 per cent [14.3% to be precise] less than men". The gap was also a bit wider than the wage gap in the workplace as a whole (12.8%). As you can imagine, the finding got widespread coverage, with (just as one example) the Pay Equity Challenge Coalition saying that "It is simply unacceptable for there to be such a difference in pay based on gender".

Trouble is, the pay gap statistic is pretty much hopeless as any guide to what's actually going on. Here's a worked example showing why.

A medical facility hires two types of employee -  psychotherapists (highly skilled, empathetic, predominantly women, well paid) and orderlies (semi-skilled, burly, predominantly male, lower paid). There are three orderlies per psychotherapist, and psychotherapists are paid five times what the orderlies get.

Unfortunately the manager of this facility is a bad employer who discriminates heavily against women, both in terms of hiring and what they are paid. Although male psychotherapists make up only 10% of the workforce at large, they make up 20% of this facility's roster of psychotherapists. Male orderlies make up 70% of the general workforce, but 80% here.

Men are also heavily favoured when it comes to pay. The psychotherapist/orderly wage differential is maintained at five to one, but in a discriminatory fashion. Male psychotherapists are paid five times what male orderlies get and female psychotherapists are paid five time what female orderlies get, but male pay rates are higher for each occupation. Male psychotherapists are paid 25% more than female psychotherapists, and male orderlies are paid 25% more than female orderlies.

So: what's the wage gap for this blatantly discriminatory outfit?

It's a large one - in favour of women. The average income for the women in this facility is just over twice the average income of the men (the reason being that the high proportion of women in the highly paid psychotherapy role dominates everything else that is going on in the data).

The large measured wage gap is, in other words, totally useless on its own as a diagnostic tool, as it is capable of throwing up both Type 1 and Type 2 errors. In this case, it suggests discrimination in favour of women (which isn't happening) and fails to flag the discrimination in favour of men (which is).

To be fair, the Commissioner is aware of these data limitation issues. Her report notes that the explanation provided by the State Services Commission for the New Zealand public sector wage gap is that “A higher than average proportion of women work in lower paid occupation groups and a higher than average proportion of men work in the higher paid occupation groups", which is exactly what drove the result in the worked example above. And she goes on to say that "This begs the questions – why are women less likely to be in higher paid occupation groups? Is the work women do considered to be of less value because it is women’s work? Are there barriers to women accessing higher paid occupations?", which are eminently reasonable lines of enquiry.

I'm highly sympathetic to those lines of enquiry, and in general to efforts to detect and tackle discrimination. All I'm saying here is that the statistic that people have seized on as evidence that discrimination is happening is deeply inadequate in that role.

Tuesday 24 June 2014

Tuesday 17 June 2014

The benefits of competition, from a guy who's been there (and everywhere else)

The veteran travel writer Jim Eagles has a piece in today's 'Travel' supplement to the Herald (I've searched the Herald's site, and elsewhere, but it doesn't seem to be online*). It's called 'Living in the golden age of flight': those of us with our knees squashed up under our chins in cattle class might jib a little at the 'golden age' description, but Jim's bang on with the gist of his piece.

After recounting consistently bad experiences with the high fares and bad service on monopoly airline routes, and the much lower prices and better service from low cost airlines in more competitive markets - "Even Ryanair, which has a rather mixed reputation, provided a vastly better experience than the last time I made the mistake of choosing BA for European flights" - he gets to his punchlines.

"It all goes to confirm for me, what a wonderful thing competition is...Now every carrier knows that if it doesn't perform the customers can and will go elsewhere. When Air New Zealand (and its parent NAC) had a monopoly on domestic routes the service was shoddy and expensive. Now, thanks to the arrival of competition, it is a superb airline...It's a miracle".

Ten competition economists or a hundred competition lawyers* couldn't have put it better.

* Update June 19 - it's now available here
** A non-random ratio

Thursday 12 June 2014

The other news in the Reserve Bank's decision

No surprises from the headline decision at the Reserve Bank today - interest rates up again, and likely to keep heading up - but as usual there's all sorts of other interesting analysis in the Monetary Policy Statement.

On the headline front, the Bank's latest interest rate forecast is shown below. If you like numbers rather than pictures, the Bank is picking a 90 day bank bill rate of 4.5% in a year's time (compared to 3.5% as I write), and a further but smaller rise to 5.0% by June '16. The financial futures market currently reckons the Bank won't charge ahead quite as fast as all that - it's picking 90 day bills at 4.25% in a year's time (you can find the futures prices here, subtract them from 100 to get the expected bill yield) - but either way rates are headed substantially higher.

