Friday, 30 September 2016

Auckland and Canterbury housing: what next?

The latest statistics on building consents came out this morning, and I've been keeping an eye on them mainly because Auckland housing consents at the start of this year actually declined for a while - a deeply worrying development, given that consents even before they dipped were not keeping pace with new demand for accommodation, let alone eating into the backlog of existing unfulfilled demand.

Here are the latest data for Auckland dwelling consents. I've included the 'actual' data and the 'trend' data': the 'trend' version is Stats' best effort to abstract from the (quite considerable) month to month volatility and to show us the underlying picture. I've gone back to 1995, partly because that's where the 'trend' series starts in Stats' database and partly to put the current rate of building into context.

It's good news as far as it goes. That dip has gone away, and it's onwards and upwards in recent months. It's still not clear why we had that earlier dip: some people I've spoken to said that developers were waiting to see the shape of the Auckland Unitary Plan, and maybe that's true. But it's somewhat at odds with the recent rises, which predate the publication of the Plan (it went public on July 22 and was only signed off by the Council on August 19). Perhaps there'll be another hiatus as the Plan is appealed, or maybe developers aren't fixated on the Plan at all: we'll have to wait and see.

Another possibility is that the trend-detecting algorithm at Stats had a temporary hissy fit and is now back on track, though the downside of that thought is that if it detected dips when there weren't any, maybe it's finding surges when there aren't any, either. And yet another possibility is that the month to month numbers (especially for apartment blocks) are just too volatile to find a reliable signal in all the noise, even if your trend-spotting software is up to scratch.

But in any event, let's bank it - as far as it goes, which isn't far enough. You can see for yourself that this recent rate of consenting is getting closer but still isn't back up to the levels of the early 2000s, and on a per capita basis it's still well adrift: urban Auckland's population was around 1.2 million in the early 2000s, and it's nearer 1.5 million today.

And it's not just an Auckland problem, either: nationally we seem to have had increasing difficulty in getting homebuilding activity up to the level it needs to reach. This chart (from Stats' info release today) shows that we are currently consenting some 30,000 dwellings a year (and that's inflated quite a bit by the Canterbury rebuild), but we were regularly clocking 30,000 and more in the early 1970s when the population was only around 3 million compared to today's 4.7 million. There are more sophisticated ways of measuring it, but I doubt if they'd shake the basic conclusion, which is that we need to get the supply side of the market operating a good deal more responsively.

I hadn't been following the Canterbury rebuild numbers closely: I had a vague impression that peak rebuild was somewhere around now. And indeed it is, on these figures from the June Building Activity Survey: the total value of building work in the Canterbury region is still going up a bit, but looks like it is plateauing.

Within the overall total, the housing rebuild is actually past its peak, which was back in late 2014 and early 2015, while the non-housing rebuild is still growing.

Today's dwelling consents figures for Canterbury show the same picture: consents also peaked back in the second half of 2014.

There's still a lot of housebuilding going on in Canterbury, and self-evidently the job can't be finished, but hopefully the recent modest drop in activity is a signal that the bulk of the demand has been met and there's less left in the pipeline still to do. 

The other thought that emerges from these data is that as far as the impact on overall GDP growth is concerned, the boost from the Canterbury rebuild has largely run its course. Ideally the construction sector would swing more or less smoothly from meeting demand in Canterbury to meeting demand in Auckland, though as noted above our national ability to meet demand has become progressively creakier. We could even see further GDP growth if the Auckland build started to become larger than Canterbury's. But overall it's beginning to look as if we're going to find something else to do with our resources if we want to keep 3% growth going.

Monday, 26 September 2016

Good books - September '16

Economics reading has been a bit thin on the ground recently, so instead let me pass on some third party recommendations. Diane Coyle at The Enlightened Economist got asked to recommend "some general reading for someone about to start a masters in public policy" and came up with this reading list. It's excellent: I've read four of them (Reinventing the Bazaar, Who Gets What and Why, What Money Can't Buy: The Moral Limits of Markets, and Economics Rules), and they were all very good, so I reckon you can trust the rest of the list as well.

And on the strength of this fine review by Deirdre McCloskey in Prospect magazine, I've pre-ordered my copy of economic historian Joel Mokyr's latest, A Culture of Growth: The Origins of the Modern Economy. Out on November 8, the hardback was only $40.71 (postage included) from The Book Depository in the UK. Mokyr's earlier book, The enlightened economy : Britain and the Industrial Revolution, 1700-1850, is also very good, if you'd like an update on where modern thinking has got to on the genesis and progress of the Industrial Revolution in the UK. If you're an economics student in New Zealand and you're interested (as you should be) in economic history, you're going to have to take this DIY route since, apart from a new course AUT is bringing out, there's virtually nothing offered on the economics syllabi anywhere (as I documented here).

Politics: I enjoyed Michael McManus's Edward Heath: A Singular Life. It's not a conventional biography - it started life as an intended collection of tributes and anecdotes from people who knew Heath but morphed as the material accumulated and McManus decided to make something bigger out of it - but it is still fascinating. Towards the end (p366) McManus summarises Heath as a "decent, shy, sometimes frustrated, often difficult, rarely charming, wantonly brusque, proud public servant who always believed in fairness and who loved his country".

