Thursday, 7 October 2021

Reinventing the wheel?

In the armoury of regulatory interventions you might reach for to fix a market problem, I'd normally rank the Part 4 regime in our Commerce Act just above dosing with ivermectin and roughly on a par with sacrificing goats to Baal. I'd try everything else first.

But to my own surprise I'm beginning to wonder if it mightn't be a better answer to the Three Waters hoohah than the current "take the water assets away from councils and give them to four bigger entities with a convoluted governance structure".

There are various things going on in the water policy space, and no doubt conservation and Māori perspectives are at play, too. But if the big policy problem in water is (and I think it is) what economists like to call dynamic inefficiency - councils aren't minded, and/or able, to invest enough to keep the water assets in serviceable nick over the longer haul, hence iffy reservoir capacity (Auckland), poisonous water (Havelock North), pipes bursting in the CBD (Wellington) - then maybe it's time to deploy Part 4, or at least part of it, before creating whole new superstructures.

The bit of Part 4 that looks particularly fit for purpose is the 'information disclosure' regime. It's already been applied, for example, to electricity lines businesses: for lines businesses owned by local consumer trusts, who are in the same governance ballpark as water assets owned by councils, it's the only bit of Part 4 that typically applies (the rest of the lines businesses are required to disclose, too, but are also subject to a revenue control regime). Information disclosure can be a great way to surface whether an incumbent utility is not investing enough to keep the lights on, or the water flowing, over the long haul.

Here's an example of what's disclosed: it shows some of the 2020 data for Vector, which happens to be the lines network where we live. If you're interested in your own locality, head to this page, and click on your local network on the map. It'll bring up the option of downloading a pdf with all the data for your place. There's a lot more beyond the graphs shown below, and you'll also find that each lines company is compared with its peers.

Vector's lines and cables are in good nick. Only a very small proportion is 'Over generic age', and in any event Vector's planned spending on replacement is well above the minimum required to keep the network in good shape.

Some of its switching gear is getting a bit long in the tooth, but again Vector has it in hand and plans to spend well above the minimum required to keep them chugging along. From a dynamic efficiency point of view it's all good. 

You could easily imagine requiring all the water entities being asked to provide the corresponding data, which would stand a very good chance of zeroing in on the problem areas. Some of the councils, for example, are declining to join the proposed new four-entity regime because they say they're managing just fine, and that's a perfectly fair point to make: an information disclosure regime along these lines would prove their case.

And if there's a problem how would you go about fixing it? As it happens, we've got a worked example of that, too. It's  Aurora, which to give it its due is in the process of fixing things, but which was starting from a very bad place as far as maintenance of its lines network went. 

Aurora is the Dunedin Council owned network that serves Dunedin, central Otago, and Queenstown Lakes. As the Commerce Commission said here (p7) in March, "Aurora’s ageing network has been inadequately maintained due to underinvestment going back many years. As a result, it is providing an increasingly less reliable service to consumers. The average number and duration of outages has risen significantly over the past 10 years and would continue to worsen if action is not taken". Sound like the water problem? It does, doesn't it.

And the answer is a form of revenue control (Aurora is council owned, rather than consumer trust owned, so falls under the revenue control regime). The Commerce Commission has approved a 'customised price path' or CPP for Aurora, which will allow it to raise $563 million over the next five years to spend on bringing its network up to scratch. 

As the Commission said (p5), "Our decision on Aurora’s capital spending reflects our view that it has largely made the case for the increased investment". Because it's such a big ask starting from where they were, the price increases will be phased in (p5): "To help mitigate the impact of increased bills on consumers we have decided to cap Aurora’s total line charge revenue over the five-year CPP period. Annual increases will be limited to approximately 10% per year plus or minus any changes from the Consumer Price Index (CPI) forecasts we have used". Something similar might well be needed for the water entities most behind with their upkeep.

My question is: if we've already got a policy regime that looks pretty useful at diagnosis (information disclosure) and treatment (a costed and funded remediation programme) for electricity lines businesses (and gas pipelines, plus airports are under info disclosure), who do we need to re-invent the wheel for water?

Friday, 24 September 2021

Win some, lose some

From the outside the Commerce Commission's Fair Trading Act case against Bunnings always looked a difficult one, and I can't say that I'm hugely surprised that Judge Gibson in the Auckland District Court found for Bunnings on all 45 allegations. You can find the decision here on the Commission's website (though it's one of those annoying pdf's that won't let you select blocks of text).

The judge found that consumers were unlikely to have interpreted Bunnings' ads in a literal way but rather, at [136], "would take into account the nature of the industry, the size of the stores, the number of SKU's [stock keeping units, individual items on the shelves] and the general impossibility of ensuring that on each day every SKU in Bunnings stores was the lowest price. Consumers would also consider the LPG [the lowest price guarantee, i.e. the well known "if you happen to find a lower price we'll beat it by 15%"] alerted them to the possibility that not every item in Bunnings may be the lowest price but providing a remedy to achieve that". 

The "if you happen to find a better price" wording was self-evidently fatal to any overly literal reading of Bunnings ads, so the alternative argument run by the Commission was that, even if you cut Bunnings some slack over the practicalities of trying to monitor how its own 62,000 SKUs compared with the many tens of thousands of its competitors' prices, they weren't in fact making a decent enough fist of it to be able to claim that their prices were generally lower than their competitors.

That fell over, too, because none of the comparative price surveys put before the court was statistically robust enough to be relied on. The Commission argued (as I would have) that none of these surveys may have been perfect on its own, but taken in the round they suggested such and such. This "triangulation" didn't impress the judge who at [141] took (my wording) a Garbage In, Garbage Out approach, which is fair enough when the standard of proof in the proceedings was "beyond reasonable doubt".

The Commission has taken it philosophically (response here). But it left me wondering: while this was formally a Fair Trading Act matter, was it also expressing a more Commerce Act based concern about lowest price guarantees?

What concern, you may well wonder: what could be more competitive and pro-consumer than propositions such as offering to beat a competitor's price? What sort of twisted logic would see any harm in that?

The alternative logic goes like this. Suppose a new model of Kindle comes out, and I advertise it at $299 plus a guarantee to match or better any lower price from a competitor. My competitor has also got a stock of the Kindles and is wondering what to do. She sees my ad, and (the argument goes) reckons there's no point in trying to undercut me, as it'll do her no good: I'll just match her, she won't win any extra sales, and we'll both be worse off. So she prices at $299 as well. End of price competition for the consumer.

And there are other ways the lowest price guarantee might work against consumers' interests. A shopper may see my lowest price guarantee, and conclude there's no point in shopping around. Knowing that I've defused at least some comparative price searching might encourage me to set a higher price in the first place.

None of this, by the way, applies to Bunnings. As you can see in the judgement at [35-6], they genuinely went out to do what it said on the tin. 

There might be cases of nudge nudge, wink wink, see you in the bar at the next trade fair, where the competition is more apparent than real. But it wouldn't be my default position on the likes of best price matching. If a company is going to some trouble to position itself as an "everyday low prices" supplier, chances are that's what's going on. Alongside Garbage In, Garbage Out, maybe another computer motto is the best take: What You See Is What You Get.

Wednesday, 15 September 2021

One never knows, do one

Yesterday the Economic Development, Science and Innovation Select Committee reported back on the Commerce Amendment Bill, and there was (at least from my perspective) one pleasant surprise.

First the big stuff. The proposed change to s36 of the Commerce Act, which deals with abuse of market power, has got the tick. We'll be shifting to Australia's "effects based" test and getting away from our current "take advantage" wording. 

For those whose eyes have just glazed over, it means that when a company with market power is brought before the courts for throwing its weight around in an anti-competitive way, the judges will stop asking, "Would a company otherwise just like this one, but without the market power, have done this? It would? No case to answer, get outta here". 

The problem with that line of reasoning, which follows on from the current s36 wording, is that it misses the essential point: when something is done by a company with market power, it may have different consequences compared to when a non-powerful company does it. To fix this, the new formulation will just look at the effects, or likely effects, and will stop speculating about what non-powerful companies might have done.

