Thursday, 30 May 2013

The Auckland housing market, revisited

I'm a great believer in 'economics by walking around', just as the management theorists are fond of 'management by walking around'. Particularly when I was the BNZ's chief economist, and got out to enormous numbers of meetings and groups, I quickly realised that I was learning far more about the economy, from the people who turned up at those speeches or meetings, than I was passing on to them in my prepared speech. They told me things that weren't showing up in any of the published statistics or surveys. And everybody won: the feedback I got  improved my take on what was going on, and my next prepared speech would be more on the button for the next audience.

All of which is by way of introducing one new bit of anecdotal economics by walking around: what's happening to the Auckland housing market.

I run, most days, plantar fasciitis permitting, and as I puff my way round the North Shore neighbourhoods, it's become very obvious that many existing family homes are being bowled over and being replaced by new infill development. One day, there's an old-fashioned family home on the quarter acre section, next day it's gone, the day after that, the builders are in putting up two or three townhouses. The latest one is right beside us. Yesterday, and literally around the corner from us (we're on Clematis Avenue, the house was on Sunrise Road), the big machinery came and took away the existing house, and any minute the construction crew will arrive.

There's good news and - maybe not for today or tomorrow, but in due course - potentially bad news here.

The good news is that the market's working. Housing demand in Auckland exceeds supply, prices are high and rising, and supply is responding:  two (maybe three) households will get accommodated where one was before, albeit with the loss of the garden.

The potentially bad news is that this sort of supply response is the sort of response you get in the later stages of a house price cycle. I remember, when we first moved to Auckland in early 1995, this sort of thing was all the rage, too. We had friends, and this was all they did: bowl, or improve, existing houses. And I remember going to look at one renovated house: there were four twenty-somethings involved (I gave up on who was with whom, or why) whose modus operandi was to buy a wreck, live in it while they expanded it, flick it, and move on to the next dump.

So that's the market today. At this stage, and I know this is seat of the pants stuff, I wouldn't (and maybe this is where I might be parting company with the Reserve Bank a bit) say that the price rises are in any sense hugely out of whack. For now, in Auckland, there's genuinely strong demand and genuinely limited supply, so what would you expect?

There's a whole side debate to be had about the role of arguably too-loose monetary policy exacerbating the demand side, but even if mortgage rates were appreciably higher, I reckon there'd still be something of a supply/demand imbalance that would justify a strong market. And if he hasn't already, Reserve Bank Governor Wheeler could usefully get on the phone to ex-Governor Don Brash, who faced the same problem of trying to differentiate a region-specific house price boom from a potentially more alarming generalised blowout in asset prices.

So we know where we are: we're well into a bull market. I'll be keeping an eye on it as I run past, but for now, that's all that's underway: I wouldn't say we're at or near the top of the cycle. There's certainly a lot of this speculative in-fill redevelopment going on, but it seems to me, for now, that there is a good opportunity cost basis for it. In this tight market, the tired or small 1950s home on the big section badly needs to be put to its most productive use.

There's the odd straw in the wind that's suggestive of things getting a bit over-enthusiastic: as I mentioned in a previous post, the real estate agents are frenetic, and yet again, this morning, we had a letter imploring us to put our house on the market. At a guess, though, I'd still say that this is a strong market, rather than a fevered one.

A thought experiment about charter schools and competition

Charter schools are, obviously, in the news. The latest development is an open letter sent to all MPs arguing against them, and saying, among other things, that they haven't worked overseas.

In future posts I'll come back to the points raised in the letter, and talk about some empirical, real world evidence. But let's just suppose for a moment you knew nothing at all about the practical outcomes of charter schools overseas. Let's go back to first principles for a minute.

Who would you expect to benefit from greater choice in education? Or indeed from greater choice across a wide variety of public services - charter schools are only one example of a strong and growing trend in the developed world towards offering greater choice in areas such as education and health. Self-evidently, you'd expect the people who would benefit most are those who have least choice now.

And who would they be, I wonder?

It's not the well-off: they can, and do, pay for private schooling and private health.

It's not the moderately well-off: they can, and do, change the health or education zones they live in. They aim to buy a house in a good school zone: you'll have seen for yourself that the estate agents signs regularly advertise 'In zone' for a well-regarded local school. And there's nothing unusual in that, by the way - it's internationally well-documented that one of the main effects of zoning-style school allocation is that house prices rise in the better locations.

The main beneficiaries of choice, in short, can only be those who currently have little or no choice at all. And in New Zealand conditions (and in many other countries), that means poorer people in poorer areas.

And it's not like you can escape the poor areas without money. Bright kids in poor areas can't, in general, get scholarships to good private schools elsewhere: that was one of the first things the incoming Labour government of 1999, unforgivably, banged on the head. So poor kids, bright or less bright, are trapped. The only choice they have, at the moment, is the school they're in zone for. It might be an awful sinkhole school, but that's all that is on the menu.

So: a charter school arrives. And your current  local school is dire.

Take a wild punt on the outcome: your current dire school, plus the chance (not the certainty) of a better school, versus your current option, the dire school.

How likely is it that you will be worse off?

Is bad news the only news?

Last night I watched  the BBC World News, on Sky. And it had a major hooha about sharp falls in the Japanese stock market. The big news, apparently, was that the Nikkei had had a substantial fall - they talked about 5%, though the index data at the close weren't to hand, and in the event it was a less newsworthy but still largish  fall of 3.4% (opened at 14,072.9, closed at 13,589.03) - and the programme went on to note that, having hit a five week low, the Nikkei's weakness was causing alarm and unrest in the rest of  the Asian markets. No doubt the other news channels were running similar items.

Talk about something that is literally true, yet unbalanced.

Six months ago (its closing level on November 30 '12) the Nikkei was at 9,446.01. Since then, and even after this latest 'dramatic' fall, it is up by 43.9%. If this is a weak market, please, Oliver-like, could I have more.

Was there equivalent coverage when the market was rising? Were the TV channels as diligently reporting large gains as they have been in reporting large losses? For example, in the space of six days, 2nd to 8th of April)the Nikkei went from 12,003 to 13,193, a gain just shy of 10%. Were last night's handwringers celebrating back then? Cue for a Tui style: yeah, right. Investors becoming massively better off is, apparently, not news.