People certainly remember the brusqueness and the rudeness - for a politician, he had a remarkably low EQ, and whatever lay behind his odd personality is still not obvious - and he became an even more awkward cuss when he was rolled by Margaret Thatcher. But they don't remember the better bits. Purely on merit, he got to the top of the socially hidebound Conservative Party, the first leader to be elected rather than anointed behind the scenes by the well-connected bigwigs: charmingly, he got nicknamed 'Grocer' by the toffs for his middle-class background. He had an admirable contempt for political spin and artifice, which was one reason he despised Harold Wilson (with, as history goes by, ever clearer justification). He had a life outside politics (talented musician, internationally competitive sailor). And he believed in attempting to reach agreement by principled negotiation in good faith - a fine ambition, and effective in piloting the UK into the European Community, but doomed to founder domestically in the dire industrial relations of the time.

The hardline union leaders of his day would have done better to meet him half-way, as they belatedly discovered from 1979 onwards, but they did for Heath, and the last of any legacy he might have claimed was swept away with Brexit. There are elements of tragedy to his story: they won't leave you feeling hugely sympathetic to the man - even the author, who worked for him, couldn't get that far - but you'll likely end up with a fairer overall view.

History: I was a Great War buff in any event, and didn't need the centenary of the Somme to have a go at the new books out commemorating it. I've finished Hugh Sebag-Montefiore's Somme: Into the Breach, and it's a good, solid introduction to what is still one of the bywords for wholesale slaughter. It also marked the New Zealand Division's blooding on the Western Front, at Flers in September 1916: you'll see the name on WW1 memorials all over New Zealand. Things would get worse again at Passchendaele in 1917.

By happenstance, Sebag-Montefiore uses the NZ Division as an example of the prevalence of venereal disease, of war crimes (killing prisoners) and of kangaroo court martials: he says they were equally prevalent in other units, but I can't say I was best pleased. Fortunately you'll get a better overall picture of our guys from Glyn Harper's Dark Journey: Passchendaele, the Somme and the New Zealand experience on the Western Front, where equally by happenstance I point you to how our chaps (and the Aussies) stopped the last great German offensive of the war in 1918 when General Gough's Fifth Army was running away. And if you want a classic example of Kiwi understatement, it's hard to beat the comment (reported on p467) of one infantryman, burying some of the dead after the battle for Bapaume in September 1918: "when there was only two of us left of our lot, I began to think: This is not too good".

Everyone should read a few of these front-line focussed books - it's still hard to go past Martin Middlebrook's 1971 classic The First Day on the Somme, or any of Lyn Macdonald's books, such as 1915: The Death of Innocence or They Called it Passchendaele - but at some point you'll inevitably start to think higher level thoughts about overall strategy and the meaning of it all. There are many thousands of choices, but one good entry point is J P Harris's relatively recent (2008) biography, Douglas Haig and the First World War.

Glyn Harper worries that much of the Great War, and New Zealand's part in it, is being forgotten, and only partly because Gallipoli overshadows everything else: "It is a tragedy that the events of Passchendaele are largely unknown to the majority of New Zealanders (p138)...Though the struggle to capture the town of Bapaume is a relatively unknown battle in New Zealand's military history, it does not deserve this obscurity. It was one of the most costly and hard-fought battles undertaken by the New Zealand Division on the Western Front (p490)". In these days of 'peace studies' and content-lite curricula, he's probably right. But with so many good books now available, at least there's ample opportunity for people to give themselves the education they should have received in school.

On a lighter note, the great Robert B Parker, who died in 2010, set the gold standard for the modern American private eye story with his long-running Boston-centred Spenser series, with its classic themes of honour, manhood, loyalty, courage, and resistance to being pushed around. Dip in anywhere if you've never tried them: they're all good. The franchise has carried on, initially I think because there were unfinished books in the hopper and more recently because some experienced writers have been able to turn the handle on the formula. I just finished one of these recent ones, Ace Atkins' Robert B Parker's Kickback, about the evil connections between a lock-'em-up judge and a privatised prison operator. Excellent, and indistinguishable from the original.

Peter Corris is fortunately still with us, with his Sydney-based Aussie private eye, Cliff Hardy. The latest in this wonderful atmospheric series is That Empty Feeling, a flashback to corporate shenanigans in the Sydney of the 1980s. And if you liked that, you'll also like Philip Temple's Jack Irish series, set in Melbourne, and probably the non-Irish books Temple has written, too.

Thursday, 22 September 2016

Leave well enough alone

No surprises from the Reserve Bank in this morning's review of the Official Cash Rate - it was held at 2.0%, as widely expected (in this survey, for example).

It's been steady as she goes over the ditch, too, not just in the sense that the Reserve Bank of Australia also stood pat at its latest decision, and left the Aussie equivalent at 1.5%, but also in the sense that, earlier this week, the Aussies re-committed to their inflation targetting regime, which is broadly similar to ours. They're not identical - the Aussie target is "keep consumer price inflation between 2 and 3 per cent, on average, over time" and ours is "keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint", for example - but they're clearly close cousins. The occasion for the Aussies staying with what they've got, by the way, was the change at the helm of the RBA, with incoming governor Philip Lowe taking over from the outgoing Glenn Stevens.

It would be nice to think that our local politicians will see the Aussies signing on for more of the same and draw the right conclusion - inflation targetting is still the mainstream serviceable model for monetary policy - but of course they won't. As sure as eggs is eggs, come to election time we'll have some of the political parties (and on past form, nearly all of them) promising to 'do' something about our monetary policy regime.

