Saturday, 27 May 2017

Good books - May 2017

Leading off with economics, George Mason University professor Tyler Cowen's The Complacent Class: The Self-Defeating Quest for the American Dream (with its dedication "To the rebel in each of us") argues that America has become more static and less risk-taking, pointing  for example (on p177) to "lower residential mobility, less building in America's most productive cities, more segregation by income and status, a much greater concern with safety and risk, the coddling of our children, and fewer start-ups and slower growth in living standards, among others", including a reduced willingness and increased inability to undertake grand projects like those of the past (a moon landing, the interstate highway system). He also reckons the current zeitgeist of complacency will have nasty geopolitical results - along Minsky lines, a long period of stability encourages increasing risk-taking, culminating in the GFC in the economic sphere and who knows what in international politics.

I'm not sure what I think about his ideas, though if he's right people should be deeply concerned, in particular, about higher economic and social immobility: for us economic liberals (why, yes I am) high equality of opportunity is one of the bedrocks of a fair - and efficient - society. Could we be going the same way in New Zealand? It's possible: you look at deeply regressive ideas like ever more prevalent, and tighter, school zoning in Auckland, for example, or our inability to progress infrastructure build-out to any defensible timeframe, and you can see aspects of the same issues. In any event, it's very well written and well worth a read.

Not every economist, to put it mildly, writes so well. If you want to improve your own writing style (and want to understand why you should), or you're teaching economics students, who may get little (and possibly no) formal in-faculty communications training, try Deirdre McCloskey's Economical Writing. It's short (only 98 pages including the index), geared to economics examples, spot on in its advice, and (if you've got cash-strapped students), cheap. My copy arrived from The Book Depository for $27.24, delivery included.

In politics, the definitive account to date of the Brexit campaign is Sunday Times political editor Tim Shipman's All Out War: The Full Story of How Brexit Sank Britain's Political Class. It's a big book, and there's a cast of thousands at the beginning to get your head around, but stick with it. It's enormously well informed, and persuasive. One thing I learned is that David Cameron didn't fight the Remain side as hard as he might have, because (a) he thought he was going to win anyway and (b) he was thinking strategically about the embittered and disunited Conservative party he'd have to manage later if everyone had earlier put the boot in hard. Another was that I'd been inclined to blame the European Union for their short-sighted churlishness in not giving Cameron a renegotiation 'win' to wave in front of the UK voters. They're not blameless, but as it happens Cameron never asked for as much as he might have. And finally Cameron himself comes as a decent human being - one of the very few to keep their cool through the dramas of the campaign, even on election night as the shock vote came through - which is more than can be said for practically everyone else involved.

Which leads me to now freelance journalist (and previously with the Daily Mirror and Daily Telegraph) Rosa Prince and her Comrade Corbyn A Very Unlikely Coup: How Jeremy Corbyn stormed to the Labour leadership. Talk about unintended consequences: a Labour electoral system specifically designed to produce a short list of candidates acceptable to the parliamentary Labour party, before going to the wider electorate of unions and members, was subverted to produce the exact opposite. Oddly, at one level, I came away with a somewhat better opinion of Corbyn himself: he's loyal, honest, a hardworking and locally respected constituency MP, and (for the most part) straight up about what he believes in, unlike the trimmers and hedgers he faced in the run-off for leader. But a lot of what he believes in is either misguided or obnoxious: in particular, he strongly believes in "my enemy's enemy is my friend", leading to his support for the likes of the IRA and Hamas.

He's also got one asset that none of the other contenders had, and none of his plausible future rivals have, either: he's paid his dues over decades and decades. No demo was too small, no fund-raiser too insignificant, no campaign too tiny: he turned up for all of them. He's consequently built a devoted, well left of centre, activist supporter base that eats out of his hand, and which got a further big boost from the "three pound vote" feature of the leadership election. My guess is that there's little chance he'll resign if (as seems likely) he loses next month's general election: why would he? His 'Momentum' group has finally succeeded in grabbing control of Labour, where earlier 'entryist' conspiracies had failed. They won't be going away.