Irrespective of thoughts about media posturing, what's really going on?

The Japanese market had run hard and run strong. It had some good reasons for it. The new Abe government decided that it wanted substantially more spending on infrastructure, very low interest rates for even longer, and a much lower exchange rate (the whole 'Abenomics' thing). This big reflationary impetus greatly improved the short-term prospects for Japanese GNP growth and for Japanese corporate profits. A big rise in the equity market was entirely consistent with this new set of policy settings.

Did the equity market overdo things? I'd say, very likely. The Japanese share market is not the most transparent or above board of the world's equity markets, and a semi-organised over-ramp of share prices wouldn't have surprised me in the least. And even in less - let's call it collegial - markets, asset prices are well known to have tendencies to overshoot the levels that the fundamentals might justify. In some sectors of the Japanese market (and most notably the property and property development companies) share prices had, to use a technical economic term, gone mad.

The real news, in short, is that an extraordinarily strong equity market had got a bit irrationally exuberant, and needed to be a bit more realistic.

Was that too hard for the media to say?

Tuesday, 28 May 2013

France and the ratings agencies

Three articles in the online May 27 issue of La Tribune won't bring much joy to people worried about the Eurozone's economic outlook and its ongoing potential for disruption of global financial markets.

The High Council for the Public Finances - maybe there's a more elegant translation of the Haut Conseil des Finances Publiques, but you get the drift - has trolled through the revised 2012 national accounts published by INSEE, the French statistical agency, and has established that the nominal fiscal deficit was 4.8% of GDP (worse than the previously thought 4.5%), and that the underlying structural deficit was 3.8% (up from the previously estimated 3.5%). The good news was that the 2012 figures were better than 2011's: the bad news (and this is my view, not the Council's) is that the improvement took place under previous management (Sarkozy's).

And we heard from both major ratings agencies.

S&P is expecting a poor economic outlook (-0.2% fall in GDP this year, +0.6% growth in 2014), fiscal deficits of 3.8% of GDP this year and 3.3% in '14, and says it remains to be seen if debt will stabilise in 2105 (the government's projections are debt/GDP of 93.6% in '13, 94.3% in '14, and 93% in '15). It also says would threaten France's credit rating, and its own assessment will depend on how France deals with its main reform challenges, and it mentions rigidities in the labour market and the services sectors.

Moody's has the same hymn sheet: GDP down this year (-0.4%), weak recovery in '14 (+0.5%), and a question mark over structural reform. It gives credit for some recent labour market reforms, but notes that we haven't yet seen what their impact has been, and it says its negative outlook on France's credit rating reflects its "worry on the loss of competitiveness of the country, on its fragmented labour market, and its budgetary situation".

Monday, 27 May 2013

World famous in The Guardian

There I was, browsing through the online Guardian (May 26 edition), and I came across an excerpt from a new book by celebrity restaurant and food critic Jay Rayner - you'll have seen him, if you're a foodie like me, in various programmes on Sky's Food Channel. And there, under the headline 'Why worrying about food miles is missing the point', was a reference to a 2006 paper written by Prof Caroline Saunders of Lincoln University and two colleagues, Greg Taylor, also from Lincoln, and Andrew Barber, from The AgriBusiness Group.

The gist of the article was that Rayner had until recently been an uncritical supporter of the 'food miles' idea, which is that it is supposedly better for the planet if you buy locally, saving all the fuel and emissions that transporting your food from the other side of the world would have involved.

The flaw in the notion, if you haven't figured it out for yourself already, is that the impact on the planet depends on the total carbon footprint involved in getting the food to you. Producing low yields in unfavourable conditions (where you might need heated glasshouses, for example) requires more total energy than producing high yields in favourable conditions, even after transport costs (usually only a very small fraction of the total cost in any event) are factored in. And Caroline and her mates did the heavy lifting to show that the likes of New Zealand's lamb and apples are easier on the planet than the local UK ones.

Rayner, to his credit, was admitting to an evidence-based change of heart, starting with reading the New Zealand paper and progressing to other research, which he also cites. If you'd prefer to go to the New Zealand source for yourself, it's here.

It reminded me, too, of something I've often wondered about. On the same total footprint basis, I wonder if electric cars are really as good for the planet as they claim?

Saturday, 25 May 2013

Measuring the degree of competition

It got surprisingly little media or analyst coverage, but last Tuesday (21st) the Electricity Authority released the results of the latest surveys it has conducted of the perceived levels of competition in various branches of retailing. They were particularly interested in electricity retailing, naturally, but they also included a wide range of other major retailing sectors - the banks, electrical goods stores, online book stores, petrol stations, the supermarkets, and the telcos.

People were asked, "Using a 0-10 scale where 0 means not at all competitive, 5 means just adequate and 10 means extremely competitive, how competitive are the following businesses in terms of working to get your business and offering you the best deals? If you do not know enough, just say so".

The graph below summarises consumers' responses, and compares them to a similar 2011 survey the Authority had also carried out (and which, I regret to say, flew below my radar at the time).
Granted, these are perceptions rather than any underlying reality: retailers, if observed selling the same thing at the same price, could in principle be in near-perfect competition, or they could be in close collusion, and a consumer wouldn't necessarily know which. On the other hand, people aren't mugs, and can often be trusted to figure out the nature of the options they're shown. So I'd be surprised if these perceptions were wildly off the mark of the reality.

One bit of good news is that, over the past two years, perceived levels of competition have risen across all the retail sectors surveyed. Hopefully, that's the structural reality, and not something cyclical - the  ANZ-Roy Morgan Consumer Confidence Survey has risen strongly over the same period, and maybe households are just feeling more upbeat about everything - because increased competition generally contributes to both productivity and innovation. The UK's Office of Fair Trading published a very good paper in 2007 showing the various ways in which this happens, if you're interested in more.

Competition - consumers' views

One oddity in the graph above, however, is the low perceived competitiveness of online bookstores: my pre-survey guess would have been that they would have featured very favourably. Amazon, and the online operations of Barnes & Noble and of Sydney's excellent  Abbey's bookstore, certainly make a good deal of effort to get my custom. That's where the Electricity Authority's simultaneous survey of 81 'stakeholders' is rather helpful. It was mostly major players in the electricity industry (generators, distributors, retailers), but also had energy users and energy consumer representatives, plus some investors, educational institutions, and professional bodies. 