It's not an entirely discreditable exercise: some folks are beginning to wonder if there mightn't be something better. The Economist, for example, ran an editorial piece in its August 24 edition, 'When 2% is not enough: The rich world’s central banks need a new target', canvassing two ideas: raising the current target (typically 2% or so in many developed economies) to 4%, or moving on from inflation targetting to targetting of nominal GDP. The Economist argued that "A 2% inflation target is ill-suited to the rich world today. Doubling it would be an improvement, but targeting nominal GDP would be better still. Time for a new era".

It wasn't the most convincing thing the Economist has ever run. It argued, for example, that "credibly enacted", a 4% inflation target could be a goer, but "credibly enacted" magicks away the whole of today's biggest challenge: if central banks can't hit 2% today, despite throwing unprecedented firepower at it, what makes anyone think they can hit 4% tomorrow? Putting that aside, however, it's nonetheless plausible that there are at least some potential candidates for the Next Big Thing in monetary policy.

But as the magazine also said, "Changing targets is not something policymakers should do lightly; their credibility depends on stability". Exactly right: our current system may not be perfect, and as everyone knows we and other countries have been struggling to get inflation to where it should be, but unless there's a very clear benefit to change, net of the considerable credibility costs involved, we ought to do what the Aussies have just done, and stick with the programme.

Not that I expect this unasked-for advice will make a blind bit of difference to the next sets of election manifestos, but as I said last time I looked at some research on these issues, plea to the pollies is this.
Back off. We've got a working system that's done what it said on the label. It takes forever for new monetary systems to get bedded in and for people to get their heads around them: a central bank's credibility takes decades to lock down. We've got there: let's stay there.

Tuesday, 20 September 2016

And now for something completely different...

...namely Ann Pettifor presenting at last night's Law and Economics Association of New Zealand (LEANZ) meeting in Auckland, on the topic, 'Money and the neglected genius: John Law 1671-1729'.

And different it certainly was: the title didn't give much away, but what she aimed to do was to argue that what everyone conventionally learns about money and credit in the economics textbooks is wrong, and that there is a different and better way of understanding what is going on.

The traditional view, she said, has several components. One is that money is secondary: the things that matter are the 'real' things like production and consumption, and money is a lubricant but of no other great importance. Another is the traditional way we think about banks as financial intermediaries that take in people's savings (as deposits) and lend them out (as bank loans) to people who'd like to make use of them. And another is the view that there is a market which matches the supply of money or credit with the demand for it, with the price of money (the interest rate) set in the usual way to match the supply up with the demand.

Instead, she said, money and credit are far more important than conventionally realised: she mentioned, for example, the obstacles to economic activity in developing economies from the lack of a properly functioning monetary system. She said that banks do not need, in fact, to wait till deposits roll in: MegaBank, for example, can unilaterally make two computer entries on its book, one crediting a squillion dollars to MegaCorp's bank account, the other recording a squillion dollar loan to MegaCorp, and immediately the money supply and the stock of credit will go up by a squillion dollars. And she argued (I think) that the interest rate is set autonomously by various human agencies (particularly central banks and commercial banks) and is not the end result of supply and demand matching up.

From a policy point of view she argued that we used to manage banking regulation and monetary policy better, pointing to a period from 1945 through 1971 when there were no financial crises: things have gone worse, she felt, since deregulation. She also argued that the banks, left to their own devices, overwhelmingly lent to relatively easy-to-assess activities like property (creating bubbles in the process) rather than to more productive activities that would have been better for economic growth. And since, on her view, credit is more or less infinitely creatable by central and commercial banks, and in the case of central banks is backed by governments' effectively bottomless ability to tax, we should have little truck with 'austerity' policies. She noted, for example, that we can create money up the wazoo when we want to fund wars or bail out banks, but don't seem to be able to apply the same logic to getting economies rolling or saving the planet's climate, a view that the UK Labour Party has also come to with its proposal for "People's Quantitative Easing".

It's not every day you get someone having a go at knocking over everything you've ever learnt, so full marks to AUT's Policy Observatory, who have brought Ann down to New Zealand and have arranged a wide range of meetings for her: it's good to get challenging, and even iconoclastic, points of view. And special thanks too to Sarah Keene and the team at Russell McVeagh who generously hosted last night's event, and to Richard Meade who does all the legwork to make these Auckland LEANZ events a goer.

Did I get my own mind adjusted? Hmmm. I can see some of her points, but I'm still left with quite a few questions. I'm still not overly inclined to the view that we can print-money our way out of anything: the other week I went into a stamp and coin dealer in Wellington and bought a ten trillion Zimbabwe dollar note for $14, so clearly there are finite limits to what you can do. Ditto running up vast quantities of government debt which (Ann seemed to me to argue) must always be serviceable due to the government's ability to tax. There certainly used to be a view that countries could never go bankrupt (at least when issuing debt in their own currency), but maybe that's also a conventional wisdom that needs challenging. And while John Law may well have been a neglected genius, his experiment of creating one of the earlier paper-money banks and letting rip with it didn't end happily for anyone.

Food for thought all round, and maybe time for a bit of reading, too. Chatting to Ann before the kick-off, she told me that the definitive biography of John Law was written by my lecturer in undergraduate monetary economics at Trinity College Dublin. Law had an extraordinary dramatic life and was a pioneer of early economic theory (Ann principally mentioned his Money and Trade Consider'd with a Proposal for Supplying the Nation with Money of 1705), so I reckon it's time to track down a  copy of Antoin Murphy's John Law: Economic Theorist and Policy-Maker (Oxford University Press, 1997).

Monday, 19 September 2016

What's behind the slide in optimism?