Under both the current s36 and the proposed new s36, clear anti-competitive purpose will also land you in court, as it should: if the e-mail trail shows "Hah! Competitors will never get a look in if we cunningly tweak the software", you'll still be bang to rights. In practice, the big bunfights in court over abuse of market power tend not to feature obviously incriminatory evidence of purpose, and tend to range over the effects battlefield, so the law change fixes up the important aspect.

As well as being the intellectually correct thing to do, the new s36 will harmonise our law with Australia's, which is helpful given the presence of so many companies on both sides of the ditch.

The National members on the Committee didn't agree: they felt that "firms with market power risk liability for unforeseeable future consequences, leading to overly-conservative decision making on their part". That's fair enough: reasonable people across many jurisdictions have struggled with finding the right definition. But for mine (and it's been the Commerce Commission's view, too), the current law was broken, and couldn't do what it was meant to. 

That's a bit of a worry in an economy with its fair share of concentrated industries, where there is scope for the 600 pound gorillas to drive the smaller apes away from the bananas. That said, big companies generally play fair, and stand-over corporate bullying doesn't come along all that often, but when it does, you want to be able to deal with it. The new s36 is well worth trying.

And that pleasant surprise?

I'd made a submission to the Committee and somewhat cheekily, I'd included an off-topic idea that while they were looking at other changes to the Commerce Act

One not included, but worth adopting, would be to reinstate the former section 63 of the Commerce Act (repealed in 1990) which had allowed the Commission to issue provisional authorisations. The value of this ability has been shown in Covid circumstances in Australia, where the Australian Consumer and Competition Commission (ACCC) has made excellent use of its ability to respond quickly to authorisation requests. The Commerce Commission under recent NZ Covid legislation temporarily had this power: it should be made permanent

And blow me down if the Committee didn't run with it and agree:

there may be situations where the need for authorisation is time sensitive. Recognising this, the COVID-19 Response (Further Management Measures) Legislation Act 2020 created a temporary ability for the Commerce Commission to issue “provisional authorisation” to an applicant ... We believe that the changes made by the COVID-19 legislation should be made permanent. COVID-19 has demonstrated that there may be compelling public interest reasons to authorise conduct before the full procedure for deciding an application can be completed. Making this permanent would improve the Act’s administration (p3)

Which (despite my simultaneous complete failure to convince the Committee to put better bounds around the Commerce Commission's proposed information-sharing powers) is a good example of why people should put in submissions. You may be tempted to think, what's the point: don't. A good Select Committee will genuinely kick the tyres, as this one did, and in the background the Committee will have expert policy assistance from the relevant Ministry (in this case, MBIE), and if your idea has legs, there's a fighting chance it'll get a decent hearing.

Wednesday, 8 September 2021

Sterny McSternface

Something's set them off. 

I've just noticed that at the end of last month the Commerce Commission came out with a stern "anti-collusion reminder to businesses supplying essential services". There was a nod towards the exigencies of Covid - "some businesses able to operate under level 4 restrictions may need to cooperate to ensure New Zealanders continue to be supplied with essential goods and services" - but the bulk of the message, and its clear overall tone, was that some businesses could have been tempted to overstep the mark. 

When the "reminder" includes how whistle blowers can dob in a cartel, and finishes up with a paragraph pointing out that cartel behaviour is now a criminal offence, you get the strong feeling that the Commission is not a happy bunny.

Which brings us back to an oddity of the first lockdown in 2020 ("What if they threw a party..."). 

Then - and again now - there were all sorts of Covid-related stresses on businesses: on supply chains, on resources, on lenders and landlords trying to respond to the predicaments of their lockdown customers. In many cases, cooperation would have been in the public interest: hospitals, for example, might agree on which patients should go where, to help manage capacity for Covid ICU beds. Supermarkets might jointly use scarce lorries to get stuff into the shops.

In Australia, the ACCC got lots of requests along those lines, and was, rightly, authorising herds of them, and, importantly, it was doing it very quickly to meet the urgent need. It wasn't being silly about it - the authorisations  tended to come with controls to make sure they were limited to the Covid issues at hand - but it was chucking them out the window at a rapid rate. Last month, for example, it rolled over its interim authorisation of  "temporary and limited coordination between the ABA [Australian Banking Association] and participating banks to defer loan repayments and waive certain banking fees for small businesses impacted by the pandemic". Absolutely.

Normally, our Commission can't do these quick fixes (daftly, its power to issue provisional authorisations was taken away years back, for reasons nobody can now recall). But, while there is an "epidemic period", as there is now, it can, under emergency legislation whacked through last year (details here).

But here's the thing. 

Nobody's turned up and asked for one. Which is distinctly odd. We have had the same stresses the Aussies had, but lots of authorisations there, none here. Qué?

I hope it's not because businesses think the Commission will be too slow, and by the time they get the slip of paper the bananas will have rotted on the wharf. And you can see why they might think that: in the normal course of affairs, the Commission doesn't exactly sprint through authorisations. Yes, they can be complex propositions where estimating the benefits and costs is hard, but even in relatively straightforward ones - like the HP one it's just given the green light to - it takes its own time. It had the issues identified in a commendably quick fortnight. And then it thought about them for four months.

It doesn't help that we're in a chicken and egg situation: without evidence of a quick response, businesses may flag away applying, but if there are no applications, the Commission can't show it can indeed hop to it when needs must.

Or maybe it's just the Kiwi way: we tend to be relatively informal and to muck in even before any contract is signed, and maybe there is socially useful cooperation going on and to hell with the paperwork. 

Let's hope it's one of those relatively benign reasons. Because if some businesses have used Covid to price fix, then they deserve anything the Commission throws at them - not to mention the risk of a PR disaster.

Monday, 9 August 2021

The future is hybrid

The Competition Law and Policy Institute of New Zealand (CLPINZ) held its 32nd annual workshop in Wellington over the weekend. As is the norm these Covid-plagued days, it was a 'hybrid' event, with people having the option of attending in person or online: the Commerce Commission's going the same way later this year, and the NZ Association of Economists ended up there perforce, when Day 1 of their conference got away in person but Day 2 fell foul of a Wellington lockdown and was rescheduled online.  

My guess is that even when Covid is gone, we'll stick with the hybrid model: there will always be takers for both options, and (let's face it) the online option makes for much cheaper overseas speakers. Plus the technology is in the bag: Charlotte Emery and her Conference Innovators team did a fine job successfully juggling speakers from Washington DC, Brussels, Sydney and Melbourne, as well as hosting online attendees from Australia and New Zealand. Hat-tip, too, to workshop dinner venue Dockside: confit duck, twice-cooked pork belly, and dark chocolate torte worked for me.

The big opening keynote, chaired by Lane Neave's Anna Ryan, was the University of Chicago's Dennis Carlton on merger retrospectives. This wasn't Dennis's first CLPINZ rodeo - he gave the keynote at CLPINZ #21 in 2010 - and it was great to have him back as one of those heavy academic hitters who can put economics across in plain English and whose analysis is informed by getting his head around real world cases (he was involved in Air New Zealand / Qantas, for example). Dennis said that competition authorities obviously ought to look back and see how their merger decisions played out, but they should focus not just on the market pre- and post-merger, but also, in the interest of upping their game, on how well their modelling and analysis at the time actually played out later. One of his examples was US airlines, where six big airlines merged down to three (Delta/Northwest, United/Continental, American/US Airways): you'd guess (well, I would, anyway) that this would not be good for the travelling public, but in the event his econometrics showed quite clearly that "these mergers have been pro-competitive, with no significant adverse effect on nominal fares and with significant increases in passenger traffic as well as capacity".

Commentator, NZ ComCom chief economist Lin Johnson, spoke about local merger experience. My takeaway was that it could be a temptation to be overoptimistic about the prospect of expansion, entry, re-entry, or imports effectively constraining the merged entity. For overseas constraints, like new entry or import expansion, it's particularly important to make sure that new entry is indeed on the strategic agenda of the mooted entrant, and that (even if willing to come in) world market conditions don't make other options elsewhere more attractive. And it's worth checking the sensitivity of would-be import expansion to small changes in exchange rates. And both Dennis and Lin talked about the importance of thinking ahead about the sort of data you'd like to have about post-merger outcomes.