We were tweeting each other about something else, and Westpac's acting chief economist Michael Gordon reminded me that I'd never got round to reading Irish Times columnist Fintan O'Toole's Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger. It does what it says on the tin: it's a devastatingly hard-hitting, and accurate, critique. It perhaps underplays the role of joining the euro, which for already red-hot Ireland meant getting the monetary policy of slow growing Germany (and which helped do for Greece for similar reasons), but is otherwise bang on the mark.

My father used to tell the story of how one Irish MP would find out when constituents were due to receive the old age pension, and would write to them saying, "I've been in touch with the Department, and I'm pleased to be able to tell you that as a result of my inquiry you will get a pension of...". Shabby stuff - but the really shabby thing is that constituents expected MPs to deliver goodies by using 'influence' within the system. In one example in Ship of Fools, a building developer got a biddable politician to change the postal district of his development, so it would be reclassified into a more upmarket area. There are very good reasons for keeping MPs away from micromanagement of personal cases.

In fiction, we've sadly reached the end of the road for Peter Corris's epic Hardy series of Australian private eye stories, with the 42nd and last, Win, Lose or Draw, where Hardy is on the very cold trail of the abducted daughter of a wealthy businessman: she may or may not have been sighted, in very bad company, in Norfolk Island. Corris is flagging it away, after diabetes induced blindness has got too much for him. It's a real shame: the series is one of the classics of the private eye genre.

Joseph Knox's Sirens is a debut novel about police detective Aidan Waits in Manchester, who is called in to help rescue the runaway daughter of an important politician and goes undercover in her drug-running circle. She eventually dies from adulterated heroin as do seven middle class kids at a party (they turn blue). There's vivid detail about drug use and gang wars: one minder is force fed black and white paint, for reasons I'll leave you to discover for yourself. It's a complex plot, maybe almost over complex at the start, but otherwise it's very well written.

Another debut is L S Hilton's Maestra, where a  low on the totem pole woman at a posh art auction house rumbles a crooked art deal, gets fired, but ends up getting her revenge: it  involves a sting on Mafia art dealers (plus a lot else). Violent, with remarkably explicit sex from a female point of view: it ends 'To be continued'. I'm looking forward to the next instalment.

Finally I broke one of my own best rules - don't read private eye books where the private eye has a silly name - but I'm glad I did. George Galbraith, aka J K Rowling, is now up to three in her series about ex-military London private eye Cormoran Strike. Galbraith/Rowling is excellent at characterisation and tension-building: I loved the first, The Cuckoo's Calling; was okay with the second, The Silkworm (which may have elements of a roman à clef in the publishing world), though my wife thinks it's just as good as the first one, so what do I know; but in any event Rowling is back on song in the latest, Career of Evil. I gather there's a fourth on the way. Recommended.

Friday, 26 May 2017

The real increase in infrastructure

The government made a decent effort in the Budget to boost the spend on infrastructure, as it showed in this graph, taken from the 'Capital at a Glance' document handed out yesterday as part of the Budget material.

But if you thought that we will have an extra $32.5 billion worth of shiny new infrastructure in four years' time, think again.

All these numbers ignore depreciation. But, as we all know, road surfaces get worn, bridges develop cracks, classrooms get leaks, equipment wears out. How much of the budgeted $32.5 billion is actually going to get us new stuff, and how much is going to maintain, repair or replace existing stuff? Repairs and maintenance are of course a good and necessary thing, and nobody's begrudging that spend, but how much of the infrastructure is going on maintenance of the stuff we've already got, and how much on genuinely new additional stuff?

The answer is, at least a good half of the announced spend is keeping the existing stuff in good nick, and only around half, at most, is for new stuff.

Here's the calculation, which I've taken from Note 15 to the Forecast Financial Statements on page 107 of the Budget Economic and Fiscal Update (the 'BEFU').

You'll see that the table says that the government is planning to add $28.8 billion to the stock of infrastructure. This is less than the $32.5 billion in the graph, because the numbers in Note 15 don't include some $4 billion of new spending that hasn't been allocated to anything specific yet. But even if you add that $4 billion to the $28.8 billion in the table, you get a gross addition of $32.8 billion, and on the (generous) assumption that there is no depreciation at all on all this extra $4 billion, the answer comes out, gross addition $32.8 billion, depreciation $18.4 billion, net addition $14.4 billion. Maintaining existing stuff 56%, adding new stuff 44%.