Looking at the rest of the Statement, the Bank said that its current views and plans depend in particular on "export prices, the exchange rate, net immigration, the housing market and construction", any of which could spring a meaningful surprise.

Interestingly, the Bank had a go at quantifying what the uncertainty might look like, with a Monte Carlo exercise of simulating 1000 possible future tracks, based on historical volatility and correlations, and it came up with this as the plausible future range for 90 day rates (it did the same for inflation and the output gap, if you're interested, all on p6). The dark grey bit covers the middle two-thirds of the 1000 outcomes and the lighter grey bit the middle 90% of them.

These 'fan charts' are the in thing around the world's central banks. Here, for example is the Bank of England's equivalent stab at how British GDP might or might not unfold (from its May Inflation Report).

These charts are good reminders of two things - one, how spuriously precise economic forecasts generally are (and are taken to be), and two, how difficult a job central banks (and economic policymakers in general) face in real time. 

While there is clearly uncertainty about the exact scale of future interest rate rises, Joe and Joan Bloggs are onto it. As the Bank noted (p13), "Between the end of January and the end of April, the value of the stock of floating-rate mortgages fell by $10.4 billion while the value of fixed-rate mortgages rose by $9.7 billion, with $5.5 billion of that fixed for two years or more".

Joe and Joan are getting their act together in other ways, too. Here's the Bank's stab at the household saving rate. I'd point out that these data have been revised left, right and centre in the past few years, 'saving' can mean different things, and all in all you're best advised to treat them as indicative rather than holy writ. But they do tend to show a sizeable improvement from what was, probably, an unsustainably unbalanced position. What Joe and Joan have been doing isn't all that unusual - households across the western world have been retrenching and getting themselves into better financial shape - but it's particularly good to see it happening here at home, as we arguably had more fragile household saving than a lot of other places.

And finally an update on my own hobby horse, the state of domestic, non-tradable inflation. Here's the Bank on the situation and outlook for the tradable and  non-tradable components of inflation.

Yes, there's a fair slab of cyclically understandable, Christchurch and Auckland construction-related stuff going on in that non-tradables inflation, and in a perfect world you'd try and disentangle it to isolate the non-construction non-tradable inflation (what the dentist and the school and the local authority and the utilities are charging us). While I haven't done that, what I suspect the exercise would show us if I did is that there's a very stubborn, core rate of domestic inflation (look at how the blue line was behaving even before the Canterbury earthquakes, for example). 

All of our headline inflation is coming from domestic sources, and the only reason the Bank's inflation target hasn't been blown to billy-o is that the high exchange rate has kept imported inflation down. From that perspective, the Bank is absolutely right to set monetary policy to 'tighter', and right to keep ratcheting it up for the next year or two.

Wednesday 11 June 2014

That was quick...

Thanks to various Twitter posts - from Covec's Aaron Schiff (@aschiff) and the Productivity Commission itself (@NZprocom) - I've learned that the government is going to take up the Commission's recommendations to review some of the knottier and arguably ineffective bits of the Commerce Act, notably s36.

I missed the news myself, if indeed there was a news release, but I find that the decision is in the latest update from MBIE on The Business Growth Agenda Future Direction 2014, where the relevant bit (on p55) is this:
"We will also review the misuse of market power prohibition and related matters in response to the Productivity Commission’s recent inquiries. Because we are committed to better regulation and value for money, this review will also explore options for the removal or overhaul of regulatory provisions that may no longer be necessary or working effectively, including those for resale price maintenance and the cease and desist regime".
MBIE now has a new Progress Indicator in Priority Area 11 (a target, in other words) to "Improve the competition regime to protect consumers" (p56). Like all the other progress indicators in the document, it doesn't have a target date against it, though it (and they) should. And the traffic light system of reporting on progress indicators has a pretty useless classification (new/in progress/implementing/completed), whereas just about every traffic light system I've seen in the corporate world has a more hold-their-feet-to-the-fire version designed to highlight when projects are behind time or behind budget.

I mention monitoring progress for two reasons. One is that I have had the impression that MBIE weren't that keen on grappling with s36 before the Productivity Commission prodded the government to make MBIE readdress the issue, and I wouldn't like to think that MBIE will take its own stately time to deliver. And I'm also slightly concerned that throwing other competition law provisions into the mix might blow timeframes out. So now that the government has been commendably quick in taking up the issue, I'd like to see some concrete requirement on MBIE to be commendably quick in delivering a good response.

