CLPINZ 2024

The 35th Annual Workshop of the Competition Law and Policy Institute of New Zealand (CLPINZ) was held last week at the Northern Club in Auckland, and - despite breaching the universally acknowledged convention that every Kiwi conference must at some point offer sausage rolls - was otherwise a well-attended and highly interesting day and a half. Hat tip to the organisers on the Board of CLPINZ and to the indispensable Charlotte Emery at Conference Innovators.

It led off with outgoing CLPINZ chair Anna Ryan introducing the keynote lecture from UCLA's John Asker (UCLA link, personal site, Cornerstone Research site), on 'The Competitive Effects of Information Sharing'. John reminded us that, since at least Hayek, we should think about markets and prices as an immense, efficient, decentralised, information-sharing mechanism for allocating resources, and the integrity of prices really matters for the outcome of the process. But there is a potential tension between the necessary information-sharing in the market, via price signalling, and the possibility of people using the information to collude and undermine the benefit of the free flow of signals. And it's not hard to see real life examples: he cited the case of a Perth-based web-based scheme which had aimed to show each petrol station's prices so that consumers could get the cheapest petrol, but which eventually degenerated into a mechanism enabling the petrol companies to coordinate prices. While some competitive effects can be reasonably obvious, John said that, unlike in areas like mergers where there are known analytical techniques, economics hasn't yet developed the full suite of forensic tools that would enable competition regulators to sort out the sheep from the goats. And when you do apply what tools are available, you don't always get unequivocal answers: his modelling (with coauthors) of timber 'stumpage' auctions, for example, where competitors had information about each others' timber inventories, came up with mixed results: "diagnosing how competition is impacted in non-price information sharing is complicated, and can lead to an outcome where reasonable people might disagree as to whether competition has been adversely impacted".

Keynote speaker John Asker, flanked by session chair Anna Ryan; Fionnghuala Cuncannon as commentator

Commentator Fionnghuala Cuncannon felt that ideally you would like to know when information sharing is harmful, and what is allowed or not under the Commerce Act, and hopefully the Venn diagram of the two ideas would overlap enough to give you a operational basis to act from. On the first point, she agreed with John that deciding on competitive harm is not settled, though in some cases you may well see instances where things look wrong, one example being the price following behaviour based on the 'main port price' that the Commerce Commission noticed in its petrol market study (see for example Figure X3 and paras X35-6). On the second she felt that the Act was "okayish" as it stood, but maybe we could have a think about buttressing it with the likes of the "concerted practices" provisions in s45(1)(c) of Australia's legislation.

Emma Ihaia, the chair of the session on 'Tikanga - is it relevant to Competition Law', introduced it by saying that tikanga is "an area largely unknown to many of us in the room", and that assessment certainly included me: by way of reference for people equally uninformed, Wikipedia says "Tikanga is a Māori term for Māori law, customary law, attitudes and principles, and also for the indigenous legal system which all iwi abided by prior to the colonisation of New Zealand". By the end, we were all a great deal better up with the state of play. Te Aopare Dewes said that use of tikanga is part of a transformational change in Aotearoa New Zealand, that it is now part of our common law post Ellis*, and that it will have relevance for the statutory interpretation of competition law. She also pointed to the Commerce Commission's use of tikanga concepts such as kaitiaki (stewardship, as for example on p13 of the Commission's latest annual report) and its awareness of Māori perspectives in its September 2023 Moana/Sanford merger decision**, although she reckoned the merger would likely have been cleared even without a tikanga lens. The Hon Justice Christian Whata (who headed the Law Commission study which produced the definitive report on the legal dimensions of tikanga) then took us through tikanga as custom, values, and law and talked about "the principles of engagement" which will need to apply as tikanga and European law (if I can call it that) learn to jog along together, including both relevance (tikanga won't affect every matter at issue) and reconciliation (there's no longer a presumption that European law prevails if push comes to shove). And finally Simon Peart took us through some hypothetical case studies the panel had devised to see how the two legal perspectives might or might not play nicely together. One of them (an agreement between otherwise competing Māori fishing companies to place a rāhui on fishing, to conserve the stock, which might amount to output restriction under the cartel provisions of the Commerce Act) didn't look especially problematic: it was fine from the tikanga side and (I'd guess) a strong candidate for authorisation from the Commission's side. The other (one Māori ski operator denying a competitor a licence to operate) was a good deal trickier to reconcile, and reminded us that not all of these issues are going to be a gentle stroll in the park.

The tikanga panel discuss some case studies: L-R, Te Aopare Dewes, Hon Justice Whata, Simon Peart, and session chair (and incoming CLPINZ vice chair) Emma Ihaia

Paul Comrie-Thomson chaired the next one, 'Wellington, we have a problem!', where barrister and incoming CLPINZ chair Ben Hamlin made a convincing case that exemptions from the Commerce Act for "the Crown" are both a legislative mess and poor public policy. Yes, s5 of the Commerce Act binds "the Crown is so far as the Crown engages in trade", but both "the Crown" and "engages in trade" are poorly defined. The Crown (however defined) also has extensive (though nor unfettered) scope to limit competition when not engaged in trade, and as a matter of good public policy it would be better if that scope was subject to some sort of overriding rationale or principle. Ben suggested that "bodies exercising public power should only be able to limit competition where expressly authorised by Parliament, it is reasonably necessary to achieve some public purpose, or it is permitted by a Commission authorisation", and he's drafted a Bill that would legislate along those lines (he's interested in feedback and assistance in polishing it up, so feel free to contact him). In these endeavours Ben was enthusiastically supported by the commentator, Dr Eric Crampton, who pointed to a range of examples of what he regarded as anti-competitive regulation (eg incumbent professionals being allowed to act as the gatekeepers assessing new entrants wanting to ply their trade) and which arise because "The Commerce Act provides broad exceptions for the Crown, particularly in relation to activities that affect commerce but are not considered to be in commerce".

The 2023 workshop had pioneered a new concept, the "Next Generation" session, where rising stars in the competition and regulation world get to strut their stuff, and it worked so well that it was back this year, again chaired by Will Taylor. Russell McVeagh senior solicitor Callum Dickson spoke on 'Privatisation in the space industry': one takeaway was that governments can be quite smart in organising procurement so that they're not at the mercy of a few suppliers or one, in this case suppliers of rocket launching services. Wynn Williams associate Rachael Monkhouse talked about 'The application of competition law to professional sports', where it's evident that sometimes sport gets carved-out treatment that to my eyes at least isn't always defensible. And Houston Kemp economist Nick Twort spoke about 'New analytical tools for understanding retail competition', and in particular the location data that can be cheaply hoovered up from your mobile phone and which can give improved empirical backing for regional market definition, where previously you and I might just have drawn a 5 kilometre circle around an outlet. All good stuff, and while on the topic of up and coming talent, the winner of the inaugural 2024 CLPINZ writing award was Russell McVeagh's Lydia Christensen, with her article, 'Competition Law and the Environment: Climate Change as a Non-Economic Consideration', where she argues that the Commission "has failed to genuinely engage with climate change factors as non-economic considerations that ought to be balanced against other factors".