Next up, chaired by Russell McVeagh's Troy Pilkington, we had John Land on 'Anti-trust and IP' (i.e. intellectual property), with Russell McVeagh's Petra Carey as commentator. The argument was that proposed changes to s36 of the Commerce Act (moving to an 'effects' test for abuse of market power) and to s45 (repeal of the provision whereby merely enforcing your patent rights didn't put you foul of s36) could end up interacting in an unhelpful way. The risk is that perfectly unexceptionable commercial patent-licensing, which could even be efficient and pro-competitive, could be miscast as having the effect of constraining competition. If I were the Economic Development, Innovation and Science Select Committee, which will let us know its views on the Commerce Amendment Bill in mid September, I'd be tempted to rethink repeal of s45.

Onwards to 'Economic regulation of water', chaired by Chapman Tripp's Simon Peart, with NERA's Will Taylor and Water New Zealand's CEO Gillian Blythe as speakers - Will laying out exactly what the regulatory issues are in the current programme of 'Three Waters' reform (drinking, storm, and waste), and the tools that might be used to achieve them, and Gillian giving us a lot of helpful background on how the industry operates. If this is all news to you (as it mostly was to me), then you'll find the reform proposals here, while Gillian pointed us to this very useful trove of water performance data. Sadly, the story hitherto is one of an immensely fragmented system with a chronic infrastructural deficit and periods of acute crisis (think Auckland's inadequate reservoirs, Havelock North's drinking water, Wellington's pipebursts). Incentives to foster dynamic efficiency have clearly either fallen down or are perverse (eg electoral incentives to keep the rates down today while the pipes burst tomorrow). The proposed consolidation into four national water service entities looks a useful first step: whether better dynamic incentives will kick in, though, isn't at all clear.

Session 4, chaired by Bell Gully's Glenn Shewan,  was on media bargaining codes, which took us into the competition issues of bargaining imbalances between the big social media platforms and the news media, and what, if any, compensation should be paid by the likes of Facebook and Google for the public good of news provision. King & Wood Mallesons' Wayne Leach took us through the system Australia has set up (it's Part IVBA of their Act), while we got New Zealand industry viewpoints from Stuff's Editor in Chief Patrick Crewdson and NZME's General Counsel Allison Whitney. Wayne posed a number of questions, with maybe the big one being whether competition law can, or should, be extended to solve all the world's ills. And while Patrick claimed not to be an economist, he nonetheless managed to reason his way exactly to where an economist would have got on externalities (tax negative externalities like conspiracism and fake news, subsidise positive externalities like non-partisan newsgathering).

If session 4 had wondered whether competition law has a role in regulation of digital platforms, session 5, chaired by DLA Piper's Alicia Murray,  wondered what, if anything, it could or should do to assist with rolling back climate change. Brussels based Jordan Ellison from Slaughter and May took us through how European competition law can in theory be compatible with firms' cooperating for environmental benefit: a 'carbon defence' would apply if, say, three firms collectively agreed on some action to eliminate X tonnes of emissions, and would be safe from challenge if the value of any subsequent price rise to consumers was less than the overall saving to society from the emissions saved. The commentator, principal economist Reuben Irvine of ComCom, reminded us of 'Sustainability and Competition - Note by Australia and New Zealand' (available, with other useful stuff, here), where the good news is that in both countries the definition of a net benefit is wide enough to encompass things like environmental payoffs (as, for example, it was also wide enough to accommodate the democratic value of media plurality in the mooted Stuff/NZME merger). We'd have less difficulty accommodating genuinely (net) beneficial cooperation than the Europeans might. That said, inter-competitor agreements shouldn't be the default, and businesses shouldn't be able to stop competing in the sustainability dimension of their product offerings without some vigorous tyrekicking.

And finally we got to 'Consumer data right and open banking', chaired by moi but with the heavy lifting on the session structure largely down to Will Taylor. Rosannah Healy from Allens in Melbourne took us through the Aussie experience with legislating for consumers' control over the assignment and use of their data: they've been up and running since 2017, while we're still at the stage of planning legislation for next year (you can read our policy decision here). And Josh Daniell, CEO of open finance platform Akahu (mission, "to empower consumers to gracefully control and leverage their personal data")  showed us what sorts of applications we are actually likely to see in New Zealand. The CDR is a really exciting development: in principle, it should reduce switching costs and enable new entry in sectors such as banking (typically one of the first cabs off the rank when CDRs get underway), electricity, and  telecommunications. In practice, it tends to take quite a bit of drawn-out sector-specific customisation, but I wouldn't underrate its potential to be a game-changer over the longer haul.

Two final thoughts. One was that the workshop would would have been good in any event, but got an extra boost from hearing from industry players like Gillian, Patrick, Allison, and Josh: at our table (a motley crew of economists, lawyers, officials and enforcers), we all felt we learned a lot from them. And the other, which emerged across various sessions, was that the Commerce Act is looking decidedly moth-eaten. There have been targeted reviews of bits of it (like the one that culminated in the current s36 proposals and the, overdue, ability for ComCom to conduct market studies), but when you look at the current inability of ComCom to establish industry codes (à la supermarkets inquiry), or to accept behavioural undertakings in mergers, or to issue interim authorisations as it used to be able to, or elsewhere (eg the clunky wording of the retail price maintenance sections), it looks like it's time for a vigorous spring clean.

Wednesday, 30 June 2021

What got snuck in

We only got through Day 1 of last week's NZ Association of Economists' annual workshop before the Plague shut us down, but it was interesting while it lasted (full programme here - there's a fair smattering of the papers available to download), and on the positive side at least we snuck one day in, unlike the total lockdown wipeout of 2020.

The first keynote was ecological economist Marjan van den Belt on 'Aoteanomics; A Vision for a Thriving, Just and Sustainable Aotearoa NZ' (brief abstract here). If you're a fan of, say, Kate Raworth's Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist, then this was for you. I liked her emphasis on systems thinking/modelling that captures all the positive and negative aspects of any policy, and accounts for the inter-relationships between the various moving parts. 

But I didn't agree that economics as we all know and love it today isn't up to, or interested in, handling issues like climate change or other environmental degradation: you don't get far into an economics course these days without bumping into 'externalities' and how to deal with them. And she's what I might call a technology pessimist about the ability of technological change to get us out of the climate and pollution hole - "we can't efficiency our way out" as she put it - whereas I'd point to the likes of the plummeting cost of solar energy or indeed the speed with which Covid vaccines were developed. The last 20th / early 21st century is an odd time to be downbeat about inventiveness.

From the concurrent session options, I picked 'Auckland Council - Urban Economics'. The big takeaway for me was the work done by David Norman (the former chief economist for the Council) and his colleague, now acting chief economist, Shane Martin, on whether the planning constraints which apply inside the Rural Urban Boundary (RUB) are responsible for the very high prices of Auckland housing land when compared to land outside it. As an Auckland resident regularly gobsmacked by the price of land, I'd have been prepared to bet a reasonable amount of money that they did, but at least for now I've been disabused. After comparing like-for-like land (eg correcting for the value of closeness to amenities and a zillion other hedonic features) there's virtually no RUB factor, as shown below (from the version of the paper available on the Council's Economic Advice page).

After coffee it was time for Motu's Arthur Grimes on 'Reinterpreting Productivity: New Zealand’s Surprising Performance'. Well worth reading: while the stylised narrative is that New Zealand has gone to hell in a handbasket in terms of relative international performance over time, Arthur argued (pp22-3) that "The country enacted reforms in the 1980s and early 1990s that improved allocative efficiency as well as technical efficiency. The result has been one of the strongest performances of any developed country in the growth of sustainable consumption possibilities over the second 24 year period covered by our data" (i.e. the second half of 1970-2018).

In the afternoon the 'Household Economics' session had two papers looking at how extra tax credits and extended parental paid leave since 2018 had worked out (one paper is up, here): my overall impression was they made a difference (in a good way) but more could be done. Victoria's Norman Gemmell presented on behalf of his co-authors Nazila Alinaghi and John Creedy on 'Do Couples Bunch More? Evidence from Partnered and Single Taxpayers', which looked at the bunching of people's tax returns around marginal tax rate thresholds. 

