Wednesday, 26 June 2019

Spot the good guys

Trade wars are top of mind for those interested in the macroeconomic outlook. As our own Reserve Bank said in today's monetary policy review, " A drawn out period of [trade] tension could continue to suppress global business confidence and reduce growth". And it's not just the US vs China stuff, bad as that is, but it's all over the place, as the World Trade Organisation pointed out a few days ago under the heading 'WTO report shows trade restrictions among G20 continuing at historic high levels'.

Out of casual interest I had a fossick through the WTO's trade database, which among other things counts the prevalence of trade barriers. Here's an interesting result.

We're not angels all the time, but at least on this criterion New Zealand scrubs up well by not adding much to the current protectionist rackets. And full marks to MBIE and the National-led government who in 2017 drew the teeth of the worst of these anti-dumping rorts, by amending the law so that consumers got a look in before anti-dumping duties get imposed. 

Here's the press release at the time, and if you're a trade policy tragic the new public interest test can be found in s10F(2) of the amended Trade (Anti-dumping and Countervailing Duties) Act 1988. It reads: "Imposing the [anti-dumping] duty is in the public interest unless the cost to downstream industries and consumers of imposing the duty is likely to materially outweigh the benefit to the domestic industry of imposing the duty".

Personally I'd have put the onus the other way around - "Imposing the duty is not in the public interest if the costs to downstream industries and consumers are likely to materially outweigh the benefits to domestic industry" - but hey, in these more trade-hostile days, I wouldn't quibble too much about wording. When you get a pro-consumer public interest test in trade law, take it and run.

It's happened again

It's easily done. A company decides to get out of a line of business, and sells the operation to someone else. A business decides to flag away retailing and stick to wholesaling, and sets up an exclusive retail arrangement with a distributor. A company buys another company in the same line of trade. All perfectly normal and (barring an acquisition of a competitor that would create substantial market power for the new combo) perfectly fine from a competition policy perspective.

But then the parties "jump the gun", as the jargon puts it. They start tidying their affairs - mutually agreeing things - before the divestment / distribution agreement / merger has actually gone into effect. That's where they risk falling foul of s27 of the Commerce Act (arrangements lessening competition) or, worse, s30 (price fixing). And things can really go pear shaped if the proposed divestment / agreement / merger falls over, as it can easily do. Now you can find yourself swinging in the wind when the Commerce Commission comes calling and wants to know why you're colluding with what is still an independent competitor.

The latest to find this out the hard way ($825K fine and $100K costs contribution) is Milfos, which among other things sells milk quality sensors and dairy herd management software (Commerce Commission press release here, High Court judgement here on the Commission's site). A proposed exclusive distribution agreement eventually turned to custard but the two companies involved went on coordinating the price of the milk sensors in the interim anyway.

It's not yet a full-blown Thing, but this has become one of those areas where a bit of probably not explicitly malign carelessness can now walk you into a heap of trouble. Nobody wants to be jumping at every imaginable legal risk, but it's now clearly advisable to add something else to the checklist when you're thinking of divestment or acquisition. If you'd like some more background info on what to look out for, have a read of what happened in a recent Australian case ('Too harsh?') which was cited in this latest Milfos episode, or on the wider general topic of gun jumping you might like 'Jumping the gun'.

The other thing that's started to pop up more in mergers is failure to get clearance from the Commission for potentially problematic ones. We went years without seeing the Commission sally forth and challenge a merger, and then there was a sudden blizzard of them in 2018 ('They're like buses'). Fortunately, most of them (listed here) have gone away with no further action, and to date only one has been pinged, and deservedly so ('Naïve? Casual? What?'). Two are still live.

I say "fortunately" because I like our system of voluntary notification of mergers. Most other developed countries have some sort of compulsory merger notification regime: we don't, and I like it that way. I wouldn't want it to fall over, which it assuredly would if it's discovered that merger parties are routinely trying to do an end run around it.  As a small economy,  we're already got at least our fair share of micromanagement superstructure: we don't need another dead hand process on top.

Wednesday, 19 June 2019

Are we ready?

