Tuesday, 30 August 2016

Another great competition workshop

Over the weekend in Wellington the Competition Law and Policy Institute of New Zealand put on its 27th annual workshop, and as usual it was a fascinating get-together (I wrote up last year's one here).

The big keynote session was Dr Jorge Padilla, head of Compass Lexecon Europe, on "Reform of misuse of market power", exactly the right choice given our current reconsideration of s36 of the Commerce Act. And Jorge had the gumption to prepare the helicopter-view, framework-setting piece the rest of us should have put in to MBIE's s36 review. Sure, we have mouths to feed and payrolls to meet, and perforce went straight into the undergrowth details of counterfactuals and case law and purpose versus effects, and none of us is paid to take the big picture view of a good MBIE policy analyst or a conference headline act, but with hindsight I, for one, certainly wish I'd taken more time in my own submissions to set the broad context first.

Never mind: Jorge filled the gap admirably, and I'm sure his high-level analysis will find its way into the MBIE hopper. He cast it in the form of an 'error/cost' model - no, come back! I'm going to explain! - and it made a lot of sense.

First, as background, on Twitter a while back I found a wonderful way to remember 'Type 1' and 'Type 2' errors: remember the story of the boy who cried 'Wolf!'. First time round, the villagers thought there was a wolf, but there wasn't. Second time round, they thought there wasn't a wolf, but there was. And the trick is that they committed Type 1 and Type 2 errors in that order. Type 1 is seeing something that isn't really there, convicting an innocent person, wrongly seeing anti-competitive abuse. Type 2 is not picking up something that you should have, acquitting a guilty person, letting an abuse slide as acceptable commercial practice.

Jorge's big idea was that not only legislation like s36, but also the shape of the competition authority and its governance, should all be designed as the solution to the problem of minimising the expected cost of errors, taking into account both the likelihood of type 1 versus type 2 errors, and the costs of the two kinds of errors. This will tend to steer you to the right legal test along the spectrum of per se legality at one end (eg above-cost 'predation'), through rebuttable presumption of legality (where you're most worried about Type 1 mistakes), through rule of reason (the error risks are more balanced), through rebuttable presumption of illegality (where Type 2 is front of mind), to per se illegality (eg cartels). He put 'refusals to deal', for example, in the box where on balance you'd be more concerned about Type 1 errors (wrongly pinging a practice that actually makes pro-competitive sense), so you'd want to apply a regime of presumptively but not absolutely legal. Below-cost predatory pricing would on similar reasoning be presumptively illegal.

Someone asked him about purpose-based or effects-based approaches to s36: he went for effects based, so let's hope that view, too, finds its way into our policy redevelopment.

The other big set-piece was Prof Carol Beaton-Wells, Director of Studies, Competition and Consumer Law at the University of Melbourne, on "Cartel Leniency and Trade-offs". This was one of those presentations that changes your mind about something that had previously seemed beyond all reasonable doubt. In this case, the previously unquestioned idea was the effectiveness of the leniency programmes that competition authorities run to destabilise and uncover cartels, and which typically offer immunity from prosecution by the authorities to the first (and only the first) cartel member who comes in and rats out the others (and continues to cooperate, for example by providing incriminatory evidence).

For me, and for the other Commissioners who were there at the time it came in, the Commerce Commission's leniency programme was the bee's knees, and indeed the Commission's guidelines (here as a webpage, here as a pdf) say "International and New Zealand experience indicates that an effective leniency programme is the single most effective tool available to detect cartels".

So Caron's presentation was an absolute eye-opener. Among other things, she pointed to data showing that the number of cartels being rumbled hasn't increased, and may have gone down, after the introduction of leniency; that the cartels being discovered are overwhelmingly ones that had already fallen over ("digging up dead bodies", as she put it) rather than the ongoing ones you might well be more concerned about; and so on, all the way down to the practicalities of problems with getting juries to go along with the evidence given by the dobbers-in, which juries tend to mistrust as self-serving or underhand.

For now, I'm at the gobsmacked stage of reaction, and if you're the same, we'll all have to go and work our way through Caron's latest publications on the (in)effectiveness of leniency policies. While you're at it, have a read of Robert C Marshall's and Leslie M Marx's The Economics of Collusion: Cartels and Bidding Rings, which I've recommended before and which is pretty much indispensable as a starting point for recent thinking about cartels.