There were questions from the audience suggesting that it looked like tax evasion: it isn't (or not necessarily), because (a) that's the way the tax system is, or as the paper says (p25) the system "imposes relatively weak constraints on intra-family income sharing" and (b) the income split is inherently arbitrary for self-employed couples. If one partner stays home to let the plumber in while the other goes out to meet a client, who's contributed what? It was also a reminder that while the all-knowing always-calculating homo economicus may be a caricature of how people behave, people aren't stupid, either, and are perfectly capable of making fine adjustments to their affairs to their own best advantage.

Finally I went to the 'Commerce Commission: Market outcomes in the retail fuel and electricity markets' session (natch). Quick hat-tip to the Commission and the NZAE - there were years when the conference carried little or nothing in the competition / industrial organisation / regulation space, but in the last few years it's had its own regular slot.

The Commission's Ben Harris and Imogen Turner spoke on 'Valuing the harm to consumers in electricity markets'. I'd imagined beforehand that this might have been a go at estimating how much people were missing out by being on inappropriate pricing plans, but it actually looked at the value consumers ascribe to not suffering power outages. Human nature being what it is, people say they'd be hugely put out by an outage inflicted on them. But when offered cold cash to accept an outage, they turn out to take a much lower amount. Funny that. Why does the Commission care? Because the valuation goes into the regulatory regime to prevent the risk of electricity lines companies overbuilding ('gold plating') their asset base and providing levels of reliability that consumers do not actually want. More positively, it feeds into an incentive system rewarding lines companies for better-than-expected outage performance.

Finally Commerce Commissioner John Small took us over 'Empirical analysis on the retail fuel market study' (the study itself is here) and as part of it reminded us of this graph.

The dotted lines are when Z Energy was publishing the 'MPP', "the price that is used at most of Z Energy’s retail sites in the South Island and lower North Island" (market study, p296). The Commission said that, while there could be other explanations, from the graph "it appears that average margins increased during the period when the daily MPP was published, and have levelled off or decreased since publication ceased ... The evidence therefore appears to support our conclusion that the retail market is
conducive to tacit coordination through price transparency and leader-follower pricing" (p298).

The petrol industry is getting close to the pointy end of implementing the recommendations of the market study (a wholesale market, liberalised wholesale supply contracts, publicising the price of 95 octane, and enhanced information provision). My guess would be that the Commission will wait and see how effective they've been, but at some point I'd bet that they will be combing the evidence to see if they've dealt to that "tacit coordination".

Monday, 28 June 2021

So far so good. What next for fiscal policy?

If the Plague had indeed broken out big time last week in Wellington, it would have taken out a high proportion of the country's economists.

No, don't be like that, and put that champagne back in the fridge - fingers crossed, our Sydney visitors don't appear to have spread the pandemic here. But if they had, there was a combo of the Treasury / Reserve Bank workshop on fiscal and monetary policy in the wake of Covid (Tuesday), and the annual shindig of the New Zealand Association of Economists (Wednesday and Thursday, though Thursday got cancelled when Level 2 was brought in). Just about everyone with an interest in macro policy and economic research were all in the same lecture halls at Vic - a very short virus-exposed walk from Rydges Hotel, one of the 'locations of interest'.

Tuesday's workshop (full programme here) kicked off with a keynote, 'New challenges for macroeconomic stabilisation policy: The role of fiscal policy', from Treasury Secretary Caralee McLiesh. What I took away was that we've done well through Covid: as she said (p3) "Overall these [supportive monetary and fiscal policy] interventions, alongside a health response that successfully eliminated COVID-19 in New Zealand, have been effective in supporting the New Zealand economy, which has outperformed our forecasts since the beginning of the pandemic". By international standards we've ended up in a good place, and pushed the fiscal lever hard to get there, as these graphs from her speech show.

Fiscal policy fired up quickly (even if a begrudging part of me wants to add "for once"), and got the support out in literally hours, in some cases, to applicants for wage subsidies. And there's been a corresponding re-assessment of how well fiscal policy can help stabilise an economy against cyclical shocks, with our wage subsidies and the Australians' and Americans' cheques-in-the-mail approaches all clearly effective, and in a timely way.

The supposed pre-Covid consensus that monetary policy was the best cycle stabilisation tool and that fiscal policy would be too lumbering to do any good, has been rather overstated. It was never that clearcut: monetary policy, after all, famously operates through long and variable lags, so isn't necessarily the quick fix some folks touted, and fiscal policy isn't always on a 'turn the first sod in twenty years' Transmission-Gully-style timetable. But in any event the new consensus is that they can both be deployed to good effect early in the piece.

Some commentators see a new, bigger role for fiscal policy as potential over-reach. Michael Reddell in his blog piece on the workshop, 'Fiscal policy in the wake of Covid', felt that "When a half-baked loaf is finished cooking it can be a fine thing, but this loaf seems to need a lot more work before New Zealanders should be rushing to embrace a much more active role for fiscal policy or a lot more public debt". The NZ Initiative's Eric Crampton in 'Govt making the case for higher levels of debt for longer' said that "If the core of the public sector is happy with higher debt levels, despite clear failures in ensuring that funded projects pass any reasonable cost-benefit assessment, greater prudence is needed in how that debt is issued". 

The exact scale and scope of future fiscal activism is still in sum very much up in the air, though if McLiesh is right, and we are indeed headed into a world of permanently lower interest rates, then I hope one outcome is that we pull finger and get on with the overdue infrastructure we need and which have now become significantly cheaper to finance. Which I've been saying for at least the last five years ('A once in a generation opportunity'). 

In  any event you don't have to just sit there and take what's dealt to you in the fullness of time. Treasury is reviewing our macroeconomic frameworks, and you'll get your chance to put in your tuppence worth. There's an e-mail address at the site if you want to get involved.

Wednesday, 26 May 2021

The Bank and the markets are on the same page

First thing you notice about today's Monetary Policy Statement?

Well, maybe the second thing, after the wholly expected news that the official cash rate or OCR will be staying where it is for quite a while yet, as (for example) all 13 folks surveyed on the Finder OCR preview page had anticipated.

The possibility of an OCR cut is now remote. The February Statement had said, "The Committee agreed that it remains prepared to provide additional monetary stimulus if necessary and noted that the operational work to enable the OCR to be taken negative if required is now completed". The April Review had said, "The Committee agreed that it was prepared to lower the OCR if required". And in this one? Any cut to the OCR has been taken out the back and quietly buried. Which makes complete sense: the futures market has already moved on and has been signalling no further cuts for a while now.

We're back to the good old days when the Bank published a projection for the OCR, rather than the notional "unconstrained OCR" construct it had been running with in recent Statements. And here it is.

As the Bank says (p17), "This projection is conditional, in that it communicates the policy path required to meet our monetary policy objectives subject to the economic outlook and the assumed impacts of other monetary policy tools", and it is not "forward guidance", or the Bank's formally tipping its hand about likely future moves, and if the outlook changes the projected OCR path will, too. But all that said, it's the best take we've currently got on what the Bank is likely to do next. It also agrees with what the markets were expecting, which was an OCR hike of 0.25% around the middle of next year and another one by the end of 2022..

On the Really Big Question that is bothering central banks right now - are current signs of inflationary pressure a signal of permanently higher inflation down the track, or will they go away as (eg) Covid effects wither away? - the Bank has come down largely on the temporary side: 

"The Committee discussed the risk that these one-off upward price pressures may promote a rise in more general inflation and inflation expectations. However, the Committee agreed that these risks to medium term inflation were mitigated by ongoing global spare capacity and well anchored inflation expectations" (p3), and

"we expect the broader impact on consumer price inflation to be moderate and temporary. Our projection assumes that goods supply-chain bottlenecks begin to ease in late 2021, and dissipate gradually over 2022. There are already tentative signs that the strong global demand for goods is abating, as easing of public health restrictions abroad is lifting demand for services such as eating out and travel. In addition, we expect labour shortages will lessen as border restrictions ease and more workers are able to come into New Zealand" (p28)

though if the Bank's wrong it will have to do something about it, or as it put it (p19), "there is some risk that the change in prices is more persistent and leads to ongoing inflationary pressure. Consistent with the [Monetary Policy] Remit, the MPC [Monetary Policy Committee] would be expected to respond to ongoing inflationary pressure if it were perceived as being inconsistent with the inflation target".

