When there's a will ...

You don't often see competition reform feature in the Budget, but we did last week.

"We are ... committed to boosting competition in the New Zealand’s grocery sector to ensure people pay fair prices for food and other basics", Grant Robertson said in the Budget speech. "Today, we are introducing legislation that will remove barriers to new retailers entering the market. Specifically, this will prohibit the restrictive covenants on land that major grocery retailers use to limit site availability for competitors. Such covenants will be prohibited immediately once the Bill comes into effect, and I anticipate that competitors can begin to consider new sites shortly thereafter".

The Commerce (Grocery Sector Covenants) Amendment Bill is here. It defines Foodstuffs North Island Limited, Foodstuffs South Island Limited, and Woolworths New Zealand Limited as 'designated grocery retailers', and creates a new s28A of the Commerce Act whereby "Certain grocery-related covenants are treated as prohibited and unenforceable" by deeming them as "having the purpose, or as having or being likely to have the effect, of substantially lessening competition in the relevant market", and so pinging them under the existing s27 and s28 of the Act. s27 we all know and love - contracts, arrangements and understandings substantially lessening competition - and s28 is its equivalent for anti-competitive covenants.

In its grocery market study (summary here, whole shebang here), the Commerce Commission had identified "more than 90 restrictive covenants entered into by the major grocery retailers, the majority of which are still active" (6.77) and "over 100 exclusivity covenants in leases entered into by the major grocery retailers, the majority of which are still active" (6.80). Clearly, this isn't a small issue, and it may be rather bigger than the Commission thought. On its helpfully proactive 'Market study reporting dashboard', Foodstuffs North Island says that it alone has removed restrictive covenants from 78 out of 135 affected properties (the outstanding ones are on land it doesn't own any more, and they are approaching the current owners to bop those off, too).

So it's good news that the government has moved quickly to implement the Commission's recommendations 2A, 'Prohibit restrictive covenants that relate to the development of retail grocery stores' (discussed at 9.68 - 9.72) and 2B, 'Prohibit exclusive covenants in leases that relate to the operation of retail grocery stores' (9.73 - 9.79). Their impact may be overstated - my guess is that planning laws restricting the supply of land available for supermarkets may be more important, as may planners' inclination to protect competitors rather than to protect the competitive process (hence the Commission's 'Recommendation 1F: Retail grocery store development should not be able to be declined on the basis of adverse retail distribution effects on existing commercial centres') - and the supermarkets look to have been dismantling them anyway, but it's progress. 

It's helpful that the political pressure to 'do something' about rising prices in the shops - a key focus of the Budget - helped bring about a quick competition policy response, and you'll excuse me if I snarkily add, 'for once', given the tortuous processes in getting s36 reformed, cartels criminalised, and indeed setting up the market study regime itself. When there's a will, there's a way, as they say. Moving this quickly, incidentally, means that you've only got a very brief window for submissions: Friday, in fact. The submission link is here.

But I hope that the "it's the supermarkets wot done it" line about inflation doesn't get taken much further. In April the Commerce Minister, Dr David Clark, commented on the 7.6% rise in New Zealand food prices over the year to March, and said that "The March increase is above general inflation figures and highlights the role the grocery sector is playing in driving up prices. Rising food prices is a global issue. Omicron, ongoing disruptions to global supply chains and Russia’s invasion of Ukraine is putting pressure on prices in every country, but that is exacerbated here by the lack of competition at the checkout".

Hmmm. In the US, annual food price inflation was 8.8% in March; in Canada it was 9.7%; in the UK it was 6.7% in April. Overwhelmingly, inflation is not a matter of grocery industry structure, but a result of those other global factors that the Minister mentioned: he might have thrown in monetary policy, here and overseas, being left too stimulatory for too long after the initial Covid hit. Blaming the supermarkets, if only in part, for current food price inflation may play well to the galleries, but it's not a strong argument. If, as he said at the time, he had "not ruled out going further than the options that the Commission tabled in its final report", fair enough: quite a few folks (but not me) reckon the Commission didn't go far enough. But I wouldn't take that step on the back of a not very convincing line of attack on inflation.

Did Special Housing Areas help?

A while back I went and had a looksie at some local Special Housing Areas near me in Auckland.