All these numbers involve some forecasting, and the forecast events may or may not happen, and they also involve some judgement calls about what assets are worth. Valuation can be a bit of an art sometimes, though having looked at how these assets are valued and depreciated (which you can read for yourself in the 'Accounting policies' bit of the BEFU's 'Additional information' document, pages 43-6) the methodologies look reasonable enough to me. All that said, let's round things off massively to allow for the uncertainties: very roughly, of every $2 that's going to be spent on infrastructure over the next four years, $1 will go on new stuff and $1 will keep the old stuff going.

To recap. There's nothing wrong with counting maintenance in the total spend: there are too many countries which roll out new facilities and don't maintain them properly, so it's good that we allow for it. And it's good that we're upping the total spend. It's rather late in the day, and there is still a huge infrastructure deficit, built up under a succession of governments, to tackle - as I've noted before, there are Third World countries making a better fist of building links to their airports than we've been able to manage - but we are at last getting more serious about it. 

That's all good. But next time you see a big spend-up announced, calm down, and remember to take $4.5 to $5.0 billion a year off the headline number, to get some feel for the extra stuff we're actually getting.

Thursday, 25 May 2017

Budget 2017 - the big picture

What's the very, very first thing you should look for in any Budget? It's not the headline surplus or deficit, no, nor the spend-ups, nor the tax breaks, nor the gimmicks (does anyone ever track the effectiveness of this year's grant scheme or last year's incentive?).

It's whether the Budget boosts or brakes the economy. And how would you know? By digging out the 'fiscal impulse'. Which isn't the easiest thing to find: it's never in the big Budget bumph, but is relegated with the horoscopes and crossword to an 'additional information' document (this year's is here). And that's partly because Treasury are a bit embarrassed by it: the calculations involved can be on the arbitrary side, and you wouldn't want to bet anything valuable on the accuracy of the outcome.

But for all its flakiness, it's the only thing we've got. What it does, is strip out all the cyclical stuff from last year's Budget and this year's. It could be, for example, that last year's Budget showed a surplus solely because the economy was doing well and the GST take was pouring in, and this year's surplus is even bigger because the economy is doing even stronger still (not a million miles removed from what's actually happened). Both surpluses, and the increase from the first to the second, may have sweet eff all to do with careful stewardship of the nation's finances, and may not tell you anything about the overall impact of the Budget.

So what you do, is you strip out the fortuitous cyclical stuff from both Budgets, taking out (for example) the happenstance of higher GST in good times or lower GST in bad times. You might have to take out one-offs like earthquakes as well, to get a proper feel for the real 'normal times' state of the government's books. And when you've done that, then you compare the true, 'underlying', 'structural', 'cyclically adjusted', outcome - call it what you will - in the two Budgets. If, for example, last year's Budget had a true deficit of 1% of GDP, and this year's has a true surplus of 1%, that's a turnaround of 2% of GDP, which by fiscal standards would be a reasonably significant tightening of fiscal policy - a clear brake on the economy (last year injecting some money into the economy, this year taking some out). And conversely a larger true deficit, or a smaller true surplus, would be a boost.

We know, too, that Ministers of Finance ought to do the right counter-cyclical thing - in good times (like now), fiscal policy doesn't need to be, and shouldn't be, a stimulus to the economy. In bad times, it does, and should. So, how'd Joyce go? Here's the fiscal impulse.

The good news is that he didn't go for a pro-cyclical splurge in election year. Overall, the stance of fiscal policy won't be making much of a difference, either way, to our current business cycle. There is a mildly pro-cyclical fiscal stance for 2018 and 2019 (acknowledging, again, the ropiness of these kinds of calculations), and the heavy lifting of getting government debt down has been pushed out to 2020 and 2021 and beyond.

