Monday, 31 October 2016

Good books - October '16

Top billing this month goes to Timothy Garton Ash and his Free Speech: Ten Principles for a Connected World. It's enormously well researched (19 pages of bibliography) and amounts to a full-on defence of the right to free speech against the assassin's veto, the heckler's veto, the fundamentalists' veto and indeed the crybully victims' veto as they flee from "trigger alerts" and quiver in their "safe spaces".

As a practical matter it "proposes a framework for civilised conflict in a world where we are all becoming neighbours" (the 'cosmopolis') with 10 principles that I reckon most Kiwis would sign up for, ranging from the bedrock Principle 1 - "We - all human beings - must be free and able to express ourselves, and to seek, receive and impart information and ideas, regardless of frontiers" - through to (say) Principle 8, "We must be empowered to challenge all limits to freedom of information justified on such grounds as national security". It's a tricky area: even people way down the progressive liberal end of the world can sometimes wonder where any limits should be drawn (cartoons of Mohammed, if likely to lead to deaths?). This book will put you back on the right post-Enlightenment track, where we have a duty to think for ourselves and a right to say what we think. It's rather sad that large parts of the world, including people in the 'West' who should know better, are slipping into - or even embracing - a new Endarkenment.

Sarah Bakewell's At the Existentialist Café: Freedom, Being, and Apricot Cocktails is an excellent explanation of existentialism. Like many others (including me) she dabbled with it as an angsty teenager, flagged it away, but has now come back to have another look. It's not easily summarisable as a philosophy - the most I'd take away from it is that your big task in life is to be responsible for your own decisions - and it hasn't benefited from a progressively more obscurantist lineage from Husserl through Heidegger to (especially) Sartre. Incidentally, if you'd like to explore some historical context behind the annoying French predilection for complex metaphysics, try Sudhir Hazareesingh's How the French Think : An Affectionate Portrait of an Intellectual People.

There are good portraits of the leading personalities. Bakewell makes a good case that Simone de Beauvoir may prove to have the greatest legacy, and Maurice Merleau-Ponty comes out well, too. I tried to buy into her appreciation of Sartre, but I couldn't get there: for me his fiction remains as unreadable as his prose, and I wouldn't swap Boris Vian's little Froth on the Daydream (let alone anything by Albert Camus) for all Sartre's output. Heidegger's reputation has been, probably irreparably, damaged by his enthusiasm (never retracted) for Nazism, but that wasn't all that was wrong with him. The book has the story of how Heidegger arranged, when a poet was visiting him, for the local bookstores to have the poet's works displayed in their windows. Nice gesture, but as Bakewell acidly observes (pp304-5), "it is the only documented example I have come across of Heidegger actually doing something nice".

Bakewell's got a good line going in explaining philosophy to the intelligent reader: if you like At the Existentialist Café, have a go at her earlier How To Live: A Life of Montaigne in one question and twenty attempts at an answer.

Joseph Lelyveld's His Final Battle: The last months of Franklin Roosevelt covers the last year or so of FDR's life. It doesn't add a huge amount to the big picture of what we already know about him: probably the most effective politician of the twentieth century, with an unrivalled mastery of political strategy and tactics, and a most remarkable capacity for cunning and artifice. But it does flesh out a lot of the detail of his last year. How times have changed: even in the middle of World War Two, Roosevelt was able to clear off for weeks at a time from the White House (and without letting the public know where he actually was); press briefings were off the record; air travel was primitive; and his doctors were able to cheerfully and repeatedly lie through their teeth about his precarious health and get away with it. Physically, over that last year, he wasn't up to the demands of the office, and there's a good case that the strain of keeping going killed him, though his health was so poor that even the lower demands of a peacetime presidency might also have carried him off. That said, Roosevelt half-dead was twice the calibre of most of his successors.

I like to browse the 'Just returned' shelves at the library - you probably do too - which is where I found John Hornor Jacobs' The Incorruptibles. It is described by a reviewer on its back cover as "One part ancient Rome, two parts wild west, one part Faust. A pinch of Tolkien, of Lovecraft, of Dante. This is strange alchemy, a recipe I've never seen before", and neither had I, and on that description (which leaves out a soupçon of vampires) you mightn't ever want to. I'm still not entirely convinced it isn't some sophisticated parody of 'quest' tales. But for all of that, it was a rollicking good read. My wife also thought it was very strange,but she got into it, too.

On the go: Angus Deaton's The Great Escape: Health, Wealth, and the Origins of Inequality; Richard T Kelly's The Knives (novel set in modern UK politics); Timothy Garton Ash's The File: A Personal History (the file is the one the East German Stasi kept on him); Anthony Gottlieb's The Dream of Enlightenment: the Rise of Modern Philosophy; and Jeffrey Lee's God's Wolf: The Life of the Most Notorious of All Crusaders, Reynald de Chatillon.

