Friday, 20 December 2019

Beneath the calm surface

The Productivity Commission's been working on 'Technological change and the future of work'. Last month it came out with the second report, 'Employment, labour markets and income', in what will be a five-part series (press release here, whole thing here). The big headline takeaway was that it might be well worth looking at systems like Denmark's 'flexicurity', where people's incomes are supported through employment volatility. The idea is that the labour market needs to be able to be flexible, and jobs will come and go, but people's incomes will be cushioned against the volatility through, for example, an employment insurance scheme. All very sensible.

Along the way Chapter 4 looks at the case for 'active' labour market policies, things like retraining to help people find new jobs. The Commission is somewhere between agnostic and outright sceptical about their value: "There is a large gap between good intent and robust evaluation of the effectiveness of labour-market programmes. Few programmes are subject to robust evaluation.  Of labour-market programmes, ALMPs ['active' ones] have received more evaluation effort. The results of those evaluations are not encouraging (p78) ... Overall, the Commission cannot say whether New Zealand’s labour-market programmes are effective or not" (p80).

The Commission may have missed the latest bit of evidence, which I wrote about in 'Let's get more active', and which was more upbeat about their potential. It found that two kinds of programme appeared to be effective (wage subsidies and helping people to go out on their own as self-employed), vocational training wasn't too bad an option, but brokering services (helping match job seekers and recruiters) were a waste of space. So if I were the Commission I think I'd be taking a modestly more constructive view of the potential to make the labour market work better, particularly as it's a vital economic issue.

For one thing, governments in many countries (though not Denmark, obvs) have been failing to live up to the social compact underpinning an open, flexible, market-based economy. The core bargain is that the national gains from openness will create enough income for the winners to be able to compensate the inevitable losers and still come out ahead. But the redistribution to the losers hasn't been happening, and the resulting resentment in the world's Rust Belts is feeding tear-up-the-old-rules populists everywhere.

For another, virtually nobody outside the economics trade (and not always inside it, either) realises just how vast the flows in and out of the labour market actually are. We learn from Stats, for example, that total employment went up by 16,000 in the June quarter, and by 6,000 in the September quarter. That doesn't look like a lot of movement.

But what is actually happening is that huge numbers of people change jobs, get fired, and get hired each quarter. The 6,000 in the September quarter is the small net effect of enormous gross flows in, out, and between.

In recent years, roughly 155,000 new jobs are created each quarter, which has happily been ahead of the 145,000 or so jobs that have gone bung in the quarter. The 10,000 or so increase in employment in each quarter is the outcome of very large gross flows indeed. The data, by the way, come from Stats' Linked Employer-Employee Dataset ('LEED'), which you can play with yourself for free on NZ.Stat. I've done rolling four-quarter averages to take out the pronounced seasonality.

And the big levels of job creation and job destruction are only part of the wider ferment in the labour market. People are moving around from one job to the next in very large numbers. A bit over 350,000 people each quarter change seats.

Are we out on a market-turmoil limb here? Not at all. In the States, for example, the increase in jobs in any given month is around 200,000: in December it was 266,000, which was thought of as quite a large increase at this late stage of the long U.S. expansion. But that is absolutely tiny compared to the gross flows. According to the U.S. JOLTS data, which show us the underlying gross flows, in the month of October alone (the latest to hand), 3.5 million people voluntarily quit their job in the month. Another 1.75 million were laid off or fired. Employers hired 5.75 million people. In one - one - month.

Bottom line. There are two reasons we ought to be helping people a lot more to cope. One is that moral compact: for both efficiency and equity reasons, we need to have a dynamic but not painful labour market. And the other - acknowledging that a fair amount of it is entirely voluntary, with people quitting (especially in good times) to do better for themselves in a new job - there's far more turnover in the labour market than you likely thought. Flexicurity, and 'active' labour market programmes, aren't just for the unlucky few in the meat processing factories: they're for all of us.

End-year bits and bobs

We're all winding down and people's appetites for competition and regulation stuff are likely waning, but as we all head for the beaches (Golden Bay in our case) here are some assorted bits and bobs that will tick over into 2020.

1 What's happened to Lodge? That's the case about real estate agents in Hamilton charged with anti-competitive collusive behaviour. The High Court said they didn't. The Court of Appeal said they did. The Supreme Court allowed an appeal last March and heard it in (from memory) August. Is four months the normal gestation period for a Supreme Court decision? Or is there some extended thinking going on about exactly what constitutes a meeting of minds as opposed to simultaneous but independent agreement on a course of action?

2 And if the Supreme Court does ping the Lodge real estate agents, what about the penalty? Other real estate companies hadn't fought the case, pleaded guilty, and got what I thought were fines on the high side of appropriate. I'm no fan of cartels: I was really pleased for example when the Aussie courts threw the book at the Japanese shipping lines (most recently here) and totally delighted when they nearly quintupled the fine on a brazen bang-to-rights Japanese cartellist who'd unwisely appealed the original A$9.5 million. But I'm not at all convinced that the book needs to get thrown in Lodge. Yes, of course, you don't want cartel fines becoming just another cost of doing business, and all that economics stuff about optimal deterrence needs to get an airing. But there also needs (in my view) to be a clearer distinction drawn between the less culpable and the most egregious.

3 Talking about appropriate penalties, when cartel criminalisation goes live in New Zealand in April 2021, is every cartel case going to be treated as a criminal matter? Or only the worse ones?

4 Still on cartels, I wonder how the ACCC's underwriting case is going to fare? Apart from the current skirmishing over whether the evidence trail has been contaminated - the case is definitely in criminal law process territory, as we will be too from 2021 - we're going to have another of those Lodge-style bunfights about whether everyone took the same view, given the force of the ambient circumstances, or went that step too far and collusively agreed to act together (in this case, allegedly, controlling how many unsold ANZ Bank shares would be dribbled out onto the market).

5 Does history repeat itself? You betcha. Seen the ACCC's first go under the new Australian 'effects' based formulation of abuse of market power (media release here, concise statement of claim here)? Let's see now, what does a port with its own pilot and towage business allegedly over-reacting to a competitor remind you of?

6 In the great scheme of things I'm more interested in competition and regulation than consumer protection. But I get it that consumer law has its place in making markets work well, and was persuaded a bit more in that direction at this year's RBB Economics conference. So I think we're on the right track with the new Fair Trading Amendment Bill, which aims to bring in a new 'unconscionable conduct' provision, and which you'd think would help address gross imbalances in market power between sellers and buyers. "Unconscionable" isn't defined in the Bill but the government's explanatory note (which presumably will come into play when there's the eventual statutory interpretation headbutting) says that "Unconscionable conduct is serious misconduct that goes far beyond being commercially necessary or appropriate". The good bit is that s7(3) and s8 try to give some guidance to the court, in order to avoid the Kobelt outcome we recently saw in Oz (good summary here, case itself here) where it went to penalty goals and a 4 -3 decision against finding the alleged unconscionability. But - and maybe it's a fool's search to go looking in the first place - I can't say that "serious misconduct that goes far beyond being commercially necessary or appropriate" rings my bells as a decisive guide.

7 Out of the blue, earlier this month I got an e-mail from the American Bar Association Antitrust Law Section about a seminar that will "be focused on platforms regulation and merger litigation. Rod Sims will deliver a keynote that follows-up on the ACCC’s Digital Platforms Inquiry and provides an update on the ACCC’s next steps, followed by an interactive panel discussing that report and other issues related to digital platform regulation. This will be followed by an all-star panel of judges and litigators from the United States and Australia discussing the unique features and challenges involved in the increasingly common practice of litigating merger cases". I looked it up: it sounds promising, and I'm going. It's free, and only half a day, in Sydney on February 6. While it's free, you need to register here.

Wednesday, 11 December 2019

Give that man a DB

Everybody from blind Freddy upwards has been telling this government, and previous ones, to get on with fixing New Zealand's gross infrastructural deficiencies.

"We should pull finger and get the hell on with it while the going is still pretty good", I wrote just over three years ago. "Roll out the infrastructure we need, and pull finger about it while you're at it", I said over two years ago. And apart from an unfortunate predilection for 'pulling finger', I was right, as was everyone else who has been banging on about it.