That said, I for one don't mind too much if we take a while to get net government debt below the target 20% (which on current forecasts will be in the June 2021 year) if instead we spend up large on our severely deficient infrastructure. The Budget speech said that "Through this new capital spend [$11 billion] and existing commitments the Government and its key infrastructure agencies will invest a total of $32.5 billion over the next four years in new infrastructure". It may sound odd to say that $32.5 billion is only a start, but that's the reality: the infrastructure deficit has been allowed to balloon to a level that is now difficult to grapple with, even in $32.5 billion chunks. And even these higher levels of spending will result in indefensibly slow improvement (30 year timeframes for rail to Auckland's North Shore come to mind).

What else?

The tax thresholds. Yes, of course they should have been adjusted upwards, good job they were. And it's good to see the bulk of the increase concentrated on raising the lowest threshold (where the 10.5% rate applies) from $14,000 to $22,000. Leaving them unadjusted had been an insidious and regressive way to raise the tax take: people barely into middle-class incomes, paying the top marginal tax rate, along with the millionaires? Give us a break.

Mr Joyce did not, however, take a principled approach and commit to keep on adjusting them every year. While (I guess) he thinks that's clever politics - keeping a lolly up his sleeve for future years' scrambles - it's not good, either as economics or politics. The economics is obvious: we'll soon have teachers and police constables back paying the millionaires' tax rate. Politically, it would have been smarter to commit to indexing the thresholds, gaining all the moral high ground, and watch the opposition parties squirm if they didn't match it. And if you really want to inherit the technocratic, managerial mantle of Bill English, a valuable political asset built up over many years, you do the fiscally right thing, even if it costs you the option of a cheap political stunt every year.

Lowering the target for net government debt to 10% to 15% of GDP by 2025 is fine by me. If there's anything we've learned over the past decade, it's that you need to leave a lot more 'fiscal space' or 'fiscal leeway' than you might have thought in pre-GFC days. You don't want to go into whatever the next unpleasant surprise may be carrying significant amounts of debt (as countries like France may discover) and even countries like Ireland, which appeared to be in a decent net debt starting point, found that, in fact, it wasn't enough to cope with the implosion of their banking system.

Finally, the economic forecasts. At first squizz they look reasonable enough - perhaps a tad on the optimistic side - but there's an interesting wrinkle in the details, where housing construction is expected to barely grow in the year to June '18 (+0.3%) and then perk up a lot (up 8.7% in the year to June '19, and another 8.8% in the following year). As the forecast document says, "There is considerable uncertainty associated with the judgement that this slow-down will be temporary", and that a building boom in the Auckland market is on the horizon. I really hope there is. But then I look at our capacity constraints, and our planning delays, and I wonder.

Monday, 22 May 2017

The state of telco play - 2017

We pay too much attention to bad stuff, so here's some good news that has come out of the Commerce Commission's latest annual report on the state of the telco markets (media release here, quick infographic here, whole thing here).

Speeds are up. Congestion is down. Value for money is better. Prices generally compare well with other countries. Competition is working. Investment is high, with a big slab of dollars going into the rollout of the Ultra-Fast Broadband (UFB) fibre project. And even though the telco team at the Commission don't say so in the report, I'd give them credit for helping to make this happen.

There are lots of ways to illustrate the good stuff: here's just one, on fixed line broadband, which speaks for itself.

As I said in my piece on last year's equivalent report, the Commission's comparison of our broadband download speeds with other countries' could be a bit better and doesn't sweep in some of the comparator countries you'd normally expect to see, but even on a wider set of comparators we're doing better than we were. If you go to the source Akamai document the Commission used, we now rank 34th globally for download speed - not enormously flash, but better than the 41st we scored a year earlier. And we're a little better against European country standards, where we would now tie for 19th rather than 21st. Room for improvement, as they say in the school reports, but as the UFB builds out and more people sign up for it, we've got good prospects of climbing the rankings a bit more.

The UFB trends in the report also spell out Sky TV's ongoing corporate nightmare: the rollout and adoption of a whole new way to deliver movie and sports event quantities of data. There are now 368,000 UFB connections, and growing like fury, and nearly half of households are on unlimited data plans, and the proportion is rising rapidly.

