Friday, 16 February 2018

Back to square one

First we were going to criminalise cartels - the main effect being that business executives could go to jail. That was back in October 2011 when a bill was introduced which allowed for a criminal cartel offence in addition to the existing civil offence (where companies and employees can be fined, but not jailed). And if you think October 2011 is ancient history, you're right, but then you haven't been following the recent pace of competition policy reform in New Zealand.

Criminalisation wasn't the only thing on the bill's menu. It also made various other changes, including splitting out 'cartel' into three distinct infringements (price-fixing, collective output restrictions, and divvying up markets). And it provided both exemptions from cartel accusations for various desirable business activities such as joint ventures, and a new mechanism where businesses could get a new kind of okay ('clearance') from the Commerce Commission for cartel provisions that were "reasonably necessary" for a collaboration, in addition to the existing 'authorisation' route.

The proposals made it through the Select Committee process, but in December 2015 the National government yanked the criminalisation bit (the rest of the bill made it through, a mere five years and ten months after it had been introduced). I wasn't happy about the yanking. As I said at the time
Let's get serious here. Piddling offences not worth the courts' time are prosecuted every day. But "hard core" cartels,  about as obnoxious and harmful as it gets when it comes to white collar crime, escape the dock. It's not right.
or a little later
For cases that fit the classic hard core model - anti-competitive intent that is manifestly not bona fide, secrecy, collusion, persistence, materiality - it's beyond absurd that the shop assistant who pockets $25 from the till will end up in the District Court, whereas the shadowy guys who meet on the fringes of industry fairs to steal $25 million from the public won't hear the knock of the cop at their door.
And now reason has prevailed, with the news that criminalisation is back on again. MBIE's write-up of the new Commerce (Criminalisation of Cartels) Amendment Bill can be read here, and the Cabinet paper proposing the return to square one is here.

I had some interesting exchanges on Twitter when I welcomed the tack back to the original course. As one guy sarcastically put it, "Great. I look forward to the bright line definition of cartel behaviour which unmistakably distinguishes it ex ante from pro-competitive cooperation and coordination in all circumstances, and absolutely no chilling effects through uncertainty. Brilliant".

That's fair comment, and indeed the potential chilling effect was the stated rationale for the yanking in the first place.

But personally I think there are enough safeguards to prevent chilling desirable collaboration or - more importantly - miscarriages of justice where people end up jailed for well-meant behaviour. There has to be a clear intention, or as the Cabinet paper put it in paragraph 23, "this mental element of the offence will target the offence to those persons who meant to engage in cartel conduct or who would be aware that this result would occur in the ordinary course of events". And people will be able to argue that they genuinely thought one of the collaboration/cooperation exemptions applied.

I did wonder about paragraph 33 of the Cabinet paper which said
The [Commerce] Commission has raised concerns about the breadth and complexity of the defences proposed. It will raise these concerns at Select Committee.
Concerns about the complexity - maybe. Concerns about the breadth: if the Commission thinks the defences aren't robust enough and need bolstering, excellent, but if it thinks they've gone too far, I can't agree. This is an area where criminalisation really needs to catch only the "hard core" cartels, and nothing else, and the protections need to be industrial strength to prevent a mistaken view of clause 206 in a joint venture agreement turning into a two year sojourn in Mount Eden.

I'm no lawyer (as my lawyer friends occasionally point out) but if anything I'd err even further on focussed targeting of the provisions. As extra protection, I'd be inclined to have a closer look at that "intention" element and tighten it up a bit more, especially that second leg of being "aware that this [cartel] result would occur", and at some stage the Select Committee is likely to get my best impression of the mens rea bits of Legally Blonde.

Saturday, 10 February 2018

Should we obsess about 2% inflation?

For a moment, watching the webcast, I thought there were going to be no questions at all at the Reserve Bank's press conference last Thursday, after its latest Monetary Policy Statement. The Bank had been universally expected to leave policy unchanged, as it did, so there was little "news" in the official statement, and the acting governor Grant Spencer will shortly hand over to the incoming Adrian Orr, so there was no massive interest in what an outgoing caretaker might have to say.