Their, arguably more informed, assessment, is shown in the graph below. And it fixes the anomaly: the online booksellers move from bottom (in the consumer survey) to middle of the pack (in the stakeholder survey). Otherwise the assessment is pretty much the same as the consumer one - which rather leads you to believe that both surveys may be picking up the same underlying reality - except that the stakeholders rate electrical goods stores more competitive than supermarkets, which is plausible, too. I certainly feel I've got more choice when it comes to PCs than when it comes to groceries.

Competition - stakeholders' views

There was also an interesting table in the consumer survey, reproduced below, showing the level of 'Don't knows' for each of the retailing sectors.

Distribution of consumers' answers

By and large, consumers feel they know whether they're being offered a more or less competitive landscape. As I say, they could be wrong, and they might be getting smoke blown in their eyes by a simulacrum of competition - marketing ballyhoo in one small part of a market, for example, disguising lethargic competition in the bulk of it - but on its face it's quite an encouraging result.

It helps to explain the online booksellers, too. That's the only retail sector in this survey where there were very high numbers of people who were unsure about the level of competition. It seems odd to me - I would have thought the word had got out about the Amazons and Book Depositories of this world - but evidently not. My guess would be that next time this survey is done, the 'Unsures' will have dropped quite a bit, and the online operations will come out in a more favourable light.

Wednesday, 22 May 2013

The perks of office

For six weeks in 1987 (as I mentioned in the previous post) I got seconded to the Leader of the Opposition's office as an economic adviser. I did it mostly for the intrinsic interest of it, and partly because I'd done a stint as an adviser to a rather controversial Irish government minister, and had learnt a few things that I thought I could put to good use.

All well and good. What I wasn't prepared for was that I was now - not a VIP exactly, but more a Somewhat Important Person - in Parliamentary Services' grand scheme of things. And that meant that, at 7.15am each morning, a chauffeured car arrived outside our house in Pauatahanui, to carry me away in style to help to attend to the great matters of state. Sadly, it all stopped on election day (August 15). As, of course, it should.

If you're a fan of Yes, Minister, you might ask, were the New Zealand Parliamentary Services drivers as much in the know as their counterparts were in Jim Hacker's UK? You might very well think so, but I could not possibly comment.

The political economy of opposition

I've been thinking about the Labour/Green proposals to introduce a monopoly purchaser of electricity, as a mooted way of driving electricity prices down.I have to assume their proposals were well-intentioned and sincere, but equally there was a lot of media comment (and business pushback) suggesting that the policy was an opportunistic spoiler of the Mighty River share float.

It reminded me of an episode that occurred back in 1987, when I got seconded by the BNZ to be Jim Bolger's economic adviser. Apparently, the tradition was - and I have to say it's a nice one, and I hope it's still respected - that someone in Treasury got deputed to help out the office of the Leader of the Opposition once a general election got underway, so as to even up the odds a bit. Trouble was, the reform-minded Treasury of the time had a low opinion of National, assuming that National was still in the grips of Muldoon's dirigisme, and I don't blame them. I'd have felt the same way in their shoes, too.

In short, nobody in Treasury could be persuaded to go along. So the call went out: is there an economist in the public sector that could be persuaded to give it a go? The flying fickle finger of fate pointed towards the BNZ (then still government owned). The top brass at the BNZ dithered for a while but eventually, said, okay, partly because I'd done this kind of job before in Ireland.

A big issue for National back then was how to respond to one of Labour's set piece policies - GST (which had been introduced the previous year). The National team went into reflexive oppositional mode: GST is a work of the devil, we won't have it, we'll do something completely different. For tragic policy wonks who might want to know, the alternative National came up with at the time was called the X-tax ('X' being 'expenditure'), which as I remember it was a sales tax on spending in the shops. And as an adviser, you banged your head against the politics of those days. The alternative policy might be poor, or inferior to the government's policy, but any talk along those lines got trumped by what seemed to be the political axiom of those times: we have to be seen to oppose. Opposing rallies our supporters, and attracts defectors from the other camp.

Except if you are creating credibility problems for yourself later on. National lost in a landslide, and post-election the supposedly superior policy of an X-tax was quietly buried, never to be exhumed again. Exactly the same process, by the way, played out in Australia, where Labor portrayed John Howard's introduction of GST in 2000 as a terrible idea, only to leave it in place when they got in.

How, as an opposition, do you establish your credibility as a potentially competent manager of the economy, when you are faced with the modern-day equivalent of a big new policy like GST?
From what I observed in 1987, the wrecking-ball, or the reflex "we'll do the opposite", risks coming across as political posturing in the voters' eyes, and not seen as primarily concerned about what's best for the economy.

There are alternative ways. Say that the government policy goes too far? Sure. Too late, too little? No problem. We'll open the books and look at the problem when we get in? That can work. It's just what we'd have done if we were in power? Not the path often followed, but can sometimes be true, gets traction with the electorate for candour, and doesn't leave you in the awkward position of having to backtrack on what you once said, as and when you end up in the Beehive.

There will, of course, be occasions where an opposition will genuinely have good reasons to junk an incumbent policy - we saw this play out in industrial relations legislation in particular, where successively we had the Employment Contracts Act (National), then the Employment Relations Act (Labour), then amendments to the ERA (National again) - and the electorate will agree with them, and that's obviously fine.

That said, economic credibility for an opposition is an extremely valuable asset, hard to accumulate and easy to dissipate (much the same is true of central banks). Look at the UK: it took the UK Labour Party 18 years (1979-'97) to rebuild itself as a plausible economic manager, after the chaos of the "winter of discontent" (1978-79) of James Callaghan's administration. And then it took the Conservatives 13 years (1997-2010) in the wilderness before they were again seen as credible, after the assorted problems of John Major's government (including getting forcibly driven out of the European Monetary System in 1992). Hoarding your credibility is still playing out there, too: polls show that the voters, despite the swingeing austerity policies of the Conservative/LibDem coalition, rate the incumbents as better economic managers than Labour.