Have we got unfinished business? I speculated last year that maybe it is time to revisit our regulated mobile termination rate: it's still unrevisited, at a left-high-and-dry level by comparison to current overseas rates, for no obvious reason that I can see. And there's an ongoing issue with the high cost of mobile data downloads to data-only devices (see pp28-29 of the report).

The other bit of unfinished business is the ludicrous arrangement whereby the Telecommunications Commissioner is required to monitor the telco industry, and the Commerce Commission is forbidden to monitor any other industry. MBIE went through a whole process in 2015-16, in its targeted review of the Commerce Act, which included the option of fixing this nonsense. Ten months have gone by since the final cross-submissions (including mine) darkened MBIE's door.

Come on MBIE. This is getting embarrassing.

Thursday, 11 May 2017

No change to interest rates? Really?

Today's Monetary Policy Statement wasn't quite what I expected.

I thought we'd get something along the lines of, "One quarter's CPI is neither here nor there, so we'll wait and see if the June one is also unexpectedly high, but if the March quarter outcome is repeated, we'll probably start raising the OCR a bit earlier than we've previously indicated". Instead we got exactly the same projected track for the OCR as we had in the February Statement - no increase until late 2019, and then only one 0.25% increase.

Can't see that happening, myself, and neither can the financial markets. Today's 90 day bank bill yield is just below 2%: the futures market has it at 2.77% by the end of 2018, which would be equivalent to three 0.25% increases next year. The futures market can be a flighty beast, and futures sentiment can change quickly, but having had the best of today to think about it, it's currently saying there it doesn't believe a word of "nothing till late 2019".

What explains the gap in viewpoints?

Three things, I'd reckon.

One is the possibility - I'd put it no stronger - that the Bank is institutionally scarred by its premature tightening in 2014. It wasn't, in my view, a strange thing to have done at the time, but as things panned out it had to be reversed (and then some). So it's possible that the Bank has decided, whatever mistakes it's going to make in the future, premature tightening isn't going to be one of them. The risk, though, is that it gets "behind the curve", as the jargon goes, chasing after inflation that's got away from it.

The second is that we're actually at an inflexion point in trend inflation - it's been unusually low, but is on the turn - and turning points are notoriously hard to pick in real time. I'm not surprised that "uncertainty" and its variants turned up 38 times in the Statement. So these are genuinely tricky times for the Reserve Bank, and irrespective of whether it is battle scarred or not, it might well want to wait for clearer signals.

For what it's worth, I think the inflation tide is definitely coming in. I like to look at non tradables inflation, ex the cost of new houses, as a rough and ready guide to domestically generated inflation pressures (the only ones the Bank can ultimately influence). As the graph shows (and I've included an alternative, non tradables ex housing and ex household utilities, as an extra perspective), domestic inflation is on the up.

The third is even trickier again: what if the economy isn't behaving the way it used to? As the Bank found on its latest visits to businesses, "wage pressure remains surprisingly limited". It's not clear whether the employers, or the Bank, were surprised - maybe both - but in these strong cyclical conditions, on past experience, people would be asking for pay rises and threatening to move on if they didn't get them.

But "on past experience", that's the thing. As the visits found (p26 of the Statement), "Contacts suggested this may in part reflect the negative impact of the GFC on employees’ expectations of wage growth and employers’ willingness to offer substantial wage increases". I have some sympathy for this view that the post-GFC world is (at least for now) structurally different to the pre-GFC one, though not quite enough to believe it has changed enough for the Bank to leave policy "accommodative for a considerable period". We'll see.

Two final thoughts. Businesses also reported that "it is difficult to find workers with the right skills", which may be partly cyclical (the one with the skills are already spoken for) but also, I suspect, reflects all not being entirely well with our education system and our 'active' labour market policies. And they said that they "also expected to increasingly look offshore for labour": I don't expect this will make a blind bit of difference to the current anti-immigration sentiment and its backers,  but it's a reminder that tightening up immigration in a boom labour market doesn't look like the smartest idea.