So all credit to Grant Robertson, who at today's Half Yearly Economic and Fiscal Update ('HYEFU') has done precisely that: an extra $12 billion into infrastructure. It was, from an economic perspective, completely correct: we need the choke points fixed, borrowing costs are at historical lows, and monetary policy has been driven into ever more grotesque distortions because fiscal policy wasn't carrying its share of the inflation-boosting load. Show me someone who disagrees with this boost, and I've a better than average chance of showing you a nutter.

To be clear, I'd say well done to whoever held the portfolio: I try to be non-partisan, and I'll give credit where it's due. In this case the economics said, go for it, and he did. Robertson also ran a bit of a political risk: "you can trust us with the public purse" was an electoral asset, and he's been prepared to face the "you promised a fiscal surplus and you blew it" flak (you'll have seen it's already flying) for the greater good. Good call.

There are practicalities that might intrude. With this spend-up, there is are risks that any old vanity project will get a green light. There are probably capacity constraints, meaning good intentions won't translate into diggers on sites, and hence and otherwise you'd want to see some thought given to (say) apprenticeships in the engineering and construction trades. There could be other constraints: it's a wild guess, and probably totally unrelated to whatever might be the Commerce Commission's next market study, but I wonder what are your chances of buying construction materials at a reasonable price, if  you were minded to buy a lot more of them? And the infrastructure spend-up is going to make overall expenditure control trickier: "you could find $12 billion for roads, but you can't find money for [insert allegedly deserving cause here]". For all that, it's still a good plan.

The other interesting thing from today's HYEFU was the update on whether fiscal policy is likely to boost or brake the economy. Yes, I know I go on about this, but for good reason. Most of the fiscal coverage is from a vested interest point of view - will my pretties get their share of the lollies - and the overall national interest doesn't get enough of a look in. But we all need to know whether on balance, overall, the government is on an austerity tack or whether it's adding to the national spend-up.

The answer to that question - and when I say 'answer', I have to confess it's the best we've got, rather than an outright humdinger of a clearcut answer - is given by Treasury's estimates of the 'fiscal impulse'. Here they are. Bars above the line say that fiscal policy is supportive, below the line it's contractionary. The blue bar is the best one to look at.

Treasury's commentary (p16 here) says that
Compared to Budget Update [last May], the fiscal impulse in 2019/20 and 2020/21 is now more positive (0.9% and 0.3% respectively, up from 0.0% and -0.2% previously). The change in the 2019/20 impulse largely reflects operating spending shifting from 2018/19 to 2019/20. The change in the 2020/21 impulse reflects increased capital spending.
I don't blame you if you're wondering what's being said here. Unpacked, there's good news and bad news.

The good news is that fiscal policy is going to be more helpful over the next year or two than originally planned, which, given that the current preponderance of risks in the global economy is tilted to the downside, is a good precautionary move, as well as taking the heat off the Reserve Bank and starting to chip at our infrastructural problems.

The bad news is that $12 billion of extra infrastructure spend, which you'd think would make quite an impact, will take forever to kick in. Here's the profile (from p13 here).

Some of this is inherent in the nature of infrastructure spending: you can't go out tomorrow and start hacking away at Transmission Gully or a second Auckland Harbour crossing. Some of it is down to unnecessarily complex and slow planning processes. Some of it is down to governments not being ready (from a cyclical management point of view) with the proverbial 'shovel ready' projects or (from a longer term investment perspective) not having a coherent portfolio of projects thought through well ahead of time.

But however you parse it, you can announce $12 billion today, but only $3.7 billion is actually going to be spent over the next three and a half years. So while Treasury talks about increased capital spending contributing to a fiscal boost in 2020/21, the effect is quite small because infrastructure is harder to get moving than a teenager with an attitude.

I'm not the first to say this, but there is a ever stronger case building for a non-partisan agreement on a core programme of infrastructure spending. We shouldn't be in a position where overdue investment happens only when cyclically opportune; we shouldn't be in a position where one government's 'holiday highway' is the next government's 'road of national significance'; we shouldn't be reacting, after the event, to stresses that have become evident because we haven't had the wit to preempt them. And on the supply side, we won't have the range of contractors we'd like to have to build the projects we need, unless they get the comfort of a pre-announced schedule of potential contracts. We risk being hostage to the big few who can ride out the dry years.

But enough of the quibbles. Did fiscal policy step up to the plate? Yes. Did we get more real about infrastructure? Yes. Does that man deserve a DB? Yes.

Monday, 9 December 2019

This doesn't help

The OECD came out the other day with its latest PISA results - "the Programme for International Student Assessment (PISA) examines what students know in reading, mathematics and science, and what they can do with what they know. It provides the most comprehensive and rigorous international assessment of student learning outcomes to date". Here's how New Zealand students have been doing over the history of the PISA tests. We used to be clearly better than the OECD average across reading, maths and science, but the results have been deteriorating in all three areas.

We're not alone in this. Here are Australia's PISA results. Almost exactly the same.

You could, I suppose, take some comfort from the fact that our performance levels (even if steadily declining) are still not that shabby by international standards. Here are the top 30 countries (I'm using countries loosely here to include for example the consolidated results from four regions in China producing quality-meeting PISA scores), when ranked by reading scores. We're still 12th, Australia's 16th. But self-evidently we'll get eaten if, for example, the rapidly developing economies of eastern Europe up their game and we continue to slide.

I'll leave the bunfight over the reasons for our (and Australia's) recent PISA declines to others. What bothers me about these trends is the contribution they may be making to our long-standing productivity problems, where for any given degree of effort and resources we seem to produce less than the higher-income OECD countries. Australia's also hit a productivity wall: its latest official estimates showed that "market sector multifactor productivity (MFP) fell 0.4% in 2018–19, the first decline since 2010–11 ... Labour productivity fell 0.2% in 2018–19, the first recorded negative for the sixteen industry market sector aggregate (since the beginning of the time series in 1994–95)".

A wee while back I wrote a column for the Australia and New Zealand accountants' magazine Acuity, documenting New Zealand's and Australia's productivity problems and canvassing some of the usual suspects ('Is there any scope for multifactor productivity growth?'). I didn't include falling skill levels for new entrants to the workforce - a fall of some 4.7% across all three areas since 2000 - but maybe I should have. Normally you'd expect each entrant cohort to the labour force to be bringing higher, not lower, levels of skills to the productivity party: it gets a lot harder to make progress when your starting point is going backwards. In the context of productivity growth, where small changes matter a lot over the longer term, a drop in entrant skills of approaching 5% in two decades is a big thing. This is a ball and chain we don't need.

Thursday, 5 December 2019

Our first market study

The petrol market study came out a short while ago, and if you haven't caught up with where it landed, the Commerce Commission has an infographic on its main findings, another one on its recommendations, the media presentation this morning, an executive summary, plus the whole report.

From a regulatory policy point of view I like where it has gone. There's been an almost unthinking reach for heavier-handed forms of sectoral regulation in recent years, and it's good to see a lighter-touch approach favoured for petrol. The two main recommendations are a terminal gate pricing wholesale market, and less restrictive contractual arrangements between petrol wholesalers and petrol retailers, both overseen by an industry code of conduct.

There is the threat of tougher regulation in the background if these arrangements don't do what they're meant to, which is fair enough, but the key element is a "more market" one, with a currently ineffective wholesale petrol market getting a kick start towards greater liquidity and relevance. And that's as it should be: the intervention required should be the minimum required to get a result, and if we can get an effective market-based solution satisfactorily supervised by the industry itself, we're done.

These are of course only recommendations to the government, and who knows how a three-headed cat will jump, but hopefully the proposals will get the tick. At least we know we will get a response, as the very excellent s51(e) of the Commerce Act requires that "The Minister must respond to the final competition report within a reasonable time after the report is made publicly available".