Tuesday, 21 May 2013

Data you should notice

One of the odd things about media coverage of economic developments is that some releases get lots of coverage, while others go largely unreported.

As a financial journalist in a previous life, I can understand how this happens: you develop some contacts at a particular institution - at one point when I lived in Tokyo I was the world expert on the Japanese syndicated loan market (I appreciate this is not anyone's life ambition) because I knew who to ask about the latest deals - so you invest some effort into understanding the data that originators produce, and you get comfortable with them. If they seem to have a good feel for what's going in their neck of the woods, you tend to stick with them, and you don't pay much mind to alternative data sources.

All that said, it's a little bit odd that the Reserve Bank's surveys of private sector expectations get such little coverage. It's not the fault of the comms folk at the RB: they're diligent, and personable. But for whatever reason, the RB's survey doesn't get much airtime.

And that's a pity. The survey is, to be sure, mostly aimed at things the Reserve Bank, more than anyone else, would most like to know, and it's not tailored for mass consumption. From the RB's perspective, they are especially interested in inflation expectations, and in people's perception of whether monetary policy is a stimulus or a brake on the economy. On the latter point, you might think that there couldn't be a great deal of debate on the stance of policy - either the Reserve Bank is aiming to boost activity, or it's aiming to slow things down, and by and large the Bank tells you where it is at - but at the end of the day, what some policy authority intends may not match up at all well with what its target constituency is actually experiencing. And as we'll see in a moment, its target constituency has mixed views.

So here (given that I'd bet a dollar or two the mainstream media haven't covered it) is what the latest Reserve Bank survey is telling us.

You can see it for yourself here, but before we go there I should disclose upfront that I'm one of the respondents to this survey. In passing, this might be a bit presumptuous, and the Reserve Bank might have its own reasons for the people it asks, but the number of people the Bank consults is getting a bit on the thin side. In this latest survey. they sent out 117 questionnaires, and got 71 responses back. That's not awful, but it's not fully covering the waterfront, either. If you think your view is as good as anyone else's, why don't you have a word with the RB about participating? Get in touch with Mike Hannah, their PR guy. Tell him I sent you. When he's finished laughing, he might still add you to the survey panel.

Where was I? Oh yes - the latest survey results. Four things.

One, we don't have a generalised inflation problem. Whether you look at the immediate inflation outlook, or 1 or 2 years ahead, the answer comes out the same. People expect inflation to fall, and to be well within the RB's 1-3% inflation target.

Two, and despite the benign inflation outlook, people expect monetary policy to become a bit tighter. That could be for lots of reasons. Many people might reckon (rightly) that we needed lower interest rates in the wake of the Canterbury earthquakes - the RB was quite explicit at the time about providing support to the economy, as an insurance policy, to help us through the impact - but equally, now that it's obvious that the economy is on an upswing, that insurance policy is no longer needed. It's possible, too, that respondents to the survey have some sympathy with the Bank's concerns about frothy housing markets.

Three, people have differing views about the current orientation of monetary policy. Before I tell you what the survey says, what's your own perception of the stance of monetary policy - easy? middle of the road?  tough? If you found that an easy question to answer, that's fine, but you may be missing something:  the respondents to the latest survey didn't find it an easy question to answer at all. They were all over the place: just over a quarter of them thought monetary policy was tight, 15% thought it was neutral, 60% (give or take) thought it was easy.

What's going on here? We have one of the most transparent monetary policy regimes in the world. The Bank goes to great lengths to tell us, upfront (rather than well after the event), what it's doing, and why. How can there be this range of views about its stance?

The short answer is that respondents are actually weighing up both interest rates (which are very low) and the exchange rate (which is very high). How that combination impacts you is an entirely empirical matter, and if you're an exporter (for example) you could well, and honestly, report that, taken in the round, monetary conditions are making life difficult for you. All the more reason, by the way, for paying more attention to indices of monetary policy that include both interest rates and exchange rates, and arguably other measures too (for example, the availability of credit,and  the feasibility of raising equity on the share market). Have a look at my April 23 post about the Monetary Conditions Index, which makes the same sort of points. On that overall monetary conditions basis, by the way, you'd have said that monetary policy was relatively restrictive, despite low interest rates.

Four, and despite incessant hand-wringing reports in the media to the contrary, the survey respondents believe the economy's in a growth phase. There wasn't a single respondent who expected a fall in GDP in either the March or June quarters; no respondent expected a fall in GDP in either the year to March '14 or the year to March '15; and the consensus view was that GDP would grow by 2.5% in the year to next March, and by 2.8% in the year to March '15.

Expectations can of course prove off the mark, but wherever you look - and the latest BNZ/Business New Zealand performance indices for manufacturing and services, published in the last few days, are as good a place to look as any - the New Zealand economy is on an upswing.

Saturday, 18 May 2013

A bright idea from Hollande

I didn't get much from President Hollande's big set-piece press conference this week - apart from a vaguely expressed desire to get Europe "moving" again, and some predictable side-swipes at the UK's lack of enthusiasm for the European project, there wasn't anything to indicate what his administration intends to do about competitiveness, structural reform, and the ongoing fiscal haemorrhage. And a government reshuffle - which might have indicated that structural progress was being taken more seriously, especially if the current nutbar in charge of industrial policy, Arnaud Montebourg, got shifted or sacked - is still possible, but "not yet".

But there is one initiative that caught my eye. Currently, if you want something from Town Hall, or the local office of one of the government departments, or from the various social and medical funds, and you don't get an answer within two months, it's a deemed No. Naturally, this gives all the bargaining power to the famously obstructive French bureaucracy. The proposed initiative would change the deemed No, to a deemed Yes.

It's an excellent plan. It's not perfect - as one guy said when interviewed about it on France's TV2, sometimes you'd prefer a quick No to a delayed Yes - but it's absolutely on the right general track.
How much of it will actually get into legislation (apparently scheduled for September) remains to be seen, especially from a government with strong ties to the public sector unions, but hopefully it might be a wee straw in the wind of some new thinking.

And don't you love the word paperasserie, the French term for the cumbersome paperwork you need to get officials' approval? To English ears (and perhaps French, too), it neatly combines papers and harass.