The latest quarterly Westpac McDermott Miller survey of consumer confidence came out this morning, and much of it was pretty positive. But there was one chart in particular that I was keen to see, and it was that mysteriously saggy 'outlook in five years' time' one that's been puzzling me for a while. Here's the latest reading.

The odd thing is that, after a surge of relief  in late 2009 and early 2010 that the worst of the GFC had passed by, people in New Zealand have steadily turned less optimistic about New Zealand's future prospects, despite our recent strong business cycle.

And it's not an oddity of the Westpac McDermott Miller survey: exactly the same pattern shows up in the ANZ Roy Morgan consumer confidence survey.

So why this steady loss of optimism?

That latest bounce in the Westpac reading (and the smaller lift in the latest ANZ one) suggest part of what's going on: it looks as if both measures are picking up the recent improvement in dairy prices. As Westpac commented, "Despite picking up, the number of households expecting favourable economic conditions in five years’ time remains at some of the lowest levels we’ve seen in decades, with those in rural areas especially downbeat...Recently, we’ve seen global prices for dairy starting to
improve, and we’ll be watching to see if confidence in rural regions also starts to lift over the coming months".

International trading conditions are clearly one of the drivers of these measures: they can also be seen in that dip in the ANZ survey readings in mid 2015, which coincided with volatility in world financial markets when it seemed the global economy might be running out of oomph (people at the time were worried about China in particular). Evidently the people surveyed think that (some recent improvement in dairy prices excepted) the world economic outlook is not crash hot at the moment, which looks to be a realistic assessment: every recent major review of the world economy has found it is growing more slowly than usual - as shown for example in this indicator of the world economy from J P Morgan/Markit - and that the balance of risks is tilted to the downside.

There are also probably a couple of other things feeding into the downbeat mood. One is expensive house prices. As the ANZ commented, "Higher house prices aren’t a win for all. Confidence in the 25-34 year bracket (first home buyer heartland) continues to see-saw: as house price expectations rise, their confidence in current conditions falls and vice versa", and I wouldn't be the least bit surprised if very expensive housing isn't feeding into lower longer-term confidence as well.

I wondered if politics also had something to do with it, but neither the ANZ nor the Westpac surveys have questions obviously linked to political perceptions. So I turned to the separate Roy Morgan research which asks people, "Generally speaking, do you feel that things in NZ are heading in the right direction or would you say things are seriously heading in the wrong direction?".

There's a rough and ready fit: in the ANZ, Westpac and Roy Morgan graphs, there's been a rise over 2012-14 and slide over the past couple of years. People are still, on balance, happy with where the country is being taken, but not as happy as they were. What this says I'm not sure: perhaps people feel that somewhere over the next couple of elections, a safe pair of hands will be replaced by something less predictable? Or are they becoming progressively disenchanted with steady as you go and don't frighten the horses?

In sum, that slide in optimism, which seems at odds with the current strong state of the business cycle, can, I reckon, be unpicked - a realistically downbeat assessment of the world economy, a close concern with trends in commodity prices, angst over the dream of home ownership, and, for one still unclear reason or another, some modest loss of confidence in political direction.

Monday, 12 September 2016

Unions and collective agreements

Our revamped Household Labour Force Survey now collects information on union membership and on types of employment agreement, which sounded interesting, but when I went and downloaded the HLFS Excel files (here) the info wasn't there. So I got in touch with Stats and their helpful chap Ken Joe told me two things.

One was that Stats had put out a specific article about these very topics on August 25 (which for some reason I'd missed, and I may not be alone, as there doesn't seem to have been much media coverage of it). And the other was that the data is available, though not where I went searching for it first. If you'd like to look it up for yourself, it's on Infoshare: go to 'Work, income and spending', then 'Household Labour Force Survey' and scroll down to the P's where you'll find 'Paid employees by type of employment agreement' and 'Paid employees by union membership'.

The article said that "Statistics NZ collected this information only twice previously, in the Survey of Working Life 2008 and 2012": they didn't compare the new HLFS data for June 2016 with the previous years' estimates, however, so I've dug out the earlier data. If you missed the Stats release (like I did), and would like the wider historical sweep (such as it is), here is the result.

It's not a pretty picture if you're sympathetic to organised labour. The absolute numbers probably show it even more clearly: in 2008, an estimated 525,000 people were members of a union; by 2012, that had dropped a bit, to 501,000; but it's slumped in the past four years, to 379,000. The drop in numbers of people on collective contracts isn't as dramatic (467,000 to 440,000 to 410,000) but it's still substantial. If the declines continue at these rates in coming years, unions face an existential threat.

Especially if anything arises to weaken membership in the sectors where they are still important. As Stats said, "Some industries are far more unionised than others (see figure 2). Over 4 in 10 employees in both health care and social assistance (43.5 percent) and education and training (42.2 percent) belonged to a union. Given the size of these industries (231,100 and 203,500, respectively), this means half (49.2 percent) of the 379,300 union members worked in only two industries".

Here's that figure 2 Stats was talking about.

Outside what are largely public sector industries, union membership has fallen to insignificant levels - even in sectors such as finance, where unions were once a reasonably large player, but are now down to 10% of the workforce in the sector.

Originally I'd set out to look up some data releases I'd unaccountably missed (I'm on Stats' distribution lists for pretty much everything they put out), and not to do any policy research into the role of unions in a modern economy, and I'm not going to start now. All I'd observe is that the sharp membership fall of the past few years is a lot faster than I intuitively (econospeak for "at a total guess") would have expected to see, and I'd guess there are some worried people around the tables in unions' head offices.