Not that I've got any issue with adding in some other competition or regulatory provisions for scrutiny, and the two itemised look well worth revisiting. Resale price maintenance (principally s37 and s38 of the Commerce Act), as I've blogged before, isn't, on modern legal or economic thinking, the black and white evil you might have thought it was. And the cease and desist provisions of the Act (sections 74A through D) have essentially withered on the vine. You'd think off the top of your head that they could play a useful role, especially in more dynamic situations where, by the time the carthorse of the courts has lumbered into action, it's too late to remedy the competitive damage. However, as far as I can tell, the cease and desist cannon has been fired in anger only once (back in 2006), so you can see why the government might want to know whether it's still  necessary or working effectively.

All up, this is very prompt and very satisfying progress from the government in directing a relook at some of the more problematic areas of competition and regulatory policy. Let's hope the results of the exercise will be with us in reasonably short order.

Tuesday 10 June 2014

The good times roll

It's worth checking in from time to time with Treasury's Monthly Economic Indicators (you can find links to the latest ones here). The value is not so much that the analysis is wildly different from what you get from the bank economists or the NZIER, for example, but more that the Indicators pull together data from all sorts of sources and typically give you a longer-term view of the economic cycle, plus they have interesting special topics from one issue to the next.

Here, for example, is the strength of the current upturn, set in historical context (taken from the latest Chart Pack).

What we've got is one of the strongest - perhaps the strongest - upturn in 20 years. It hasn't been feeding through to wages growth yet, but going by the historical lag between falling unemployment and rising wages, shown in the chart below, we're now at the point where a tightening labour market will start feeding through to higher wages for any given job (which is what the Labour Cost Index measures).

In other ways, though, the good times have already shown up. People's net worth, for example, is well on the up. Relative to disposable income, the way it is shown in the graph below, it's rising, but hasn't got all the way back to pre-GFC levels. But in actual dollars it has. The pre GFC peak for household net wealth, according to the data on the RBNZ's website, was $633.4 billion in September '07. It dropped to a low of just under $570 billion in March '09, but since then it's been growing strongly. It got back to its pre-GFC levels at the end of 2011, and it's kept on going.

In the year to March '14,  the value of households' financial assets rose by over $23 billion dollars to $269.6 billion, and in the year to December '13 (the latest available data) the value of the equity in their houses rose by nearly $53 billion to $530 billion. Much of the coverage of higher house prices has been been negative (including in the latest IMF report on New Zealand, one of the more anodyne documents you'll ever read): what's at risk of being missed is that a lot of middle New Zealand is seeing serious $$$ signs on the house, the KiwiSaver, and the odd share that they've bought or inherited. There's a rather impressive wealth effect mounting in the background - and among other things I wonder if it's being overdiscounted in the electoral forecasting game.

The special topic in this month's Indicators is a comparison of the economic and fiscal outlook in Australia and New Zealand.  Here's one way of portraying things - the output gap (or how much slack there is in each economy). Not a lot in ours, and likely to get even less, and a bit more in theirs, and getting larger. It's not often that ours is the better story, so we might as well enjoy it while we can: smoke 'em while you've got 'em.

Friday 6 June 2014

Have we got a map?

Today's breakfast presentation in Auckland by the New Zealand Data Futures Forum left me - baffled wouldn't be right, and awestruck is too much - let's say dazed. The Forum has a fine objective - "New Zealand is a world leader in the trusted use of shared data to deliver a prosperous inclusive society" - but at the risk of sounding like Sir Marcus Browning MP, even after this presentation and a previous one (described here), I still don't know what this vision will look like and don't know how or whether we'll get there.

We've got four big megatrends going on - social apps, the cloud, mobility, big data - and where they all fetch up, and what effect they will have on the economy, culture and society by the end of the process is anyone's guess. I'm perfectly prepared to believe that harnessing the information that's in the increasingly humongous amount of data we create could lead to transformational advances in health, education, productivity, and our general understanding of the world.  Beyond that, for me it's a blur. As John Whitehead, the chair of the Forum, said in his wrap-up remarks, the current data revolution may be similar in scale and scope to the Industrial Revolution, and nobody knew at the time where that was heading, either.

Everyone would like New Zealand to be one of the more effective innovators in this new increasingly data based world, and arguably we're starting with some comparative advantages. We have, for example, a high level of trust in our institutions, which means we have a lower starting point of angst over issues such as surveillance and privacy. On the other hand I wasn't encouraged by someone observing that New Zealand is the only country in the Asia/Pacific accredited by the European Union with having the same data protections as it does. It was meant to be a compliment about our current arrangements, but it left me somewhat worried. My impression is that the EU is no model for a data driven future, and already inhibits commercial data use that would be regarded as commonplace and unexceptionable in many other places.

