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.