The thing I was most mulling about, in the interval between the draft report back in August (which I wrote about here) and this morning, was what had happened to all those arguments about the real problem being tacit retail price collusion, which had cropped up in (for example) the MBIE petrol market study and in the Commission's own Z / Chevron decision. The answer to that is in para 7.97 of today's report, where the Commission says coordination is still a risk, but one that will be made harder (and any effects would be less) if the proposed wholesale market gets up and running:
most of the market features that made retail markets vulnerable to tacit  coordination when we considered the Z/Chevron merger in 2015/16 remain today although some market features have changed to make the markets more vulnerable to tacit coordination and others less so. We consider that retail fuel markets are vulnerable to some level of tacit coordination. We welcome Z Energy removing the MPP from its website. However, we consider that tacit coordination has been and may remain at least a contributing factor to the margins that we observe. We consider that measures to improve competition at wholesale and retail levels of the fuel supply chain, opening up those markets to new suppliers, will reduce their vulnerability to accommodating behaviour as well the potential effect of any such behaviour that does occur.
Out of vanity I looked up what had happened to my own little submission on the draft: I'd said that a chart showing New Zealand with amongst the world's highest post-tax petrol prices should have been on a purchasing power parity basis, rather than at market exchange rates, since market rates at one point in time can wobble all over the place, and what looks expensive in New Zealand today might look cheap tomorrow. I'll call it a draw: at 3.88-89 the Commission agrees that a point-in-time comparison isn't the best, and they've included longer-term paths which show our petrol prices are indeed among the developed world's most expensive (possibly for good reason, eg transport costs to a small isolated country), but the Commission remains wedded to spot rates. Over longer periods the Commission says spot rates will average out the volatility.

The other thing to take away is that we've now seen the first final output from the new market studies powers. Self-evidently, despite the critics and sceptics, the sky has not fallen. It's been done at reasonable cost, in reasonable time, with a good degree of balance - in the media presentation, the chair Anna Rawlings pointed out a range of consumer-benefiting innovations in the petrol business, for example - and with sensible-looking recommendations tailored to the diagnosis. Good day's work all round.

Who'll be next, I wonder? The goss has been that the government in principle recognises that the Commission can initiate its own studies (s50 of the Act) but in practice will fund only one a year, and will be picking another one toot sweet to pre-empt which one it'll be. I've heard rumours, but let's not spoil anyone's Christmas.

Friday, 29 November 2019

The good old days. Not

Marilyn Waring's interesting memoir The Political Years is an eye-opener on New Zealand in the late 1970s and early 1980s. While she has a particular perspective to emphasise, there's no doubt that the casual sexism, racism and conservatism of the day that she recalls do not square with the "we've always been progressive since women got the vote in 1893" story we like to tell ourselves.

From an economic policy point of view, it's also a reminder to those who put 'Rogernomics' and 'Ruthanasia' in the 'awful neoliberalism experiment' basket that reform was needed. Even Waring, down the left end of the political spectrum, concludes (p46) that
Within just a few months [of first being elected in 1975], I was getting a picture of incredible inefficiencies. Tariff structures were a nightmare, and were still in hangover mode from the Second World War. Licensing was a mess: those who had import and transport licences ran small fiefdoms. Transportation regulations intended to protect the railways restricted truck movements without a special licence, adding significant costs. Vast amounts of primary production were subsidised. Far too much discretionary power rested in the hands of ministers. Certainly, that meant I might lobby for gains for my constituents, but the process needed a wholesale clean-out.
She gives examples (pp45-6) of the kind of lobbying involved: letters to ministers with "requests for relief of import duty on a sports cup for presentation at the local high school and for a licence to import woven woolen fabric for the Te Awamutu and District Pipe Band".

Mercifully most of that nonsense went overboard after trade liberalisations, but it's doubtful whether our chronic propensity for micromanagement is permanently buried at a crossroads with a stake through its heart. It's not that long ago that a government minister's approval was required for a Tourette's Syndrome sufferer to have access to a medical cannabis product. And in my own narrow neck of the woods, the Commerce Commission's "cease and desist" powers - designed to provide a timely interim stop to anti-competitive conduct until the substantive issues got litigated later - were so hedged about with preconditions and provisos that they were eventually abandoned as useless.

Another bad habit not fully kicked is unnecessary secrecy. In Waring's day, Robert Muldoon would not even share Treasury's analyses with his own MPs: on p256 she recounts how
Ruth Richardson, one of six new MPs in caucus [after the 1981 election], wasted no time in asking to see the Treasury reports on the state of the economy. Muldoon replied they were confidential, amd Hugh Templeton added that the secrecy gave Treasury the 'freedom to report'. The PM noted that the reports referred to high interest rates, devaluation, running down cash balances and internal liquidity under pressure. There was no cause for alarm, he said.
You can see why the Labour government of 1984-90 brought in the Public Finance Act to require a step change in transparency.

The same dubious "freedom to report" rationale was invoked to keep the proceedings of the Public Expenditure Committee secret. The Committee - which I'd guess was a forerunner of today's Finance and Expenditure Select Committee - was charged with "examining the Annual Reports and Accounts, and the Estimates of Expenditure, for every government ministry, department and agency" (p56), a highly important accountability role, especially given the limited other avenues at the time for scrutiny of the executive. Waring, appointed to the Committee and later its chair, questioned the secrecy and was told by the Clerk of the House (p56) that
Official papers prepared at the request of the Committee have always been regarded as confidential, and the assurance of confidentiality has been fundamental to the willingness of departments to supply frank and detailed examination.
We have, thankfully, largely moved on. But even today s9(2)(f)(iv) of our Official Information Act includes, as a valid reason for withholding information, "the withholding of the information is necessary to ... maintain the constitutional conventions for the time being which protect ... the confidentiality of advice tendered by Ministers of the Crown and officials" or under s9(2)(g)(i) to "maintain the effective conduct of public affairs through — (i) the free and frank expression of opinions by or between or to Ministers of the Crown or members of an organisation or officers and employees of any department or organisation in the course of their duty".

There may be genuine occasions when these confidentiality provisions need to apply, but a few minutes on Twitter will tell you that some entirely responsible and proper 'citizen journalists' will be wondering, after bumping heads with the OIA, exactly how far we've progressed from the Sir Humphrey Applebys of Waring's day.

Friday, 22 November 2019

RBB Economics draws a crowd

A record number of attendees braved the smoky air of Sydney yesterday to attend RBB Economics' ninth annual competition conference. If you're in the competition law trade and you haven't been, have a word with them: it's a good event. This year's was on the general theme, "What's next for competition law in Australia?"

We started off with the traditional opening keynote by Rod Sims, chair of the ACCC (his speech is here). As it happened two of his points - the potential role of consumer law in enhancing competition and productivity, and a potential need for strengthened merger laws - got developed in a lot more detail in later sessions. Like a lot of people in the competition game I've tended to relegate consumer law to poor cousin status, and (let's face it) largely on intellectual snobbery grounds: where's the challenge in reading an ad to see if it's misleading or deceptive, compared with the subtleties of economic theory? But Rod, and subsequent speakers, made a good fist of arguing that consumer law helps buttress the workings of workably competitive markets.

Jacqueline Downes, a partner at Allens, spoke in reply. The main points I took away were that the ACCC's concerns about merger laws not being effective in blocking anti-competitive mergers were not supported by the data: the few cases that go right through the courts and go against the ACCC are only a tiny unrepresentative fraction of mergers. The vast majority of potentially iffy ones get knocked back either by the firms' advisers, or in informal discussions with the ACCC. The system works. She also wondered about the number of market studies being undertaken (not that the ACCC has any choice about doing some of them) and their potential for politicised policy responses.

The next session was 'What would a new unfair trading prohibition look like?', led off by ACCC commissioner Sarah Court. She had recently changed her view and now thinks an 'unfair' trading prohibition would be a useful tool, in part because of recent difficulty in making the existing 'unconscionable conduct' offence stick: you'll find a good entry point to the Kobelt case that caused the grief here. In reply barrister Robert Yezerski also commented on the Aussie courts' struggle to get their heads around the statutory formulation of  'unconscionability' as opposed to the common law equitability jurisprudence they had learned at their elders' knees. In Robert's view, the key concept in the statutory formulation is, essentially, immorality - something that is so at odds with society's moral norms as to deserve condemnation.

Even if Kobelt fell over from a regulator's point of view (the financial regulator ASIC in that case, not the ACCC), it may have been one of those finely balanced facts-based cases that don't count for much in the longer-term. Which is just as well, as we in New Zealand will be looking to the Aussie jurisprudence when we adopt unconscionability, as we are now likely to do. As for bringing in 'unfair' in Australia, I could sympathise with Sarah's point that the wording would likely need to be linked to 'significant consumer harm', but I'm not sure (and I don't think the audience was either, going from the Q&A) that there is going to be any easy way of formulating a workably effective form of words.