It also, I think, helps explain what may have happened post-leniency: as Marshall and Marx show, cartel members and cartel hunters are engaged in an ongoing "arms race". Leniency may have given the hunters an edge, but cartels may have responded to the riskier environment by tightening confidentiality and devising stronger bonds of mutual obligation. That may also have happened post-criminalisation in Australia, where there was a long gap between criminalisation and the emergence of the first criminal prosecution. One possibility, as I suggested in 'Cartels? What cartels?', is that today's cartels are emulating submarines: running quiet, running deep.

And those were just the highlights of the workshop. We also had sessions on the s36 review, vertical price fixing, judicial perspectives on competition law cases, the collaborative activities exemption in the proposed revamp of s30, a state-of-play report on the current telco sector review, and a primer on the (newish) unfair contract terms legislation. Great stuff, jam packed into a very valuable day and a half, and special thanks to Chapman Tripp for providing the Wellington facilities. Well done to John Land and all the CLPINZ team on pulling this year's one together, and clear the date in your diary for next year's.

Tuesday, 23 August 2016

Your competition law exam question

Question 1 (100% of marks)

You are the New Zealand Commerce Commission. An application for authorisation of a merger is in front of you.

Two electricity generators propose to merge. There will be a substantial lessening of competition. An archangel* has appeared to you in a dream and revealed that the value of the detriments caused by lessened competition has been accurately quantified at NZ$1 zillion.

There will also be benefits. The archangel* has told you that the value of improved quality and security of supply has been accurately costed at NZ$2 zillion.

However, a major industrial user of electricity (the archangel* says you may want to think of aluminium) is highly price-sensitive, and will immediately close when prices rise post-merger and it is unable to compete with cheaper imports. Its closure will also have immediate knock-on adverse effects on users of its output. The archangel* says that the detriments arising in the aluminium and aluminium-using sectors have been accurately costed at NZ$3 zillion.

There are no other relevant facts.

Do you authorise the merger?

Give your reasons. Write on one side of the paper. Stop writing when the bell goes.

* TRIGGER WARNING While 'archangel' is encountered in several major world religions, some examinees may find this spectral concept alarming. If so, (a) substitute any near-omniscient process or entity you are more comfortable with, and/or (b) report the matter to the college authorities, who will conduct a fair and full investigation and then harry the examiner out of academic life.

Friday, 19 August 2016

Good books - August '16

Let's start with the economics: David Evans and Richard Schmalensee, two big names in the field, have written Matchmakers: The New Economics of Multisided Platforms. Highly relevant to today's world of social media and network apps, easy to read, insightful - I especially recommend the checklist (starting on p150) of things people will need to have thought through if they want to create a successful platform - and another fine example of how economists can add value to business strategy. If that's an interest, pair it with Hal Varian's Information Rules: A Strategic Guide to the Network Economy (I lent my copy to someone and never got it back. If that's you...).

Politics: Niki Savva's The Road to Ruin : How Tony Abbott and Peta Credlin Destroyed Their Own Government is fascinating. Apparently there are still people (at the Spectator's Australian edition, for example) who think the more socially conservative Abbott would have been a better Prime Minister than the relatively liberal Malcolm Turnbull. That notion doesn't survive a moment's encounter with this book. It's also very good on the mechanics of coups. Assassins need to plan meticulously, but be ready to move at once when they have the numbers. And incumbents need to realise that the only numbers they can trust are those totting up the people who say they won't vote for you.

History: Philippe Sands' East West Street: On the origins of "genocide" and "crimes against Humanity" has a dry and rather baffling title that might lead potential readers to try something else instead, but carry on regardless and give it a go. It's about the family histories of two Jewish lawyers who came up with the legal doctrines of genocide, and crimes against humanity, for the Nuremberg war crimes trials: before then, there was nothing in international law to stop sovereign governments from persecuting their own citizens. As it happens, their histories, and the author's, and that of Hans Frank, the brutal Gauleiter of occupied Poland, all intersect in Lvov in today's Ukraine: the East West Street in the title is in the nearby town of Zolkiew.

Many of the family histories end badly. Both the Nazis and the Russians were determined to eliminate the Polish intelligentsia, and the Nazis also targeted Jews of every description. The genteel, bourgeois, provincial society that had prospered in what was Austro-Hungary's Lemburg was annihilated, as were others. As one way of remembering what was wiped out, have a look at the photography of Roman Vishniac's A Vanished World.

Still on a historical tack, Mary Beard's SPQR: A history of ancient Rome has had great reviews all round, and for good reason. It covers the rise of Rome from its earliest days through to Emperor Caracalla (d AD 217), is a joy to read, and is near-essential reading for anyone who want to understand the origins of the modern western world. I saw that it featured in the Wellington version of Unity Books' best-seller lists (carried in The Spinoff) but not in the Auckland one, which says something about both places.