Friday, 17 May 2013

Who do hotels rip you off?

Okay - I was down in Wellington on Wednesday, and staying overnight, so as to go to the Budget analysts' lock-up on the Thursday morning. As I was checking in at the hotel - not where I usually stay, since Wellington accommodation was apparently nearly all taken up, maybe because of the Budget, and I had to take what I could get - I happened to notice a sign at the counter, advertising the exchange rates the hotel used to convert US dollars or Aussie dollars into Kiwi. In both cases, the hotel offered a ludicrous rip-off exchange rate. According to the hotel, a Kiwi dollar would cost you US$1.05 or A$1.05, where in reality it actually costs more like 83 or 84 Aussie or US cents, if you were to buy it at a bank.

Why do hotels do this?

As I was thinking about it, it reminded me that I'd read something once, about a similar phenomenon - why does popcorn cost so much more at the cinema than it does in the supermarket? It took me a while to track it down, but it was a chapter in Steven Landsburg's wonderful book, The Armchair Economist: Economics & Everyday Life (The Free Press, 1994). One reviewer, by the way, described this book as "An ingenious and highly original presentation of some central principles of economics for the proverbial Everyman. Its breezy tone conceals the subtlety of the analysis. Guaranteed to puncture some illusions and to make you think", which you might think is nice but no more than the usual puffery of a new book, until you notice that the reviewer was Milton Friedman.

I'd like to be able to tell you that Landsburg had the definitive knock-out answer, but he didn't. He dismisses, for a variety of reasons, what you might call the layman's explanation, which is that the hotel guest, or the moviegoer, is the temporary captive of a monopoly seller. I didn't think that could be the answer, either: if there's workable competition in the hotel (or movie) market, and there likely is, then a hotel or cinema shouldn't be able to get away with it, since the hotel or cinema around the corner would scoop all the business at a better exchange rate.

The best Landsburg could come up with (and I haven't advanced the thinking much, either) is that the hotelier or cinema owner is pursuing some sort of price discrimination strategy in a world where willingness to pay for popcorn and willingness to pay for cinema tickets varies across cinemagoers, and that could explain why all the other hotels and cinemas do it, too. He may not have had a clearcut answer to what's going on here, but even so read the chapter. It's an excellent explanation of price discrimination, and the rest of the book is equally informative and entertaining.

What bothered me about this price discrimination explanation, if that's what's actually happening, is that it clearly has the capacity to backfire in a highly embarrassing way. Prices that consumers know are exorbitantly above cost have a number of unpleasant consequences for the companies that charge them. For one thing, consumers are likely to think: if they're ripping me off on popcorn, they're probably ripping me off on everything else. They'll start thinking: why pay to go to the cinema at all? If they're ripping me off, I'll rip them off: I'll download the film for nothing over the Internet. Or, in another context, one consumer making a huge song and dance in the newspapers about the $2,000 bill for their smartphone roaming charges, probably puts off many hundreds of other consumers from turning their phones on in Sydney or London. If the cinema owner had a strategy of lower-than-otherwise movie tickets and higher-than-otherwise popcorn, now he's brassed off the popcorn eaters, and he's left with lower revenue from the ticket-only customers. And in areas where there may be some doubt about the degree of workable competition in the market, you're positively inviting in the prospect of regulation with open arms, mobile roaming being a classic example.

Maybe the silly popcorn price, and the silly exchange rate, are rational strategies from some perspective or other, but if they are, they still strike me as high-risk strategies to pursue. I wonder if there's something else going on?

Yesterday's Budget and the transparency of fiscal policy

We sometimes get tempted to feel that things are done better in other countries - policies are smarter, incomes are higher, they have proper soccer teams - but there's one area in particular where we can credibly say we are among the world's best (maybe the best), and that is the transparency around fiscal policy.

It may not be the most exciting thing in the world to excel at, but let's give three loud cheers for the Fiscal Responsibility Act 1994. Our governments have to produce regular, complete, short- and long-term disclosure, on a conventional General Accepted Accounting Principles (GAAP) basis, of their current and future tax and spending commitments. They have to show the current and projected state of the government's   balance sheet, and they have to disclose all those pesky off-balance-sheet items that governments tend to use when they want to keep expensive future bills or other embarrassments out of the voters' gaze.

We saw it again yesterday, with credible multi-year projections of taxes, spending, and debt, and with full disclosure of off-balance sheet items (in the 'Specific Fiscal Risks' part of the BEFU). We saw some alternative scenarios modelled, and we got the separate forecasts of tax revenue produced by the IRD and Treasury (they weren't much different, as it happened). In many countries, if there were conflicting agency views of the likely tax take, even the mere fact of disagreement would be swept under the carpet, and the numbers themselves would certainly never see the light of day.

The Act, in short, has proved to be an excellent watchdog on what New Zealand governments do and plan to do. Apart from being good practice in itself, it helps to prevent the sort of nonsense that happened (for example) in Ireland before it all turned to custard. In 2006, Ireland was supposedly running a useful surplus (2.9% of GDP), and in 2007 was still marginally in the black. In reality, the underlying position was out of control. Tax revenues were (temporarily) swollen by the government's share of the red-hot property market. Shorn of the government's slice of the property speculation game, the fiscal accounts were massively underwater - by 5.6% of GDP in 2006 and by a stonking great 8.4% of GDP in 2007 (all figures from the IMF's database, with the 'true' position being the IMF's measure of the 'structural' balance).

So it may be on the dull and policy-wonk end of the spectrum, but the Fiscal Responsibility Act has become an indispensably valuable part of good policy governance.

Before getting too holier than thou about the whole thing, though, it's worth adding that we needed it. I've been going to Budgets and Budget analysts' lock-ups (the embargoed pre-Budget access to the Budget  materials) since the mid 1980s, and my abiding memory of the earlier ones is this: what hornswoggling swindle are they trying to pull off this year?

Thursday, 16 May 2013

Today's Budget - what ifs

By now you'll have seen extensive coverage of the Government's Budget forecasts for GDP, employment, inflation, the exchange rate, and all the rest of it. What you probably won't have seen much of in the media is coverage of the 'what ifs' - what if the Government's forecasts don't pan out? What might happen instead? What would the fiscal books look like if the domestic or global economies did a lot better or a lot worse than the Government expected?