After lunch we had 'Do we need to strengthen Australia's merger laws?'. Rod had felt that the courts were letting uncompetitive mergers through, partly because they were not properly taking into account how the post-merger commercial incentives changed  for the managers of the merged entity: he'd felt that the ACCC's submissions on changed incentives were being dismissed as speculative theorising. Jennifer Orr, principal economist in the ACCC's Economic Group, took a different line about arguably too-lax merger under-enforcement: she pointed to growing empirical evidence (in academic journals, mainly, and mostly US-focused) that industry concentration had been (wrongly) allowed to develop to the point that more powerful incumbents were anti-competitively enabled to raise price or give less. Had the prevailing 'Chicago School' approach to anti-trust missed something that older-fashioned analyses, which gave more weight to structural conditions like HHIs, had been more alert to?

In reply King & Wood Mallesons partner Lisa Huett and RBB Economics' own George Siolis pushed back. Lisa argued that "If it ain't broke, don't fix it", and provided the numbers to back Jacqueline Downes' earlier point about the vast majority of potentially problematic mergers getting flagged away. She wasn't enamoured either of the potential 'solutions' (like reversing the onus of proof, or introducing rebuttable presumptions of harm if say a proposed merger took an HHI over 2500). And she pointed out that in any event there had been a fair amount of other law reform (the 'effects' test for abuse of market power, 'concerted practices') to deal to any mischief a lax merger approval might have facilitated. George traversed the history of the evolution of anti-trust thinking which, for good reason, had arrived where it is today. He preferred that competition authorities should stay the course, use all the tools available to check for (say) potential post-merger coordination effects, and "get dirty", meaning immerse themselves fully in the facts of the case and the industry.

This session got the audience going. One chap bristled at the idea that merger parties should have to prove anything: the shoe should be on the other foot, and the ACCC should be positively required to prove harm, rather than hide behind a "not satisfied there wouldn't be" criterion. In general there was quite a bit of support for the idea that Type 2 errors (letting anti-competitive mergers through) aren't welcome, but equally (and for some in the audience, more importantly) Type 1 errors (blocking efficiency-improving mergers) weren't getting enough of a look-in.

Personally I was left in a bit of a quandary (maybe you are too), and said so in a question to the panel. On the one hand, I've been involved in mergers that went from 3 to 2: where, for example, the #2 and #3 players, merged, would make a more effective competitor to the #1 incumbent. I had no trouble sleeping at night afterwards, never mind what the post-merger HHI said. On the other hand you can't go around ignoring the evidence that Jennifer mentioned, either.

Even if you don't quite know what to think, though, one place you land is the need for post-merger reviews to see what is actually happening. In my notes I've written "ACCC not resourced, no powers" to do post-merger reviews: I can't remember whether one of the panellists said it, or someone mentioned it over coffee, or where it came from. But if so, it needs to be fixed, and the same applies to our own Commerce Commission (which in the past has had at least an indicative go at seeing how post-merger events played out). We need to know.

And so into the final session, 'How can the ACCC's competition concerns get more traction before Australian courts?'.

A Brit, a Scot and a Kiwi go into a bar ... aka Simon Bishop (RBB Economics), Dr Ruth Higgins SC, and Dr Mark Berry as they put the finishing touches to their thoughts on how to get traction in court on competition cases

One for the lawyers, but also some useful insights for those of us on the economics side of the house. Our own Mark Berry pointed to the value of the New Zealand 'hot tub' style of testing expert evidence and its ability to expose errors (on all sides of an argument). And he wondered if New Zealand and Australia were actually moving things along too quickly, by comparison with the times taken to rule on merger clearances or authorisation overseas: are we missing a chance to look deeper and harder at the issues involved? Ruth Higgins emphasised the primacy of the facts, quoting Thomas Huxley's "The great tragedy of science - the slaying of a beautiful hypothesis by an ugly fact", and argued that economic arguments are better when they integrate the apparently inconvenient facts. She also said that the big contribution from economists can come from establishing an overall framework within which the court can advance, rather than leaping to judgements themselves. And RBB's Simon Bishop said that the ACCC shouldn't necessarily be dismayed by the odd loss in court: it is not compelling evidence of wider underenforcement (they are always the marginal could-go-either-way cases), and echoed Ruth's points about economists showing restraint, focus, and a respect and care for the facts.

In panel discussion afterwards, there was also general agreement on what economists shouldn't do. There was short shrift given to the economists who can see no weaknesses in their arguments, and no sympathy for spinners of over-complex theories which they can't explain to decisionmakers in a persuasive way. But none of us are in those boxes, are we?

Thursday, 21 November 2019

Small mystery solved

Here is the table from the latest Monetary Policy Statement that shows the Reserve Bank's projection for the official cash rate (the OCR).

There's something odd. If you look at the projection for March '20 through to June '21, you see that the OCR is projected to be 0.9% for six quarters in a row. But how can that be? The RBNZ won't be setting an 0.9% OCR: it might set 0.75%, it might set 1.0%, but it won't be setting 0.9%.

If you're a monetary policy tragic, maybe you already know the answer. But I didn't. So I asked the RBNZ what was going on. And the very helpful Chris McDonald, manager of forecasting at the Bank, enlightened me.

The projection is actually what the Bank thinks, via its modelling, is what the OCR needs to be to achieve 2% inflation. The Monetary Policy Committee will make its own tactical OCR call at each policy decision point, and you'd imagine it wouldn't be a million miles away from the level the Bank's models say is the right level, but the projected path isn't actually a stab today at what those decisions will be.

I gather I'm not the first to wonder what that 'projection' meant. Future tables may well include some footnoted explanation.

Wednesday, 13 November 2019

Good call

We've just had the Reserve Bank Monetary Policy Statement. In the pre-MPS poll that Daniel Dunkley ran for the Good Returns website I'd reckoned that it was a 50:50 call, but on balance (and in the minority who lucked into making a correct forecast) I leaned towards leaving the OCR at 1%. It's the right decision.

I'd been worried that another cut would risk the same counterproductive effect on consumer and business confidence that seems to have followed the Reserve Bank of Australia's latest cut to their cash rate - "if the RBA thinks things are bad, I'd better panic too" - and there were other factors suggesting doing nothing. Local business activity seemed to have bottomed out in the latest ANZ business survey; it could be a good idea to leave some monetary policy ammo in the locker rather than creeping ever closer to zero interest rates; and in any event in current global geopolitical conditions it might pay to wait and see how things unfold.

Plus domestic non-tradables inflation had gone over 3% in the September CPI (as shown below in blue, with the 2010 GST hike taken out): I like to look at it ex housing and housing utilities (in red), but either way it looks as if local inflation is already heading towards where the Bank would like it to go, and has been for two years. So sit on your hands, I thought, made sense for the Bank.

In responding to the survey I forgot to add that the RBNZ itself thought, at its August MPS, that inflation would get back to 2% by late 2021 with the OCR effectively unchanged. The forecast OCR track in August's MPS isn't easy to interpret - there are, for example, three successive quarters where the OCR is shown as 0.9%, and if you can explain the OCR track that gives rise to that pattern you're smarter than I am - but essentially the RBNZ thought we looked to be headed for 2% inflation last time without doing anything much extra.

Since then, two other things have occurred to me. One is that I wonder whether the distortions involved in driving inflation up from its current 1.5% to the target 2.0% are worth it. And the other is whether easing monetary policy further (and in Oz they now appear to be contemplating unconventional tactics as well - 'Reserve Bank gets the money printers ready') would be effective: what if we ventured even further into unknown territory and we still couldn't get a 2% inflation outcome? What would be the point?

On the distortions, I'm leaning towards the view that there is precious little effective difference between a 1.5% and a 2% inflation outcome: both are low enough not to distort economic decisions, but both are high enough to allow that little bit of lubrication that allows relative price changes to take place without some prices having to be cut in absolute terms. I wouldn't therefore invest a lot of effort in pushing 1.5% to 2%, and I note that the Monetary Policy Committee's 'remit' says "a focus on keeping future inflation near the 2 percent mid-point" not "the focus" (my emphasis).

So there's little upside benefit from straining harder for 2%, but there are costs. Current settings are already undermining, for example, much of the rationale for retail investors to invest in term deposits, and market commentary suggests that much of the recent sharemarket price gains reflect Mr and Mrs Bloggs taking money out of the bank and plonking it in dividend-paying equities. I can't say I'm hugely enthused about the incentives on the other side of the ledger, either, for corporate treasurers to tank up on artificially cheap debt.