I wasn't hugely impressed. At the first one I went to look at, I felt that designating it an SHA didn't seem to have made any material difference either way. On the left, by the way, is the very latest state of play on that first SHA site I visited. Still a long way from being finished - no dramas, it's the developers' prerogative to set whatever schedule best suits them - but not an obvious example of SHA status moving things along.

On a follow-up visit I had more doubts, noting that non-SHA apartment blocks were going up all over the place but the SHA sites were somnolent. "I'd like to believe", I said, that "Special Housing Areas greased the wheels of the housing planning process, and either accelerated or increased new construction, or both ... But how will anyone definitively know? ... I'm hoping that someone - an economic consultant with an interest in housing, maybe? - will be asked to turn their minds to a proper 'with and without' exercise: matching a bunch of otherwise similar SHA and non-SHA areas, and checking to see if the SHA ones outperformed in speed or quantity".

Another visit left me asking the same questions. "it still leaves me with a nagging feeling that the interesting Special Housing Area initiative (faster planning approval in exchange for including some 'affordable' housing) didn't work out as everyone had imagined. We need to know whether this policy experiment worked, and if it did, repeat it or widen it, and if not, why. Otherwise we'll continue to blunder around with well-intentioned housing ideas that never get properly evaluated".

Lo and behold, someone's actually done exactly that "proper 'with and without' exercise: matching a bunch of otherwise similar SHA and non-SHA areas". It's just been published in the online version of New Zealand Economic Papers as "Price effects of the special housing areas in Auckland": the abstract is here and if you've got access to NZEP online, here's the link to the full article. It's by Mario Fernandez of Auckland Council's Research and Monitoring Unit and two co-authors, Gonzalo Sánchez at ESPOL in Ecuador and Santiago Bucaram at the Inter-American Development Bank.

They used a difference-in-differences approach which looked at what happened to house prices in SHAs compared to those in nearby non-SHA areas. Before the SHA experiment, prices in both areas had been rising at about the same rates: assuming (I think reasonably) that those trends would have carried on absent the SHA cunning plan, you can attribute any subsequent differences between SHAs and non-SHAs to the effect of the SHA policy.

The SHA initiative did not scrub up well:

Our findings indicate that the SHA programme caused price increases (inside SHAs) amounting about 5% on dwelling prices and 4% on the price per square metre, and had no effect on the probability of affordable transactions to occur but actually increased the probability of costly transactions. These results cast doubts on the reliability of the SHAs as a housing policy aimed at improving affordability (p11) ... the findings of this paper suggest that the effectiveness of the SHAs on improving affordability was questionable or negligible (p13)

The findings were robust to the usual econometric tyre kicking (eg allowing for the possibility that developers and buyers saw the SHAs coming and might have changed their behaviour accordingly, and making the comparisons only on SHAs and non-SHA areas that are very close neighbours).

The authors say, "the policy questions that arise are: what weakened the SHA programme? or why
were the affordability requirements not binding to developers?".

On the first, one possibility (they say) is that "the fast-tracking of the consenting process [the SHA deal was faster consents, in exchange for agreeing to build an element of affordable housing] resulted with the developers being able to offer an additional attribute to their products: rapid delivery of new constructions ... Hence, the SHA programme simply allowed developers to offer new homes with an additional attribute (a shorter delivery time), which consequently implied higher prices" (p12).

On the second, there was an element of gaming the system. Developers had the option of waiting to see what planning options might become available under the Auckland Unitary Plan, rather than forging ahead with their SHA consents: "there were expectations of greater profits under the rules of the AUP rather than the SHA programme. Therefore, this could explain why prices did not decrease inside the SHAs as the timing of development may have relied on building first the more profitable (and expensive) houses and later (or never) the affordable" (p12). Scuttlebutt I picked up at the time fits with this explanation.

I'm not going to bag the designers of the SHA: I'm more in the 'let a thousand flowers bloom' camp when it comes to policy experiments, and anything that sounded plausible (the faster consent / affordability combo) was worth a go. I think we all knew that it wasn't going to make much of a difference compared to the impact, say, of a large expansion in the supply of housing-zoned land. But at the margin it might have been a small help.

It wasn't. People more familiar than me with the intricacies of the housing market can carry on the conversation about why not. My takeaway from the whole exercise is that any policy experiment ought to automatically come with follow-up provisions to see how it went. Not rocket science, you'd think, but it's routinely ignored all over the place: we're throwing money in the air, and not checking to see where it drifts or who picks it up. It's time to realise that 'evidence based policy' isn't just about designing a plausible initiative: it also means seeing if it lived up to expectations, and if not, why not.