In the end the journalists (with a big assist from Bernard Hickey) filled in the awkward pause* and the conference limped into life. The most coverage was for Grant's remark that people on large mortgages at unusually low interest rates ought to be sure they can handle the payments if rates go up a few per cent. It was a sensible remark, but as the big takeaway, duh.

The questions around the Bank persistently undershooting the 2% midpoint of its target inflation range were more interesting. Some critics have argued for a long time that inflation has been too low, and unemployment correspondingly too high, compared to what would have happened if the RBNZ had run a more stimulatory policy. Michael Reddell for example said it again last week, and added that the Bank's view that inflation is actually heading back to 2% may be proven overoptimistic yet again.

The Bank's responses were first that people shouldn't get obsessed with the 2% number - the Policy Target Agreement says there should be "a focus on keeping future average inflation near the 2 per cent target midpoint" and the Bank seemed to parse this as "a focus" - and second that too many microadjustments of the steering wheel to keep close to 2% will make the passengers in the back seat carsick.

There are arguments both ways. My own take is that central banks virtually everywhere have been blindsided by unexpectedly low inflation: something, still not pinned down, has meant that inflation in the post-GFC world hasn't been behaving like it "should" relative to pre-GFC relationships. In that context, our own Bank hasn't done too badly: at least we've had recent core inflation in the 1% to 1.5% range, when others have fared worse. The European Central Bank still hasn't got core eurozone inflation clearly back over 1.0%, and the Bank of Japan despite extraordinary levels of monetary stimulus has struggled to get up it from zero (currently 0.2%).

The "something" that's changed means that the old 'Philips Curve', if it still exists at all, has shifted to the left. Any given rate of unemployment brings less inflation with it than before, or as critics of the RBNZ would put it, for any given inflation target, like 2%, you can safely drive unemployment down lower than you would have before. But (a) this is all in hindsight and (b) we still don't know exactly how hard you can push unemployment down without setting off an unwelcome bout of too-high inflation.

That's where the RBNZ's latest research will be highly interesting. As the Monetary Policy Statement said on page 5, and both Bernard Hickey and Michael Reddell have picked up on, the Bank's done some new research on where that trigger rate of too-low unemployment (the 'NAIRU' as it's called in the trade) might be. All we know at the moment is that the latest best point estimate is an unemployment rate of 4.7%, within a plausible wider band of 4.0% to 5.5%. Given that we're currently at 4.5%, the Bank would argue it's gone as far as it should.

We don't know the full details yet: the Bank will be coming out with an Analytical Note on the research in the near future. My first reaction (and others') is that 4.7% looks a bit on the high side. But it could well be in the lower 4's somewhere: we're not the States, but it's interesting that the American unemployment rate has needed to drop to 4.1% before there have been a clear pickup in wage growth.

Finally, it's often puzzled me that the media don't reproduce more of the graphs in the Policy Statements. Maybe it's part of the dumbing down of the big media outlets. But in any event here are two interesting ones.

Why are world equity prices currently retreating? Because equity valuations, particularly in the U.S., had been overinflated by a period of unusually low interest rates. But as this graph clearly shows, the interest rate tide has been on the turn for some time. Valuation correction was overdue.

Nearer to home, here's how little inflation is being generated domestically, outside of housing-related costs. The blue bars are everything from school fees to doctor's visits to hairdressing prices, and currently inflation for all those sorts of things comes to only a little over 1.0%. As noted earlier, it's still a bit of a mystery that an economy with 4.5% unemployment is generating so little inflation, but enjoy it while you can: the Bank thinks it won't last.

*I've been at a press conference that died on its feet. As a financial journalist in the early 1980s I went to hear the then Japanese finance minister talk at one of the big annual multilateral meetings (ADB or IMF, can't remember which). Noboru Takeshita gave a speech of such inane banality that none of us could think of a single thing to ask him about it.