There has to be some risk of inflating asset or debt bubbles. On Standard & Poor's calculations, the S&P / NZX 50 index at the end of October was trading at 24.8 times expected earnings. That's even more expensive than the U.S. market. Looking at the MPC's remit again, it says at 2(b)(i) that "the MPC shall ... have regard to the efficiency and soundness of the financial system": have any members started asking questions about the allocative efficiency consequences of where we are?

Even if that's a hard question to answer, I think it's pretty clear that whatever the distortionary costs are, they're likely more than deploying fiscal policy would involve. There's plenty of efficiency-improving infrastructural investment (including building the human capital skills of the unemployed and underemployed) that could push on our output gap and generate the desired inflationary pressure.

And can we even be sure, given the state of the rest of the world, that there is any sensible setting for local monetary policy that would actually deliver the 2% target? By sensible I mean a setting that does not have the exchange rate a long way away from purchasing power parity, or interest rates at very high or very low levels in real terms. The assumption has been that all we have to do is push the official cash rate to some non-absurd position on the dial, and 2% inflation will follow in due course. As the old DB ads might say, is that right?

The reason I ask that question is that I think there is some risk of forgetting the fact that we only have a limited control of our own monetary policy destiny. As Friedman's 'trinity' put it, you can have two, and only two, out of the following three: control of your own interest rates, control of your own exchange rate, and control of cross-border money flows. We've opted for our own interest rates, and free capital flows: the exchange rate which we can't control will be whatever it will be. What guarantee is there that the autonomous exchange rate will settle at a level compatible with 2% local inflation? None at all.

Chuck in the fact that we have only partial control of our own interest rates in the first place - we're effectively squeezed into the territory constrained by the zero lower bound and other countries' currently ultra-easy monetary policy settings - and it may well be that our limited room for interest rate manoeuvre (combined with that free-ranging exchange rate) isn't compatible with a 2% outcome. There's room to be sceptical about pushing ever harder on a piece of string.

Friday, 8 November 2019


I don't understand WACC, the Weighted Average Cost of Capital.

No, don't look at me like that - I do understand the mechanics of the thing, and have had my fair share of meetings pinning down appropriate beta comparators, the extent of the market risk premium, Brennan-Lally tax adjustment, and due allowance for the curvature of the earth.

No, what I mean is, I don't understand WACC as a regulatory concept.

Bear with me. I can see WACC as an accounting concept. A firm's balance sheet is made up of  equity and debt, and each comes with a cost: what you have to pay the owner shareholders to invest their risk capital, and what you have to pay lenders to lend. And the overall cost of the whole balance sheet is the weighted average of the two costs, WACC. All good.

But you'll often see a regulated firm described as "earning its WACC" (with subtext, "and no more"). No, it isn't. The firm is earning its return on equity. Its lenders are earning their return on debt. Neither of them is earning WACC.

In fact I can't see why (with one potential exception) regulators take the interest they do in the cost of a firm's debt. The standard regulatory equation in rate of return regulation (certainly as it's been implemented in New Zealand under Part IV of the Commerce Act) is
Allowed revenue minus (efficient) opex minus (efficient) investment minus (economic) depreciation = allowed interest costs plus allowed return on equity
But why do regulators give a fig about the interest costs? They're a cost that the regulated firm has every incentive to minimise: it's paid away to the third-party suppliers of credit, not a return to the firm itself.

The standard formulation makes little sense to me. Why shouldn't the equation be squarely focused on the return to equity:
Allowed revenue minus (efficient) opex minus (efficient) investment minus (economic) depreciation minus actual interest costs = allowed return on equity (ROE)
It's more logical: the only return that matters in a market economy is the ROE. And the rejigged version of the equation is both simpler and less restrictive.

It's simpler, because at the moment rate of return regulation goes through a whole process determining the "appropriate" cost of borrowing for the regulated entity - typically by establishing what a company of similar credit standing in that industry would pay, for debt of a maturity equal to the period of regulation (often five years). It would be simpler just to write down what it actually paid, not mess about guessing what a firm just like it might have paid.

It's less restrictive, because it would not risk imposing unnecessary and possibly inefficient constraints on the maturity of the debt raised. Right now, there'll be many a corporate treasurer who reckons that we are at a cyclical low point in borrowing costs, and will be keen to lock in currently attractive prices for as long as possible. If they're right, paying a bit more than you'd pay today for five year debt in order to issue ten or fifteen year debt could well work out cheaper - maybe a lot cheaper - in the long run, benefiting consumers. Allowing the regulated entity only the five year cost could be counterproductive.

The current formulation also potentially inhibits other efficient approaches to borrowing. There are good rationales, for example, to match the maturity of debt to the working maturity of the assets they finance. In regulated industries, the assets tend to be very long lived indeed. What is the logic of not compensating the regulated entity for the actual cost of doing the sensible thing?

And many treasurers will want to avoid a concentration of debt maturities falling due around the same time: you don't want to be going around the money markets with a large begging bowl if it happens to be in the middle of the next GFC.  Rather, a prudent treasurer will have a mix of maturities: on average they might approximate to the five year maturity the regulator will allow, but equally they mightn't. Why impose a penalty (or subsidy) on what a prudent maturity mix actually costs?

A purely ROE-focused approach, one which drops determining an "appropriate" cost of debt, is a better way to go as a general rule, but I mentioned one possible exception. That's where the debt providers are associated parties. Let's suppose the regulated entity is owned by a private equity company. It could fund its "debt" from a financing vehicle in the group, and stream above-market "interest" payments effectively to itself. But in normal circumstances most companies borrow at arm's length from banks and the capital markets. A quick check that its funders are not interlinked, and in most cases you'd be done.

There is one aspect of debt that regulators should properly monitor, and that is excessive leverage. With an effectively guaranteed income, there could well be a moral hazard risk of the regulatee putting in $10 of equity and a squillion dollars of debt, juicing the ROE if all goes well and lumbering the bondholders and any operator-of-last resort if it doesn't. A maximum leverage ratio, or as a more market-oriented option, a minimum investment grade debt rating, might be a useful regulatory adjunct. But beyond that, leave it to the corporate treasurer to figure out the cheapest financing bundle.

A final benefit of an exclusively ROE-based approach is stopping some game-playing. Quoting the WACC that the regulator has allowed can be deceptive. The regulator can say, "See how effective we've been? We only allowed them 6%!". The regulatee can play the same game: "See how unfair they've been? They only allowed us 6%!". In both cases - particularly at today's interest rates - the WACC is low because the debt component is low. The regulator may not in fact be especially effective; the regulatee may not in fact be hard done by. It's only the ROE that can answer those questions.

Thursday, 31 October 2019

Future plans, past tragedies

I'm no fan of regional development as a policy priority - a remote sparsely populated country of five million people ought to be putting its energies into agglomeration benefits, not into dispersion inefficiencies - and still less of how we're executing it. But that said, I'm not sorry Dunedin's the latest winner drawn from the Lucky Dip bag ('Dunedin projects secure multimillion-dollar Provincial Growth Fund investment'). It would be one of my agglomeration corridors anyway, plus it's a surprisingly interesting place, as I've posted before ('On holiday? In DUNEDIN??').

Over the Labour Day weekend we went to the Dunedin Art Gallery which was hosting a near-definitive exhibition of Frances Hodgkins. We explored the thriving café scene - particularly good coffee at Heritage, and lovely raspberry and coconut cake at Perc - and had fine Chinese food at Papa Chou's. In Dunedin you have to visit the University Book Shop, where I bought Binyamin Appelbaum's The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society (purchases are not endorsements), followed by a fossick in the Hard to Find bookshop, where I added to my First World War collection with John Terraine's 1963 military biography, Douglas Haig: The educated soldier.

The Great War kept intruding. Just to remind you of the seismic scale of the war for New Zealand, in the foyer of the wonderful Railway Station I read the plaque commemorating the Dunedin staff of New Zealand Rail who died in the war. Guess how many, just from one company's staff, in one city*. Or see the West Taieri war memorial across the road from the deservedly popular Wobbly Goat café in Outram (try the pinwheels), with the desperately sad pattern of multiple names from the same families. On the one small monument are three Sprotts, two McLeods, two Whites.