Friday, 5 May 2017

Common sense - at last

Yesterday I warned you that I was writing a piece for competition policy tragics, and this is it. In the event it's not terribly technical, so give it a go even if you're not a tragic - especially as it shows how we've got, finally, to a better place when it comes to assessing things like the NZME/Fairfax merger. Plus it's got some pirates in it.

First some context. The Commerce Commission when it gets the likes of NZME/Fairfax has to decide, if there's a loss of competition (as there was), whether to authorise the thing anyway, because there are, overall, net benefits to New Zealand: the good stuff (cost savings, international competitiveness, whatever) outweighs the bad (mainly the increased market power of the new entity).

Here's a completely general, utterly uncontroversial little diagram of all possible benefits and detriments.

The 'net of realisation costs' in the table is fairly simple, too. Let's say there is a cost savings benefit - scrunching two head offices into one, for example. You should count any costs involved (redundancy payments, for example) when putting a number on the cost savings benefit. All good. All clear.

Where it starts to go strange, however, is in the Commission's Authorisation Guidelines, where you find this.
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.30
38. In contrast, in assessing detriments we only consider anti-competitive detriments that arise in the market(s)31 where we find a lessening of competition (whether substantial or otherwise).32
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.
In terms of the diagram, when it comes to things like NZME/Fairfax, the Commission would count A, subtract B, add C, but ignore D.

This makes no sense from an economist's or indeed any commonsensical perspective, as I've argued before, and any lawyers who thought the case law on the Commerce Act required it need to go away and have a good lie down until they come to their senses. Why ignore D - if the merger caused some large detriment outside the markets the merger is taking place in, why on earth wouldn't you count it?

In what I think may have been the best single para I've ever written in this blog, I finished my previous post about this nonsense with this:
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?
And what indeed happened?

Along comes NZME/Fairfax, where there is indeed a big D, a detriment outside the immediate markets involved: as the Commission said in paras 75-77 of its decision (irrelevant footnote omitted):
the proposed merger of NZME and Fairfax has the potential for negative consequences that may extend beyond the reader and advertising markets in which competition is affected.
In particular, a loss in plurality might impact on New Zealand society more generally...
A significant reduction in plurality would affect all New Zealanders, whether they directly consume news content or not. A loss in plurality may therefore have effects that extend beyond the reader markets in which competition is affected.
As you can imagine, the lawyers for NZME/Fairfax told the Commission, stick to your own Guidelines. They referenced the Guidelines, and, for good measure, the Commission saying the same thing in an OECD Working Party, and said (at para 27) that
the Commission's inclusion of plurality effects in its detriment analysis is contrary to the statutory scheme, its previous positions, case law and its own restatement of the correct legislative framework within the Draft Determination
The Commission, in short, found itself boxed into an untenable position: big detriments that it had said wouldn't be counted under its usual approach. As it pointed out (para 81 of the decision)
The implication of the Applicants’ approach is that we might have to authorise a merger that in our assessment was not in the public interest. That is, if we considered that there was a negative consequence that outweighed the positive aspects of a proposed merger, we might still have to authorise depending on where those negative impacts were felt
So how did the Commission extricate itself from the daftness of the Authorisation Guidelines and navigate its way back to Planet Earth?

First (here come the pirates) it used the Captain Barbossa approach in Pirates of the Caribbean where he reneges on an apparent deal with Elizabeth 'Turner' made under the pirates' code, by pointing out that "the code is more what you'd call "guidelines" than actual rules", or as the Commission put it (footnote 72, page 34), "the Guidelines are necessarily general and we must apply them flexibly according to the facts of each application. The Guidelines do not, and cannot, address every issue that might arise".

The Commission also found a little escape hatch in footnote 32 of the Guidelines. The footnote says that in the key case on benefits and detriments ('Godfrey Hirst 1' as it is called in the decision), "while the court endorsed this settled approach [i.e. of  ignoring D], it observed that ‘disbenefits’ or negative benefits that arise outside the affected markets may be relevant to the public benefit test". Of course, that rather raises the question why the Commission said it wouldn't usually count them, but never mind.

And it also made the (to me not very persuasive) argument that the law has moved on ('Godfrey Hirst 2') and the Guidelines have yet to be updated.