You don't need any Latin to read SPQR, but if your interest is piqued or, like me, you learned Latin at school or university (a scholarship in Latin and Irish paid my university fees) but have let it slide since, then have a read of Ann Patty's Living With  A Dead Language: My Love Affair with Latin. At which point you've got two choices (or do both, as I did). You can go the old-fashioned learn-by-rote route, in which case your best bet is N M Gwynne's Gwynne's Latin (his Chapter 4 makes the case for the old ways), or you can go the comic book slide-up-to-it-obliquely route of Maurice Balme's and James Morwood's Oxford Latin Course. There are various commercial editions: mine came with three paperback books of lessons plus a paperback Reader with the usual suspects (Cicero, Caesar, Virgil...)

If you're like me, you'll have a finite appetite for striking camp and slaughtering Gallic tribes, and I've always found Cicero a tedious old gasbag - though he lived a dramatic life, brilliantly fictionalised in Robert Harris's trilogy Imperium, Lustrum and Dictator - so you may want to try some other authors in the original.

This is where you'll need the Loeb Classical Library, which does parallel texts, Latin on the left hand page, English translation on the right. The Letters of Pliny the Younger are worth a look: they include an eyewitness account of the eruption of Vesuvius, and, in what feels like quite a modern section, Pliny's memos back to head office when he was a provincial governor under the Emperor Trajan, including the one asking what to do about these pesky Christians (don't witch-hunt, Trajan replied). Martial's Epigrams are fun, and handily come in mostly bite-sized chunks. The Latin is more difficult than Caesar, and at first you'll need to treat them like crossword puzzles to be teased out, but they're an exceptionally vivid glimpse of Rome in the first century AD.

You'll need a dictionary, but don't go mad about it. My Collins Latin Dictionary & Grammar was cheap and perfectly adequate.

Serious fiction: I don't know what sort of genre it can be slotted into, and others have struggled too ("a madcap new novel" isn't very helpful) but Jonas Jonasson's Hitman Anders and the Meaning of It All is an absolute delight. I gather his big claim to fame is his earlier The Hundred-Year-Old Man Who Climbed Out the Window and Disappeared, which has been filmed.

Thrillers: I mentioned earlier that I love Philip Kerr's series about Bernie Gunther, a police office in the Berlin criminal police during World War Two. I can highly recommend his latest, The Other Side of Silence. Bernie has escaped from a Russian prisoner of war camp, and is working under a false name in the south of France in 1956, where he gets entangled in manoeuverings between the KGB and the Brits, centred around Somerset Maugham's villa.

Another good one is Tom Wood's A Time To Die, the latest in a series about a professional assassin. As a genre, it can be dire - though I liked Lawrence Block's 'Hit' series, Josh Bazell's Beat The Reaper, and Chris Holm's The Killing Kind  - but this is terrific. It's mostly set in Belgrade, a place I used to know reasonably well. I was there on business in the early '80s, and again in the early '90s, and it's the only place I've ever been where you could see that the standard of living had gone markedly backwards. Which is a cue for one of the best economics books I've ever read, Daron Acemoglu's and James Robinson's Why Nations Fail: The origins of power, prosperity and poverty.

Thursday, 18 August 2016

In denial

The first edition of the new Household Labour Force Survey came out yesterday, and there have been some strange reactions.

At first I agreed with Grant Robertson, Labour's finance spokesman, when he said that it wasn't right that people looking for jobs solely over the Internet aren't being counted as unemployed. In today's world, that is indeed a daft approach, as I said at the time when Statistics NZ was running its (very useful) seminars around the country about the new-look HLFS. It's particularly odd, since this definition, which as Robertson correctly said has the effect of making unemployment look lower than it really is, came from the UN's International Labor Organization, which is emphatically not a labour-hostile institution with an agenda of concealing unemployment: it is, as its website says, "devoted to promoting social justice and internationally recognized human and labour rights".

But I was then surprised, and dismayed, to see Robertson casting aspersions on the motivation of Statistics NZ, which justifiably took exception. We don't need the quality of public discourse getting nudged further into the mud.

I was also surprised by commentators who took the line that, because the new survey contained methodological changes, we could not be sure that employment grew at all in the second quarter. At face value, the HLFS had shown a 58,000 rise in employment in the June quarter compared with March, but as Stats said (here) "part of this increase reflects improvements to the redeveloped HLFS alongside any real-world increase in employment this quarter".

It is technically angels-on-the-head-of-a-pin true that the HLFS doesn't tell us whether there was "any real-world increase in employment". But to try and make the case that there really wasn't any is complete cobblers. Absolute arsehats.