One bit of good news in the Statement is that while we are not in completely calm waters yet, some of the extreme risks around the economic outlook have dissipated: "Confidence in the outlook is rising as the more extreme negative health scenarios wane given the vaccination progress globally. We remain cautious however, given ongoing virus-related restrictions in activity, the sectoral unevenness of economic recovery, and the weak level of business investment" (p2). 

On Covid, the Bank is operating on the basis that "New Zealand is assumed to remain at Alert Level 1 or a lower level of restrictions over the projection ... Border restrictions are expected to begin to ease more broadly from the beginning of 2022. The majority of New Zealand’s adult population is assumed to be fully vaccinated by the end of 2021" (p34).

Thursday, 20 May 2021

Cyclical course-setting? Pretty good

Does the Budget set a sustainable course? Is it appropriately boosting or braking the economy? Short answer to both: yes.

Here's the 'true' or 'underlying' state of the Government's finances (from pp34-35 of today's Budget Economic and Fiscal Update) which uses the methodology I talked about the other day. The solid blue line shows the headline deficit, and the green line shows the underlying position when the headline figure is adjusted for the state of the economy. The thing to keep a watch on is the track of the underlying cyclically-adjusted balance, and from a sustainability point of view it is tracking as it should. It's gradually moving back towards balance, which is a good thing to do over the longer haul, but not disruptively quickly, which is the right thing to do in the still-unsettled short term.

The government is running ongoing deficits (cyclical and structural), so over the forecast period it is supportive all the way (it's adding more to the economy than it's taking out). But it's also useful to look at whether it's becoming more supportive, or less. That's estimated by the 'fiscal impulse', the change in the underlying cyclically-adjusted position from one year to the next (shown below).

This looks pretty reasonable, too. There was an appropriately huge increase in fiscal support in the June '20 year, to the tune of just over 6% of GDP. The degree of support is being eased back a bit in the current June '21 year, and that makes sense, as the Covid downturn wasn't as bad or as long as expected, and the rebound has been faster and stronger than first thought. 

You could make a case that the forecast increase in fiscal support in the June '22 year isn't necessary from a cyclical point of view: we're looking at a period of expected GDP growth of 2.9% (current '20-'21 year), 3.2% ('21-'22), and 4.4% ('22-'23) which doesn't add up to the strongest case for revving up the degree of fiscal stimulus. 

On the other hand, the unemployment rate at June '22 is expected to be 5.0%, and there is an argument (explicitly made by the Aussie Treasurer Josh Frydenberg in his Budget earlier this month) that you should keep the fiscal pedal to the metal until the unemployment rate has a 4 at the front. So no biggie either way, and at least the years beyond '21-'22 show an appropriate ongoing unwinding of the Covid-era fiscal stance.

In terms of setting the best fiscal course, on the left lay the lure of buying everything in the toyshop, on the right an "I'm more fiscally responsible than you" austerely fast return to surplus. This Budget has steered pretty well through those extremes.

Wednesday, 19 May 2021

Small issue, little interest, move along

Last week I turned up (by video) at the Economic Development, Science and Innovation Select Committee to have my say about the Commerce Amendment Bill: supporting reform of s36 (abuse of market power), suggesting that the Commerce Commission should be able to issue quick-fix provisional authorisations like the ACCC can, and arguing against the information sharing powers being proposed for the Commerce Commission.

Very few people seem to care about the information sharing issue. There were 29 submission on the bill but on my count only 5 of them raised the information sharing powers. 

They were the Commission (for); Edward Willis of the University of Auckland Law School ("tentative support, subject to some reservations"); Malcolm Harbrow (Twitter's Idiot/Savant and No Right Turn blogger), who wanted to make sure the new provisions weren't used to subvert application of the Official Information Act (good idea); and Russell McVeagh and me (both opposed). Russell McVeagh in their executive summary say "Such expansion of powers will disincentivise businesses from voluntarily providing information to the Commission to the detriment of the current levels of efficiency in the discharge of the Commission's significant number of functions", and I agree, though I also have wider issues, as I said in my submission.

So: not many people care. And maybe it really is no biggie. At the Committee hearing the Commission sang quite a good "we're all public sector entities trying to work together" song, and I can imagine that hitting the spot. And to be fair it has guidelines (the relevant bits are pp33-4) which set a reasonably high threshold for sharing information. 

The guidelines say that "Other than as provided for in the specific situations discussed below we do not share evidence with other New Zealand or overseas law enforcement or government departments or entities". The specific situations are: joint investigations; Fair Trading Act sharing with the FMA and Takeovers Panel (allowed for in that Act); where there might be serious fraud (allowed for under the SFO's Act); where there might be serious criminal offending (sharing with the likes of the police); where there might be a serious threat to public health or public safety (whatever agency is relevant); and assisting overseas regulators the Commission has a cooperation agreement with (allowed under various Acts including the Commerce Act).

That's all sensible and desirable, and if the Commission carries on along those lines, and you'd expect it to, all good. But the problem is that the proposed legislation doesn't replicate those high standards. It just says (proposed s99AA) that 

(1) The Commission may provide to a public service agency, a statutory entity, or the Reserve Bank of New Zealand any information, or a copy of any document, that the Commission—

(a) holds in relation to the performance or exercise of the Commission’s functions, powers, or duties under this Act or any other legislation; and

(b) considers may assist the public service agency, statutory entity, or Reserve Bank in the performance or exercise of its functions, powers, or duties under this Act or any other legislation

That opens a very large door: "Any information ... that ... may assist" a public sector entity is a far looser criterion than the serious criminal offending, or serious threat to public safety, that the Commission under its present guidelines would need to see before it was prepared to share. 

Ed Willis is his excellent submission (more judicious than my own coathanger tackle) said, and I'm with him, that 

it would usually be expected that processes for the protection of relevant interests and the promotion of transparency would be incorporated into the statutory drafting itself rather than being left to the Commission to work out in practice. That said, the real issue here is one of appropriate balancing. The Committee may wish to question the Commerce Commission directly about the anticipated procedures it will employ to ensure any information sharing under the new provisions is appropriate and fit-for-purpose. Only if the Committee is satisfied with the Commission’s response should it recommend that the Bill be enacted in its current form (p5)

Tuesday, 18 May 2021

A practice run

We've got the Budget coming up on Thursday, so as a limbering up exercise let's have a look at how to figure out whether the Budget will be braking or boosting the economy. 

You'd think that would be one of the top things the media would cover, but in practice they don't, or not well. Far more attention goes on "the" deficit or "the" surplus, on the debt profile and fiscal sustainability over the longer haul, and on specific initiatives. They're all fine, and worth the attention, but they don't tell you whether the Budget will be helping the economy when it needs help, or tapping the brakes when it's threatening to get boisterous - the 'stabilisation' role for fiscal policy, as they say.

So as a practice run at figuring out what cyclical impact Budgets have, here's a graph of what happened in the Aussie Budget that their Treasurer Josh Frydenberg presented last week (taken from their big Budget document, Budget Paper No. 1: Budget Strategy and Outlook).

Start with the solid black line. That's the historic and forecast path of "the" deficit or "the" surplus, the headline figure commentators tend to obsess on. Indeed in both Australia and New Zealand it's become almost a macho indicator of "I can run the Treasury better than that other lot", and any Treasurer that can't point to an actual or forecast surplus must be doing it wrong. Infantile, but that's the politics of it for you.

Now have a look at the 2018-19 year, which I've helpfully identified with that green arrow.

You'll see that the headline outcome was effectively a balanced Budget, with no material surplus or deficit. But what actually happened was that the headline outcome was flattered by a stronger than usual Aussie economy. You can make a decent stab at calculating how much extra tax revenue (or how much reduced government spending on benefits) was down to the good times, and that's shown in the blue bar. It was about 1% of GDP. Without that temporary windfall, the reported headline balance turned into an underlying cyclically-adjusted deficit of about 1% of GDP (the red bar).