In any event we got to a good place. The Commission has now definitively said (para 134.1, my emphasis) that
we can consider all negative consequences arising from the proposed merger, in our consideration of whether the merger will result, or will be likely to result, in such a benefit to the public that it should be permitted
which in this case enabled them to get to the right conclusion, that (para 134.2)
irrespective of whether the plurality consequences of the proposed merger are ‘in market’ or ‘out of market’, we will consider any plurality losses as ‘disbenefits’ or ‘negative benefits’
So it's been a bit of a journey, but it's now very likely the next edition of the Authorisation Guidelines will reflect this eminently more sensible approach.

Thursday, 4 May 2017

Yup, as expected

By now you're likely reaching saturation point on the NZME/Fairfax merger decision - every newspaper in the country seems to be running an editorial on it this morning, with the Herald for example saying 'Blocking this merger is a big mistake' and the Dominion Post going for 'The Commerce Commission doesn't get it' - so I'll try and say something new.

First thing is, I have a fair degree of sympathy for the folks in the two companies. They're on leaky ships that are taking in water, and even though the merger lifeboat wouldn't have held all of them, enough of them would have clambered on board to live for another day. You can understand why they've reacted with everything from disappointment to rage.

But that's commercial life, folks. Technologies  improve, customers switch preferences, economic policies change, businesses lay their plans best they can, and the best plan (by luck or design) wins, and sometimes wins big, as it should given the risks involved. And the losers, well, lose. The whole process - and you'll realise I'm just channelling Schumpeter here - works out for us in the end as businesses are highly incentivised (by stick and carrot) to do their level best to be the most appealing option to us customers. As an American judge once said - oddly enough, in a media case - "society has an interest in competition even though that competition be an elimination bout".

And that's my second point. The Commission did a good job explaining why ongoing competition would be a better long-run option than permitting the substantial loss of competition the merger lifeboat would have caused.

It's a perennial battle to make that case, because people tend to have odd but partly understandable ideas about competition: the ideas make some sense because there are some facts which appear to support them.

At the one end there are the people who see competition as a race to the bottom - who can deliver the nastiest barebones bundle at the cheapest price. You get a lot of that kind of reaction when anyone suggests more private provision of education or health services, for example, but you can see why people think it could apply to the media, too. As I write, the latest 'News' on the Herald's website includes 'Princess Diana's biggest fear over Camilla revealed', and 'Kanye's Met Gala absence due to fury over Kardashian's butt photo'.

At the other there are the people who argue that less competition means better resourced competitors, who are better able to meet consumer demands or fight an effective fight against rivals (one of the big themes in  NZME/Fairfax). Too much competition, and nobody in a skinny-margin industry will have the funds for R&D, too little and you'll get lazy monopolies who'll gouge the customer, but in a sweet spot in the not-too-much-competition middle, companies will be making enough money to be able to fund research and innovation. There's some evidence for this, too, as I mentioned the other day in the context of the mobile phone business.

But I thought the Commission made a good fist of arguing the case that competition typically enhances quality, rather than reducing it, and that more competition is more likely to hold companies' feet to the fire than less. As the Commission put it (in paras 26 and 27 of the Executive Summary)
we consider that competition between NZME and Fairfax leads them to produce higher quality content than would exist with the merger. Competition incentivises investment in editorial resources, motivates journalists and editors in their day-to-day work, and ensures diversity of editorial approaches. Competition also leads to greater investment and innovation in the way that content is presented to readers.
Fairfax and NZME compete to be the first to unearth and break news. When they have been beaten to a scoop each works quickly to catch up and look for new angles. Under the proposed merger this rivalry and the benefits it delivers is likely to be removed. In our view this would negatively impact the quality of news and breadth of coverage produced.
My final point is that the decision represents a rare triumph for generic competition law over sectoral regulation. Many countries have given up on the competition law of the land as an effective way to rein in unwanted problems and have turned to sector-specific regulators instead. In the UK, for example, there are Ofgem (gas and electricity), Ofwat (water) and Ofcom (communications), and we've gone down that road, too, with a Telecommunications Commissioner and an Electricity Authority.