Again, this is one of the questions that is actually addressed in the bundle of bumph that comes with the Budget (specifically, in Chapter 3, 'Risks and Scenarios', in the Budget Economic and Fiscal Update, often known as the BEFU).

The good news is that the economic outlook has picked up since last December's Half Year Economic and Fiscal Update (you guessed it, the HYEFU). Back then, the risks to the outlook had been skewed to the downside - the probability was that if events unfolded in an unexpected way, it would be for the worse, and there were good reasons for that. The finances of the Eurozone's most indebted economies were still in disarray, the US was skidding towards the top of the 'fiscal cliff', and there were worries that China might have been heading for a significant slowdown in its rate of growth. Here at home, the impact of the Canterbury rebuild on economic activity always seemed to be just over the horizon and never actually here yet, and there had been an unexpectedly sharp jump in the unemployment rate. And there wasn't much that looked like springing an unexpected pleasant surprise.

This time round, Treasury reckons - and I think they've got it right - that the risks are more evenly balanced, and that things are as likely to be better than the Government expects as they are to be worse. This, of course, is the same conclusion that the world's equity markets have also come to this year: things aren't as bleak as they looked four or five months ago, and share prices have risen substantially pretty much everywhere as a result.

Why be more optimistic? The US, despite its dysfunctional policymaking, avoided the 'cliff', though it's still a long way from getting out of its partisan policy omnishambles; the Eurozone has made some progress with some of its more indebted problem children, though still has plenty of problems on its plate; China is still growing at a vigorous rate, even if not quite at the rates of before. And at home the Canterbury rebuild is finally showing some legs, and recent economic data (including the unemployment rate) have been notably better than before.

Obviously, there are still risks - the drought could be really bad, a wheel could come off in one of the bigger Eurozone countries, whatever - but there's now as much reason to be optimistic as pessimistic.
It's nice to see, too, that whichever of the Treasury's 'upside' or 'downside' scenarios might actually play out, the economy looks to be in reasonable shape either way. Even on the downside scenario, there's no recession (which, as I mentioned in my April 28 post, 'Recession - what recession?', is also the view of the rest of the forecasting community), and unemployment continues to fall (but more slowly). Treasury notes (correctly) that its 'upside' and 'downside' scenarios don't cover every eventuality - something much better, or much worse, could still happen - but on a sensible guess at the likely range of outcomes, things look reasonably comfortable either way.

If there's any big difference between the upside and downside scenarios, it's on the interest rate front. Treasury's central forecast is that the 90 day bank bill yield will stay around its current 2.7% for another year or so, and then gradually rise to 4.8% by March 2017. If the economy does really well, though, house prices will rise more sharply, inflation pressures will pick up, and we'll hear a more forceful message from the Reserve Bank, with the 90 day bank bill yield rising to 6% rather than 4.8%.

Obviously, a really good burst of economic growth would be terrific for everyone. Just don't expect to continue to get dirt-cheap mortgages if we have one.

Today’s Budget – the outlook for profits

As I've indicated earlier, some of the best stuff that comes along in the Budget isn't in the Budget speech itself or in the main supporting documents like the Economic Outlook, but are tucked away in the more subsidiary supporting tables and statistics. The thing I always reach for first is called the ‘Additional Information’ – it doesn't sound very promising, but that’s where all that cyclically-adjusted and commodity-price-adjusted data came from, for example.

It's also the source of Treasury's forecast of the level of profits in the economy. As far as I know, there isn't any other regular, authoritative stab at forecasting business profits, and Statistics New Zealand doesn't publish quarterly profit statistics like the ones you get in Australia or the US. Yet it's self-evidently an extremely important measure of how New Zealand businesses are travelling, and it's essential if you want to have some feel for the correct valuation of New Zealand equities.

In the 'Additional Information' material you find a forecast of what Treasury calls 'Net operating surplus': this is a good proxy for what's happening to profits. Excluding agriculture, profits are expected to have risen slightly in the year to March ’13 (+1.5%), are expected to have a boomer of a year this coming year (+13.9%, year to March ’14), and then to have a string of fairly small increases (+2.5% to March ’15 , +4.2% to March ’16 , and +1.6% to March ’17).

What that suggests to me is that the recent strong rises in the New Zealand share market have had some solid macroeconomic justification (investors were likely taking on board the coming year's good times), but something else probably needs to come into the mix to take local shares higher again.

Today's Budget - fiscal balance (3)

Earlier posts fossicked through some of the better measures of what’s really happening to the fiscal position than the headline numbers that get the big coverage, and by and large they showed that fiscal policy is on the right track – the projected surpluses are ‘real’, and the fiscal books look like they can come good without doing too much short-term harm to the economy.

Before we all get too euphoric, though, the current figures are flattered somewhat by the fact that New Zealand incomes are currently getting a – possibly unsustainable – boost from high prices for our export commodities. The tax take is getting its share of those high dairy payouts (for example), and if global dairy prices fall, so will the government’s revenues. Maybe the government’s finances ought to be looked at, as if they weren't getting this windfall?

And that’s done by Treasury too, again in the documents down the back of the Budget materials. I mentioned earlier that the cyclically adjusted fiscal deficit in this June 2013 fiscal year will be 1.8% of GDP.  If you said that commodity prices ought to be around their longer-term average (say over the past 20 or 30 or 50 years) rather than where they are today (namely, in the stratosphere), then the ‘more normal state of affairs’ fiscal deficit blows out from 1.8% of GDP to more like 3% of GDP.
That’s a bit of a worry: we wouldn't want to see some shock to the global economy happening any time soon that sent commodity prices sharply lower, as that would expose a bit of a vulnerability in our fiscal position.

Of course, it’s possible that commodity prices have moved permanently higher for a good reason (thumping great increases in demand in Asia, for one thing). If that’s the case, there’s obviously much less cause to worry. Another measure that Treasury calculates is a statistical one that simply smooths out commodity prices – in current circumstances, the method assumes that commodity prices would have risen but not as abruptly as they actually have, and it doesn't assume that they will drop back to some lower level again. On that basis, as you’d expect, there’s much less to worry about : the deficit is only a little larger (on average) in coming years than otherwise.