For one thing, Stats had earlier published the June quarter results from what used to be a separate Quarterly Employment Survey publication and is now part of an overall Labour Market Statistics release. It isn't on all fours with the HLFS one (for example it misses very small businesses, and agriculture) but it is another valid perspective on employment, and it showed that the number of full-time equivalent employees rose by either 0.3% (seasonally adjusted measure) or by 0.6% (the 'trend' measure) in the June quarter.

For another, every single business survey tells us that employment is growing. The latest employment components of the BNZ/BusinessNZ Performance of Manufacturing Index, the BNZ/BusinessNZ Performance of Services Index, and the ANZ's Business Outlook survey are all showing growth in employment. Here's the ANZ one.

So it's time to stop playing silly buggers with the data and to stop denying the undeniable: employment is growing. That's it.

The other interesting thing in the new HLFS was a new 'underutilisation' measure, which adds up the officially unemployed, the underemployed, those looking for work but not quite ready to take it up, and those not "actively" seeking work but who would like a paid job and are available (which includes those Internet-browsing people, who aren't being "active" enough, apparently, to fit the official definitions).

Measures like these are often politically abused - "Sure, the unemployment rate has gone down, but see, there's all these other people..." - but it's still an interesting concept, as this Stats publication (pdf) explains. And it's one where we can see (here) how we're travelling by international standards (give or take - it's the picture from last December, as not every country has up to date figures).

To be honest, I'd thought we would show to greater advantage than 'a bit better than the OECD average': cyclically, the economy has been doing well by international standards, so you wonder how (for example) the sluggish Japanese economy is to the left of us. Perhaps the answer is demographics: there may simply be very few warm bodies left unemployed in the relatively aged Japanese population, compared with our younger structure. It's less of a surprise, though, that our relatively flexible labour markets have produced better outcomes than the sclerotic institutional arrangements in France, Italy, Greece and Spain.

But we have one blot of our own (shown below) that badly needs fixing. I don't have any immediate answers, beyond the traditional liberal nostrum of more, and better, training and education. Hopefully others have more ideas: either way, this can't be allowed to go on.

Friday, 12 August 2016

Time to kill off an absurdity

Today the Commerce Commission said that it is starting a study of domestic telecom backhaul services (the connections that carry your internet traffic around New Zealand). They're doing it to
  • understand how the market for domestic backhaul services has evolved in today’s telecommunications environment and what it may look like in the foreseeable future
  • consider what, if any, changes may be required or are desirable to the regulatory framework to best promote competition for the long-term benefit of end-users
and among other things the Commission will be looking at "emerging competition issues (if any) that may require a regulatory response".

Excellent. It makes total sense for the Commission to be on top of what's happening in these important and fast-moving sectors, to be thinking about whether existing regulation is still needed or fit for purpose, and if there's a case for new or different regulation.

Irrespective of the regulation angle, it's also worthwhile that the Commission will be looking out for any competition problems. That's what you'd expect a competition authority to do. You'd be annoyed if it didn't. And it makes total sense that the Commission "must monitor competition" in telecoms (s9A(1)a of the Telecommunications Act), may fossick around in anything telco-related (s9A(1)b), and must publish its results (s9A(1)c).

But that's where the policy coherence ends. The Commission must monitor competition in telecoms. But it must not monitor competition anywhere else, because of a debatable decision of the Court of Appeal* in 1994 which hasn't been fixed since. The Commission back then had gone and looked at whether the telco regulation of its day (an information disclosure regime) was any good (it wasn't). Telecom challenged its right to have looked. And the presiding judge said
The basic difficulty with the argument put forward for the Commission...is that it would endow the Commission with the role of an ongoing and omniscient watchdog, policing the operation of the Commerce Act in all respects and reaching out to other statutory fields such as that of the disclosure regulations. It is not unnatural that something of that sort might be expected by someone not closely familiar with the Commerce Act, but it is not a view which survives scrutiny of the Act
If every man and his dog in their "not unnatural" naïveté would have expected the Commission to be able to look at competition around New Zealand - this under an Act, recall, which has as its purpose "to promote competition in markets" - but the Act, in the learned opinion of their Lordships of Appeal, doesn't actually allow the Commission to look at the state of competition, then the Act should have been smartly amended.

But of course it hasn't been, and here we are twenty years on, still footling about. MBIE, to be fair, has consulted on giving the Commission a "market studies" power: I hope we're finally getting closer to rationalising the absurdity of requiring competition to be monitored in one sector and forbidding it everywhere else.