No great dramas either way, other than (a) illustrating the point that a Treasurer's "success" in putting a balanced or surplus Budget in the window may have nothing to do with their responsible fiscal management and rather more to do with the state of the economy and (b) reminding us all to watch what's happening to the cyclically adjusted balance as a better guide to what's really going on with the stance of fiscal policy.

Onwards to 2020-21 (the orange arrow). There's a headline deficit of a bit less than 8% of GDP, flattered a bit by cyclical conditions (including the Aussie Treasury clipping the ticket on record high iron ore prices), so the underlying deficit is actually a bit bigger, at a little over 8% of GDP.

The Aussies have quite helpfully split out the underlying deficit into two bits - how much is down to temporary anti-Covid measures (the teal-coloured bar), and how much is genuinely 'structural' (the red bar) and will still be there when things like their JobKeeper wage subsidy scheme have dropped away.

Them's the concepts. What do they tell us about the cyclical role of Aussie fiscal policy?

First of all, that in the current 2020-21 there will have been a stonking great 7% or so of GDP as anti-Covid fiscal support, on top of some 2% of GDP in the 2019-20 year. This is fiscal policy doing its stabilisation stuff, and then some. I have no problem with that: it's possible that Finance Ministers pretty much everywhere ended up overdoing it a bit, but that's okay. Providing too much counter-cyclical support is a hell of a sight better mistake to make than providing too little. 

It also shows, by the way, that fiscal policy when it puts its mind to it, can be deployed very forcefully and very quickly. That wasn't the accepted wisdom pre-Covid, but is now. 

Next thing you'll notice is that Freydenberg was in no hurry to take the Covid support away: it tails off gradually. That's probably right, too: some sectors dependent on an open border will still be hurting for quite a while yet (the Aussies' assumption in this Budget was their border not opening till mid '22). Frydenberg explicitly chose to put a higher priority on near-term cyclical support over the pace of eventual deficit reduction, and one of the key things I'll be looking for in our Budget was what choice Grant Robertson has made.

You can measure how quickly support is being taken away: it's a thing called the 'fiscal impulse', and it is the change from one year to the next in the size of the structural balance. Think of it this way: suppose this year you get $100K in wage subsidies, but next year you only get $50K because the package gets tightened up. You're still being supported, but less so. The fiscal impulse picks up that degree of tightening. For some reason the Aussies don't bother calculating it (search their Budget Paper No.1 for 'impulse' and you get nada), but we do. It's the very first figure I'll be looking for on Thursday.

Even after all the Covid support is gone, Frydenberg has also decided to take his own good time to deal to the non-Covid structural deficit, which will still be running at 1.5% - 2.5% of GDP in the later years of this decade. That's more debatable, but to the extent that an ongoing deficit reflects using once-in-a-lifetime low borrowing costs to provide infrastructure, I can live with that too. Again it'll be interesting to see what choice we make.

Monday, 10 May 2021


Every year the American Economic Association picks the year's best paper from each of its four journals (Applied Economics, Economic Policy, Macroeconomics, Microeconomics): there's a list of the winners for the past decade here if you'd like to catch up with the good stuff. In a nice touch, you can download the full text of each one without being an AEA member. 

So us pro-competition types can feast, for example, on the finding by the 2016 Economic Policy winner ('Death by Market Power: Reform, Competition, and Patient Outcomes in the National Health Service') that increased competition in the UK's National Health Service worked:

Within two years of implementation, the NHS reforms resulted in significant improvements in mortality and reductions in length of stay without changes in total expenditure or increases in expenditure per patient. Our back of the envelope estimates suggest that the immediate net benefit of this policy is around $479 million per year

Fernando Luco, who hails from Texas A&M University, is this year's winner in the Microeconomics category with 'Who Benefits from Information Disclosure? The Case of Retail Gasoline'. This one, though, doesn't have such an unambiguously happy moral.

Our story starts in Chile in 2012, when the government required petrol stations to post their prices on a government website and update them promptly (within 15 minutes) whenever they changed. An everyday tale of empowering customers to find the best deal, you might think.

Except that petrol stations' margins increased by some 9% after the new disclosure policy, and various statistical checks confirmed that it was indeed the disclosure policy, and not some non-policy event happening at the same time, that was behind the petrol stations coining it.

What went on? As the author says (p278)

information disclosure may have both pro- and anti-competitive effects. On the one hand, disclosure may intensify competition if consumers benefit from lower search costs and firms use the website to compete more intensively. On the other hand, if stations can easily monitor their rivals’ actions and consumers do not actively use the disclosed information, disclosure may facilitate coordination

so it could go either way, and the net effect depends on who uses the info smartest.  As it happens, the author had a dataset of smartphone price look-ups, geocoded, so he could see in each local petrol market how actively people were checking out the prices on offer. In aggregate, the petrol stations won - but not everywhere (p302):

price disclosure allowed firms to monitor their rivals’ actions and to increase their payoffs on average. However, when consumers actively engaged in search [which he could tell, from his dataset], the demand-side response to disclosure dominated and competition intensified

The more smartphone-savvy higher income areas came out okay, lower-income areas not so much: "while in the lowest income areas margins increased by around 12 percent, margins decreased by 4 percent in the highest income areas, suggesting that disclosure affected low income areas the most" (p296). 

Bottom line from a competition policy point of view (p303)? 

mechanisms that increase market transparency may increase competition and benefit consumers only if consumers can easily access and use the disclosed information. Otherwise, the supply-side response to disclosure is likely to dominate, and the intensity of competition will decrease. Hence, this paper provides evidence showing that policy makers should consider ease of access to the newly disclosed information to be of major importance

In a New Zealand context, I suspect smartphone use probably doesn't vary as much with income as (I'm guessing) it does in Chile. Even so, the general proposition still applies: a price disclosure Cunning Plan has the potential to be a good pro-competition pro-consumer idea, but only if there's a good deal of effort put into making sure people from every walk of life end up using the thing.

Thursday, 18 March 2021

The pointy end

Almost seven years ago,  the Productivity Commission raised it as an issue worth looking at. MBIE put out an issues paper in 2015; submissions rolled in in early 2016; the government kicked for touch in 2017; MBIE put out another discussion paper in 2019; a policy paper went to Cabinet in February 2020; and at long last a Bill was introduced this month. The Commerce Amendment Bill 2021 is now with the Economic Development, Science and Innovation Select Committee, which is due to report back by September 16. 

In sum, we've finally got to the pointy end of doing something about s36, the bit of our Commerce Act that is supposed to rein in powerful incumbents from abusing their market power, but doesn't. The Bill provides for changing our s36 wording from the current unsatisfactory

"A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of — (a) restricting the entry of a person into that or any other market; or (b) preventing or deterring a person from engaging in competitive conduct in that or any other market; or (c) eliminating a person from that or any other market"


"A person that has a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in — (a) that market; or (b) any other market".

It gets us out from under all the problems "taking advantage of" has caused in our competition jurisprudence, and for good measure lines us up with the Aussies, who made the same change to their equivalent legislation back in late 2017.

Submissions to the Select Committee are due by April 30, so it's time to start putting your thoughts together. If you want to keep track of how the Bill is going, you can sign up to get e-mail alerts from the Select Committee here and you can follow progress at the Bill website.

I will be submitting in wholehearted support of the change to s36 for the reasons I mentioned last year when the policy paper went to Cabinet ('It creeps ever closer'), and I hope others will, too. But I'll be opposing one element of the Bill. Last year I didn't like the look of a proposed amendment, giving the Commerce Commission powers to share information it holds with other public agencies: I thought that "there should be a tough threshold test before any of that information gets passed around the wider public sector agencies", and indeed the Cabinet paper had talked about "appropriate safeguards".

In fact the proposed level of safeguarding is pitiful. The Bill at s99AA(1)(b) provides that the Commission can hand information over when it considers it "may assist the public service agency, statutory entity, or Reserve Bank in the performance or exercise of its functions, powers, or duties under this Act or any other legislation".