Will Taylor (L) introduces the Next Gen speakers: L-R, Callum Dickson, Rachael Monkhouse, Nick Twort

Saturday morning brought us 'Settlement of IP disputes', chaired by Otago Professor Ed Willis and presented in case study format by barristers Earl Gray and John Land. Their argument was that since the the expansion of the definition of a cartel in the 2017 changes to the Commerce Act to specifically mention collusive output restriction, agreements in intellectual property disputes to stop producing things that infringe copyright or patents are at risk of being pinged as a cartel, and the risk is all the more real after the Moola*** case. Their solution is an amendment to the Act (which they have drafted and is ready to go) which would exempt good faith settlements in genuine disputes from the ambit of s30 cartel conduct. We need to be wary of anything that might open the door to the rather despicable 'pay for delay' sham patent settlements we've seen in overseas pharmaceutical markets, but that said, I can see the issue that confronts genuine settlements. Part of me wonders about the legal reasoning - how can it be an output restriction if the output allegedly restricted could never have been legally produced in the first place? - but when I asked the question, it didn't seem to cut any ice with my learned friends in the law. I also got the distinct impression that the Commission would be unlikely to bestir itself in cases where, on the facts, like in Earl and John's dairy packaging machinery example, there's clearly no collusive anti-competitive intent.

Finally we got to what Anna Ryan later described as "almost a second keynote address", and it was: Danielle Wood, chair of the Australian Productivity Commission, spoke on 'Competition Policy: Back in Fashion?', in a session chaired by her former colleague Hayden Green. In Australia, the answer to her question is, absolutely yes: they are pressing on with further reform (after two thorough previous goes, the 'Hilmer' and 'Harper' reviews), with their current rolling well-resourced Competition Review and its Expert Advisory Panel (of which Danielle is a member, as is John Asker) and which has already produced draft M&A legislation to address eg 'killer' and 'creeping' acquisitions. It is also tackling other good ideas, including addressing the epidemic of non-compete agreements which is anticompetitively blighting labour market mobility, and working on the next instalment of a National Competition Policy (programmes of reform agreed between the Federal and State governments) which might encompass things like easing parallel import restrictions. The Productivity Commission itself has further useful things on the go, such as liberalising occupational licencing. If you don't have access to the CLPINZ workshop materials, Danielle reprised her presentation in the latest of Treasury's guest lectures, and you'll find both a video and the slides here.

(L) Danielle Wood, chair of the Australian Productivity Commission, and (R) commentator Catherine Montague, manager of competition policy at MBIE

The commentator was Catherine Montague, manager of competition policy at MBIE, speaking in a personal capacity rather than presenting a ministry or government view. She suggested that there was potential impetus for reform in New Zealand, based on the current government's focus on productivity, the example of the Aussies, and the rark-up we got from the OECD in Chapter 3 of their latest economic survey of New Zealand (from the Executive Summary, "Insufficient competition is an important factor underpinning low productivity ... more can and should be done to further improve competition outcomes"). While nothing's yet settled, potential candidates for attention are mergers ('creeping' mergers, amending the SLC test to specify that it would include entrenching market power, and aligning with wherever Aussie gets to), non-competes and other restraints in the labour market, ensuring more attention is given to the competition effect of policy changes, and implementing a Consumer Data Right. 

Fingers crossed that something like this agenda happens, and sooner rather than later: recent experience has unfortunately been that we have been too timid in scope and process, much too slow, and decidedly belated. Either MBIE or our new Ministry for Regulation would be well advised to take a leaf from the Aussie textbook and get on with something similar to their latest Competition Review, and if we're interested in alignment with our friends across the ditch, a couple of cross-appointments (like the ones the ACCC and the Commerce Commission already operate) wouldn't go amiss, either.

*Ellis v R [2022] NZSC 114, [2022] 1 NZLR 239

**The final clearance decision doesn't seem to have been loaded into the Commission's online case register

*** Commerce Commission v Moola.co.nz Ltd [2021] NZHC 3423

The clock ran out

This week's 'mini Budget' was certainly down the minier end of mini, and understandably so. While I sympathise with a bias for action, and there was also a political commitment to be honoured, by the time the coalition was settled and portfolios allocated, there just wasn't enough time left on the clock to pull everything together and produce an up to date and internally consistent mini-thingie and its accompanying Half-Year Economic and Fiscal Update (HYEFU). As the HYEFU notes (p9) its forecasts were put to bed on November 6, but after that it lists a slew of events (notably the new government and its policies, and some important data releases including that weaker than expected September quarter GDP number) that haven't been able to be fully factored in. We'll have to wait for the Budget Economic and Fiscal Update (BEFU) next year for a complete and up to date view.

That said, there were a couple of interesting bits of analysis in the HYEFU. One important issue is whether the economy is still at or above capacity - if it is, there might still be lurking inflation risks emanating from domestically traded but supply constrained goods and services, if it isn't, then we might start looking ahead to eventual RBNZ easing. Here's the HYEFU take: it's reasonably encouraging from an inflation-pressure perspective. On its 'output gap' calculations, Treasury reckons we'll be going from 1% above capacity in June '23 to roughly at-capacity (-0.1% below potential output) in June '24 and to clearly below (-1.0%) potential output by June '25.

That all depends, though, on whether you can get a good handle on potential output - the maximum level of GDP growth we could manage on a sustainable basis - and I don't envy the Treasury analysts their task ("There is considerable uncertainty surrounding the degree of excess demand in the economy" - HYEFU p14). One big uncertainty is how much of the recent immigration-superpowered increase in labour supply feeds into what GDP it will produce. Another is likely productivity growth, which recently has been all over the place, as the graph below shows, and it would be a brave person who claimed to know where it was going next. You'd think there might be a chance that post-Covid business practices (working from home, greater flexibility, less command and control), might be about to deliver some kind of productivity payoff, but then again maybe not: after all, over the 13 years in the graph, we've only managed to eke out a 0.3% a year productivity gain, and only a small part of it came in the most recent few years.

Finally, for me one of the most important bits in any HYEFU or BEFU is the degree to which the fiscal policy stance is stimulatory or contractionary, and whether the stance matches with the state of the business cycle (a 'pro-cyclical' stance, making booms even boomier and downturns even gloomier, being the trap to avoid). Here's the latest stab at the 'fiscal impulse', the degree to which underlying fiscal policy is looser or tighter than the year before.

To me, and accepting that some of the spend was in response to North Island weather events, the fiscal policy stance for the 2023-24 year was inappropriately procyclical. In June '23 the unemployment rate was only 3.6%: the economy didn't need a fiscal boost. And it also put fiscal policy at odds with the tightening stance of monetary policy, which had started to apply the brakes from late 2021 and pressed harder and harder through 2022 and into this year. Monetary policy needs mates, as they say, but it ended up dancing alone.

Looking ahead, the economic outlook is not that flash: over June '23 to June '25, HYEFU expects GDP growth at a relatively slow 1.5% a year pace, and unemployment to rise from 3.6% to 5.2%. That'll be a tricky environment to be thinking about taking 2.4% of GDP out of aggregate demand (the estimate of the fiscal impulse for 2024-25). The new government will need to be careful not to turn a slowdown into something worse.