The truth is probably somewhere in between the two measurement methods – there’s probably some modest flattery of the government accounts from current world commodity markets, but not enough to make you question the plausibility of being able to get back to a sustainable fiscal position.

Today's Budget - the fiscal balance (2)

Another aspect that doesn't get enough attention in the media coverage is whether the Budget is adding to (‘expansionary’) or subtracting from (‘contractionary’) growth in the overall economy. Increases in the fiscal deficit are generally regarded as good for the economy, at least in the short run: this is the orthodox ‘Keynesian’ view. Similarly, tightening fiscal policy (by raising more tax or by lower government spending) is regarded as a brake on the economy. Without doing any sophisticated number-crunching at all,  you’d guess that if Bill English is working the fiscal position from a deficit to a surplus, the Budget must be ‘contractionary’, and you’d be right.

It’s interesting to put numbers on it, though. First, however, a bit of jargon: if the cyclically adjusted deficit this year is (say) 3% of GDP, and next year’s is (say) 2% of GDP, then fiscal policy has tightened by 1% of GDP (either taxes have been raised by 1% of GDP, or government spending is lower by 1% of GDP, or there’s some combination of the two adding up to 1% of GDP). This 1% tightening – the difference between one year’s cyclically adjusted balance and the next – is known as the ‘fiscal impulse’, and is a useful summary of the overall stance of fiscal policy. Okay: end of jargon, here’s a graph of the thing.

Downward pointing bars mean that fiscal policy has got tighter, and it’s probably best to focus most on the right-hand-most ones for each year, which strip out the impact of various earthquake payments. As you can see, fiscal policy is expected to be contractionary pretty much indefinitely into the future.
And that’s fine: despite fiscal policy tightening by about 0.6% of GDP a year over the five years  2012/3 to 2016/7, the overall economy continues to grow at a reasonable rate (+2.5% a year over the period) while the government’s finances move into much better order. Again, we’re fortunate that we’re starting from manageable levels of deficit and manageable levels of government debt: one of the tragedies of the Eurozone ‘austerity’ policies is that, from their much worse starting position,  they can’t pull off the same trick of simultaneously fixing the government’s books and keeping the economy growing.

Today’s Budget – the fiscal balance (1)

You’ll have seen the main news in the Budget elsewhere – still on track for fiscal surpluses, reduced ACC levies, the sale of Meridian, housing initiatives – so you don’t need any recap here. I've concentrated on some of the more out-of-the-way but important aspects which don’t always get their fair share of air-time.

As always the main media focus is on the headline numbers for the fiscal surplus or deficit – where the government still expects to squeak into the black in the 2014-15 fiscal year with a tiny surplus of $75 million, and is then planning to run rather a small surplus of 0.3% of GDP in the 2015-16 year and a rather larger one of 1% of GDP in the 2016-17 year.

While these numbers get the headlines, they don’t really tell you what you most want to know. That’s because the fiscal surplus or deficit moves up and down of its own accord, depending on the state of the economy: in good times, tax revenues increase and payments on the likes of unemployment deficit go down, none of it due to any policy changes or good or bad management by the government. It’s purely a cyclical phenomenon.

To see what the impact of the government’s decisions actually is, you have to strip out those purely cyclical influences on the economy. How you do it in practice is more art than science, but various organisations give it a go, including (obviously enough) the Treasury itself. The ‘cyclically adjusted balance’, or CAB, is the result. As the graph below shows, the deficit today isn't really as bad as it looks. In the June 2013 year, the headline deficit is 2.9% of GDP, but the impact of the earthquake accounts for about 0.6% of GDP and the weakish state of the economy accounts for another 0.5% of GDP. Take those out – in other words, assume it’s a normal year with no major disasters and the economy in okay shape – and the deficit would have been only 1.8% of GDP.

That’s reasonably good news: we’re not starting from the sort of fiscal black hole that many other OECD economies find themselves in, where the true underlying state of the public finances is dire. A fiscal deficit of 1.8% of GDP isn't something you’d want to go on running indefinitely, but it’s not the end of the world, either, as a place to be starting out from.

The other bit of good news is that the fiscal surpluses that the government is projecting for future years are actually real – they’re not just a reflection of the economy getting better. In the graph, you can see that there’s no difference between the headline surplus numbers and the cyclically adjusted ones.

Monday, 13 May 2013

Dig in, or push on?

In my post (May 10) on recent interesting non-fiction titles, I recommended Alex Stone's book on magic. I was only partway into it at the time, and hadn't reached page 147, where Stone (who'd at that point got into trouble with the magicians' professional authorities by supposedly giving away secrets of the trade to the public), says, partly in his own defence but also more generally
 "I don't think that it's any coincidence that the golden age of stage magic was also the golden age of exposures [publicising how tricks work], because exposure drives innovation. Much in the way that market-oriented competition among businesses fosters economic growth by forcing companies to evolve, exposure compels magicians to modernise their acts and invent new material. Secrecy, meanwhile, is a license to be lazy. Like monopolies in the marketplace  it breeds stagnation".
Stone's not an economist (he's been a PhD physics student, professional magician, and author), but can spot the essence of why and how many markets work. It's obvious to him that innovation-driven competition is what makes us all better off. It's even, as Stone notes, in the long-run interests of the incumbent firms themselves.

That's not, of course, how incumbent firms tend to view it. Nobel laureate Joseph Stiglitz, in a recent scathing  article for Project Syndicate, has written about how (in his view) one US company is not only pushing the bounds of over-aggressive defence of its patent rights - it's gone all the way to the US Supreme Court - but also deliberately impeding the development of alternatives to its technology. His conclusion is that "unbalanced intellectual-property regimes result in inefficiencies—including monopoly profits and a failure to maximize the use of knowledge—that impede the pace of innovation", and argues that America's intellectual property regime is indeed unbalanced, over-favouring the possessors of today's technology. While you're at it, if you haven't come across it before, have a fossick around the Project Syndicate site, it's well worth it.