*Sometimes called the 'Telecom "fishing" case', or more formally Commerce Commission v Telecom Corporation of New Zealand Ltd [1994], 2 NZLR 421 (CA)

Thursday, 11 August 2016

Interesting detail from today's Monetary Policy Statement

There is some really interesting material in today's Monetary Policy Statement (pdf file).

On the downside, there's an analysis of world dairy production, which shows (in the graph below) a strong and probably ongoing surge in world dairy supply. We can't see the demand curve as easily, but it may not be strong enough to absorb this new supply: as the MPS said, "While demand for dairy products is expected to be supported in the long term by growth in emerging markets, high global production is likely to weigh on prices in the medium term. These factors have led the Bank to revise down its medium-term assumption for whole milk powder prices". I'm no expert on dairying, but unless there is some quick and large fall in the NZ$, I'd say the already high levels of financial stress on our dairy farmers are going to be stronger, for longer. Not good at all.

Housing is top of mind for a lot of people at the moment. Here's a fascinating graph: look at that black line in the graph showing house price inflation ex Auckland and ex Canterbury. Basically it shows that quite a few people have been saying, "My house in Pakuranga is worth $1.5 million? Sold, it's yours, I'm off to Nelson", and quite a few other people have been saying, "Here come those jafas. Jack the price up".

Is it all going to fall over anytime soon? No, says the RBNZ. It has house prices still rising, at a national level, over the next few years, though rising at a far slower rate. We'll see.

If I parted company with the RBNZ over any of its analysis, it's over net migration and our output gap. On migration, the RBNZ has net migration dropping away quite a lot, and reasonably quickly. They could be right, but I'm more inclined to believe any drop-off will be more modest than that. There seems to be a political anti-immigration head of steam building up which might curtail inflows, but if that doesn't eventuate, our relative cyclical positioning in the global economy seems to me to be more consistent with net immigration holding up more than the Bank is picking.

The output gap - is there lots of spare capacity (a "negative" output gap, and so little domestic inflation), or very little (a "positive" gap, with stronger inflationary pressure) - is a key variable. Measuring it is inherently iffy, but the RBNZ's best guess is that the economy is currently roughly at capacity: the output gap is neither strongly positive nor strongly negative. As the graph below shows, the Bank believes the output gap will turn increasingly positive in the next couple of years, helping to push prices up.

I'm not quite there myself. On a very basic calculation, if the labour force keeps growing at its current 1.7%, and business investment grows by 6% (the Bank's forecast), the economy has the potential to grow by around 3.1% (two-thirds weight on labour, one-third on capital), plus throw in some modest overall productivity gain, and you get to 3.3% or 3.4% growth in the country's output capacity. If the economy actually grows at around the same rate - which is the Bank's forecast - then the output gap doesn't change at all, and domestic price pressures don't build up like the Bank expects. Its job of getting inflation back to 2% will be harder than it thinks it is.

But we knew that.

Wednesday, 10 August 2016

A million dollars doesn't go very far...

The latest REINZ house price data are out, and to nobody's surprise they showed a hot market, with the national median price up 8.6% over the past year, and the Auckland median price up 12.2% to a new record level ($825,000). The median price on the North Shore (Auckland's most expensive region) is now $1,062,500.

Some of this is our own doing, especially the slow and inadequate response of housing supply, and some of it is down to cyclical issues like strong net immigration (which includes more Kiwis coming home, more not leaving in the first place, and more foreigners wanting to come here). But as I've argued before, we need to remember that there are broader global issues in play, too.

Those million dollar homes on the North Shore, for example, are nothing unusual in Australia. As it happens another lot of house price data came out this week, compiled by CoreLogic, and it showed how many suburbs across Australia are over the million dollar mark (Aussie dollars, at that). The latest answer? 613. And as the CoreLogic graph below shows, the number of million dollar suburbs has been rising strongly over the past three years.

Anything with a view of Sydney Harbour in particular is now stratospherically expensive. Here (again from CoreLogic) are the average prices in Australia's top 10 most expensive suburbs.

It's not much different where I grew up, in south County Dublin. Here's a typical four bedroom house from the area (full details here), close to where my sisters and I went to our secondary schools. The asking price in today's Dublin market will set you back €1,075,000, or some $1,660,000.

None of this is coincidence: the common factor is global monetary policy, which has been set on ultra-easy in the US, the UK, Japan and the Eurozone, and which has fed through to Australian and Kiwi mortgage rates, as the graph below shows. It starts back at the end of 2004 because that's where the RBNZ's data series on fixed rate mortgages (Excel file) starts.