But frankly nobody really knows what's the infrastructure you'll need to get off to a good start (though a single internet pipe to the rest of the world probably isn't exactly what you'd want), and that includes the policy and regulatory infrastructure, if indeed they are going to be relevant at all.  As Bill English, one of the speakers, mentioned, and commenters from the floor echoed, it's likely that events are likely to unfold  faster and more widely than any privacy commissars can keep up with, or as he put it (and I think this is pretty much a literal quote), "a slow moving, rule driven, control freak government structure" can't stay on top of the speed of events in the world of big data. Maybe the best policy setting is to get out of the way, for the most part, with perhaps some flexible principles-based (as opposed to rules-based) framework as backstop to privacy or other concerns.

The Forum has been thinking about what those principles might be - in its second discussion document it's come up with value, inclusion, trust and control - and if you've got your own ideas about innovative data-driven innovations, or about anything in the general area of big data, data use, and privacy, then head over to the Forum's website and put in your view. They're commendably open to input of all kinds - they've got a 'have your say' thingie - but it's only open for another ten days or so, so it's speak now, or forever hold your peace.

Thursday 5 June 2014

Excellent ideas on competition in services

I'm delighted with what the Productivity Commission's got to say about the role of competition, in its final report on raising productivity in the services sector (here are the media release, a cut-to-the-chase summary, a longer summary, and the whole caboodle).

Somebody needed to say a few things unequivocally about the state of competition in services, and about the need for more of it, and the Productivity Commission has delivered.

"Pressure from actual or prospective competition increases productivity growth" it says (p81), no ifs or buts. It notes that you can in principle push competition too far, so that "innovation may be discouraged if competition is so intense that firms expect additional revenues from innovation to be quickly eroded, particularly when large investment is required and the probability of success is small or unknown" (p82), but it rightly points out that we are not exactly close to that hypercompetitive frontier, so it's a highly moot worry to be concerned about. "The smallness and remoteness of many New Zealand markets limit the intensity of competition in them, making it unlikely that policies to promote competition will create competition so intense that innovation is discouraged" (p82).

And when it looks at the current intensity of competition in practical terms from four different angles - accepting that it's an imprecise exercise from any of these perspectives - on an overall competition intensity heat map (which I've blogged about before) it finds there isn't a great deal: "there is a general pattern that service industries experience less intense competition than industries in the goods producing and primary sectors...No [services] industry scores well on all indicators" (p91).

From which it snappily concludes that "Given the clear evidence on the role that competition plays in improving productivity, it is logical that policy settings that intensify competition will also improve productivity" (p91).

When it gets down to brass tacks, I like everything it's got to say. It says the government should implement the recommendations from the Commission's 2012 joint study with its Aussie Productivity Commission equivalent into barriers to trans-Tasman trade in services. It says that perfectly capable services professionals are being shut out of doing business in New Zealand by obstructive and pointless licensing requirements (my words, but that's the guts of it), and that "The Government should mandate the recognition of foreign licenses to practise when those licences are based on equivalent or better standards than the corresponding New Zealand standards" (p95). It also says that "The Government should consider the competition benefits of a regime based on certification or registration rather than licensing when reviewing existing, or considering new, arrangements for the regulation of providers of professional services" (p120), and that "The promotion of competition should be included in the statutory objectives of all professional bodies afforded statutory recognition" (p123).

On competition law, it'd like s36 of the Commerce Act reviewed properly as there's a strong enough case that anti-competitive behaviour by incumbents with market power isn't being pinged effectively (the courts are delivering "false negatives"). It says that whatever we do on s36, we ought to aim to coordinate with wherever the Aussies get to with their own current review of their competition law.

And it thinks the Commerce Commission should have the statutory authority to carry out market studies into the state of competition in different markets (currently it can only do telecoms). I must say up front here that this was something I've been lobbying for (I chucked in two submissions arguing for it, which are quoted here and there in the report), and voilĂ  - "The Commerce Commission should be able to undertake studies on competition in any specific market in the economy" (p150) and "The design of market studies should be based on existing practice under s9A(1)(b) of the Telecommunications Act 2001. The ability to make recommendations in market studies would be a useful additional feature, and this should be clarified in the Telecommunications Act and the Commerce Act 1986". Yay.

It has also looked at the Commerce (Cartels and Other Matters) Amendment Bill, which on the one hand criminalises hard-core cartel behaviour but on the other hand also provides protection for genuinely pro-competitive collaborative activities, and again they've got sensible things to say. They picked up on a submission from Russell McVeagh pointing out that the Bill is "languishing" in the entrails of the House, and said that "The Commission is not aware of any policy rationale for this delay. Regulatory uncertainty creates costs for businesses and should be avoided as much as possible. Government should use its influence to expedite the Commerce (Cartels and Other Matters) Amendment Bill, or, at minimum, provide businesses with more guidance on the Bill’s timetable".