In the middle of nowhere we detoured from a day's fishing at Lake Mahinerangi to the Old Waipori cemetery, where there is a memorial (pictured below, with his image from Discovering Anzacs) to Wilfred Victor Knight, the first reported New Zealand casualty at Gallipoli. Knight came from Waipori, since submerged by the hydro lake, went to Otago Boys High, and was working on the Sydney trams when war was declared on August 4 1914. He signed up on August 22, made his will in his pay book on April 25 1915, and died probably on April 27. He was 25.

* 56. Bear in mind that the population of New Zealand was only one million at the time. Multiply by five to get an idea of a proportionate loss today.

Wednesday, 30 October 2019

How competition deals to wage discrimination

"Increased competition in the business marketplace", I wrote in a post last year ('How competition benefits women's pay'), "is one of those ideas that neatly hit both equity and efficiency objectives. The equity outcome is obvious: the efficiency payback is that output rises as the previously underutilised female workforce gets to pull its proper weight. And what's true of women is very likely also true of other groups that would otherwise face relatively uphill going in the labour market".

And as it happens, along comes a bit of evidence that my supposition about "other groups" is indeed correct, and it comes from four researchers in Belgium. Their 'Wage Discrimination Based on the Country of Birth: Do Tenure and Product Market Competition Matter?' examined wage discrimination in Belgium against immigrants, and was able to use a bunch of linked employer-employee datasets to uncover what was going on. Among other things they looked at whether the degree of competition in the markets Belgian businesses operate in made any difference to the degree of wage discrimination immigrants face.

Overall, after controlling for a whole battery of firm and employee characteristics, immigrants in Belgium earn 6.1% less than EU-15 natives (the EU-15 is the old core EU before Austria, Finland, Sweden and, later, a swathe of largely eastern European countries joined). Asians (which in this context means, I think, the likes of Indians and Pakistanis) fare worst, with wages 17.5% lower than natives, and east Europeans do badly, too, with wages 12.0% lower.

But what happens if you look at the degree of competition the employing businesses face? In theory, or at least in the well-known theory associated with Gary Becker, discriminating employers don't get to indulge their prejudices in strongly competitive markets. If they try, they'll get eaten by the more efficient companies who hire solely on productivity.

The researchers tried four different measures of competition, and compared wage differentials in the most competitive top-third on each measure versus the wage differentials in the medium to low competition businesses. The result?
the magnitude of wage discrimination against migrant workers decreases and becomes generally non-significant when firms operate in highly competitive product market environments. These findings are robust to the use of four different product market competition indicators and are in line with Becker’s theory, according to which discrimination is present only in firms operating in lower product market competition environments (p20)
Apparently, there isn't a lot of other research knocking around about the beneficial impact of strong product market competition on employers' ability to wage discriminate, but what there is points the same way as this Belgian study. As the researchers put it
Peoples and Saunders (1993) and Peoples and Talley (2001) have studied the impact of the deregulation of the trucking market and of the public-transit bus sector privatization, respectively, on wage discrimination against black truck/bus drivers in the US. They concluded that the increased competition resulting from market deregulation and privatization significantly lowered the wage gap between white and black truck/bus drivers. More recently, Ohlert et al. (2016) studied wage discrimination against migrants in Germany in relation to the level of competition in the product market ... the authors found that increased competition in the product market is likely to decrease the unexplained wage differentials between native and migrant workers (p7)
It is understandable that people concerned about wage discrimination might see markets as the unregulated problem, rather than the efficient answer. But in this case a competitive market is your friend. The more employers are forced by vigorous product competition between them to hire as efficiently as the other guys, the more the profit motive of the employers gets the result you want: their own self-interest will lead them to hire on ability, not on surface attributes.

Rings a bell, doesn't it*.

*"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages". 

Thursday, 17 October 2019


I've just finished John Gibney's A Short History of Ireland, 1500-2000 (Yale University Press, 2017). Near the end (pp236-7) he recounts how
The Republic of Ireland in the 1980s was a state gripped by a recession, burdened by a huge national debt, and ravaged yet again by emigration on a huge scale: more than sixty-one thousand people left Ireland in 1988 alone, with two-thirds of them departing for the United Kingdom ... The spectacular economic growth of the 1990s saw emigration, a traditional litmus test of Irish economic performance, reverse; Ireland instead began to receive immigrants ... The upsurge in the southern economy had an impact on the emigrant flow: young Irish people were staying at home during the boom, as there were now jobs to be had
So, how do we fare on that "traditional litmus test"? Here's the annual net flow of New Zealand citizens over the past 40 years or so. Over the period we lost very nearly 800,000 people, nearly all to Australia.

New Zealand's a great place from many perspectives, but let's not kid ourselves. We've been hopeless at closing the gap in the standard of living between here and Australia, which is the big driver behind that loss of 800,000 Kiwis. When it comes to the final verdict on our economic performance, people have voted with their feet. And how many people really believe that, under this government or its recent predecessors, there's been an urgency to turn it around?

Solutions in search of a problem?

Yesterday evening in Wellington the Law and Economics Association of New Zealand (LEANZ, here's its spiffy new website), put on its latest seminar, 'Regulating Big Tech: Key Findings from the ACCC’s Groundbreaking Digital Platforms Inquiry', presented by Morag Bond, Joint General Manager of the ACCC's Digital Platforms Branch. There'd been an earlier one in Auckland at lunchtime.

Morag (below) did a fine job, in front of a good crowd. That was partly down to the intrinsic appeal of the topic, and partly down to coordination between LEANZ, the New Zealand Association of Economists, and the Competition Law and Policy Institute of New Zealand, each of whom gave the heads up to their memberships. Nice one. And hat tip to Russell McVeagh Wellington, who generously hosted.

Morag's slides aren't up yet, so in the meantime, if you're not already familiar with it, here's the ACCC's page on the inquiry, which includes the press release, an executive summary, and the whole 619-page inquiry itself. If videos are your thing, here's the 37 minute press conference on publication day.

Overall, my feeling remains where it was when this territory was traversed at this year's ComCom conference: quite a lot of smoke, no clear fires. There are, to be sure, some issues that need investigation. One that should indeed bother merger regulators, for example, is the big incumbent platforms buying up fledgling businesses that might have morphed into credible competitors. It is of course (as Morag noted) open to an ACCC or ComCom to make that case now under our existing legislation, but the inquiry said it might help if the law was made more explicit. It recommended that
Section 50(3) of the Competition and Consumer Act 2010 (CCA) be amended to incorporate the following additional merger factors:
(j) the likelihood that the acquisition would result in the removal from the market of a potential competitor;
(k) the nature and significance of assets, including data and technology, being acquired directly or through the body corporate
Maybe that might help to stiffen the odd judge's spine, but the reality is that a rewording doesn't ease the underlying difficulty, which remains highly vulnerable to both Type 1 error (stopping the purchase of a non-challenger) and Type 2 (allowing the purchase of a real threat). You can see how Type 1 errors might happen when every venture capitalist behind a start-up is puffing to new investors that it is The Next Big Thing. And you might well threaten the pipeline of innovation if inventors of useful complementary technology are wrongly prevented from cashing out to the guys with the big chequebooks.

In dynamic industries, as a general principle it's probably best to do as little as needed. It's fine to ping clearly anti-competitive practices ("thou shalt have no browser but My browser") if you come across them, and Morag said the ACCC has five investigations underway. But beyond that, you are dealing with a high-speed industry with strong network effects, where bigness is almost inevitable and the most likely playbook is a Schumpeterian succession of temporarily highly-profitable near-monopolies. It's true, as Morag said, that Facebook is being somewhat disingenuous when it argues that someone might topple Facebook as readily as Facebook toppled MySpace, but that's the longer-term way to bet. If you're my age, you once wrote in WordStar and worked with data in Lotus 1-2-3: where are they now?

Sit back and let it evolve is likely to be a good default competition policy strategy from another perspective. If there are real issues, for example genuine consumer concerns over privacy or data sharing - and in my view it's not yet proven that enough consumers care about the current bargain they've struck -  I wouldn't underestimate the ability of markets to deal to them. Worried about the outfits tracking your every online move? Instal Ghostery: as I write it's telling me there are no trackers following the ACCC site, four tracking ComCom's, and 13 tracking mine. Hah! Worried about the trustworthiness of a site? Instal Web of Trust. And even the incumbents are beginning to realise that it's in their own longer-term interest not to push their luck: have a look, for example, at 'How to Set Your Google Data to Self-Destruct'.