You can see at a glance that our long-term interest rates are very closely linked to world rates (and if you'd like more formal research on the closeness of the link, have a read of an analytical note from the RBNZ, 'What in the world moves New Zealand bond yields?'). Our fixed rate mortgages are consequently set for us: they're smoother than the overseas rates, and there's quite a lengthy lag - it's about a year, eyeballing the graph - but they're dealt to us by the world croupier. We don't have a lot of say*.

And sometimes, like now, that can be a problem. We can end up with rates that don't suit our local objectives, just as the Irish did in the 2000s when they had low Eurozone interest rates dealt to them at a time when the Irish economy was already booming. And for us, it's going to get worse again, because of that lag between overseas rates and ours. There's a fair whack of the recent sharp fall in overseas rates that has yet to feed through to lower local mortgage rates and which has the potential to wind up our housing market a few notches more.

So when we're thinking about the local explosion in house prices, especially in Auckland, we absolutely do need to free up and accelerate supply, and do all the things that are under our control. But it's unlikely that house prices are going to go all the way back to their usual relationship to family incomes until global monetary policy also moves away from its current abnormal setting.

*The economics of it is that you can have any two off a menu of your own interest rate, your own exchange rate, and your preferred capital inflow/outflow. You might want to pick the interest rate plus one of the others, but you might not like the implications for the third.

Tuesday, 9 August 2016

Bonkers. Barking. With a capital B

Auckland Council staff have been working through the Proposed Auckland Unitary Plan that an independent hearings panel delivered to them last month, and they've recommended some changes (there's a good summary in the Herald). Councillors will start their deliberations tomorrow: the agenda document is here if you fancy taking on the 618 page brute (and without a proper table of contents, either).

Everyone will have their own hot topic - 'shoebox' apartments are up there for some, housing in volcanic craters for others, plus there's the perennial Long Bay development controversy - but what caught my eye was the staff's view on protection of rural land (it's item 6.4 starting on p35).

The original draft plan that the independent panel considered had included "an objective seeking to achieve food security for the region". That was self-evidently bonkers. "Food security" makes little or no sense for countries in general, where it's usually a protectionist device to protect local farmers. It makes spectacularly little sense for a huge food producer like New Zealand. And it has no logic at all at a sub-national level for any economy with roads and trucks.

The independent panel correctly gave "food security" the flick, and the Council staff concur: they're recommended to councillors to go with the flow and junk it. So far so good.

Unfortunately both the panel and the Council staff have left in a planning objective of "making a significant contribution to the food supply" for Auckland and New Zealand. And that has fed into the staff's recommendation not to accept the panel's proposals to make it easier to do rural sub-divisions, because it would result in "loss of rural production".

There may be other reasons for opposing urban spread into rural areas - the Council staff mention some, including their ideology of a "compact city" which is one of the reasons we've got the problems we have - but let's be clear. Loss of farm production shouldn't be one of them. It's barking mad as a criterion.

If Auckland in the morning were to swallow up 10,000 hectares of prime farming land, we wouldn't notice the slightest difference. It would be less than 0.1% of the total agricultural land in the country*. It's nonsense to think you're making a "substantial" contribution to food production by restricting Auckland's spread.

And even if you were, which is the bigger problem: making a microscopically tiny difference to a country already awash in agricultural capability, or making quite a big difference to the huge shortfall of land available for housing, the consequent stratospheric housing prices, and the serious social issues they are causing?

*The data in the 2012 Agricultural Census land use tables show total agricultural land of 14.4 million hectares, from which I've subtracted the two categories of bush and the 'other' category, which makes the core supply of agricultural land as 12.9 million hectares (the biggest component is the 7.9 million hectares of grassland). 10,000 hectares deducted for Auckland housing would be 0.077% of the total. You could make it 100,000 hectares for housing and it would still be less than 1% of the total farmland.

Friday, 5 August 2016

We are not alone

Although we are heavily intertwined with the global economy, us New Zealanders are not terribly good at living with its corollary: while we like gotcha! blame-finding of local bigwigs, the reality is that a lot of what happens here has precious little to do with anything we've done (or neglected to do), and has a great deal more to do with the great sweep of world affairs. Even our surging house prices (as I argued yesterday) have a substantial international context to them.

Along those lines, I've had a go recently at suggesting (in 'Give the guy a break') that we should cut our Reserve Bank governor some slack. Yes, inflation is still below target. Yes, forecast inflation has been too high. Yes, the Bank raised interest rates in 2014 and (with hindsight) probably shouldn't have. But none of this is at all unique to New Zealand. It's not all, or mostly, or even a fair bit, down to Graeme Wheeler and the team at No 2 The Terrace.