And the Commission also wants to be sure that the Bill will work out as intended. There are a lot of folks who have real concerns about genuinely collaborative behaviour being misread as collusion, particularly now that there are criminal penalties involved (and I agree they're right to be concerned), and the Commission would like to see the Bill - as and when it ever emerges from the legislative sausage factory - reviewed not too long after the event (it suggests two to four years). I agree: indeed, it's not a bad idea for any bit of new legislation.

There's a whole lot more in the report, especially in chapters 9 through 11, about the potential for ICT to help lift services sector productivity - have a read for yourself.

When you look at this report, and the Commission's earlier work, you end up feeling that we needed the likes of the Productivity Commission. As a country, we're a little bit light on the dispassionate policy analysis shops that other, wealthier economies can run to. There is, I know, a lot of talent in the economic consultancies, and part of their work can be very useful when it bears on high level policy issues, but they're necessarily out on the commercial battlefield most days and not available to turn all their expertise to these kinds of topics. The Commission fills a gap - though we will also need successive governments to keep giving it meaty issues, and to pay attention to what it says.

Tuesday 3 June 2014

In praise of policy rules

A couple of weeks back I blogged about the Budget, and I mentioned that Bill English had introduced what I think is a new fiscal objective - I'm pretty sure it's new - or at the minimum explicitly restated an existing one, namely "After net debt has gone below 20 per cent of GDP, the Government intends to manage this debt within a range of 10 to 20 per cent of GDP over the economic cycle".

I seem to have been just about the only person to have been interested in this: it didn't make much of a splash at the time, and it's disappeared off the media and blogosphere radar since. It's a bit of a shame it's been overlooked: it's quite a good idea. So I thought I'd raise its profile a bit.

There's a big economics literature about the relative utility of rules as opposed to discretion in setting economic policy, and particularly in setting the appropriate stance of fiscal and monetary policy. Along that debated continuum from "all rules" to "all discretion", I'm somewhat partial to rules. While it sounds like a toothpaste ad, rules can indeed help avoid the buildup of unsustainable imbalances (almost by definition rules lean against boom and bust), and they improve transparency and political accountability. If a populist politician wants to buy the vote with a fiscal splurge in election year, for example, an apolitical rule saying where the deficit ought to be, give the state of the economic cycle, at least exposes the degree of profligacy. It may not stop it, but it makes it clear what's actually going on. Same goes for letting inflation rip, or suppressing interest rates, or the other monetary policy wheezes that opportunistic politicians might want to try on.

The main problem with rules, though, is that they tend to get adopted by the responsible countries that least need them, whereas the irresponsible ones won't want their hands tied. And it's certainly true of our latest net debt rule, too. Here's the current net debt picture for most of the developed world. It  shows net government debt as a percentage of GDP as estimated by the IMF for this year, and it comes from the IMF's latest (April) Fiscal Monitor (you can download the source data for yourself as an Excel file here and get the whole document here).

Basically it's the Scandinavians, the Aussies and us, and Switzerland, who have prudently conservative net debt levels (you could make a case for the Koreans, the Dutch and the Canadians too) - just the sorts of folk that least need rules binding their hands, yet just the sort of folks who will introduce ones anyway for good order. That said, Norway could in principle have squandered its North Seas energy wealth: who's to say one of the seriously wacky parties making headway in recent European elections mightn't have sprung up in Oslo, too? So it's a prudent safeguard to have a rule that accumulates the wealth into a sovereign investment fund. It doesn't totally safeguard policy from the potential loonies, but it's helpful.

And at the other end of the spectrum, you've got the usual suspects, where you can see that the likes of Greece have effectively reached the end of the fiscal line. I don't want to go into the pro and anti austerity debate, and I'm prepared to accept that today may not exactly the right cyclical time to be reining in the Greek fiscal extravagance, but equally you can see why people are saying, enough is enough, and if not today, then soon. Net debt rules along the way might have helped - maybe only a bit - to stop the Greek fiscal gravy train crashing into the terminus.

They'd have helped in France, too. France has run forty years of successive fiscal deficits - sometimes not very big ones, fair enough - but a net debt rule would have better exposed (and ideally moderated) the cumulative impact of individual deficits, each of which did not look especially problematic on its own.

So I quite like this net debt rule. I have no idea where the 10% to 20% of GDP level came from, or whether it's optimal in any sense. But I don't much care. Any rule that says, keep net down to some internationally low level, looks a useful weapon in the fiscal arsenal.