An "ugly casserole" indeed

So we've tightened up our immigration settings, again. Opponents are saying it's fiddling at the margins. I hope the critics are right: while it's dismaying that they've felt the need to bend with the prevailing political winds at all - "an ugly casserole of prejudice, resentment, economic envy and xenophobia from which New Zealand is not exempt", as Vernon Small put it in his īnsightful Dom-Post article - I hope it's the absolute minimum the government could get away with.

Not that it's without its own political dangers.Throwing scraps of meat out of the sleigh as the wolves close in may delay the chase, but wolves soon learn to chase sleighs for reward, and will be after you fitter and faster than before.

And I certainly didn't like the "Kiwis first" messaging around the thing. That's more the sort of jingoism you expect from the Aussies, and indeed got this week in their own tightening of their immigration regime, which more obviously pandered to the likes of One Nation and is more likely to do real economic damage. Early reactions suggest they've shot themselves in the foot, making it harder for employers to fill hard-to-recruit vacancies.

Let's not pretend, either, that there's anything remotely linked to the economy behind this. It's pure politics.

For one thing, the cyclical state of the labour market is very strong. Wanna see a picture of a thriving labour market? Here's one from the ANZ's Bank's latest tot of job ads.

Wanna see another? This is MBIE's latest tot of vacancies - jobs available right now. High, and climbing steadily,

If you're concerned that unskilled emigrants are driving down wages and stealing the everyday battlers' jobs at the hard end of the labour market, the greatest rise in vacancies in recent years has actually been for unskilled and semi-skilled jobs.

So it's extraordinarily hard to make any case that immigrants have soaked up the available jobs. Despite a recent large increase in net migration, there are more vacancies available than ever, even at the low wage end.

As for the fable that immigrants are putting pressure on already stressed infrastructure, it's either a marginal effect or complete bollocks. Higher levels of net immigration are a relatively recent phenomenon - the last three years or so - whereas the infrastructure, especially in Auckland, was already stuffed every way to Sunday well before that. 

Here's the clincher: as an economist colleague helpfully pointed out when I was tweeting about this, there was very little difference between Statistics New Zealand's population projections for Auckland's population ten years ago and what has actually happened. We knew there was a surge coming, and didn't plan for it, and still aren't - that's the reality, under national and local administrations of all political hues. It's got very little if anything to do with migration, and everything to do with systematic underfunding of infrastructure and obstructive land-use and other regulation. Our politicians have preferred to run dairy farms, mine coal, deliver letters and keep prime housing land to grow onions, rather than deliver the social and physical infrastructure for a high-income economy.

And that's something else the anti-immigration crew are missing. Far from being a burden on the economy, many migrants are actually alleviating the roadblocks to growth we've inflicted on ourselves. Across the road from us, one of those terrible Asian property investors - probably got one of those suspicious Chinese-sounding surnames - has started to turn two houses into five. Round the corner another of these awful leeches has already redeveloped one house into three. Employment for two gangs of tradies, five extra houses. Not bad for two parasites.

Maybe I shouldn't be surprised about these latest turns of events here and in Australia. Liberal values and sensible economics are under attack pretty much everywhere, from the clowns in Washington to the Brexit-deluded in the UK through to the more sinister operators in (for example) France, Hungary and Poland. It's especially sad to see people "of the left", who might be expected to take a more progressive, internationalist view of the world, going along. 

But maybe there's hope around the corner. As this excellent article, 'In defence of liberalism', points out, the liberal values and better economic policies that created post World War Two prosperity are certainly under attack. But it concludes

the things we value can’t all be realised simultaneously and made compatible with each other. A liberal society is the best method yet devised of recognising this multiplicity of aims. It stresses value pluralism in the face of political and religious dogmatism, and of spurious appeals to national unity for the common good. I’ll doggedly stick to it.

So will I, even though in the short run the probability of a socially liberal, economically responsible government emerging from our next election looks to be half of five eighths of sod all.

Has planning been worth it?

There was a big turnout on Tuesday night in Auckland at the latest Law and Economics Association of New Zealand (LEANZ) event - a panel discussion featuring three members of the Auckland Unitary Plan Independent Hearings Panel. In fine interdisciplinary LEANZ style, they were Judge David Kirkpatrick (the Panel chair), planner Jan Crawford, and economist Stuart Shepherd.