RBB Economics conference - the big keynote issues

I spent Thursday at the latest RBB Economics Australian competition conference in Sydney - my first, RBB's sixth. It's a pretty impressive bit of marketing - free to attendees, but featuring a first class line of speakers on well chosen topics: two keynotes; a session on issues in merger control; a session how to use teams of economists in competition agencies; and one on new developments in Australian competition law (which we may well have to think about, too, if we eventually follow where the Aussies have gone with treating abuses of monopoly power and addressing "concerted practices").

The first keynote speaker was Rod Sims, chair of the ACCC (media release here, full speech here) who tackled the issue that many markets appear to begetting more concentrated (some have suggested, because of soft-headed competition authority oversight of mergers). His speech covered three points: "is Australia’s economy getting more concentrated, and does this matter?" (arguably somewhat more, but maybe it's not the end of the world); "the often put view that we need not be concerned with industries becoming heavily concentrated, and with monopolies and their behaviour" (absolutely wrong, with too many people, including the Australian Consumer Tribunal, forgetting "the conventional wisdom that monopolies will charge more and produce or give less"); and "some questions...we all need to ponder", including why off-beat research suggesting monopolies aren't as bad as you think gets the airtime it does, whether the onus of proof of no competitive harm should be shifted to the merging parties when post-merger concentration would be high, and how competition authorities should approach the situation "where large incumbent firms acquire promising start-ups".

On that, Sims said that "It is a challenging task to predict and assess the impact such acquisitions may have on competition in dynamic markets. It is even more challenging to establish that there is likely to be a substantial lessening of competition on the basis of the removal of one potential competitor", which is a politely formal way of saying you've got Buckley's chance of knowing whether two guys in a garage would have been the Next Big Thing.

Second up was Zhi Jiang Chen, vice director general of China's National Development and Reform Commission, who talked about the "new economic era" of the internet and multi-sided platforms and the implications for merger and competition policy - a world where, he said, monopolistic competition is even more prevalent than before, based often on non-price elements of companies' products (particularly technical innovation).

He reckoned there were three implications for traditional competition enforcement in this new world. One, unless it's especially egregious and obvious, it's getting harder to tell what is pro- and what is anti-competitive behaviour, which he said would lead you to be more careful about interventions because of the increased risk of false positives and their potential adverse impact on innovation; it would also lead you to look especially hard at barriers to innovation, rather than at barriers to access more generally. Two, agencies need to be realistic about how businesses recover their (sometimes very large) expenditures on innovation and R&D through their pricing, and not be too hasty to see (say) predatory pricing where it's isn't actually happening. Three, market share is becoming even less of a guide to market power, as product cycles have shortened and incumbents have been displaced faster: the market-disrupting competitor may be invisible today but can appear in the marketplace at any time..

It seemed to me that Chen was putting a pretty good case together for taking a "contestability" approach to competition issues, relying more on tomorrow's Schumpeterian competition to dispatch today's incumbents and relying less on worries about today's market structure. So I asked him was that indeed what he meant, and, if it was, did Rod Sims go along with it?

Chen said, yes, that was exactly what he meant to say, though he added an important qualification, saying that there could be new, and different kinds of abuse of market power in the internet economy. Sims said that contestability was all well and good, but you can't assume that it will change everything. In some sectors, technologically disruptive new entrants might well have the power to challenge the current incumbent set-up, but in other sectors they might not. He said, for example, that people have been talking about disruptive change arriving any day now in the financial sector, but it hadn't yet materialised to any great extent (although there is an interesting set of issues just beginning to pop up with Apply Pay's deployment in Australia).

All up, an excellent start to the day, and I'll report on the other sessions when I've got half a mo.

Wednesday, 19 October 2016

Now you see it, now you don't

Yesterday's inflation data held no great surprises. Everybody expected a pretty low number for inflation during the September quarter and for the year to September, and they got it: 0.2% for the quarter, 0.2% year on year.

Cue for hand wringing over the Reserve Bank yet again allowing inflation to stay too low.

But here's the thing.

We know the overall headline rate of 0.2% can be split into two bits, the bit that happens in the 'tradables' world of exports and imports, and the 'non-tradables' bit that happens in our own economy, the likes of the local authority rates, the doctor's bill, or the school fees. And we know that the overall 0.2% outcome was made up of tradables prices falling over the past year by 2.1%, while non-tradables prices rose by 2.1%.

The Reserve Bank has sod all influence over the tradables bit, except to the extent that it might manage to control the exchange rate, which influences how much of the world inflation rate comes through to us. But it (and any other central bank) tends not to be able to steer exchange rates terribly well, so in practice whether the Reserve Bank is on top of things comes down to whether it is steering non-tradables inflation to where it needs to be.