Friday, 9 September 2016

The net benefit test

In some recent posts ('Your competition law exam question' and 'That competition law question') I've been asking if there is something amiss with how the Commerce Commission applies the 'net benefit test' when (for example) authorising a merger that has some anti-competitive detriments, which are more than offset by assorted benefits.

Recently the Commission put up on its website the key case on this, Godfrey Hirst NZ Limited v The Commerce Commission HC WN CIV 2011-485-1257 ('Godfrey Hirst'). Now that I've read it, I'm pretty sure the current Commerce Commission approach is indeed awry.

First some background. Here is a little schematic of all the possible benefits and detriments that might flow from a merger (or anything else with a mix of anti-competitive harm and offsetting public benefits). It is completely general and uncontroversial, and I've added in that 'net of realisation costs' bit to the 'Benefits' boxes, as again it is uncontroversial that any benefits must be counted net of the costs to achieve them (if the realisation costs were equal or greater than the benefits, there wouldn't be a benefit, would there?).

The Commission's approach is to count all benefits anywhere (i.e. A + C), but to count only detriments in the markets where competition is lessened (B), so its calculation of overall net benefit is A + C - B: all the benefits anywhere, less only some of the detriments, though in fairness the bulk of the detriments in practice are likely to arise in box B, and D may not often be large.

Even so, my contention is that this makes no logical or economic sense from a national welfare point of view: why should the detriments D caused by the merger be magicked away and ignored? The correct calculation is surely A + C - B - D: all benefits anywhere, less all detriments anywhere.

The only reasons in principle you'd go the illogical calculation route are if, despite its oddity, you believed the law required it, or courts had interpreted the law to require it (as an empirical issue, you might also feel D detriments are typically too rare or small to bother with, but let's stick to the principles for the moment). As it happens, both reasons have come into play: the approach appears to have started because that's how the Commission (in a 1987 Goodman Fielder decision) interpreted the law as it read at the time, but more recently the courts have also weighed in.

Fast forward to 2011 and Godfrey Hirst. In that High Court case, Godfrey Hirst challenged the Commission's decision to authorise a merger in the wool scouring industry. If you want to skip to the chase, my conclusion is that Godfrey Hirst endorses all-benefits-all-detriments, i.e. A + C - B - D. In its wording the court phrased it as A + (C - D) - B, which is the same thing. In the next bit I'll step through the relevant parts of Godfrey Hirst.

Wool Equities, a cooperative that supported Godfrey Hirst in the appeal, argued for the all-benefits-all-detriments approach, because it thought there were detriments to farmers in markets other than the wool scouring market. There was a bit of argy-bargy at [63] - [65] over whether the Commission had itself (accidentally) endorsed all-benefits-all-detriments, but the court found it hadn't. The court also said that a statement by the judge in the NZ Bus case endorsing the all-benefits-some-detriments approach was only a throwaway line and not settled law.

And so the court - two sharp cookies, Justice Mallon, and Kerrin Vautier sitting as lay member - came to the substance of Wool Equities' argument.

At [67] and [68] they recap that the Commission's current approach started with the Goodman Fielder decision in 1987, though even then, apparently, the Commission wondered about the oddness of it all: at [68] they note that "The Commission asked itself ―[i]f the benefit from the whole of the proposal is taken into account then why not the detriment arising therefrom?".

[69] through [71] are irrelevant for today's purposes, and then at [72] they say the Commission has consistently followed its current approach and that the approach was okayed in two cases involving Telecom in 1992.

And then at [73] we get this (footnotes omitted, and the 'emphasis added' is the court's, not mine):
[73] An acquisition may however result in detriments (other than competition detriments) beyond those markets in which an increase in market power has been found. As to such detriments, the High Court in Telecom said this:
Moreover, we would caution that the detriments attributable to the strengthening of dominance are not the only detriments that could conceivably be relevant. The very concept of benefit to the public allows for some netting out, in an appropriate case, of any detriments to the public from the acquisition itself — albeit, again, it is a question of what difference is made to the shape of the future with and without the acquisition. (emphasis added)
This makes it very clear (to me at least) that any detriments are indeed in play. Which leads us to [74], the key paragraph, and I'm afraid I'm going to have to unpack it in bite-sized chunks.

Chunk 1 : "[74] It is well accepted that, in assessing public benefits, a net approach is taken whereby the costs in realising the efficiencies are deducted. This point was expressly noted by the Commission in this case." All good, and covered in the wee schematic at the head of this post.

Chunk 2: "The above passage [i.e. the High Court Telecom bit] refers to a wider concept of net benefit to the public than that". Indeed it does: it clearly means, don't forget about those detriments in box D.

Chunk 3: "We are not aware of any New Zealand decision, after these comments by the High Court in Telecom, which has viewed net benefit in this wider way". This could mean several things. It could simply mean the point has simply never come up in the period between the Telecom cases (1992) and Godfrey Hirst (2011). It could mean that the opportunity for courts to take the all-benefits-all-detriments approach did come up, but nobody took it. Either way it still leaves the all-benefits-all detriments approach alive. And it also means the Telecom case is the up-to-date statement of the law on the matter.

Chunk 4: "That is, where there are other detriments that fall outside the defined markets [i.e. the ones where competition has been lessened], these can be considered as disbenefits or negative benefits and then offset (along with the costs of realizing efficiencies) against the (positive) public benefits claimed". This probably means, calculate C - D. It might mean calculate A + C - D, but in any event on either reading it says, take note of D.