The Budget came and went while I was overseas, and I've been catching up with the news and the coverage.

It's not surprising that a lot of the media and analyst attention was focused on the 'wellbeing' perspective: it's getting attention overseas, too, as in this thoughtful piece in the Financial Times ($?). It's equally unsurprising, though, that virtually nobody (as usual) has asked the simple Keynesian question, is the Budget expansionary or contractionary? Do its direct effects on government spending and taxation boost or brake the economy?

Here, buried (as usual) on page 15 of the 'Additional info', is Treasury's best guess at the answer. The 'fiscal impulse' is the effect of policy changes on aggregate demand, allowing for anything cyclical that might also be affecting tax revenues and government spending. A positive impulse is expansionary, and you can see that fiscal policy has been giving a decent 1%-of-GDP-ish boost to the economy in the June year just finishing. It's not doing a lot either way in the next couple of years, and then if policies stay as they are, it starts to modestly brake the economy over 2021-2 and 2022-3.

The last time we saw these calculations was at last December's 'Half Year Economic and Fiscal Update', or HYEFU, when they looked like this (I wrote about them here).

From a fiscal policy cycle-management point of view, the new profile makes a good deal more sense than the old one. In the old one, there was a stonking 2%-of-GDP fiscal boost in the 2018-19 year, when the economy didn't need it, nor was there any obvious reason why the brakes should have gone on immediately afterwards. The new pattern is rather more sensible: there's less of a pro-cyclical boost in this June year, and the brakes aren't getting applied in the coming June year.

It would be nice to think that this was a deliberate adjustment of fiscal policy to make it more attuned with the cycle, but it looks more happenstance than design. While there is a bit of extra spending in 2019-20 that helps draws the sting of the previously planned braking, otherwise it seems to be down to timing differences: spending didn't happen to the original timetable. Or as the official explanation puts it
The 2018/19 impulse is now estimated to be 1.1% of GDP compared with 2.2% forecast at the Half Year Update. This reflects changes in the expected timing of operating and capital spending. Some operating spending previously expected to take place in 2018/19 is now expected in 2019/20. Changes in the timing of spending and higher allowances announced at Budget 2019 see a broadly neutral impulse in 2019/20 compared with a -0.9% of GDP impulse forecast at the Half Year Update.
That's all understandable: we're all human, things always don't go like clockwork, and the incoming Coalition government didn't exactly have a fully worked-out policy programme when it first took the reins, so some slippage isn't a huge surprise.

But if you get biggish changes in the stance of fiscal policy happening by administrative accident rather than for proactive cycle-management reasons,  it does make you wonder how effective fiscal policy can be in dealing with cyclical ups and downs. You might well want to slow things down, for example, only to find the economy gets an unwanted boost from spending programmes kicking in late, or conversely find that planned fiscal boosts get undermined by slower than expected spending.

With monetary policy creeping ever closer to its practical limits, especially after the latest interest rate cuts in Australia and New Zealand, fiscal policy is necessarily going to have to do more of the heavy lifting to manage the business cycle in the next downturn, which may not be too far away if the Trump administration continues in brinkmanship mode.

As it stands, however, fiscal policy is vulnerable to large ebbs and flows that can dwarf any attempt at fiscal cycle control. We need to be able to do something more effective when - not if - the next downturn turns up. Ideally, 'shovel ready' infrastructure spending programmes that could be rolled out quickly would do the trick, but while they're not impossible to organise they're not a doddle either. An alternative would be quicker-to-work defibrillator fixes like "put $500 in every beneficiary's bank account", which we've shown we can organise (recall the recent winter heating top-ups to national super, for example).

I'd like to think there's someone in Treasury primed and ready to pull the Emergency Fiscal Boost lever. Am I wrong?

Friday, 14 June 2019

Competition papers coming up at the NZAE conference

The New Zealand Association of Economists annual conference is coming up (July 3-5) in Wellington, and if you're interested in competition issues there are some interesting papers due to be presented. You can find the current draft state of the full conference programme here and you can register to attend here.

