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 ├ža 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.

Friday, 20 September 2019

Let's get more active

By far the best single way to get unemployment down is to keep up a good run of economic growth at a robust pace. Not only does the unemployment rate go down, but the longer and stronger the expansion, the more it succeeds in bringing more marginalised groups into employment.

I've shown previous versions of the graph below: here's the up to date version, which shows (yet again) that less favoured groups suffer distressingly high rises in unemployment when the business cycle goes pear-shaped, but conversely a long expansion works its magic on everyone, even on those who tend to be on the outer. It's not perfect - rates of unemployment for some groups, notably Maori and Pasifika, are still too high - but the long post-GFC expansion has seen big falls in the unemployment rate across all groups..

Because growth alone will not deal to everything there's always a role for 'active' labour market policies that try to make the labour market work better. Residual unemployment for example could be down to things like skills mismatches: employers are looking for people with skills they don't have. Or it could be down to regional immobility: who's going to move from Northland to a job vacancy in Auckland given the cost of putting a roof over your head in Auckland? And there can be other mismatches preventing people willing to hire from signing the deal with people wanting to work.

There's a brilliant new bit of research out looking at active labour market policies, and which ones work. They're not just any old active policies: they're ones where there was a control group experiment, where you can see how those who went through the programme fared compared to those who didn't, which is how the researchers can tell if it made any difference. Here's the more readable version for the intelligent public - 'Understanding what works for active labour market policies', on the excellent Vox site - and full-blown policy tragics can get the more academic version here.

Here's the key result in terms of the impacts on earnings and employment:
If we focus on the median impact on earnings, wage subsidies and independent worker assistance ['Support to micro-entrepreneurs and independent workers'] show the greatest impact relative to the control group, with improvements of 16.7% and 16.5%, respectively. Vocational training programs have a median impact of 7.7%, while employment services show an almost negligible impact. The median impact on employment outcomes exhibits a similar pattern
Here's the graph they drew to show the results, though to be honest it's hard to see the scale of the impact with the vertical scale they've chosen to use.

They also discovered a variety of other things that make complete sense: "Individualised coaching or follow-up of the participants, training exclusively focused on a specific industry, and the provision of monetary incentives to trainees all correlate with better outcomes in vocational training programmes (the most frequent ALMPs in our dataset)", and, unsurprisingly, they also found that you get better outcomes when you run these programmes in good times rather than in the pits of a recession.

They also found (noting that cost data isn't uniformly available) that you get what you pay for. As the graph below shows, employment services programmes are cheap, but useless, while the most effective option, helping people to do their own thing, costs the most.

There's a lot we could learn from this. Currently we're down the wrong end of the OECD league ladder when it comes to what we spend on active labour market policies (as I discussed here). This research gives us a pretty clear steer on what we should do to up our game.

It's also left me wondering about our policy institutions. This research works because all over the world people have invested in randomised control trials - experiments where you try something out and compare it with what happens where it wasn't rolled out. But I can't think of many home-grown examples where we've had a go at economic policy field experiments: charter schools, maybe, but they got sat on.

My feeling is that we're too fond of the over-dirigiste 'one size fits all' approach. And our chronic political oppositionism makes both the public service and the decision-making politicians far too wary of experiments that might go wrong - even when they might hold valuable information about what works and what doesn't. There's too high a political price to pay for what will be pilloried as 'failure', and it's hindering finding out what might or might not make a real difference to those hardest to get into work. We should move on: it's time to join the adult policy world.

Friday, 6 September 2019

Those high petrol prices - another view

There's a graph, Figure 3.8 on page 82, in the Commerce Commission's petrol market study that's puzzled me. And not for the first time: it also puzzled me when I first saw an earlier version of it, in MBIE's 2017 go at an inquiry into the petrol industry (where it was Figure 4 on p3). Here is ComCom's one.

It shows the price at the pump of a litre of premium petrol in a wide range of higher income countries, standardised by being converted into US dollars. Eyeballing the graph, you see New Zealand is there at roughly US$1.47. At the exchange rate of the time (March quarter '19) of 68 US cents, the price converts into NZ$2.16, which looks right. All good.