The ACCC inquiry was required in its terms of reference to consider "the impact of platform service providers on the level of choice and quality of news and journalistic content to consumers", and the upshot was that the Australian public allegedly risks losing some worthwhile public interest coverage of (for example) local politics. This is because, as shown below in a chart from the Executive Summary,  online advertising has eaten the old media's classified advertising revenue, which means they can no longer afford proper "local beat" journalists and are forced to recycle cheaper celebrity gossip, clickbait, and grief porn (my words, not Morag's or the inquiry's).

But I wonder if citizen journalism and the rise of "digital natives" - media that have only ever existed online - are a better market-oriented answer than the taxpayer subsidies the ACCC recommended for coverage of local courts and local politics. As Morag mentioned, the barriers to entry for new media have dropped enormously, enabling that "long tail" of small pockets of interest to be accommodated. Even in relatively niche areas, all of us now read expert, informed, committed media, from all ends of the spectra of opinion, that didn't exist a few years back. If local politics matters to people, and it does to some, it's highly likely someone will rise to the challenge unprompted.

Maybe I'm wrong, the North Shore Times will fall over, and the deliberations of the Hibiscus and Bays Local Board will be lost to posterity. I doubt it, but yet again, the better course is to see how it plays out before jumping to 'solutions'.

Friday, 11 October 2019

In the eye of the beholder

There's been a lot of focus on what looks like a large $7.5 billion fiscal surplus in the fiscal year just ended. Part of it, as Treasury explained in the financial statements for the year, is due to various one-offs, which in a nerdy fiscal policy wonk sort of way, I'd thought I'd have a look at.

I didn't come across anything earth-shattering, although personally - and this'll show why accountancy is not my forte - I wouldn't have put any of the revaluation gains arising from a change in how the rail network is valued into the surplus, which is, after all, the "operating balance excluding gains and losses". But as explained on p15, the surplus includes $2.6 billion of "Reversal of prior year impairments that impacts OBEGAL". Never mind.

Along the way I came across something interesting, and it's this. Down the back of the statements you can see the value placed on the government's ownership interest in three electricity generators, Genesis, Mercury and Meridian. The Auditor-General's audit report says (p35) that "As outlined in Note 16, the electricity generation assets, which are at least 51% owned by the Government, are valued at $17.2 billion at 30 June 2019. The valuation of these assets is carried out by specialist valuers because of the complexity and significance of the assumptions about the future prices of electricity, the generation costs, and the generation volumes that these assets will create".

Note 16 shows that the specialists' valuations are based on the net present value of future earnings (give or take), and that's fine. But then I wondered, why don't the accounts just use the market price? Maybe modern accounting policy doesn't support the approach, though I seem to remember that post the GFC, there was a move to have more investments and liabilities "marked to market", i.e. valued at what they'd actually fetch rather than on some notional basis that might flatter the real-life value of investments or minimise the real-world cost of liabilities.

So here are the valuations at market price as well as the valuations on the government's books.

The valuations on the fiscal books are (unless I've got my calculations wrong) uniformly higher than what the financial markets say. There's nothing sinister about that: I'd guess the financial accounts are required by the accounting standards framework to follow some acceptable valuation methodology, and this is how the cards have fallen.

But it's an interesting outcome. It's intriguing that the markets don't think the generators are worth what the valuers' approach shows. Now, it may be that the answer to any valuation question depends on the context of the question: a valuation to establish a regulatory asset base, for example, may have its own imperatives. But even so, you look at the two sets of numbers, and you're tempted to ask, who's right? What does one approach know that the other doesn't?.

Friday, 4 October 2019

Good stuff

Little did I know, when I got antsy the other day about where the electricity price review had got to, that Dr Megan Woods, the Minister of Energy and Resources, was only days away from publishing the review's final report and responding to it (all the relevant documents - government decision, Cabinet minute, final review report, and the earlier options paper - are here).

The review's got extensive media coverage so no need to reinvent the wheel here - in particular there's an excellent piece by Stuff's Tom Pullar-Strecker, 'A run down on the Government power plan', that ticks all the what-you-need-to-know boxes.

Overall the review team and the government have done a fine job. I don't find myself quibbling with much, even though some of the recommendations looked a bit counterintuitive at first. Banning "win back" counter-offers from incumbents - preventing them competing back, as it were - at first blush doesn't look supportive of the competitive process, but when you think about it a bit more it is necessary for competition to work at all in this area (the thought had crossed our minds when we made our switch). Similarly the ban on prompt payment discounts, which aren't the reward to consumers they appear but effectively act as regressive late payment charges on financially stressed households. The abolition of low fixed charge plans is in the same bucket: sounded like a good pro-consumer idea, turned out (among other things) to "unintentionally shift costs to households with low incomes and high electricity consumption" (final report, p62).

Increasing the ability of electricity retailers to hedge against price volatility is an especially useful idea. Normally both buyers and sellers of commodities like energy have a joint interest in a functional futures market ( a 'contract market' in the sector terminology): they both see value in price predictability. Less so in our energy sector, when the availability of price insurance helps challenger retailers compete more effectively with the gentailers' own retail arms. Effective retail competition needs an effective hedging mechanism, and if market-making in a contract market needs to be imposed on generators, so be it.

Both regulators in this area - the Electricity Authority and the Commerce Commission - get some raps on the knuckles, particularly for lack of consumer engagement. The final report said (p12)
A frequent complaint we heard from consumers was that neither the Commerce Commission nor the Electricity Authority – but particularly the latter – listened to, or took account of, their views. Consumers need to see regulators making a concerted effort to understand their points of view. Nothing beats meeting people in person. It was disappointing, therefore, that neither regulator attended the stakeholder meeting in Te Kuiti convened by The Lines Company at our request. Both would have benefited from hearing residents’ stories, as well as understanding their expectations of regulators – the chief of which is that they focus on consumers’ long-term interests.
Oops. It hasn't helped that on several other fronts progress has been too slow. It's understandable that the Minister is now getting impatient. On the contract market, for example she said that "I want to be assured the fragility previously observed in the wholesale market at times of stress is not repeated in future, and I will make it clear I do not want to wait for a “better solution” that might never be found" (decision paper, para 96). She noted that "The Electricity Authority has been reviewing transmission pricing for more than ten years" (para 102). And she's prepared to bypass the Authority if it doesn't get on with the review recommendations (see paras 34-5).

The Authority, and the Commission, are independent agencies as the Cabinet decision recognises, and can't be told to jump to ministerial whim, and in general I'm no fan of expanding ministerial discretion in an already micromanaged and over-politicised economy. But our policymaking and regulatory processes are too slow, and on this occasion a bit of holding feet to the fire doesn't seem amiss.

Two final points. The proposed new Consumer Advocacy Council for the electricity sector could, as the decision says (para 40) "potentially be extended to cover gas, telecommunications and other utility services ... This is because consumers of those services, which are increasingly bundled with electricity, are also likely to lack an effective voice". It's not just the consumer voice issue: it's the sit there and be ripped off consumer inertia issue, too, which is liable to be just as prevalent in those sectors and which, to be honest, no country has really got its head around. The Brits and the Aussies have been equally befuddled ('Have we got the same problems?'). An early task for the Council should be to reach for some industrial strength behavioural economics research.

And finally, as both the review and the government's response acknowledge, the energy hardship some households are experiencing isn't so much down to locally high electricity prices - the review said (p1) that "residential prices on average ranked 10th lowest among 35 OECD countries in 2017" - as locally inadequate incomes to pay them. It would be nice if this, and successor, governments showed the same urgency to get on with raising living standards as they have in reforming the electricity business ('Are we serious?').

Tuesday, 1 October 2019

Are we serious?

Every couple of years the OECD updates its Going For Growth reports, which are meant to be its best policy advice to governments on how to raise living standards. Or at least that's how it used to be: the focus up to 2017 was exclusively on productivity and incomes, but in 2017 it widened to include social inclusiveness and, in this latest iteration, brought in environmental sustainability as well. Worthy causes, to be sure, and there are of course interlinkages with productivity and incomes, but I'd have preferred if they'd kept Going For Growth as a productivity instruction manual. Especially for its New Zealand readership, given that our low productivity performance is something we self-evidently could use a bit of focused help with.