What got me thinking about it again was today's Statement on Monetary Policy from the Reserve Bank of Australia. Here's one graph from it that's worth poring over. It shows that we are in the same boat as the rest of the world: with few exceptions (certainly in the developed world), inflation everywhere is lower now than it used to be, and lower than central banks would like it to be (Australia ditto). Local missteps or inaccuracies can't be any big part of the story.

Here's another, showing how the US Fed - arguably the most sophisticated central bank in the world - has been wrong-footed by this unexpectedly low inflation: again, it's not just us. Earlier this year the Fed thought that it would be marching the Fed funds rate smartly up to 3% by late 2018 ('FOMC' in the graph is the Federal Open Market Committee, the Fed's policy-setting group). Now it thinks it'll be more like 2.4%, and chances are that 2.4% is still miles too high: the financial markets' expectations are for sub 1%. The financial markets themselves have also been forced to have a rethink.

Just as ours have. Here's the comparison between the March and June consensus forecasts for our 90 day bank bill rate (from the NZIER's latest consensus poll). You can see (near the bottom) the expected track has been revised down by 0.5%, which is a large change for a single quarter.

Of course we should avoid making any egregious errors of our own. And of course we should aim to do a bit better than the international average. But when things appear to have gone off the economic rails and we're tempted to bag someone for it, it will often be a good idea to take a deep breath and check whether we're wrestling with the same issues as everyone else.

Thursday, 4 August 2016

It's. Still. Too. Slow

Let's start with the positive: Stats told us that building consents in Auckland rose by 16% in the year to June, to 9,651 homes.

Right, having got that out of the way, another perspective is that the consents (when they eventually translate into construction) are still running some 4,000 to 5,000 a year below the level to keep pace with demand - the conventional wisdom is that something like 14,000 a year are needed - let alone eat into the existing shortfall of perhaps 20,000. We will need to keep growing at 16% a year for the next three years just to reach match-new-demand levels, by which time the shortfall will have risen to around the 25,000 mark.

I'm also rather concerned about this - it's the 'trend' estimate of what's happening to Auckland consents, after Stats has waved its magic smoothing wand over the (very erratic) monthly data. On this measure, Auckland consents peaked towards the end of last year, and have been falling steadily since.

I've wondered about this before. It could be, for example, that there's something strange in Stats' smoothing algorithm. Or - and I'm leaning more to this view after having a quick natter with someone who's been closely involved with Auckland's Unitary Plan - it could be that developers (and apartment block developers in particular, I'm  told) - have been holding off to see what the Plan allows. You would, too, if your Plan A had been a two-storey development but the Unitary Plan might allow a six-storey one.

So the upside is that if the Plan goes through, the developers will go ahead with their best options, and the previously deferred projects will eventually boost the numbers in the right direction (possibly by a lot if the Plan goes the right way on allowable heights). The downside is that if the Plan runs into NIMBY or other flak, and there's no near-term finality, some developers are going to leave their plans on the shelf. A protracted period of uncertainty would have very unwelcome consequences: in that case. and even though I'm a jafa these days, if Auckland Council can't get its act together then I wouldn't have the slightest problem with central government taking over the job.

All up, even on the 16% increase view,  it's pretty clear that supply is responding slowly, and part of the solution will involve figuring out why (capacity constraints? deadweight planning?), and fixing it.

At the same time we should realise that not all of what's going on is down to New Zealand specific issues. People have been pointing fingers at our land use and land availability planning restrictions, our current net immigration flows, our tax regime and hence or otherwise our love affair with rental property, and our easy access to bank credit. There's something in all of those. But they also miss a wider point: our booming housing markets are just one further symptom of globally ultra-easy monetary policy.

One of my other gigs involves talking to chief investment officers at some of the big fund managers, and from those conversations, it's become clear that just about every income-producing asset, including housing, has been bid up to expensive levels. Global government bonds, higher quality corporate bonds, physical and listed global property, dividend-paying equities (especially the more defensive sectors such as infrastructure) - every one of them has been bid up to historically expensive valuations by investors desperate for yield, at a time when central banks have effectively driven short-term interest rates to zero (or even below).

And we're not even at Peak Global Ease. The Aussies have just cut their policy rate; the Brits are likely to; Japan has upped its 'quantitative easing' programme; China might well want to support its economy a bit more. We're probably going to have to as well, especially after that Aussie cut. The only economy where policy might be tightened anytime soon is the US, and even there the current futures pricing is betting that there's a 60% chance that the Fed funds rate will still be at its current 0.25-0.5% level at the end of this year.

So by all means fix the things we can fix, and try to pull what demand and (especially) supply levers we can. But I wouldn't be too sanguine about dealing to historically high prices until global monetary policy starts to creep back to more normal levels.