This doesn't help

The OECD came out the other day with its latest PISA results - "the Programme for International Student Assessment (PISA) examines what students know in reading, mathematics and science, and what they can do with what they know. It provides the most comprehensive and rigorous international assessment of student learning outcomes to date". Here's how New Zealand students have been doing over the history of the PISA tests. We used to be clearly better than the OECD average across reading, maths and science, but the results have been deteriorating in all three areas.

We're not alone in this. Here are Australia's PISA results. Almost exactly the same.

You could, I suppose, take some comfort from the fact that our performance levels (even if steadily declining) are still not that shabby by international standards. Here are the top 30 countries (I'm using countries loosely here to include for example the consolidated results from four regions in China producing quality-meeting PISA scores), when ranked by reading scores. We're still 12th, Australia's 16th. But self-evidently we'll get eaten if, for example, the rapidly developing economies of eastern Europe up their game and we continue to slide.

I'll leave the bunfight over the reasons for our (and Australia's) recent PISA declines to others. What bothers me about these trends is the contribution they may be making to our long-standing productivity problems, where for any given degree of effort and resources we seem to produce less than the higher-income OECD countries. Australia's also hit a productivity wall: its latest official estimates showed that "market sector multifactor productivity (MFP) fell 0.4% in 2018–19, the first decline since 2010–11 ... Labour productivity fell 0.2% in 2018–19, the first recorded negative for the sixteen industry market sector aggregate (since the beginning of the time series in 1994–95)".

A wee while back I wrote a column for the Australia and New Zealand accountants' magazine Acuity, documenting New Zealand's and Australia's productivity problems and canvassing some of the usual suspects ('Is there any scope for multifactor productivity growth?'). I didn't include falling skill levels for new entrants to the workforce - a fall of some 4.7% across all three areas since 2000 - but maybe I should have. Normally you'd expect each entrant cohort to the labour force to be bringing higher, not lower, levels of skills to the productivity party: it gets a lot harder to make progress when your starting point is going backwards. In the context of productivity growth, where small changes matter a lot over the longer term, a drop in entrant skills of approaching 5% in two decades is a big thing. This is a ball and chain we don't need.

Are we serious?

Every couple of years the OECD updates its Going For Growth reports, which are meant to be its best policy advice to governments on how to raise living standards. Or at least that's how it used to be: the focus up to 2017 was exclusively on productivity and incomes, but in 2017 it widened to include social inclusiveness and, in this latest iteration, brought in environmental sustainability as well. Worthy causes, to be sure, and there are of course interlinkages with productivity and incomes, but I'd have preferred if they'd kept Going For Growth as a productivity instruction manual. Especially for its New Zealand readership, given that our low productivity performance is something we self-evidently could use a bit of focused help with.

Not, I suspect, that Going For Growth has much of a New Zealand readership. Neither the 2017 version ('Take advice? Moi?') nor this latest one appears to have got much mainstream or social media attention. So if you're not one of the select policy tragics who've had a look, here are the OECD's five priorities for New Zealand (if this whets your appetite here's the full country report):

1. Reduce barriers to FDI [foreign direct investment] and trade and to competition in network sectors. Non-transparent screening, barriers to trade facilitation and competition in network sectors deter investment and hinder the competitiveness of downstream firms [in this bit they mean the 'barriers' to extend to 'barriers to competition']
2. Improve housing policies. Restrictive land-use policies reduce housing supply responsiveness to demand, accentuating price increases when demand rises
3. Reduce child poverty. Child poverty is higher than in the top performing countries. It has adverse effects on children’s health and development.
4. Reduce educational underachievement among specific groups. Students from Māori, Pasifika and vulnerable socio-economic backgrounds have much poorer education outcomes than others
5. Raise effectiveness of R&D support. Relatively low public funding of business R&D contributes to below average R&D intensity

Four of these were on the 2017 priority list, too (number 3 is a new one reflecting the new focus on social inclusiveness), and the implementation record since 2017 has been distinctly patchy. There was no action taken at all on number 1, for example. Number 2 continues to be a national scandal, and I see in today's DomPost that it's not just Auckland, either: "Wellington City has consented fewer buildings this year, its waiting list for social housing has spiked sharply, and its rental crisis is on par with Auckland's". The only achievement the OECD records on number 4 is the Sir Humphrey Appleby "appointment of a taskforce". Number 5 is the one recommendation where there has been anything like a respectable response: the current government has, for example, run with the recommendation to "make the tax credit refundable so that firms that are not yet profitable can benefit".

It's hard to see why we haven't followed up what looks like a reasonably uncontroversial list of targets and tactics (although the anti-trade nutters may jib at #1). They're almost certainly not enough to make huge inroads into our productivity problems, but they'd be a good start, and a couple of them (#3 and #4 in particular) would be worth doing in their own right, even if they didn't have spillover productivity effects on the talents of our workforce.

There is one possible explanation, albeit a depressing one. In the economics trade we call it "revealed preference": you can figure out what people value from what they actually do.  It could well be that successive central and local governments haven't put the priority they claimed on higher living standards. When it's come to having the national incomes to pay for modern healthcare, or rationing the expensive drugs, they've preferred rationing. When it's come to a choice between wealthy homeowners having an unobstructed view of a volcano, and poor families with young children sleeping in cars, they've been with the homeowners.

It would be nice of the OECD's 2021 scorecard showed a better rise to our livings standards challenge. But I won't be holding my breath.

By the numbers

There's a really neat bit of dataviz gone up on the Productivity Commission website, which has a go at showing different measures of the intensity of competition in the various sectors of the New Zealand economy. The Commission has had an interest in competition as it surmises - I'd say correctly - that the intensity of competition (or lack of it) may have something to do with our national productivity (or lack of it).

The story starts with the Commission getting Motu's Dave Maré and independent researcher Richard Fabling to look at the links between the intensity of competition and productivity outcomes, an exercise they published as 'Competition and productivity: do commonly used metrics suggest a relationship?'. As part of that exercise they first had to get the underlying dataset scrubbed up, an exercise they describe in brief here; their full paper is here.

The competition and productivity data that Maré and Fabling collated form the basis of the dataviz. It's the work of data wizzes Aaron Schiff and Harkanwal Singh, who have taken the data on competition and created the Competition Explorer.  There's an accompanying paper, 'Competition in New Zealand: highlights from the latest data', which you'll be relieved to hear "is aimed at non-specialist (and non-economist) readers", and which explains that it "provides a consistent set of competition measures for 39 industries for each year between 2001 and 2016".

Have a play with the Explorer. By default you start at the 'About' tab, which shows you the measures: yer standard Hirschman Herfindahl Index of concentration; price to cost margins (in two flavours, broadly similar); profit elasticity, which measures the responsiveness of profits to changes in variable costs and which should be higher in more competitive industries (again in two flavours, but the 'fixed effects' version is the one with legs); and subjective measures of self-reported levels of competition in their neck of the woods as told by businesses to Stats' Business Operations survey. Once you've got your head around the measures head for either 'Home' or 'Measures' and you're underway.

In principle this measurement of the strength of competition is a good idea. I liked it before, when the Productivity Commission was doing its services inquiry ('Yes, you can measure competition'), and again when the Electricity Commission had a go at trying to figure out whether electricity retailing was more or less competitive than other parts of the retail sector ('Measuring the degree of competition'). We all need to know whether markets are workably competitive, and I'm a big believer in using data imaginatively wherever possible.