Not, I suspect, that Going For Growth has much of a New Zealand readership. Neither the 2017 version ('Take advice? Moi?') nor this latest one appears to have got much mainstream or social media attention. So if you're not one of the select policy tragics who've had a look, here are the OECD's five priorities for New Zealand (if this whets your appetite here's the full country report):
  1. Reduce barriers to FDI [foreign direct investment] and trade and to competition in network sectors. Non-transparent screening, barriers to trade facilitation and competition in network sectors deter investment and hinder the competitiveness of downstream firms [in this bit they mean the 'barriers' to extend to 'barriers to competition']
  2. Improve housing policies. Restrictive land-use policies reduce housing supply responsiveness to demand, accentuating price increases when demand rises
  3. Reduce child poverty. Child poverty is higher than in the top performing countries. It has adverse effects on children’s health and development.
  4. Reduce educational underachievement among specific groups. Students from Māori, Pasifika and vulnerable socio-economic backgrounds have much poorer education outcomes than others
  5. Raise effectiveness of R&D support. Relatively low public funding of business R&D contributes to below average R&D intensity
Four of these were on the 2017 priority list, too (number 3 is a new one reflecting the new focus on social inclusiveness), and the implementation record since 2017 has been distinctly patchy. There was no action taken at all on number 1, for example. Number 2 continues to be a national scandal, and I see in today's DomPost that it's not just Auckland, either: "Wellington City has consented fewer buildings this year, its waiting list for social housing has spiked sharply, and its rental crisis is on par with Auckland's". The only achievement the OECD records on number 4 is the Sir Humphrey Appleby "appointment of a taskforce". Number 5 is the one recommendation where there has been anything like a respectable response: the current government has, for example, run with the recommendation to "make the tax credit refundable so that firms that are not yet profitable can benefit".

It's hard to see why we haven't followed up what looks like a reasonably uncontroversial list of targets and tactics (although the anti-trade nutters may jib at #1). They're almost certainly not enough to make huge inroads into our productivity problems, but they'd be a good start, and a couple of them (#3 and #4 in particular) would be worth doing in their own right, even if they didn't have spillover productivity effects on the talents of our workforce.

There is one possible explanation, albeit a depressing one. In the economics trade we call it "revealed preference": you can figure out what people value from what they actually do.  It could well be that successive central and local governments haven't put the priority they claimed on higher living standards. When it's come to having the national incomes to pay for modern healthcare, or rationing the expensive drugs, they've preferred rationing. When it's come to a choice between wealthy homeowners having an unobstructed view of a volcano, and poor families with young children sleeping in cars, they've been with the homeowners.

It would be nice of the OECD's 2021 scorecard showed a better rise to our livings standards challenge. But I won't be holding my breath.

Monday, 30 September 2019

Did it work?

A year ago, in the interest of making competition work, we switched our electricity supplier ('We take the plunge'). And now that we've got a year of bills from our NewCo, we can compare them with what our OldCo used to charge. Here's how it worked out.

Pretty good, eh? So there's not a lot of reason for you to be one of the 400,000 to 750,000 people who've never switched, is there? Off you go to Consumer New Zealand's Powerswitch or the Electricity Authority's What's My Number. Make the competitive process work for you.

Incidentally, that estimate of the very large number of people who've never switched came from the Electricity Price Review. As its website says, "Please note: the review delivered its final report to the Minister of Energy and Resources on 29 May 2019. The timing of its public release has yet to be determined".

Good policy development shouldn't be precipitate, but I'm leaning towards the view that four months is enough thinking time given that a range of options were canvassed and consulted on during the review process (if you've forgotten them, head to 'At A Glance', which is p3 here). It's getting time to see the report and the government's response.

Tuesday, 24 September 2019


Last weekend we had the 30th annual workshop of the Competition Law and Policy Institute of New Zealand, and to mark the CLPINZ anniversary we went back to Christchurch where it had all started (on August 11-12, 1990). We even had two of the original attendees (John Land and Alan Lear). Back then the inaugural workshop had spent a fair deal of its time on s36, abuse of market power - plus ça change, eh? Thirty years on we're almost on the cusp of junking our ineffective s36 and going the Aussie route, but we're not quite there yet.

The keynote speaker via video link was David Evans, chairman of Global Economics Group and co-author (with Richard Schmalensee) of the excellent Matchmakers: the New Economics of Multisided Platforms, which is a very good guide to two (or more) sided platforms. His topic was "The role of market definition in assessing anti-competitive harm in Ohio v. American Express", and his conclusion was that the US Supreme Court got it right in finding for Amex.

It was a top-notch presentation, but not everyone was convinced by the conclusion. I hadn't been, either, when I first encountered the Amex case. Amex was trying to defend the practice of "anti steering": shops who accepted Amex cards were contractually prevented from suggesting that customers taking out their Amex cards should or could use competitor cards like Mastercard and Visa (which were cheaper for the shop to accept). As blatant an anti-competitive contractual provision as you could find, you might think, and initially I thought so, too. But I changed my mind ('Two sides to the story') and I'm now with Evans.

From discussions at the workshop, however, some of my colleagues think it's a mistaken ruling, and let's not forget the court itself had split 5 - 4. One attendee sent me 'Why credit-card rules are anticompetitive', and you can find the formal economics here. And there are others who think that between Amex and the AT&T / Time Warner merger, the US Supreme Court has lost the pro-competitive plot: see for example 'Policy Failure: The Role of "Economics" in AT&T - Time Warner and American Express'.

I won't reprise the whole workshop: copies of the presentations will be going up on the website for members (you are a member, aren't you). I'd particularly recommend Professor Martin Richardson's paper on 'The role of lay members in court', which has a lot of useful stuff on what makes for a good expert economist witness. In the interim, if you're desperate for Evans' paper, you can find a version here.

Assorted takeaway thoughts:

- Chris Whelan from RBB Economics presented on 'Cutting edge tools in economics' and mentioned the upward pricing pressure arithmetic of vertical mergers, bargaining theory, machine learning, and an application of regression to separating "buy" trades from "sell" trades in financial markets (an issue that arose in an Aussie case alleging manipulation of short-term interest rates). On that occasion the regression approach was misapplied and fell over, and that's fair enough, but in my discussant paper I argued that regression is still the go-to workhorse tool for a great deal of empirical work outside competition cases, and there's a lot of scope to use it more than it has been (I was pleased to see interesting regressions pop up in the Commerce Commission's petrol market study)

- from the Fair Trading Act session on making unsubstantiated representations, I have to confess I didn't know that you had to be able to justify any advertising claims you make at the time you make them. Even if they're subsequently challenged and found to be true, you're at risk. I noticed that all the early prosecutions were about manufacturing (heat pumps, steel mesh, water filters): happenstance maybe, but it left me wondering about enforcement in the 70% of the economy that's made up of services

- cartel criminalisation goes live in New Zealand in 2021. The Commerce (Criminalisation of Cartels) Amendment Act 2019 does not distinguish between 'hard core' and other cartels, though a lot of us would hope that criminal sanctions would only apply to the more egregious ones. I learned from the presentation by Gilbert & Tobin's Elizabeth Avery that in Australia there's a mechanism (an understanding between the ACCC and the Commonwealth Director for Public Prosecutions) for sorting the worst from the less bad. I presume - hope? - that we'll do something similar

- in the electricity sector, there's a plausible scenario that we're going to need a big expansion of generation capacity to cope with the likes of cars moving from petrol to electric power. But I'm left wondering whether we can get our infrastructural and regulatory acts together to enable it to happen. And while we're on electricity, what's happened to the retail electricity pricing review?

- I'm now persuaded (rather belatedly) that prohibiting the Commerce Commission from accepting behavioural undertakings in the context of a merger makes little or no sense. Sarah Keene at Russell McVeagh has been arguing this for yonks, and did again at the workshop, and no doubt others have been pushing the barrow too, and I think it's correct. The Commission might well end up using the power sparingly, but it's better than not having the option at all

Christchurch itself was an eye-opener: there are more swathes of the CBD than I'd expected that are still vacant lots. A lot of reconstruction has already been done, and a good deal more work is underway, but there's still an awful lot left, as the cathedral in particular reminds us.