But we haven't gone down the route of a media overseer, though many countries have: as the Executive Summary said (para 42), "there are no media ownership restrictions or other mandatory journalistic regulations that would be effective enough, in our view, to materially constrain the merged entity". For once, the Commerce Act has been able to step into the breach and play that role, without erecting another bit of complex sectoral regulatory infrastructure. That's a plus.

There's a lot else in the decision, mostly around process and the technical pros and cons of the various economic and legal arguments, but when we've already had wall to wall coverage, I'll keep my tragically tragic post for tragically tragic competition tragics for another day.

Tuesday, 2 May 2017

Only one more sleep...

...until the release of the blockbuster NZME/Fairfax decision by the Commerce Commission.

What'll they do? Bear in mind that any of these big set-pieces that come into the Commission are always tangled, could-go-either-way affairs, and (just to be clear) I have no dog in the fight, but my guess is they'll reaffirm their decline.

For one thing, while they have to have an open mind to the late flurry of submissions, and I'm sure they do, it's going to be rather hard to walk back from this (para 1012 of the draft decision, footnote omitted):
Even in the face of a changing media landscape, the Commission cannot lose sight of the fact that is being asked to authorise a merger that would provide a single organisation with control of nearly 90% of all print media, New Zealand’s two largest news websites, and one of New Zealand’s two largest commercial radio companies. This would be an unprecedented level of media concentration in a well established liberal democracy
And from this (para  1016)
We consider that the level of media concentration brought about by the proposed merger would not be in the public interest. We have weighed the cost-savings arising from the merger against the increased levels of media concentration, the ability of the merged entity to influence opinions and lead the news agenda and the overall detriments to plurality. In an industry where there are substantial costs of entry to achieve the scale of a large news publisher, we consider that the loss of plurality that arises from the proposed merger is likely to be significant and potentially irreplaceable
The parties and their lawyers and consultants have had a good go at the "changing media landscape" and "detriments to plurality" points (and others, including how the Commission has applied the 'net benefits' test, which we will hear more of if there is indeed a decline and a subsequent appeal).

Their final submission essentially said that the merged entity would not be a colossus bestriding the old-economy print media, but just one player in a much wider and rapidly evolving media market and one moreover with its own new-economy giants (the likes of Facebook and Google).

And on plurality, they argued (my paraphrase) that you'll lose some of the plurality you've currently got if the current standalone companies go down the gurgler, or as Russell McVeagh put it in an earlier letter to the Commission, "none of the alternative, potential wished for Plan Bs that have been postulated for either business make any difference to their financial trajectory, nor to their ability to maintain the quality of journalism which they currently produce".

One thing that struck me about the whole thing is the prominence of the "plurality" discussion, which partly reflects the effectiveness of some submissions (I'd pick out this one in particular, from a group of academics).

In overseas jurisdictions, plurality has generally been shoe-horned into merger authorisations as an additional but separate public interest that merger authorities are allowed to take into account, over and above the usual nitty-gritty of expected changes to competition. As this article notes, for example, the EU allows for additional consideration of "three legitimate public interests...public security, plurality of the media and prudential rules (of relevance in the area of financial services)".

I have trouble seeing it that way. Media plurality seems to me to fall squarely within the usual competitive effects analysis. When we are looking at effects on consumers, for example, we tend to focus on the money price - will the merged entity charge more, or offer less - but we can forget that "price" is really just a shorthand for the whole menu of consumer effects, sometimes described by the SPQR acronym: service, price, quality, range. If the end result of a media merger is clickbait tat (quality) from a 600 pound gorilla (range), there's your result. I don't need to start wandering off-piste into what is the appropriate social infrastructure for a liberal democracy.

To that extent that it looked as if the Commission was doing that, I can see where NZME/Fairfax were coming from: "The Applicants’ view was that issues of media plurality are not relevant to our analysis and fall outside of the scope of the merger authorisation process" as the Commission said (draft decision, para 905). But on the substance, I think NZME/Fairfax were wrong: plurality and quality fit squarely within the usual competitive effects box.