Earlier this week I posted about Bill Rosenberg's presentation on "Low Wages: Is Competition a Factor", and Bill has pointed me to a paper scheduled for session 3.1 from the RBNZ's Christopher Bell on "Monopsonistic power in the New Zealand labour market".

Session 5.2 has the theme "Digital Markets and Competition Outcomes", and features three papers from ComCom economists: "Innovation in regulated and competitive industries" by Hristina Dantcheva;  "Airports regulation - evidence of the information disclosure regime working?" by James Marshall (I'll take a wild guess and say, the answer is yes); and "Assessment of competition in digital markets – challenges for economic analysis in the era of platforms, data and AI", by Michal Mottl.

Session 5.4, "Energy", has two papers I'll be especially interested in: "Identifying and estimating excess profits in the New Zealand electricity industry" from Victoria's Geoff Bertram, and "Petrol prices [still] rise and fall at the same speed as international oil prices" from Prince Siddarth at the NZIER.

There's also session 6.6, "Regulation and Industry", where the paper I'll be going to is "Retrospective Study on Stuff (Fairfax)’s Exits in the Newspaper Industry", a joint effort from AUT's Lydia Cheung and Geoffrey Brooke.

See you there.

Wednesday, 12 June 2019

Yet another reason why workable competition matters

A small but select audience turned out last night for the latest Auckland LEANZ seminar, featuring Bill Rosenberg, the Congress of Trade Unions' policy director and economist, on the topic of "Low Wages: Is Competition a Factor?". This was a reprise of a May presentation in Wellington which Bill gave in association with Peter Cranney, an employment lawyer at Oakley Moran: the May slides can be found here.

Maybe the topic is more of interest to a Beehive-focussed audience, but it's a pity more people didn't attend in Auckland, because Bill made an interesting case. Beforehand, I'd been afraid that he was going to have a go at attacking free (or at least workably competitive) markets, and I'd been sharpening my claws. Quite the opposite, as it happened: Bill's case might as easily have been titled, "Low Wages: Is Lack of Competition a Factor?". His argument was that businesses have accrued too much monopsonistic market power in the labour market, and for a variety of reasons, including as a side effect of increased market power in goods markets as 'super star' companies have emerged and (perhaps) merger policing hasn't been all that it might have.

Skewed labour markets are becoming A Thing in antitrust circles, and I suspect we're going to hear a lot more about them. Here for example is the peroration from a recent article (cited by Bill) in the Harvard Law Review:
Labor market power is ubiquitous and costly to society. It is bad for economic growth and equality, and fuels political conflict. Yet labor market power is generally ignored by antitrust authorities and never considered as a justification for subjecting mergers to scrutiny. This contrasts with the regulatory concern for product market power. We argue that this asymmetry is not justified by either legal doctrine or economic theory and suggest that the economic analysis of product markets regularly deployed in the scrutiny of mergers can easily be applied to the labor market (p600)
How you might address imbalances of market power in the labour market is the tricky bit. Maybe the generic competition law of the land has a part to play (on egregious use of no-poaching or non-compete agreements, for example), although as the Harvard Law Review article says, even in the litigious US it hasn't got very far. 

Bill's got a menu of other proposals (his slides 38-40). Two of them got the tick from me - raising productivity, and better support for people affected by disruptive job losses - and while I'm more ambivalent about the third route (a greater role for collective bargaining) it's possible that the Fair Pay Agreements Bill supports might deliver net benefits.

The real trick would be to pull off what Denmark's managed - retaining a high degree of employer hiring flexibility, while also providing a lot of support (eg through retraining) to displaced employees. We're not currently crash hot on the support side, as this OECD graph shows (original document here), whereas Denmark is tops.

These 'active' labour market policies also have something of a moral imperative to them. If you subscribe to the idea that freer global trade brings net national benefits (as it does), and you recognise that the overall benefits create winners and losers (as they do), then there's a good case for looking after those who have fallen in the overall victory. And there's also cold-eyed politics involved: if you don't help out,  the losers will turn on trade itself. Trump's election and the US ranking on the graph are no coincidence.