But there's no getting away from the conundrum that it's hard to do. Maré and Fabling did the sensible thing: when you have a whole bunch of indicators, each of which is likely related in some way to the intensity of competition, you can feed the lot of them into the principal components sausage machine and see if the various data series reflect some underlying common driver. As it happens, the exercise turned up two* common underlying threads, one linked to market structure and one linked to profitability, which was promising.

But subsequent attempts to see how these competition indices affected productivity did not find a lot. One explanation, as the Productivity Commission said in its 'Cut to the Chase: Competition and productivity' write-up of the research is that

this does not necessarily mean that competition and productivity are unrelated but could reflect the fact that changes in competition over the period studied have not been particularly pronounced, meaning any effect of competition changes on firm productivity has been masked by other sources of time variation in productivity.

Another, though, as the Commission and the various researchers acknowledge, is that measures of competition within industries will not necessarily reveal what you are really interested in, which is competition within markets. It's possible that an industry might be homogeneous enough to be a market, but it's generally not going to be the case. Sometimes an industry - like Professional, Scientific and Technical Services - is going to be so diverse that data based on it are going to be a jumble of the many markets within it (eg for lawyers and accountants, who may be lumped together in the same industrial sector but are very rarely in the same market for competition purposes).

So: interesting stuff, but still a work in progress. We may not yet have been able to unearth many of the likely real links between competition and productivity, but it will be worth banging on with the search. And the Productivity Commission's competition proposals (from pp5-6 of the 'Cut to the Chase' publication, and based on their earlier services sector report) are good standalone ideas in any event:

● addressing search and switching costs, including better support for comparison websites, dealing with unfair contract terms, promoting switching facilities and portability;

● addressing occupational regulations, including the role of professional bodies in supporting competitive entry to the market and the merits of certification regimes as opposed to those based on registration; and

● continuing to refine competition law, including Section 36 relating to the misuse of market power and its interpretation.

*Strictly speaking three, but the third did not explain much.

I've been to a conference

The Commerce Commission's biennial 'Competition Matters' conference has wrapped up. Here are some of my takeaways: where the road forked for parallel sessions, I went the economics / competition / regulation route rather than the law / fair trading / consumer protection path, so if you prefer that end of the world you'll probably need to watch the recordings of those sessions (they're not up on the Commission site yet, but can't be far away).

If there was an overarching theme, it was Big Data and all that new digital economy stuff. Repetitive though it sometimes can be to be reminded, again, of the ever-increasing pace of change, the reality is that we are indeed in the early stages of one of those transformative technologies that alter how entire societies behave and work. It's right up there with the printed book and the car. My main takeaway was that, if you subscribe to the traditional 'is there a problem / what's causing it / can we fix it / ought we' policy model, competition analysts everywhere are largely at sea. They haven't satisfactorily got over the first fence, let alone the rest of the course, or as the Singapore Commission's Han Li Toh put it more formally, we're all still looking for "adequate evaluative tools".

For what it's worth, I could easily be convinced that the net benefits of the new technologies massively outweigh any costs, and some of of the scaremongering reminds me of the comparable 'make a man walk with a flag in front of it' response to the arrival of the car. By all means ping any of the big players if you can indeed find them guilty of the same sort of rort a steelmaker might get up to (though we're not even sure enough on issues like market definition to be able to do that), but otherwise from a competition policy point of view I'd be very loath to jump to premature controls of any kind, let alone the heavy duty structural separation ideas that are being floated on the American presidential campaign circuit. Maybe I'll change my mind when I eventually get round to reading the UK's Furman report ('Unlocking Digital Competition') and/or the ACCC's doorstopper 'Digital Platforms Inquiry', summary here, which appeared as the conference was underway, but for now count me among the anti-competitive agnostics.

I was very encouraged by what's been called 'NewReg' regulation, the idea that panels of consumer representatives can be given authority to strike product quality agreements with regulated businesses. At the moment for, say, our electricity lines businesses, we default to things like frequency or duration of power outages, on the assumption that regularity of supply is the key quality characteristic in consumers' eyes. But it mightn't be. They might care more (and did, in the case of AusNet, the Melbourne area lines business where this got a trial) for how quickly a company cleans up after things like power surges, or whether they can easily get hold of someone at the company when they need to talk to them about something.

When the consumer panel wandered - like "curious chooks" as its chair put it - across the whole of the lines business, they found heaps of things that could easily be made to work better for consumers. It reminded me, in a good way, of the management fad a few years back for 'process reengineering'. Remarkably, they found improvements that would both benefit consumers and save AusNet money, which is a remarkable illustration of the general proposition that monopolists can be very dozy indeed when not challenged (I don't mean that to be especially critical of AusNet, who after all embraced this NewReg trial and ran with it). I'd say there is clear room for this to be at least a complement to our current 'building blocks' regulation, and in an ideal world a replacement for it. And I also wonder about the community trusts who run some of our lines businesses, and are hence exempt from price control on the assumption that the community ownership structure will constrain monopoly power. How effective have they actually been in that curious chook role? Or have they been [insert your favourite harmless animal metaphor here]?

Market studies - the first one isn't far away now, with the draft petrol study maybe two to three weeks away. For the sake of the new regime, this first one needs to go well, and not just on the technical market analysis stuff but also on how it is sold to its various audiences. One of the things that the very experienced Roger Witcomb, former chair of the UK Competition Commission, emphasised was that market studies need government support, and while you don't want independent authorities like our Commission pandering to the current public service please-the-pollies zeitgeist, this first one needs to hit all the appropriate persuasiveness buttons.

Roger also stressed being remedy focused from early on, accepting that you don't necessarily know, day one, how a study is going to unfold. In our regime, the Commission doesn't have any market study enforcement powers, and maybe that's broadly right and best left to the pols. Commissioner John Small mused, though, about whether it would be useful for our Commission to have a power to initiate binding codes of conduct, along ACCC lines: that might well be a useful extension (either in the market studies context or more generally). And speaking of remedies, it's useful that (ahem) some of us helped get s51E into the law ("The Minister must respond to the final competition report within a reasonable time after the report is made publicly available") to stop the minister sitting on the Commission's recommendations.

The big keynote speeches were very solid. Dr David Halpern on behavioural insights convinced me (and others, going by coffee urn chats) that competition analysis needs to look hard at how consumers actually behave in the real world rather than relying solely on the old utility maxing within constraints we default to. Dr Howard Shelanski on competition intervention in markets likely confirmed us in our existing views on price controls (ick) and line of business regulation (meh) but opened our minds to potential greater use of access regulation. And Ed Willett left us with some warm fuzzies that we've rolled out fast fibre-based broadband better than the Aussies have, and also raised the possibility that maybe some of the old rationales for telco regulation may not apply any more. If I'm sitting at home with a choice of copper, fibre, and three mobile networks selling fixed wireless (in turn based on competitive backhaul markets), where's my regulatory problem?