"Hey, guys, you might find this handy" is no safeguard at all.

Thursday, 11 March 2021

What's next?

The OECD came out this week with an update to its economic outlook and a set of policy recommendations. If you've wondered how New Zealand has been faring through the Covid outbreak, relative to my selection of the usual suspects, here's how we went in 2020 (we're red, and there are a couple of comparators in green, the OECD, and the world as a whole) ...

and here's how the OECD sees 2021 going ...

... and here's their best guess at 2022.

We scrub up pretty well when you look back at 2020: we had a typical-sized downturn (a tad worse than the world as a whole, a tad better than the typical higher-income OECD country), but for a much better Covid outcome than in most places, so as a package it's pretty impressive. Longer run, it looks, unfortunately, like back to the pre-Covid status quo: the OECD says we should expect relatively slow growth by either world standards or by comparison with our better-off peers.

On policy, beyond the obvious big macro settings (" A premature tightening of fiscal policy must be avoided.  The current very accommodative monetary policy stance should be maintained"), the OECD's recommendations are
  • "vaccinate fast" (Co-ordinate and accelerate vaccination of adults across the world, ensure poor countries receive their fair share of doses, and improve funding for the COVAX initiative, ensure effective test, track and trace programmes)
  • "invest fast" (Speed up implementation of new spending boost growth and jobs, help businesses adapt to a digital future, privilege grants and equity-type support over debt to give viable small and medium-sized companies the space to develop, invest in cleaner infrastructure and digital technology to foster a transition to a more resilient and sustainable economy) and
  • "support people" (Protect the incomes of people hit hardest by the crisis, help the low skilled and the vulnerable, improve training schemes and access to the labour market, focus on youth – young people need particular support now and to help them prepare for a changing world of work)

and who's going to argue with any of that, though you have to feel that "invest" and "fast" do not come easy to New Zealand policymakers, and I'll be pleasantly surprised if it happens. It would be nice if, for once, we just took the OECD's ideas and ran with them quickly and comprehensively: unfortunately, our track record is not crash hot ('Are we serious?', 'Take advice? Moi?').  Among other things, we wouldn't have today's housing market problems if we'd listened to the OECD's suggestions, going back to 2017, on how to address them. 

Wednesday, 3 March 2021

What if they threw a party ...

... and nobody came?

Which, in the competition space, is where we've got to, with our attempt to make it easier for companies to collaborate to deal with problems like Covid disruption to supply chains. We set things up to make it easier and faster for the Commerce Commission to authorise collaboration - but nobody's used the new dispensation.

Here's the background. The COVID-19 Response (Further Management Measures) Legislation Act 2020 went live mid May of last year. Its heart was in the right place. During an 'epidemic period', a new s65AD of the Commerce Act allows the Commission to issue a provisional authorisation. ss65AD(2) and (3) are the key bits:

(2) The Commission may make a determination in writing granting a provisional authorisation ... if the Commission considers it is appropriate to do so—

(a) for the purpose of enabling due consideration to be given to the application; or

(b) for any other reason.

(3) The Commission is not required to comply with section 61(5) to (6A) before granting a provisional authorisation

(3) means that the Commission doesn't have to hang about and be "satisfied" - the test in normal times, under s61(6) - that the collaboration would provide "a benefit to the public which would outweigh the lessening in competition that would result". It can just say, get on with it for now and we'll do a fuller analysis later. Right on.

As fellow aficionados of New Zealand's mania for micromanagement will appreciate, you don't see the wide discretion of "for any other reason" written into the Kiwi statute books too often. In fact it's a straight crib from the Aussie equivalent (for wonks, s91(2)c of their Competition and Consumer Act). The ACCC has been able to do "interim" authorisations all along, Covid or no Covid, and you'd think that's a sensible plan.

Oddly, our own Commission used to have the power to issue provisional authorisations under the then s63 of the Commerce Act, but that got repealed by s22 of the Commerce Amendment Act 1990. Go figure.

Never mind, here we are today, back to the original status quo, even if it only applies in epidemic periods. Given that in normal times getting an authorisation strongly resembles wading through hip-high tar for months carrying a complete bound set of Econometrica, something cheap, cheerful and, above all, fast, was just what was needed to enable urgent collaboration in the public interest.

But nobody's used the new process. There have been no applications for authorisation under the new provisions.

Which is odd, because over in Oz, the ACCC has been issuing interim authorisations all over the place: public and private hospitals, medical wholesalers, grocery retailers, banks, regional airlines, and fuel importers and distributors. It's been commendably quick - overnight, on one occasion - in turning the applications around, and it's been putting pro-competitive safeguards such as time limits into them without nobbling the public welfare point of it all. 

What sort of stuff is being authorised? For the supermarkets, as an example, it was things like jointly addressing panic buying: "co-ordinating store hours, including allocating dedicated shopping hours for  elderly and disadvantaged members of the public during periods of high demand for Retail Products", "implementing uniform or similar purchase limits and related public messaging", and "measures to ensure continuity of supply to consumers in remote or regional areas, including securing special allocations of stock and joint requests to suppliers", as you can read in this draft determination.

Sure, Australia and New Zealand each have their own funny little ways, and there's no reason why we should do everything the same way. But I'm still bemused why helpful interim authorisations are flying off the ACCC shelves, while nobody's come into the Commerce Commission looking for one. Anyone got ideas?

Wednesday, 24 February 2021

An OCR cut isn't dead after all

Every economist polled before today's Monetary Policy Statement (eg here and here) said there'd be no change to the Official Cash Rate (OCR). Quite a few (including me) thought it's unlikely that any further cuts are on the table (and that the option of going to a negative OCR might even be taken off the table by the Reserve Bank); that the next move will be up (likely preceded by winding back some of the unconventional monetary policy tools); but that it's still necessarily a longish way away. Personally I was also wondering what weight the Bank would place on the December higher than expected inflation rate and the very much lower than expected unemployment rate.

The OCR did indeed stay at 0.25%. Taking it to zero or into negative territory has not, however, taken off the table: quite the contrary. The Statement said (p3) that it's now operationally do-able ("the operational work to enable the OCR to be taken negative if required is now completed") and the minutes of the latest policy meeting said (p6) that "The Committee agreed that it was prepared to lower the OCR to provide additional stimulus if required". There was even a section on pp26-7 headed "A zero or negative OCR would provide additional monetary stimulus, if required" and went into how it might work out in practice.

Adrian Orr was asked at the media conference about the pre-MPS expectation that a lower OCR might be sidelined: he said the bank prefers to maintain a full suite of options against whatever might befall down the track. Fair enough: personally I was starting to wonder whether a lower OCR catalyst might be the need to defuse any unwanted appreciation in the Kiwi dollar. 

The Bank is rightly being cautious on reading too much into the December numbers: "How long the recent recovery in inflation and employment can be sustained is highly uncertain ... Our baseline scenario for the economy, while starting from a stronger position than assumed in November, is subdued. Significant monetary stimulus remains necessary to confidently and sustainably meet our inflation and employment objectives" (p7). 

So there will be "a prolonged period of time to pass before these [inflation and employment] conditions are met" (p6) and "Meeting these requirements will necessitate considerable time and patience" (p3). How long? The Bank publishes a measure called the "unconstrained OCR"* which has a go at measuring the overall degree of stimulus: its latest one (p41, reproduced below) shows the existing level of stimulus increasing just a tad during the rest of this year, but gradually becoming less stimulatory (though still strongly supportive) through 2022 and into 2023. When will monetary policy be back at "neutral"? If (as Figure 6.4 on p50 suggests), a "neutral" OCR is something like 2%, chances are that we won't see one till 2024 or beyond.

There's usually some interesting one-off stuff in each Statement. There's a box (pp19-21) on current conditions in the Māori economy, and this new visualisation (p14) of conditions in the labour market, which does a nice job of bringing together the various ways you might look at the market to figure out how close you are to maximum sustainable employment. 