Chunk 5: "The assessed detriments from the loss of competition in the defined markets would then be weighed against the net public benefit (ie deducting negative benefits as well as realisation costs) from the proposed acquisition to give the overall result". This says, weigh B against A plus the (C - D) calculated from Chunk 4, which means calculate A + (C - D) minus B. Which is of course the same as A + C - B - D, which is all-benefits-all-detriments.

And than at [75] there's this: "Although counsel for Wool Equities did not accept that this was the analytical approach by which detriments outside the defined markets could be taken into account, it would meet the point he was making". This nails it. The court said, Wool Equities were arguing for A + C (all benefits) minus B and minus D (all detriments), but the court's preferred formulation was A + (C - D) (all benefits, but netting off the D detriments against the C benefits in the same way you would net off realisation costs), minus B (detriments in the defined markets). But the outcome is exactly the same.

To recap, counting all benefits and all detriments is obviously the right approach from any commonsensical view. It is also, at a minimum from Godfrey Hirst, permissible. And if it's permissible (and, perhaps, either advisable or even required), why would you stick with the non-commonsensical approach?

So let's go back to the Commission's Authorisation Guidelines, which say in a footnote
32. Godfrey Hirst, above n 11, at [72]. Observation by Wilson J in New Zealand Bus Ltd v Commerce Commission [2008] 3 NZLR 433 (CA) at [271]. In Godfrey Hirst while the court endorsed this settled approach, it observed that ‘disbenefits’ or negative benefits that arise outside the affected markets may be relevant to the public benefit test.
First of all, that observation by Wilson J doesn't matter, as Godfrey Hirst said. And it's debatable, as you've just seen, whether Godfrey Hirst "endorsed this settled approach" (i.e. all-benefits-some-detriments). It's possible that Godfrey Hirst said it's not wrong, but it's also clear that Godfrey Hirst said, all-benefits-all-detriments is, at a minimum, okay and perhaps even required under the Telecom ruling.

All this may seem technical and picky, and maybe nothing will ever turn on it. In practice, though, every imaginable set of business circumstances sooner or later comes in the Commission's window, and it's possible a merger or a restrictive trade practice will indeed involve a sizeable D, a detriment to the community that is being ignored. If the courts have said you can safely take a better, more logical route, why wouldn't you?

Wednesday, 7 September 2016

The Aussies are moving ahead. Meanwhile, in New Zealand....

On Monday the Aussie Treasury came out with the draft legislation to reform their equivalent of our Commerce Act. The announcement is here, and includes the draft legislation itself (pdf) and an explanatory paper (pdf). The Aussies plan to finish consulting on the draft at the end of this month.

The big item is the change to the treatment of misuse of market power. Both Australia and New Zealand currently have very similar laws (our s36, their s46): as the Aussies put it in the explanatory paper (p35), the current approach is that
Section 46 prohibits a corporation with a substantial degree of power in a market from taking advantage of that power in any market for one of three specific purposes. These purposes focus on damaging an actual or potential competitor
where I've italicised three elements we currently share, and the Aussies are changing (p38) to
The rewritten section 46 prohibits a corporation that has a substantial degree of power in a market from engaging in conduct with the purpose, effect or likely effect of substantially lessening competition in a market.
Their italics this time, showing that 'take advantage' has gone, it's no longer 'purpose' alone but 'purpose or effect or likely effect', and it's competition they're concerned about, rather than damage to a particular competitor. They've also added a provision allowing for authorisation of a practice where there is damage to competition, but the company involved can show there are other benefits to the public that make it worthwhile to allow it.

While they're at it, the Aussies have also done some other useful tidying up.

They've made it easier for companies to engage in retail price maintenance: as the paper says (p45), "In recent years, more support has been expressed for the view that RPM is not always anti-competitive...In particular, a number of online business models now use distribution arrangements that may constitute RPM conduct. These businesses are an increasingly significant part of the economy, and provide benefits in many ways".

They've made it less likely that benign cartel provisions as part of a joint venture will fall foul of competition law by widening the exemptions for joint ventures - "The joint venture exception applies to cartel provisions that are for the purposes of a joint venture or reasonably necessary for undertaking a joint venture" (p11) - which is language lifted from our own proposed legislation on cartels. Annoyingly, the Aussies are getting on with progressing our idea, whereas our own proposed legislation on cartels has been stalled since 2014 in a Select Committee.

And they've got rid of a bit of populist nonsense. Currently, only the Aussie banks (the Aussies have a thing about banks) are covered by 'price signalling' provisions - the concern being that one bank announcing to all and sundry that it is changing (say) its mortgage rates will be taken as a nudge, nudge, wink, wink signal to its mates to change theirs too. It's daft - why just the banks? and how on earth are price changes going to be communicated in the normal commercial course of events? - so the Aussies have binned the thing and replaced it with an economy-wide provision on "concerted practices", which will catch any real you-show-me-yours-and-I'll change-mine rorts but let everyday business life carry on.

Good on them. They've ended up with proposed legislation that will catch real misbehaviour more effectively, and at the same time will have less chance of accidentally pinging legitimate business activity. As the paper says, time has moved on since the last time they had a big look at competition policy (in 1993); they've had the major Harper Review in 2014-15; they've gone with most of the Harper recommendations (pdf); and now they're legislating. I don't know enough about the party politics in Australia to take a punt on the legislation's chances, but you can't fault the process thus far.