Assorted other snippets: it is indeed probably worth kicking the tyres harder when looking at vertical mergers, though, on the other tack, if you're looking for the paper that Martin Cave cited, pointing to the unexpectedly widespread efficiency benefits of vertical mergers, it's 'Vertical Integration and Firm Boundaries: The Evidence'. And despite Dr Darryl Biggar's emphatic 'No' to my question about whether electricity lines businesses should be let play in the solar and battery markets, I think I'll remain open to it for now, if only for pragmatic get the damn thing done reasons.

Finally, the panel on 'Why does competition really matter?' looked at how the work of regulators sits with the broader national wellbeing agenda as set out, for example, in Treasury's Living Standards Framework. I didn't warm to one bit of it: there was, I thought, a bit of unnecessary economist self-flagellation. It's not (in my humble) true that economists in general have been mesmerised by GDP and monetary costs and benefits, and oblivious to soft outcomes they couldn't measure, nor that competition authorities have also been blind to them. Look at (for example) the Commission's decision on NZME / Fairfax, where by far the biggest moving part was the likely loss of media plurality in the civic marketplace (as I discussed here).

But the rest of the panel's ideas were spot on. If you look at two of New Zealand's biggest challenges - productivity (low and sticky), and poor outcomes for too many at the bottom end of the heap - making competitive markets work properly helps on both fronts. Stronger competitive pressures could do a useful Schumpeterian job of clearing out our disproportionately long tail of low productivity firms (as the Productivity Commission's Murray Sherwin noted). And on the equity front, it's inevitably the most vulnerable who fare worst when the anti-competitive fix goes in.

A different view of productivity

New Zealand's biggest economic problem is our low productivity by international standards. Here, for example, is a chart from an excellent paper by the Productivity Commission's Paul Conway, 'Can the Kiwi Fly? Achieving Productivity Lift-off in New Zealand'.

In the better-off parts of the OECD people can produce 100 widgets an hour (and in the US, more like 105). Australians can produce 90. We can only produce 65.

As Paul says on page 41 of his paper , "This is unusual within the OECD, given that lagging economies have, in principle, greater scope for improving productivity more quickly than leading economies. New Zealand's lack of productivity catch-up is even more perplexing given that its economic policies are often regarded as fit for purpose".

The more I've been thinking about this, the more I'm convinced that we should recast the problem in a slightly different way. What if we put it like this?

In the better-off parts of the OECD people take an hour to produce 100 widgets (and in the US, more like 57 minutes). Australians take 67 minutes. We take 83 minutes.

Exactly the same data, but when put in terms of how slow or fast we are, it suggests some different lines of inquiry about what's going on and what some remedies might look like.

As a thought starter, think about infrastructure planners. Say they've got a budget of a billion a year, and they've got five equal sized $1 billion projects in mind.

One choice is to start the five projects at once, spending $200 million a year on each one, and therefore (because of the budget constraint) necessarily doing them slowly over five years, using 1,000 people with shovels on each one. Five low-productivity projects.

The other choice is do project 1 quickly, using only 200 men and lots of productive (but expensive) heavy equipment, and spend the whole annual $1 billion budget on it. Then do Project 2 in year 2, again in a concentrated burst, and so on. Five high-productivity projects.

In New Zealand's culture, though, which choice do you think will be made?

Quite. And never mind that doing it the high-productivity, short-time way will actually deliver 10 years of benefits from the projects by the end of year 5, whereas going the slow-delivery route will have generated no benefits at all till the completion of all five slow-moving projects.

Not that it's wholly to be laid at the door of the commissioning planners. I'd suggest that spinning out five years of 1,000 men with shovels suits the bidders just fine, too. They keep the band together, and they take out the risk (if they do the $1 billion quick job) of being left high and dry with a lot of idle heavy equipment if they don't pick up a job in year 2. In an economy where lumpy projects don't necessarily appear like clockwork, that's a rational fear, and I'm not the first to observe that one productivity-enhancing policy might be a pre-announced big-project timetable.

Or another example. In public procurement of commercial construction, we are, apparently, extremely tough on cost over-runs. You go over budget, you wear it - too bad, as Fletcher Building has painfully experienced. But does completion time get anything like a decent look-in compared with the focus on cost? If a public buyer had to choose between the bidder who says, "It'll cost a bit more but I'll have it done by Christmas, no dramas" and the bidder who says, "Cheap as, but it'll be next Lammas Eve twelvemonth, probably", I wonder which way they'd go?

Not that I wonder a lot, as I suspect I know the answer.

And it's not just big construction projects or public buyers that are dragging the chain. I've worked in a variety of in-house and external consultancy environments: some have been on the ball, with quick turnaround times, some have been, shall we say, rather more relaxed. No doubt you've experienced the same in your career.

Thinking of low productivity as slow pace also puts a different spin on how prospective solutions might work. Many people (including the Productivity Commission, and me) think greater competition is part of the answer. Too many dozy producers are enjoying the quiet, low-activity life because there aren't enough people snapping at their heels to make them do any better. Typically, we think of competition as forcing out inefficient levels of costs, or pushing prices down to 'normal profit' levels. Maybe we should think about how it could also be harnessed to improve response and delivery times? 

Viewing our productivity problem as a low-speed issue isn't a panacea. There's still a lot of mileage to be got from the more usual low-production view. But at a minimum it's a useful complementary viewpoint. I'm quietly convinced that digging into the incentives to do things slower or faster could provide some extra answers to our productivity conundrum. 

Ideas? Sure. Answers? Not so much

Today's well-attended Government Economics Network (GEN) conference in Wellington on the theme, "Responding to Global Challenges", covered the back end - the challenges - pretty well. But as for "responding" - if I were in the policy sausage grinder, as many of the attendees were, I'm not sure I came away with enough new policy ideas, or even a clearer policy research agenda.

My highlights? The IMF's Jonathan Ostry made a good case that growth and (re)distribution as policy targets aren't as incompatible as once thought - indeed, redistribution may facilitate higher levels of GDP growth. Structural reforms, for example, often have winners and losers, and properly compensating losers may cement support for the GDP-enhancing reforms: win-win all round. That's a big policy lesson right there, and not one we knew enough about in the '80s and '90s when we were crashing through with our reform programme. So I would take one big bit of practical policy guidance away: check the inequality and equity outcomes of what you plan to do. If there's enough of a GDP payoff, and there likely will from initiatives like trade liberalisation, then there'll be enough cash in the kitty to see the losers treated right.

I also liked Australian National University Professor Warwick McKibbin's presentation on recent global trends and future prospects: he's very good at explaining the dynamic interplay of macroeconomic variables. But it's not all just seat of the pants judgement calls: he's got a multi-sector multi-country model which enables him to make a stab at calculating the global and national impacts of different policies or shocks. He modelled, for example, the Trump policy package of immigration controls, big tax cuts, infrastructure and defence spending increases, and higher tariffs, against a background of tighter Fed monetary policy (good for US GDP in the short term, pretty horrible longer term), and he also had a go at modelling what would happen if a global trade war broke out (bad news for everyone, but especially bad news for China and Germany).

What I took away from his presentation was that we ought to run any bright ideas we have - joining or not joining the Trans Pacific Partnership, introducing different forms of carbon emission policies - through a practical model like his, before we press any buttons. My impression from chatting to people in the policy game is that we don't*. And it's not helped by economists here and overseas putting the bulk of their modelling efforts into fragile DSGE-style models which fall apart if the wind shifts, rather than into more robust, empirical, simpler and useful models that will give you sensible answers to real world questions.