So let's have a look at that non-tradables inflation in more detail. Here it is.

The blue line is annual non-tradables inflation, which is running at 2.1%. So remind me again how the Reserve Bank hasn't got inflation back up to 2%, the midpoint of the 1% to 3% band it's supposed to be focussed on?

But (you'll say) that 2.1% rate of non-tradables inflation isn't all it's cracked up to be. It's not really 2.1%. It's inflated, innit, by the housing market. And you're right, it is. But if you take out the cost of new houses, you get the green line, non-tradables ex housing. It's running at 1.8%. That's not too bad, either, if you're supposed to be aiming at 2%.

Course (you'll reply), there are other housing-market-related things still being counted in that non-tradables ex housing line, in't there? Rent. The cost of keeping the house in good running order. The rates. And again, you're right. So let's purge the non-tradables inflation of every damn house-related thing - the cost of a new house, the rent, yadda yadda yadda.

That gives you the red line, non-tradables less anything to do with a house. On that basis non-tradables inflation is running at 1.25%. That's short of the Reserve Bank's 2% focus, so you could beat them about the ears if you felt like it. On the other hand, it's at least crept back into the 1% to 3% band, and it's clearly headed in the right direction. Every one of these measures has been on the rise all year.

One of the big mysteries of macroeconomics recently has been, where's the inflation gone? Why hasn't it come back like it used to when things pick up? That's a big topic, and everyone from Janet Yellen at the Fed to Philip Lowe, the new governor of the Reserve Bank of Australia have been having a crack at it, and I'll come back to it one of these days.

My thought today, though, is this: maybe it's actually come back, and we haven't noticed.

Don't be too 'asty - update

On Monday I wondered about the sense of the government tightening up on migration inflows at a time when businesses appeared to be finding it hard to get the people they need to keep growing.

Since then, while researching something else, I've discovered that there's even more evidence saying that the government ought to go carefully. It's the latest ANZ jobs ads count. As the chart below shows, the unemployment rate has been steadily falling while job ads have been steadily rising: you couldn't find a clearer illustration of how short businesses are of staff, and of the need for more people from overseas to keep the cycle going.

And you don't have to take my bleeding-heart-liberal instinctively-pro-free-movement-of-people word for it. Here's the ANZ's own take:
With firms in a mood to expand, skill shortages, rather than demand, are set to become the key brake on activity.
Those damn Chinese, keeping our economy going for us. Honestly.

I've also sat through today's Parliamentary Question Time. Sometimes it's moronic: patsy questions from government backbench MPs to their own side, or, even more egregiously, as we had today, patsy questions from one backbench opposition MP to another. Sometimes it's cynically oppositional: you know full well that the Opposition MP asking the question would, if in office, have done exactly what he is criticising the government for doing.

Today hit new lows, with ugly questions about immigrants supposedly taking jobs from our own youngsters. Never mind that the questions are hopelessly adrift of the true state of the labour market, where (as the ANZ data show) any sentient carbon based life form can get a job if it wants. But it's also ratcheted the immigration debate another moral notch lower. I didn't think, when I first came to New Zealand, that I'd ever see its elected representatives channelling Farage, Le Pen, or Trump.

In a race to the bottom, we've got some good runners.

Monday, 17 October 2016

Don't be too 'asty

The government has tapped the brakes on migration flows, for what commentators have assessed as essentially political reasons (see, for example, Duncan Garner on Stuff or Fran O'Sullivan in the Herald). 

But as Fran said, "The balancing act that Key has to apply is how he gets across the fact that New Zealand is dependent on immigration and ensures the doors to skilled people remain open". And that's getting a bit trickier, as some data today suggested we may be more imminently dependent on ongoing strong immigration flows than you might imagine.

The data were in the latest BusinessNZ/BNZ Performance of Services index, which showed the services still growing at a handy pace, though a tad less strongly than in August. In its commentary, the BNZ has flagged the possibility that difficulty in finding staff could be starting to hold firms back from continuing  to expand. In the graphs below, the bank has juxtaposed the composite index covering both services and manufacturing (the 'PCI') with GDP growth - there's usually a close fit - and said there's "the hint, from the PCI, that growth may be slowing". And below that, it put up the latest readings from the NZIER's Quarterly Survey of Business Opinion, which as the NZIER said, showed that "Firms report increased difficulty in finding labour, and this may have limited the extent to which firms could increase headcount over the past quarter. The difficulty in finding labour is particularly acute for skilled labour, with shortages at levels not seen since December 2007".

Sure, migration is a touchy issue in a lot of places right now, and one's that's backing generally economically responsible governments into places they wouldn't normally go: in the UK, for example, the Conservative government recently flirted with the tackily unpleasant idea of "naming and shaming" British companies that hire people from overseas (they've since had to backtrack). 