By comparison, we're faffing around and losing ground, and our dithering has been obvious for some time. Eighteen month ago I asked, 'Australia's got the competition gospel. Have we?', and six months ago I argued that 'The Aussies are winning the competition policy game'.

We haven't had any major review of competition policy, even though we've faced exactly the same changes over the years (such as the rise of online commerce) that the Aussies have. Instead we've had two piecemeal ideas.

One is the Commerce (Cartels and Other Matters) Amendment Bill. As noted earlier, it's stuck. It had its first reading back in July 2012, and its second reading back in November 2014; there's currently no indication when, if ever, it will get moving again.

What modest moves the Bill had in mind are also being chipped away. One of the proposed measures (criminalisation of cartels, as in Australia since 2009) has been dropped. And other bits may go, too. My spies tell me, for example, that the shipping companies are making a very good fist of lobbying for ongoing exemption from the Commerce Act, even though the Commerce Committee in its May 2013 report on the Bill had said, completely correctly, "We do not believe there is good reason for treating international shipping differently from other sectors regulated by the Commerce Act" (p7).

The other is MBIE's targeted review of the Commerce Act, which has been directed to examine only three topics (misuse of market power, market studies, cease and desist orders). It's been a good though distinctly limited process, but we have yet to see the outcome, and even then there's no guarantee that it will lead to reform or modernisation.

In sum, the Aussies have recognised that they needed "to identify impediments across the economy that restrict competition and reduce productivity, which are not in the broader public interest", so that "Australia continues to experience long-term productivity growth".

We haven't.

Tuesday, 6 September 2016

Hard core unemployment

The latest set of Treasury's Monthly Economic Indicators came out yesterday. The media reported on the headline news - the economy picked up in June and carried on in good nick in September - and I was tempted to leave it at that, but there's often something quite interesting in the Indicators that flies below the radar (particularly in the accompanying Chart Pack) so I had a fossick.

Have a look at this.

From which we learn three things.

One is that, as cyclical indicators, the 'underemployment' rate and the 'unemployment' rate tell almost exactly the same story and it doesn't really matter which one you focus on. For some policy purposes the broader 'underemployment' rate, which emerged from the recent revamp of the Household Labour Force Survey and which, as Treasury says "includes people who are unemployed, underemployed and who would like a job but are not actively looking or immediately available for work", is probably the better pick. But as indicators of the cyclical state of the labour market, they're well nigh identical.

The second thing that emerges, with hindsight, is the immense and long-lasting damage the GFC-related recessions here and overseas wrought. Even after six years of recovery we're still well shy of getting back to the labour market outcomes we had pre-GFC.

And the third thing follows from the second: there is still a wide 'output gap' of spare labour market capacity. On a totally instinctive eyeball-the-graph basis, I'd guess that a roughly full-capacity economy would be running an unemployment rate of around 4% (going down to under 3½% near cyclical peaks). Our current unemployment rate (5.1%)  is well above that. And in turn this helps explain why the Reserve Bank has been having such difficulty in getting inflation back up to 2.0%: that's not going to happen unless our domestic spare capacity gets used up a lot more than it has to date.

But there's also one graph in the Chart Pack that makes you wonder about some of this apparently spare capacity.

It's a bit surprising, if there's this supposed slack in the labour market, that employers are reporting that it's getting difficult even to find unskilled employees, and even more difficult again to find skilled employees. Even well-meaning initiatives like the New Zealand Seasonal Workers scheme, which aims to get people off unemployment and at least into temporary work, aren't helping out, as this report from Radio New Zealand showed ("We had 1400 people be interviewed and we struggled to fill an eight-seater bus").

What I see in these graphs, taken together, is that the best we can manage, when times have been good for a while and anyone with a pulse should be able to get a job, is that we would still be left with an unemployment rate of around 4% (and a bit lower again in real boom time conditions). But even allowing for the fact that we'll always have a bit of transitional unemployment, that would still leave a couple of percent of the labour force high and dry in all economic weathers.

We - well, I - don't know exactly why there is this irreducible rump, and it's only restating the issue to say there's a mismatch between what employers are looking for and what would-be employees have (or want) to offer, which might be down to anything. The education system would be near the top of my list, but you'd also wonder about technological change, family background, discrimination, and [insert your own hobbyhorse here]. And perhaps we should be grateful that it's only a couple of percent of the workforce. That's a good deal better than some economies can manage: good luck if you're young and not well-connected in large swathes of western Europe

But it's still an issue worth unpicking and working harder at. There's something going wrong at one end of our workforce when the underemployment rate is still in double digits but employers can't get bums on seats.

Friday, 2 September 2016

There's always one...

Earlier this week the Commerce Commission came out with the second of its reviews of the sorts of contracts you and I get asked to sign when we sign up for our utilities. The latest one is a review of the electricity retailers (media release, full report as pdf); in February the Commission had gone over the typical telco contracts (media release, full report as pdf).

The Fair Trading Act, and the new bits in it on unfair contract terms which triggered these reviews, aren't usually my thing: to be honest, I knew nothing about the new provisions before the Commission's Ben Hamlin took us through them at last weekend's CLPINZ workshop. But now that I've looked at these reviews, I was struck by an unusual pattern which emerged from the pair of them. Here is the distribution of the number of potentially unfair contract terms found in each sector, by company.