Kaila Colbin, 'New Zealand and Australia Ambassador for Singularity University' - no, made no sense to me, either - turned out to be a highly impressive speaker who made a convincing case that the pace of technological change is high and increasing far faster than practically anyone realises. And she also dealt to some of the more alarmist 'the robots will take all our jobs' perspectives. Wouldn't you prefer, she said, an artificial-intelligence medical device to read your X-rays with complete accuracy, and leave your doctor to talk through treatment options? It also left me - again - with the strong impression that our (and other countries') productivity and GDP data can't be properly capturing the full extent of these extraordinary advances in our capabilities.

But as with many of the issues raised, attendees might now have a better idea of some of the global trends that are going on around us, or might happen down the pike, but we weren't given many suggestions about what to do in response.

And the issues that were raised didn't cover all of the waterfront. Nobody knows for sure why New Zealand's got the low productivity issues it already has, and what we need to fix to meet both our current and future challenges. But a partial list of plausible factors would include insufficient physical and other infrastructure; weak entrepreneurial and managerial incentives and capabilities; low international connectivity; the deadweight burden of poor regulation (think housing land in Auckland, or local regulatory reactions to Uber and Airbnb); policy sluggishness in the bureaucracy and the legislature; low intensity of performance-forcing competition; social and cultural attitudes to success, innovation, unorthodoxy, experimentation and failure; and you've probably got some further candidates of your own.

They didn't get much of a look-in, nor (as the New Zealand Initiative's Oliver Hartwich pointed out in a panel session towards the end) did the challenges of urbanisation, which he rightly said was one of the most important global megatrends. It's also one of the challenges we're failing to meet: neither Auckland nor Wellington work properly.

So a good grade to GEN for bringing expert overseas and domestic speakers together, and a decent grade for consciousness-raising. And maybe the paucity of policy responses this year could be the motivation for next year's agenda.

*Update December 9 - this should probably be "we don't all the time" or "we don't enough", as John Ballingall at the NZIER has helpfully been in touch to say that the TPP was actually run through a model.

How strong is strong?

The economy's ticking along nicely. Tomorrow's GDP numbers for the September quarter are expected to show an 0.8% increase for the quarter, which would make it 3.6% for the year. And virtually all the recent data have been solid to robust. On the solid side, for example, there's the December quarter Westpac McDermott Miller consumer confidence index ("New Zealand households are in the mood to celebrate. However, it looks like the party will be more of a relaxing family barbeque, rather than a fullblown rager") while down the robust end we've had the latest (November) BusinessNZ/BNZ Performance of Services Index ("a picture of strength"). In per capita terms, it's not the boomer it might look like at first sight, and I'll come to that, but it's still a pretty picture.

Unsurprisingly, forecasters have been upping their estimates of what's down the track. The latest (December) quarterly consensus forecasts collated by the NZ Institute of Economic Research showed that likely GDP growth in the year to next March is now reckoned to be 3.5% (the September quarter consensus had picked 3.2%) and there has been a marked revision upwards for likely employment growth, which is now expected to be a stonking 4.8% compared with the 3.2% that seemed the best guess back in September. Forecasts for growth and employment over the three years to March '20 have been nudged a bit higher, and there isn't a single forecaster (out of the 9 polled) prepared to call a recession over that period.

But you knew that. What's my point? It's this: I reckon the short-term outlook may be even stronger than people currently expect.

Recently I've been playing around with my little Excel forecasting model, and I can't easily get the GDP growth numbers for the next year much below 4%. I've assumed there will be some kind of wealth effect on consumer spending, and I've assumed that there is enough capacity in the building trades to allow for another reasonably substantial rise in housebuilding. If that's your view of the world, numbers north of 4% start shimmering into view. Interestingly, according to the ANZ confidence surveys (for example, here), "Our confidence composite gauge (which combines business and consumer sentiment) is pointing to GDP growth accelerating to north of 4%. Capacity constraints (getting skilled labour) will put a dampener on that but we like the spirit".

I could easily be wrong. Perhaps New Zealand households have suddenly had an outbreak of financial prudence, or as RBNZ governor Graeme Wheeler put it in a recent speech, "Growth in real consumption per capita has averaged 1.6 percent pa in the current economic cycle – about ½ percentage point below the post-1993 average growth rate of 2.1 percent, despite the rapid increase in housing wealth...This more cautious consumer behaviour may reflect a reassessment of the ‘permanency’ of capital gains from household assets, and greater caution about the level and durability of future income growth".

Maybe. But I'd still be rather surprised if families, sitting on the biggest financial bonus of their lifetimes (especially in Auckland), continued to spend more slowly than usual. They may well (sensibly) discount the scale and the ultimate bankability of their winnings. But I don't see some wealth-related spendup being delayed for ever. Sure, some of it won't flow through to the GDP numbers: the new car and the trip to Melbourne go into the 'imports' box. But some of it will.

And on the capacity side, things are certainly tighter than they were: you could certainly read Stats' numbers on the recent slowdown in the growth of housebuilding (and of construction on general) as evidence that it's getting harder to assemble the crew for the next project. But on the other hand residential construction as a percentage of GDP isn't even up to past levels yet, as the chart below shows, and given the intense profit incentives to get houses onto the market, you'd expect us to go past previous peaks. My guess is that there's a dance in the old dame yet. And I also suspect (based on the technical economic methodology of Walking With Your Eyes Open Around The North Shore) that houses are going up quicker, which will help.

An economy that could well grow by 4.0% to 4.5% rather than the 3.5% that most analysts see in the cards would also part-explain a bit of an oddity - our low per capita GDP growth. In the June quarter our GDP (expenditure basis) was 3.8% up on a year earlier - but up by only 1.7% on a per capita basis. That was because the population grew by 2.1% (a natural increase of 28,200 plus net immigration of 69,100).

You look at that 1.7% per capita growth, and you could think two things. One is that it carries on our run of relatively slow productivity growth, and that's got to be right to some extent. But you could also think: hang on a sec. This isn't an economy with the look and feel of distinctly modest per capita growth. I appreciate that's an impressionistic judgement call, but I suspect the other leg to the apparently low per capita growth numbers is that they're a bit behind the actual pace of where the economy is (and is heading next).

It doesn't mean we've suddenly solved our slow-growth productivity problems. If anything, our reliance on construction in this cycle points them up: what we gonna do when the houses are up and the earthquake damage is fixed? And it doesn't mean that tomorrow's GDP number is going to be a little purler (any single quarter tends to have lumps in it). And 2016 was the year that gave us Brexit and Trump, so who knows what the next madness will be or what it might do to us.  But net net net, it wouldn't be too surprising if the next six to twelve months turned out rather better than currently expected.

Good ideas - but now what?

Yesterday's report from the Productivity Commission, 'Achieving New Zealand's Productivity Potential' (press release here, overview here, whole thing here), is full of good ideas.

In the housing market, for example, their proposals would have the happy outcome of pressing both the equity and efficiency buttons at once. In addition to dealing to people sleeping in cars, a better functioning market would lift productivity: "A housing market that responds to demand pressures facilitates labour mobility and improves productivity by allowing firms access to a deeper labour market, as well as more opportunities for specialisation, innovation and technology spillovers. For workers, being able to live in places where their skills are most valued improves their incomes" (p65).