*In the May 2020 Statement, p11, it had said that "the Reserve Bank used a projection of the OCR to highlight the level of monetary stimulus needed to achieve our inflation and employment objectives. A fall in the OCR projection relative to the previous Statement meant that more policy stimulus was needed. We have had to modify this practice given the Monetary Policy Committee’s forward guidance on the OCR out to early next year and the use of alternative monetary policy instruments. We have opted to publish an unconstrained OCR ... This demonstrates the broad level stimulus needed to achieve the Reserve Bank’s monetary policy objectives, much like the OCR projection demonstrated in the past"

Saturday, 20 February 2021

You probably got ripped off, too

I'm involved with a training programme for an overseas competition agency, and we've been going through the law and economics of cartels: I've been talking about the detriments they cause. As it happens, there's a recent spectacular example of how bad they can be.

One of the gurus of cartel documentation has been John Connor, emeritus professor at Purdue and a senior fellow of the American Antitrust Institute. In 'Twilight of Prosecutions of the Global Auto-Parts Cartels', he's written about one of the biggest cartels ever (amounts cited are US dollars):

At last count 18 jurisdictions vigorously prosecuted this supercartel, which demonstrated exceptional duration, global reach, size, and injuriousness. Estimates for affected commerce of the Auto-Parts supercartel range from $3.2 to $5.0 trillion. There are few reliable estimates of overcharges, but averaging the few preliminary estimates suggests that injuries are in the range of $0.6 to $1 trillion (p1)

That's a pretty impressive level of overcharges, exacted from 17 different car manufacturers from around the turn of the millennium though to late 2009, when the cartels started to get rumbled. Chances are, if you bought a car in the 2000s, you're one of the vast number of victims yourself. Depending on what criterion you use, this was either the largest or second largest grouping of related cartels ever found.

Connor reproduced this picture, originally from a European Union enforcement announcement, showing just how many different components of a car got targeted by the cartels. Basically everything but the engine, the transmission and the bodywork got rorted. If the 'wire harnesses' rings a bell, that's one where the ACCC got involved: the Japanese company pinged in that case unwisely decided to appeal their fine, with appropriately karmic results.

There's a great deal of stuff to take away from this example, one being that companies can be too hard-nosed at bargaining for their own good: "Did the assemblers [the carmakers] push too hard on price reductions in the early 2000s, and thereby trigger supplier collusion to cope with an existential threat?" (p1). It's not a defence, and it doesn't even take us very far into tout comprendre c'est tout pardonner territory, and you shouldn't blame the victims, but (like the Lodge case here at home) you do wonder whether the damn thing would ever have happened in a more reasonable world.

And if you're into corporate strategy, you might want to think twice about all that financial engineering cleverness. You can't be rorted if you've vertically integrated that component. Divest it, though  - free up capital and all that good stuff - and you've opened up some vulnerabilities:

Perhaps it is no coincidence that collusion against GM began soon after it sold its Delco-Remy division in 1994, against Toyota after DENSO no longer supplied a majority of output to Toyota, etc. Any financial cost savings resulting from divestment may have backfired. Second, by delegating manufacturing of minor inputs (say, 2% or 3% of total material inputs) to ostensibly unaffiliated suppliers, the OEMs ['original equipment manufacturers', i.e. the carmakers] suffer a substantial loss of information about manufacturing costs and a consequent loss of bargaining power over price (p16)

The main takeaway from the cartel, though, is the ineffectiveness of the fines. We know the theory: if there's a 100% chance of being detected, a fine equal to 100% (or more) of the overcharging will deter; if there's a 20% probability, then a fine of 500% (or more). What actually happened here?

There are few reliable estimates of the size of overcharges for these cartels, and more are desperately needed, but averaging the few preliminary estimates suggests that injuries are in the range of $0.6 to $1 trillion. Even if monetary penalties rise to double the current $20 billion, cartel deterrence or cartel dissuasion is highly unlikely (p30)

Which does get you thinking about the alternative sanction of criminalisation - sending executives to jail - which we are about to introduce from April. In egregious cases like car parts, you can see why people would well reach for it. But as someone from the socially liberal end of town, I have two reservations.

Here's the first one (data from this Statista page, and originally compiled here). We're already well down the wrong end of this international comparison: we're just about the last country in the world that ought to be thinking about putting even more people in jail. 

And here's the other:

Unlike typical international cartel prosecutions in the past, few of the individuals held accountable by antitrust authorities in Auto Parts have been CEOs, COOs, or CFOs of their parent companies or even their subsidiaries ... Rather, they have held titles like sales manager, director, marketing manager, or department head of units below the corporate VP level (p27).

When we eventually press the criminalisation button, I hope we don't make the car parts mistake - jailing some midlevel functionaries, but letting the big fish swim free.

Monday, 1 February 2021

Good books 2021

Over the summer holidays we like to blob out and read, and I've caught up with some great titles.

In economics, top of the list are two excellent books, Zachary D Carter's The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes; and Matt Ridley's How Innovation Works. I've also enjoyed Daniel Markovits' The Meritocracy Trap (and in the same area I've got Michael Sandel's The Tyranny of Merit: What's become of the common good? lined up); and next on the runway will be Robert Skidelsky's What's Wrong with Economics? A primer for the perplexed. Tim Harford's How to Make the World Add Up: Ten Rules for Thinking Differently About Numbers focuses on the behavioural biases we bring to statistics, and is likely to prompt you to have a go, if you haven't yet, at Daniel Kahneman's fascinating Thinking Fast and Slow.

In biography, I hugely enjoyed Fredrik Logevall's JFK: Volume 1, 1917-1956, where the story reaches JFK's (in retrospect fortunate) failure to get the Democratic vice-presidential nomination in 1956 and his decision to go for the big one in 1960. Volker Ulrich's second volume, Hitler: Downfall, 1939-1945, necessarily has more military history than the politics and personalities of the previous Hitler: Ascent 1889-1939, but is also a good read. We've been blessed with some great biographies in recent years: try Ron Chernow's Grant (Ulysses S, that is), or Charles Moore's three-decker biography of Margaret Thatcher.

In politics, I defy anyone not to enjoy Sasha Swire's ringside view of the Cameron years, Diary of an MP's Wife. Still in the UK, both Gabriel Pogrund and Patrick Maguire's Left Out: The Inside Story of Labour Under Corbyn, and Tom Bower's Boris Johnson: The Gambler, are well worth reading. Anne Applebaum's Twilight of Democracy: The Failure of Politics and the Parting of Friends will get you thinking about the origins of polarisation, populism and demagoguery, and dovetails nicely with Ian Dunt's How To be a Liberal.

And in history I'm well into Ritchie Robertson's enormous The Enlightenment: The Pursuit of Happiness 1680-1790, and when that's finished I'll be starting Katja Hoyer's Blood and Iron: The Rise and Fall of the German Empire 1871-1918. If you've any nostalgia for hereditary rule, Martin Rady's The Habsburgs: The rise and fall of a world power will put you right. While you're wandering around central Europe, try Richard Fidler's The Golden Maze: A biography of Prague

After all that highbrow fare, I confess my fiction tastes run to private eyes and the more intelligent espionage thrillers. This summer's haul included the third in Glen Erik Hamilton's Seattle-based Van Shaw series, Every Day Above Ground, Peter Hanington's A Single Source (an oldstyle BBC Radio journalist gets caught up in illicit arms smuggling during the Arab Spring), Henning Maskell's After the Fire (he's best known for his Inspector Wallender books, this is a one-off), and Liz Moore's A Long Bright River (Philadelphia policewoman on trail of someone killing young women,and her drug addict sister is one potential target). I'm halfway through Cecilia Ekbäck's very well written The Historians, set in the murky politics of WW2 Sweden.

I'm a big fan of the physical book. I like the heft, the shape, the smell of a new book. Our house is stacked with them. So I've had to be dragged kicking and screaming to the idea of a Kindle. But now that I'm there, I have to say, it's terrific. See a good review, and you can have the book on your Kindle a few minutes later. It's great on a plane or anywhere else bulk comes into consideration. While I'll never begrudge the price of a good book, and I'm still reading both physical and digital versions, the Kindle price for the e-version is quite handy, too.  And if your partner's sleeping habits aren't synchronised with yours (ours aren't), with a backlit Kindle you can keep reading in bed when the lights are off.