Well done Bill; thanks to Sasha Daniels from Spark who emceed the evening; and special thanks to James Craig and the team at Simpson Grierson who hosted the evening.

Monday, 10 June 2019

Pilgrimage and policy

It was mostly a mix of school reunion, family and social catch-up, genealogical research and all-purpose holiday, but a trip to Ireland and Scotland also allowed a side-outing pilgrimage to Adam Smith's grave in Canongate Kirkyard in Edinburgh. If you're ever minded to visit, go round the back of the church, and the grave is up against the wall of the church on the right hand side. I didn't notice it at first, but there is also a little trail of  'Adam Smith' plaquelets set into the grass that will take you to the right spot.

I wondered about the railing around the grave and the heavy duty lock: anti-market vandals? Like the nerk that scribbled anti-Smith graffiti on the yellow explanatory notice? Not so, said the formidably learned volunteer minding the church: she said it was quite common practice to rail a grave in the 18th century (Smith died in 1790). She'd also noticed that these days visitors to the grave tended to come from Europe rather than the UK, and her experience was that UK people tended to have very little knowledge of Smith: he had (she said) completely vanished from British school curricula.

I did my usual economics-by-wandering-around on the trip. Random observations:

Ireland's standard of living has pulled well away from ours. Comparisons are iffy because of big tax-domicile accounting changes to Irish GDP and an unusually large wedge between Irish GNP and Irish GDP, but it's safe to say that living standards per capita are now some 50% higher in Ireland than here. And it shows in things like the cars people drive and the quality of the houses. Ireland's no paragon of good policy or governance, it had an unusually nasty GFC, and it's got locational advantages we don't, but for all that it's clearly made a better fist of getting growth barrelling along than we have. Sure, GDP isn't everything, but if we had incomes at Irish levels we could afford a hell of a lot more wellbeing-enhancing initiatives.

There's no border between Ireland and Northern Ireland. One minute you're on the road from Letterkenny (in the Republic) to Londonderry (in Northern Ireland) and you're calculating in euros and driving to kilometre per hour speed limits, and the next you're thinking in pounds and observing miles per hour limits. That's it. No checks, no let, no hindrance - for now. This currently free passage is yet another of the potential casualties of the Brexit debacle, since the clowns running the process didn't join up all the dots (a commitment to the Republic as part of Northern Ireland peace talks to have no borders, versus the gaping hole in the customs and regulatory frontier with the EU that post-Brexit free passage would create, leading to various proposals for rickety 'backstop' fixes). But Brexit incoherence aside, hassle-free movement is a great idea. If countries like Ireland and Britain, despite sometimes prickly relations, can organise completely free movement, why can't Australia and New Zealand?

And on Brexit, if there's a hard no-deal Brexit, it's heavily odds on that Scotland will run a second independence referendum, and I wouldn't be surprised if it succeeded. Which might enable a more prosperous Scotland to do something about the state of its roads: years of false economy 'austerity' cutbacks to spending on road maintenance have left potholes everywhere (even on motorways).

There are indeed at least some limits to tourism. If you want to see one, visit the Giant's Causeway in Northern Ireland. It's an unusual geological feature, but considerably diminished by the hordes of people all over it (and it isn't even high season for visitors yet). We'll face similar issues in due course, and I don't think our new $35 a head levy on visitors is much of an answer to anything.

Some of our food exporters also face headwinds. There is a clear push, in the Irish and Scottish restaurant trades, both to explain where your ingredients have come from, and to use local providers. VisitScotland for example has an accreditation scheme which includes among its criteria, "Quality ingredients of Scottish provenance" and "Food miles kept to a minimum". 

Finally, coming back to Adam Smith, I hadn't known that since 2008 Edinburgh has a statue of him on its Royal Mile. The story of how it came about is told here, and well done all the organisations and individuals who planned it and paid for it. How much it is a statue of Smith, however, as opposed to a generic Important Person is in the eye of the beholder: for me, it could as easily have been a memorial to a sea captain. I'd like to have seen a book, and even if Smith is the father of the dismal science, would it have hurt to have shown him smiling?