Tuesday, 2 August 2016

Those who don't know history...

Richard Grossman's book, Wrong: Nine Economic Policy Disasters and What We Can Learn From Them*, is a worthwhile read.

The nine disasters are Britain's loss of the American colonies, the Irish Famine, America's lack of a permanent central bank pre 1913, German reparations after World War One, inter-war protectionism, Britain's return to the gold standard in 1925, Japan's 'lost decade' in the 1990s, the GFC, and the euro. Grossman's take is that they were typically the result of "commitment to outdated or fundamentally flawed economic ideologies", "the outsized influence of private interests", and "efforts to shift costs onto foreigners", and were also "frequently compounded by excessive delay".

We've got better at some of these - reparations are probably a permanent goner (though you could say Trump's Mexican wall is a variant), and trade barriers are much lower than they used to be despite the best efforts of the nutters and the rent-seekers - but some of the underlying drivers of big mistakes are still alive and well. Grossman has a range of suggestions to counter them, and particularly the groupthink that can set in around an ideological (or indeed any) settled way of doing things. While it's never going to be easy to know "when changes in circumstances render a previously sound economic ideology obsolete", he says that
Theoretical and empirical models combine current understanding about the relationships between various elements in the economy and can help predict the consequences of proposed policies. Cost-benefit analysis weighs the hypothesized expenditures associated with a policy against its anticipated payoff. And historical and comparative studies can provide useful analogies adopted at other times and in other places. These tools have proven their worth, although none is perfect...Using these tools to subject proposed initiatives to vigorous testing is far more likely to yield sensible policy prescriptions than blind adherence to ideology or precedent (p183)
All very sensible. But the reference to the value of "historical and comparative studies" reminded me that I've had a vague feeling for a while that economic history isn't in fact being taught to New Zealand economics students. So I went and had a fossick around the websites of all the universities to see what's being offered or required as part of an economics major bachelor degree. My vague feeling was completely right. Here are the results, in alphabetical order (the links go to the source info I used).
Auckland - nothing specific though ECON232, 'Development of the International Economy', has some, mostly focussed on the 20th century
AUT - nothing specific**
Canterbury - aha! The good news is that 300-level ECON342, 'Economic History', is bang on the money and says "We study the causes and consequences of the Three Great Transformations: language, agriculture, and the commercial and industrial revolutions that began in the 16th century". The bad news is it was last offered in 2014, and is not currently on the menu
Lincoln - doesn't seem to offer a straight-up economics major
Massey - nothing specific. You get some local political history in 148.205, 'New Zealand Politics Since 1890'
Otago - nothing specific
Victoria - nothing specific
Waikato - nothing specific. There might be a bit in ECON336-17A, 'Comparative Economics in Global Perspective', but the paper summary is blank, so you can't tell
Not that my own alma mater is any better. I took my degree in economics and political science at Trinity College Dublin in 1969-73: from memory, economic history was compulsory at the time but in any event was well attended (our lecturer was Prof Louis Cullen). The same degree has morphed over the years into today's 'Philosophy, Political Science, Economics and Sociology' (PPES): the good news is you can drop Sociology after the first year, but the bad news is that Trinity has also dropped economic history from the economics options (though there are still 'history of thought' options in both philosophy and politics).

This is a shame from many perspectives. Economics is part of the wider humanities, and any humanities course should involve some commitment to being a well-informed citizen of the world. It's not right that it should implode into a self-absorbed cult of its own. And even if today's students don't give a toss about the history of the world around them and are only after vocational skills and a credentialed meal ticket, economic history has its own utilitarian value. You never know when something like the history of currency unions won't suddenly be the hottest skill in demand when a Grexit comes along. Ask Ben Bernanke: his academic study of the Depression made him an excellent choice to chair the post-GFC Fed.

If I was John McDermott at our own Reserve Bank, and I was looking to hire a new staff economist, given the ceteris paribus choice between someone who'd taken a personal intellectual interest in the history of bank crises and another automaton off the assembly line who can crank the handle on a DSGE model, I know who I'd pick.

*Oxford University Press 2013, ISBN 978-0-19-932219-0

** Happy postscript August 3: AUT's Geoff Brooke tells me that "we will be offering an advanced undergraduate paper in global economic history at AUT from next year (it is currently timetabled for semester 2). The paper descriptor reads: An introduction to the history of long-run economic growth and related changes in population, social and economic institutions. Theories of economic and social organisation, economic growth, and business cycles are examined and evaluated against the historical record. Methodological debates around the relationship between economic history and economics and history are explored".