Chatham House rules, so I can't say anything specific about who said what, but I can safely say that all three were very good speakers - informed, persuasive, congenial, thoughtful, and able to put technical stuff into plain (or at least a good deal plainer) English. So full marks to the organisers, Richard Meade (AUT and Cognitus Advisory) and Andreas Heuser (Treasury) for putting it all together. Special thanks to Simpson Grierson who kindly hosted the event: the LEANZ caravan would be unable to travel on without these corporate oases.Though you can help, too: here's that LEANZ site again, so you can pay your $75 sub ($50 for students).

So, noting again that these are my views and not what the presenters may or may not have said, what did I take away from it?

Clearly the members of the Panel did the best they could with the machinery they had to drive, and in particular they aimed to get the availability of housing land up to where it needs to be (though there may be a developing, and less known, shortage of land for business purposes). And they had the added complexity of having to amalgamate the previous jumble of territorial authority plans into one overall plan for the new one-city Auckland, as well as being lumbered with a process not of their choosing. In the circumstances, they did a fine job.

But it's also clear that the planning process for Auckland has become enormously top-heavy and inefficient. Like other parts of our regulatory apparatus (such as the price control 'Part Four' bits of the Commerce Act) it badly needs paring back to something quicker, more targeted, cheaper, and more efficient.

In part the current clunkiness comes from importing an industrial-strength First World planning policy infrastructure, without paying enough mind to what might work for a small distant economy with not-quite-First-World incomes to pay for it. And in part it's because plans have been allowed to become voluminous grab-bags of miscellaneous agendas (price control, income redistribution, architectural design preferences). I've written previously about one bonkers 'food security' provision, where growing vegetables was prioritised over housing development.

The complexity largely speaks for itself, but here, as just one tiny example, is the legend you'll need to understand the Unitary Plan maps.

Six kinds of residential zone. Five kinds of 'open space'. Ten - ten! - kinds of business zone. Five kinds of rural zone (not counting the Waitakeres and the Hunuas, which are two more zones of their own). And seven kinds of coastal zone. 'Micromanagement' doesn't even begin to describe it.

And it's not just a matter of economic inefficiency, though the purely economic costs must surely be substantial: a fair slab of potential housing development, for example, reportedly got put on hold until the Unitary Plan finally saw the light of day at the end of a nearly three year process. It also carries social costs. The process is now so cumbersome and protracted that it is very difficult for non-experts to have their say - a level of difficulty that could threaten to undermine the perceived legitimacy of the outcome amongst the wider public. .

I'm also not sure that the planning process has fully got to grips with what you would imagine would be one of the core outputs of any plan: integrating the plan, infrastructure provision, and the intentions of owners/developers of resources. All three need to be aligned for anything significant to happen. Nor are enough people making even back of an envelope attempts to estimate the net benefits (widely defined) of plan provisions. What about those 'volcanic viewshafts', for example, which protect people's ability to see (say) Mount Wellington from their home? I wonder how Tokyo would have got on if it had to be designed so everyone could see Mount Fuji: not very well at all, I'd say. And if people were given the choice of their kids getting houses (say) $200,000 cheaper but without a view of Mount Albert, which would they pick?

Which brings me to my final point - the role of markets. Yes, we all know that plans may be needed to help address the externalities and coordination issues that can crop up in dense conurbations. But the role of markets and prices (and indeed economic analysis) hasn't been so much assisted as largely displaced. In particular, the housing market has been distorted and suppressed.

The Salvation Army's latest State of the Nation Report, for example, says (p50) that

based on an average occupancy of three people per dwelling...and given that Auckland’s population grew by an estimated 45,000 people for the year to 30 September 2016, accommodating this number of people required 15,000 additional dwellings. Consents for new dwellings over the same period lagged this number by 5000.

Over the past five years, the cumulative shortfall in new housing to cater for Auckland’s population growth is estimated to be almost 18,000 dwellings. 

The Sallies snarked that the recent level of consents (10,000 a year) "has been celebrated as proof that Auckland’s housing problems are being resolved by the market", but that "in a slightly longer context this record is, however, not remarkable". The reality isn't that the market has delivered, but inadequately. The reality is that the market has not been allowed to work properly, or, for some places and activities, not allowed at all.

In sum, on the one side, you have an uncertain quantum of planning benefits, and on the other, clearer and large costs. I wonder what the net outcome has been?