The Commission is big enough and bad enough to push its own barrow, so I'm not going to recycle its full list of proposals, but I would like to add a little bit of support for its competition ideas.

As the report says, "Lifting competitive intensity is key to improving services sector performance...Increasing competition would energise market selection effects, making it less likely that productive resources – including skills and intellectual property – get trapped in lagging slow-growing incumbents and, instead, flow to innovative new entrants" (p69). And trapped they are: as the report overview notes (p7),  "a relatively long and persistent tail of productivity underperformance exists in New Zealand", with not enough competitive pressure on it to either lift its game or get off the pitch.

The Commission has two suggestions, and I'm fully behind both of them (though I should disclose that I may be a teeny bit involved in helping to get the second one on the agenda).

The first one is reform of s36 of our Commerce Act. Life has moved on, particularly in Australia, since the Commission started running with this, so here's the Commission's latest take (p69):

In its inquiry into boosting services sector productivity, the Productivity Commission found that Section 36 of the Commerce Act – taking advantage of market power – is impractical and needs to be reviewed. Under this Act, abuse of dominance cases are assessed using a “purpose test” that the conduct had an anti-competitive purpose and a “counterfactual test” that the conduct could not have occurred in the absence of market power.

This approach is increasingly out of step internationally, with competition law in almost all other OECD countries focussing on whether a dominant firm’s behaviour creates demonstrable harm to consumers (OECD, 2005). Following the Harper Review on competition policy in Australia – which recommended shifting to an effects-based test of abuse of dominance – the New Zealand approach is looking increasingly unusual and unworkable.

The second is proactive kicking the tyres ("market studies") where there might be competition problems (p70):

Much of the debate on competition in New Zealand has been from a legal perspective and very little is known about the economic impact of competition in New Zealand markets. Given signs of weak competition in conjunction with high rates of return in some parts of the economy, policy-relevant research aimed at better understanding the role of competition in the economy would be highly beneficial.

For example, the advocacy role of the Commerce Commission in promoting competition as means to enhanced economic efficiency and wellbeing could be improved. Specifically, the Commerce Commission should be able to conduct market studies without reference to a merger application or other investigation, as is the case in Australia. These changes would help strengthen the competition culture among policymakers and the public. For example, the ability to conduct market studies would allow the Commerce Commission to investigate potential barriers to competition in poorly performing but highly profitable industries.

A policy combo aimed at effectively policing any Big Beasts impeding the competitive process, and at looking to see whether poor outcomes but high profits are down to a lack of effective competition, sounds like an excellent double header to me. And I'd stress that this is not from any anti-business perspective: as the Commission points out (pp67-8), it is other businesses that wear the input costs of whatever old Spanish practices may be operating in the cosier corners of the economy.

Which is where MBIE could usefully do its bit to improve the labour productivity of the economy by letting us know what it's going to recommend on s36 and market studies. It's just over a year now since MBIE started down this path, and the final round of submissions and cross-submissions closed four months ago.

It's time to hear from you, guys.

Poorer management, lower productivity. Makes sense

On Tuesday we had the Productivity Commission's excellent symposium on innovation  and productivity, where one of the main talking points was the growing importance of investment in 'intangibles' like research and knowhow. We're not especially good at it, as the three right hand bars in the graph below show (taken from this recent Productivity Commission working paper, 'Measuring the innovative activity of New Zealand firms' - symposium attendees will recognise it from the brochure).

By coincidence the Peterson Institute for International Economics in Washington had a conference last month on 'Making Sense of the Productivity Slowdown' which covered some of the same landscape. One of the presentations in particular was quite suggestive about one of the intangible knowhows we could do with a bit more of - and that's managerial skill.

The LSE's John Van Reenen was talking about 'Productivity Issues: Past, Present & Future'. He's been working with a sophisticated index of management expertise: you can find out more about it at the World Management Survey website, but in essence it grades companies, on a 1 to 5 scale, on how well they do 18 different management things. Van Reenen (and others) have then gone on and looked at the links between management expertise, as measured, and various financial and economic outcomes. They are generally sizeable: here, for example, is the global link between a firm's Total Factor Productivity (TFP) and the quality of its management.

TFP, by the way, for folks not versed in the black arts, is the bit of a firm's performance left over after you've accounted for the contributions of its workforce, its employees' skills, and its capital spending. At one level it means "anything we can't get a handle on", but it's also often used as a shorthand for important intangibles like management quality, social skills and "the way we do things round here", and smart processes.

In this latest outing, he's had a go at explaining differences in countries' TFP: if you make a plausible assumption about management's importance in overall TFP, and you have measures of TFP and management expertise, you can estimate how much of countries' TFP differences is down to differences in management. Often, in these kinds of surveys, New Zealand tends to be among those absent, but for once we're in the numbers, and here are the results. Differences in TFP are measured as a percentage of the US level. I've circled NZ in red.

Now, I think we can all agree that this is somewhere down the more heroic end of estimation, and also that there are the usual issues of correlation and causation. But we can also agree that rough and ready estimates, that are approximately in the right sort of area, are also useful things to have. 

And I think there is something to this one. The overall pattern looks realistic: poorer countries at lower levels of development - the ones on the left with, say, less than 20% of America's TFP - tend to have bigger issues to confront than the relative quality of their management, and sure enough the contribution of management to the development gap tends to be low. But at higher levels of development, where you've got higher levels of resources available, how you manage them becomes more important. 

On these estimates, 43.5% of the productivity gap between us and the States is down to our relatively weak management capabilities (and it's interesting that Australia, with a somewhat similar business environment to ours, comes out with a similar number, at 45%).  These numbers also sit comfortably with other evidence that our management capabilities aren't that flash: for example, the Productivity Commission's services inquiry found some data that suggested that low ICT uptake appeared to be linked with a "couldn't be arsed" approach by business owners (as I posted at the time).

Even if the proportion is uncertain - let's just say it might be somewhere between a quarter and a half - it makes for a significant line of attack if we're thinking about better management's potential contribution to narrowing the productivity gap with overseas. There were some neat ideas at this week's productivity symposium - but they're not going to get the traction they should if our business managers are slower to run with them, or worse at execution, than their overseas competitors.

Who got what?

The Productivity Commission has just come out this morning with an interesting new Working Paper, "Who benefits from productivity growth? –The labour income share in New Zealand", and if life's too short, there's an accompanying "cut to the chase" summary. The labour income share, by the way, is as it sounds  - "The labour income share (LIS) is the proportion of income generated from production that is spent on labour in the form of wages and associated on-costs" such as employers' super contributions. The rest of the income in the economy is attributed to capital, so the paper is about the split of national income between wages and salaries on the one side, and returns to the owners of capital on the other.

At first sight, the headline finding risks feeding the post-Piketty fears of those who think the working stiff is losing out to the plutocrat: here's a graph (it's Fig 1 in the summary) of GDP and labour's share of it. The labour share's gone down from around 64-65% of GDP to around 56%.