All I'd observe (as I've said before) is that the labour market is rather tighter than you would think from a 5.1% unemployment rate. Mucking about with the supply of staff from overseas might make political sense. But if it threatens to get in the way of the already limited ability of businesses to find the people they want, it's not likely to be economically costless.

Thursday, 13 October 2016

A picture is worth...

What is it about graphs?

We're supposed to be living in a new world of 'dataviz' journalism where bright young things are taking data and doing clever stuff to it and turning it into attractive visualisations with insight and oomph. And some people are, like the folks at But as far as I can tell nobody in the major mainstream or social media has run with any of the graphs that the Reserve Bank's John McDermott included in his speech on Tuesday, 'Understanding low inflation in New Zealand'.

So here are some of the more interesting ones.

This is where inflation (or the lack of it) has been coming from, by sector.

Ex sin taxes on fags, and ex anything to do with housing (admittedly a fairly large 'ex' to 'ex'), there's precious little inflation around. Some of that is pure luck (world oil prices). And some of it, I'm pleased to say (wearing my 'competition is good for you' hat), is down to stronger competition in areas like air travel and (especially) telecommunications.

Here's another way of looking at it - roughly speaking, how much of our inflation is coming at us from world markets ('tradables') and how much we're creating in our essentially domestic markets ('non-tradables').

You'll notice that we're not generating much inflation of our own. John's not convinced that there's anything long-term about this, and reckons that there's cyclical stuff happening that explains it. Me - I'm not too sure. I suspect that the GFC put the fear of God into many business decision-makers and households, and the impacts haven't worn off yet: we could have inherited a change in behaviour that is more 'structural' than cyclical. It could be that greater caution about raising prices or asking for a pay rise helps explain why we're raising prices more slowly than we would have in previous cyclical upturns. We'll see.

Another interesting one is this age breakdown of net migration

You might have had some preconception, especially given the publicity around the government's recent move to tighten up on 'family reunion' style bring-in-your-mum-and-dad-too immigration, that there was a lot of it about. There is some, and the number of older people coming in has been rising, but the reality is that by far the largest parts are younger people, and people in their prime earning years. John raised it in the context of different age breakdowns having different effects on inflation: more younger people (as at the moment) have a smaller impact on inflation than more older people.

And finally, there's this, which shows the Reserve Bank's history of trying to guess where the Kiwi dollar is going next (in overall trade-weighted value).

There will be those who will use this to poke the RBNZ in the eye, and I'm kinda bemused myself. It's odd that everywhere you go, from central banks to surveys of businesspeople, people (and I've done it too) keep making the same rather mechanical forecast: if the exchange rate is going up, it'll go up a little more, but then fall, and if it's going down, it'll drop a bit more, and then go up.

But it's a seductively easy thing to do, especially if you believe the exchange rate has wandered away from the One True Level where it needs to be, and that sooner or later it will revert to it. Easy - yes. Accurate? Not so much.

Friday, 7 October 2016

Roll up, roll up

At last year's NZ Association of Economics annual conference, I found a flier publicising Victoria's Master of Professional Economics programme.  And it gave me a bright idea.

I'd been thinking for a while about that awkward Catch 22 situation many economics - and other - graduates often face, where they can't get their first job without some experience and they can't get the experience without that first job. It applies all over the place across all sorts of areas - competition, regulation, banking, consultancy, investment management.

So I thought there could be a useful course which would give students both the traditional academic rigour and some practical hands-on exposure to one of the staples of many working economists' lives - figuring out where we are in the business cycle, and making enlightened stabs at where the cycle is headed next. And I got in touch with Dr Adrian Slack who is the director of Victoria's graduate programme in professional economics to see if Victoria would be interested in running with the idea. We talked it through and put together an idea of what it would look like.

The upshot, I'm pleased to say, is that Adrian has piloted the proposal through the approval system and it's up and running. MMPE523, 'Business Cycle Analysis and Implications' is good to go: as noted here, Prof Viv Hall and I will be taking it over the fences for the first time this coming summer trimester (November '16 - February '17). It'll cover the economic theory of cycles up to the present-day state of post-GFC reassessment, the history and causes of cycles in New Zealand - an area where Viv, with the Reserve Bank's John McDermott, is the pre-eminent cycle-dating guru - through to the practicalities of assembling the "where are we now" data, forming a coherent analytical view of what's going on, and building your own two-year-forward set of GDP forecasts. We're also planning on getting in some third parties (public and private sector) who can talk about their experience in building and using cyclical models and forecasts.

So the next time that dreaded job interview question comes round, and the student is facing, "So, tell me, have you done much forecasting?", the answer will be, "Well, yes, I've been quite pleased with how my GDP forecasting model has been going. And it's got something you might be especially interested in - as part of the exercise I've built this little model of...".

If this would suit anyone you know, spread the word. Adrian's the go-to man for more info.