Which is why I've called this post, "There's always one...". Because there is: in both sectors there is one company that's gone way beyond the others when packing its contracts with consumer-unfriendly terms. Equally there's one at the other end of the scale (in electricity it's more like a closely-bunched group of three) with remarkably few of the small print gotchas.

A good slab of these contract terms were not objectively necessary - as the Commission said on both occasions, "In some instances the companies were able to provide information to the Commission to show that the term was necessary to protect the legitimate business interests of the company. In all other cases, the companies accepted the Commission view and have amended or agreed to amend the terms concerned" - so it looks as if these patterns are telling us more about companies' culture than anything else.

At the greener end, while it's possible that some companies haven't thought hard enough about all the things that might go wrong, it's plausible that we've got companies that are more consumer-focussed, perhaps out of conviction, perhaps because they reckon that consumers may be relatively flighty and will leave if pushed too hard. At the redder end, we've got - well, I'm not sure. It could be just hard-nosed business, shifting as much risk as possible onto someone else, possibly on a view that most customers are relatively sticky. It could be that the company is being run by the lawyers. Or it could be that a company views consumers as "them versus us".

So it'll be an interesting market experiment to see which approach works best over the next few years. If I was currently down the redder end, I think I'd be minded to change course: competition is a multi-dimensional beast, and in competitive markets I don't think I'd like to get into the fray lagging badly on non-price dimensions like contract fairness.

As an aside, if you'd like a fascinating example of corporate culture losing sight of the customer, try this excellent article from Bloomberg earlier this year, 'United's quest to be less awful'. I especially liked this anecdote:
On Nov. 19 the airline announced it was changing the coffee it serves on its planes and in its lounges from a brand called Fresh Brew to the Italian premium roaster Illy. It was welcome news to customers and to the flight crews used to fielding complaints. It was also a tacit admission that the choice of coffee after the merger, a decision that consumed thousands of man-hours, took nearly a year, and involved everyone from [then CEO] Smisek to the airline’s head chef to the flight attendants, hadn’t worked out.

Thursday, 1 September 2016

That competition law question...

Last week for a bit of fun (insofar as 'fun' has much meaning when it comes to competition law) I posted a competition law 'exam' question.

Most readers sensibly avoided giving any putative answers, no doubt assuming there was a trick somewhere.

Well, sort of. What I was trying to highlight was what I think is an anomaly in the Commerce Commission's, and the New Zealand courts', approach to applying the 'net benefits' test when considering authorising a merger: if there are  benefits of assorted kinds that outweigh the detriments from lessened competition, the merger can be authorised.

That's all straightforward and as it should be. But where I think something has gone wrong is this bit, which I've extracted from the Commission's Authorisation Guidelines (pdf), footnotes omitted:
37. In our assessment we regard a public benefit as any gain to the public of New Zealand that would result from the proposed transaction regardless of the market in which that benefit occurs or whom in New Zealand it benefits. We take into account any costs incurred in achieving benefits.
38. In contrast, in assessing detriments we only consider anti-competitive detriments that arise in the market(s) where we find a lessening of competition (whether substantial or otherwise).
39. To illustrate the difference in our approach to benefits and detriments, if a transaction gives rise to a lessening of competition in market A and benefits in market A and market B, then:
39.1 the public benefit is counted across both markets A and B; and
39.2 only those detriments arising in market A are counted.
The Commission refers to a couple of cases supporting this approach. One of them (Godfrey Hirst NZ Ltd v Commerce Commission (2011) 9 NZBLC 103,396) appears to be behind a paywall - how anyone has appropriated what should be a publicly available resource isn't clear to me - but the other, New Zealand Bus Ltd v Commerce Commission [2008] 3 NZLR 433 (CA), is freely gettable attable (here, if you're a competition tragic). The Guidelines refer to this observation, by Wilson J, in New Zealand Bus:
As the Commission correctly held in Goodman Fielder Ltd/Wattie Industries Ltd (1987) 1 NZBLC (Com) 104,108 at 104,147 and in Air New Zealand Ltd/Qantas Airways Ltd (23 October 2003 Decision 511) at para [897], all benefits must be taken into account whereas only detriments in a market where competition is lessened will be relevant.
So it seems to be settled. Benefits anywhere and everywhere from a merger will be counted towards the net benefit test, but detriments will only be counted in the market(s) affected by the lessening of competition.

Perhaps somebody learned in the law can put me right on this, but as it stands, this makes zero logical sense to me. And the exam question was rigged to show how this process could go wrong. There were net benefits from the hypothetical merger arising in the market where competition was lessened (a gain of NZ$2 trillion outweighing a detriment of NZ$1 trillion) so the merger would have been authorised, despite the fact that there were substantial detriments (NZ$3 trillion) in other markets* that did not get a look in. If they could have been counted (and why shouldn't they be, if they are real and caused by the merger?) the merger should have been declined: there was an overall net national detriment of NZ$2 trillion (the NZ$1 trillion net benefit in the markets directly affected, less the NZ$3 trillion detriment in other markets).

As far as I know, no real world merger authorisation has hinged on this. But someday it might. And it shouldn't. While Parliament is looking at some changes to the Commerce Act, it could usefully take the opportunity to clarify that mergers ought to be judged on their overall national impact, and not on a skewed subset of them.

*I tripped over my own feet a bit in phrasing the mock question. The detriments caused by the shutdown of the aluminium smelter would have been counted in the allocative efficiency impacts of the merger in the electricity market, so they wouldn't be part of the additional NZ$3 trillion detriment. I should have said the NZ$3 trillion arose wholly in the downstream markets for aluminium.