But whether this is a good thing or a bad thing isn't at all obvious: as the paper says (p6), it "depends on the situation and is partly a matter of preference. For example, would New Zealanders prefer to participate in an economy where real wages are increasing strongly but the LIS is falling because productivity growth is even faster, or an economy with weak growth in real wages and productivity so that the LIS is more constant?", and the paper steers clear of making any judgement calls.

One factor in the background is that capital's share will depend on how much capital there is. If there's a lot more capital going into the business of producing GNP then there used to be, and most of us would reckon that's a good thing (lots more equipment at work in the Aussie economy is one of the reasons Australia has been growing faster than us in recent years), then its share will tend to go up and labour's to go down. It's not a given - could be, for example, that wages go up fast enough for labour's share of the total cake to hold up - but it's likely. And as it happens, we have in fact seen the amount of capital in use growing faster than the amount of labour employed. Here are the numbers. 'MS-11' in the title is the 11-industry 'measured sector' that the paper has looked at, and  'MFP' is 'multifactor productivity', or that bit of GDP that isn't explained by increased inputs of labour and capital.

The fall in labour's share is also not a uniquely Kiwi phenomenon, by the way, if you've been thinking deep dark thoughts about the distributional consequences of Rogernomics and its successors*. In a range of OECD countries the labour income share typically rose to a peak in the late '70s or early '80s and declined since as a result of a bunch of things. As the paper notes summarising the research on the whys and wherefores (p10), "Perhaps most importantly, technological advances that have increased the return on capital have led to capital deepening as businesses have substituted capital for more-expensive labour...Other contributing factors include shifts in industry composition towards more capital-intensive industries, increased globalisation that increased the global supply of cheap labour, and institutional developments that have reduced labour’s bargaining power". 

And if you're still nurturing "they're watering the workers' beer" thoughts, the paper shows that there are actually good links between the value that employees bring to their business (the growth in labour productivity) and what they get out of it as a result by way of higher real wages, as these two charts from the summary show. Over time (left hand graph)  and across industries (right hand one), if firms are doing well because the employees are more productive, it turns up in the payroll run.

The paper doesn't have a lot to say about policy, and that's fine, it set out to be more of an analytical piece, but what it does say is sensible: if there are all these trends buffeting labour's share of the goodies, then (from p7)

benefiting from new technology requires investment in the necessary complementary skills. In particular, the education system must be of high quality and sufficiently responsive to provide new and dislocated workers with the skills they need to enter productive and lucrative occupations where they can make the most of new technology. Policy should also work to minimise entry barriers and other frictions, such as excessive occupational licensing, that prevent workers from moving to where they can work most productively. There is also a geographic aspect to this in that cities are one of humankind’s most productive inventions. So restrictions on housing supply that mean low-skilled workers cannot afford to live in economically dynamic places can limit productivity growth and economic resilience to change.

Even if policy is set just right to ensure that the benefits of technology-based growth and globalisation are widely spread, a social safety net may still have to catch people who fall through the cracks. Accordingly, policy must ensure that social services function effectively to deal with the side effects of rapid technological change

It may not be original - much the same policy combo is what has traditionally been prescribed to cope with the impact of freeing up international trade - but it's none the worse for that.

Another thing I liked about this paper is that it's given us a handy summary way of thinking about our recent economic growth, and here it is. You've got the different growth cycles, and their sources, all in one nicely packaged schematic.

As the graph indicates, we had a 'high productivity' phase in the 1990s, when that tricky multi-factor productivity kicked in much more forcefully than it had been doing before, or has since. Australia did, too, as the data below shows (snipped from Table 6.2 of the paper).

And that brings us to the biggest policy questions of all. Where did that surge in productivity come from? Why did it go away? And, most crucially, can we get it back?

*I'd also note that one of the bigger dips in the labour share occurred pre-reforms, in 1982-84, when Muldoon in his Late Anarchy period imposed a wage and price freeze. As the report notes (p39), "In practice, this proved to be more a wage freeze than a price freeze".

Two 5 - 0 defeats

Chorus got bowled like ninepins this morning by the  Court of Appeal, having earlier been skittled by the High Court.

The cases were about the Commerce Commission proposing a big reduction in the price Chorus could charge for UBA, or as it is formally defined, "the additional UBA service component, which allowed access seekers to supply broadband services over Telecom’s copper access lines without investing in their own equipment or software". In other words, the bits and bobs that carry broadband traffic across the gap between the copper line from your place and the start of an ISP's network.

The reduction (roughly halving the price) had been based  on a benchmarking exercise, where the Commission (as required by the Telecommunications Act) looked at the prices overseas for UBA as a quick and dirty proxy for what it might well cost here. There's lots more about the exact details of the benchmarking comparability exercise, but that's the gist of it.

The Court's decision is here as a pdf and there's a shorter media release pdf if you prefer. Chorus's reaction is here: essentially, not surprised by the outcome, but felt they had to make a point about what they see as a regulatory regime mess around pricing of broadband services.

I'd reckoned, as I said some time ago, that (a) Chorus had very little chance of succeeding and (b) in any event the whole exercise was a waste of money, but Chorus went ahead anyway. And this morning, sure enough, they got squashed like a bug. Chorus had raised five issues: the Court said No to each and every one of them, as the High Court had earlier. While Chorus has said it is studying the decision, and I suppose could take it to the Supreme Court, after two successive 5 - 0 defeats you'd think they'd flag the game away.

Chorus didn't get anything helpful about any incoherence in the regulatory regime, either. The reverse, if anything, when the Court of Appeal said at [44], "the mandatory requirement for the Commission to carry out the “benchmarking” exercise...is itself designed to implement the statutory purpose, not to contradict or undermine it". In other words, the Telco Act is internally consistent.

So now on we go to the Commission's final word on the UBA price, which will be determined by modelling the actual costs of an efficient provider in New Zealand (Chorus had exercised its right to object to the benchmark stab at the price and to have local costs estimated explicitly). According to its media statement welcoming the decision, the Commission says it expects to have the first draft of the "real" cost (my words) in December.

Who knows what that price will be, but I wouldn't be in the least bit surprised if it came out within cooee of the original benchmarked stab at it. As I've said before,  my experience across a number of contexts is that  often benchmarking gets you to an approximately correct place, and far quicker and much more cheaply than the model-building route. I didn't start at that position - in fact, I originally thought the exercise would be too flaky to rely on - but what you find, when you get your hands dirty, is that you can say, the cost of this thing is somewhere around X. It might really be 1.1 times X, or 0.9 times X, but it sure isn't twice X or  half X. And that shouldn't be too surprising: in areas like telecoms, for example, companies tend to be delivering much the same sort of thing with the same sort of technology.

It's all moot now, as we're donkey deep in the formal cost modelling, but I'll say it anyway: I have a soft spot for simple, practical-enough regulation options like benchmarking. For all our general preference for light handed regulation and our national propensity to come up with a cheap and cheerful Number 8 fencing wire answer to things, our current regulatory approaches seem to be favouring ever more complicated, ever more expensive, ever slower, ever more intrusive options, as anyone who's had anything to do with the regulation of electricity lines businesses (for example) would agree.

We're currently having a review of the telco regulatory policy regime. It would be nice, as an outcome, if simplicity and speed got more of a look in than they do now.