Because the price at the pump is heavily affected by local taxes, for competition policy purposes you need to focus on the price ex taxes, which is shown in blue in the graph. New Zealand does not show to advantage, with the third highest petrol price. Cue song and dance about how bad we are.

But what's been puzzling me is the weirdness of the country rankings. Your first inclination is to go looking for some underlying explanatory patterns - transport costs from major oil fields or refineries? - but it's hard to spot any. The three countries at the top - Mexico, Korea, us - are as odd an assortment as you'll ever see. The three at the bottom - Slovenia, Chile, Finland - don't obviously have much in common, either.

The ordering could of course reflect differences in local competitive intensity. You look at Mexico's top billing, for example, and you wonder about Pemex, a state owned monopoly up to 2013 which still has nearly three quarters of the petrol stations. You wouldn't know about the rest of them without some intensive investigation along our own Commerce Commission's lines.

But I'm also wondering whether the somewhat jumbled pattern mightn't partly reflect the fact that the petrol prices have been converted into US dollars at market exchange rates, rather than at purchasing power parity (PPP) exchange rates.

If this whole 'which exchange rate to use' thing isn't your bag, let's backtrack for a moment. If you're comparing, say, the price of an Apple i-Pad Pro 11" Wi-Fi 256GB, you'll find it's on Amazon at US$799.99 and you'll find it's NZ$1648 at JB Hi-Fi. At today's exchange rate (63.7 cents) the Amazon one costs NZ$1256. Good deal cheaper in the US.

But market exchange rates are fickle beasts and move around a lot. Because an iPad is expensive locally today doesn't mean it mightn't be locally cheap next Tuesday if the Kiwi dollar were to fall sharply against the US dollar over the weekend. You shouldn't be drawing any long-term policy conclusions about iPads - or petrol - on the basis of an exchange rate that might make a fool of you in no time.

Which is why these international comparisons are more normally done on a different basis. Supposing you went out and bought a wide bundle of stuff in the States, and it cost you US$100,000. You do the same in New Zealand, and it costs you NZ$150,000. It would then be fair to say that US$1.00 has the same buying power as NZ$1.50. In that case you wouldn't be in the least bit surprised if a litre of petrol cost US$1 in the States and NZ$1.50 here: that's just what you'd expect, because anything that costs a US dollar in the States is on average likely to cost NZ$1.50 here, as we discovered on our shopping expedition.

Long story short, people making international comparisons tend to use that US$1-equals-NZ$1.50 exchange rate, called the purchasing power parity rate (obvs). And here's what happens when you do that same chart of ex tax prices in blue above, but at that PPP rate instead. I've used the latest (2018) PPP rates as calculated by the OECD (you can find them if you fossick here).

In New Zealand's case, the pre-tax petrol price doesn't change much. It was around 77.5 US cents before (again eyeballing the number from the ComCom graph, as I'm not going to pay the €900 the International Energy Agency wants for the exact data). At the March quarter market exchange rate of the time, 68 cents, that was NZ$1.14. The PPP exchange rate wasn't very different: it was 67.6 cents. So our local price translated into US$ at PPP was 77.1 US cents, rather than the 77.5 US cents price you get at market exchange rates. Same diff.

But other countries' prices move around quite a lot when their PPP rates are used instead of their market exchange rates. And the end result is that our relative position drops quite a bit. We were third highest out of 33 on a market rate basis: on a PPP basis we're 14th out of 33. There's a bit of imprecision here, as I've used eyeball data rather than precise ones, so I wouldn't obsess over whether it's 14th or 13th or 15th*. This PPP ordering also makes a bit more intuitive sense than the market rate one: the bottom three, for example (now Norway, Finland, Iceland) look like a more coherent bunch.

There are still good reasons for having a market study look at the petrol market: those rates of profitability that ComCom found, in particular, need some explaining.  But one conclusion from this exercise is that I wouldn't get carried away by the "we're one of the dearest in the OECD" line of argument.On this, entirely conventional, alternative way of making the comparison, we're a little bit on the expensive side of middle of the pack.

*If you want to see the data I've used, and maybe check I haven't got the wrong end of any sticks, it's here (assuming I've got Dropbox working right).