Finally, if you really want to see blatant protectionism of threatened incumbents, from this morning's edition of the excellent Slate, here's a specially appalling example.

Saturday, 11 May 2013

Sex and economics

Who could resist an article that starts, "John Maynard Keynes was the sexiest economist who ever lived"? Read on here. Thanks to the very excellent Arts & Letters Daily website which rebroadcast the article, originally from  The American Prospect.

Mighty River Power - the bigger picture

So Mighty River Power has got away, at a small premium (closing at $2.62 versus the initial $2.50). All well and good. A lot of the news coverage has understandably been about the last minute spoiler from Labour and the Greens, the scale of the share uptake, and the listing price, which are all fair enough topics. Missing, though, even from the Government itself, is any core explanation of why privatisations like MRP are a good idea. Fran O'Sullivan's piece in today's Herald  is a fairly rare example of looking at some of the broader context, although it concentrates heavily on just one aspect, the contribution that listings of SOEs  can make to the development of broader, deeper, local capital markets.

The core case for privatisation has mostly gone unheard, so here it is: in most circumstances, and certainly looking at our government's asset portfolio, government ownership of commercial assets is bad policy. There is no good reason for a government to own businesses that would be created in any event.

Ask yourself: should the government own a chain of video rental shops? A newspaper? Some corner dairies? Shoe shops?  Bookstores? A car manufacturer? A computer maker? Massage parlours? Kiwifruit orchards? The answer is obviously, no: government money is expensive to raise (through taxes or through debt), we can get all those services without its involvement, and there are desperately more needed goods and services that the government ought to be providing with its scarce resources (infrastructure in particular, but also unmet needs in education and health).

There's a variety of other ancillary arguments against state ownership and for privatisation (the capital markets one, the probability that state-owned businesses will be run less well than profit-oriented ones, and various distortions to markets working properly), but the key point is that for many commercial activities, state ownership is both pointless and wasteful.

You can see it for yourself: the government's current portfolio has the same lack of underlying logic as video stores or newspapers would have: a TV station (producing, incidentally, output worse than many privately-owned ones), a radio station (for once, a rare example of where some public service ethos has been maintained), and a bunch of assorted assets (a bank, coal mines, an airline, energy companies) producing things that in most western countries are routinely and competently delivered by private businesses. Daftest of all, the government (in Landcorp) owns a string of dairy farms. Puh-leez!

Remind yourself, next time you see long waiting lists for life-altering operations in the health system, or stew in a traffic jam in Auckland, or wish your kid's school was better resourced: gee, isn't it great that the government is using my taxes to milk some cows.

Thursday, 9 May 2013

Australia's labour market data

I mentioned in my post earlier today ('All good news in today's employment data') that Australia's jobs statistics have been bouncing around in the same way that ours have, and as it happened Australia's latest numbers came out while I was writing. Same again: this year, the seasonally adjusted estimates of new jobs created each month in Australia have been +12,300 (January), an outsized +71,700 (February), a slump of -31,200 (March), and now a large +50,100 (April). No wonder the economic forecasters have been baffled by trying to pick the monthly numbers - the consensus forecast was for +11,000 jobs, well below what actually happened.

Or did it? The variability in the statistics is, very likely,  not mirroring what is actually happening in the economy. The best advice at the moment (as I said in that earlier post)  is probably not to pay much mind to the seasonally adjusted numbers (though these will be the ones featured in the media) and look at the 'trend' estimates, which take out a lot of the fluff and noise. On the trend basis, new jobs each month this year were +18,900 (January), +19,700 (February), +18,400 (March), and +16,500 (April).

That looks much more reflective of what has been actually happening - ongoing though modest growth in the Australian economy, with the mining sector slowing down from its previous boom-time investment spending and the rest of the Australian economy not picking up the slack.

All good news in today's employment data

Everything came up trumps in today's labour market statistics. Seasonally adjusted, employment grew by 12,000 in the March quarter, the employment rate (the share of the workforce in a job) went up a little from 63.3% to 63.5%, the number of hours worked (a good indication of the overall state of activity in the economy) increased by a substantial 3.2%,  and the unemployment rate went down, from 6.8% to 6.2%.

While there's nothing wrong with part-time jobs - they suit a lot of employers and employees -  it was also good news that full-time jobs have been especially strong. And a new measure of the underemployment rate (those "part-time workers who are available and want to work more hours") was also positive: Statistics NZ doesn't have seasonally adjusted numbers for it, so we can't properly compare March '13 with December '12, but compared with a year ago, the numbers underemployed dropped by 9,800 to 83,300, and the underemployment rate dropped from 4.2% to 3.7%.

And if you're especially concerned about youth unemployment, as you should be, the good news kept on coming. Over the past year, the number of unemployed younger people (15-24) dropped by 10,500, explained by a 11,200 drop in the number of 20-24 year olds unemployed. For them, the unemployment rate dropped sharply, from 15.0% to 10.9%. And the seasonally adjusted 'NEET' rate (those aged 15-24 'not in employment, education, or training', or in other words, at a loose end, voluntarily or involuntarily) also dropped, from 14% in the December quarter (and 13.7% a year ago) to 12.5% in this latest March quarter.

The numbers have been flattered by an especially strong labour market in Canterbury (which is what you'd expect), but this is overall an encouraging set of statistics.

In passing, while everyone is used to paying the most attention to the seasonally adjusted numbers - as you normally would - they continue to show quite a lot of volatility, and are showing what look at first glance like big changes in the labour market from one quarter to the next. For example, the seasonally adjusted unemployment rate rose sharply in the September quarter of last year, from 6.8% to 7.3%, dropped back to square one in December (6.8% again), and dropped sharply again this time round, to 6.2%.  It might be genuine, it might be the sort of sampling error that can happen to any statistics, who knows - and, oddly, the Australian monthly jobs numbers are doing the same thing - but currently it's probably better to go by what Stats calls the 'trend' measures rather than the 'seasonally adjusted' ones. These have the advantage of taking out a fair amount of whatever random noise is causing the numbers to jump around: even on a trend basis, however, the same picture emerges of a substantial improvement in the labour market in the March quarter.

Finally, readers might like to know that Stats also includes an international comparison of unemployment rates in these labour market releases. The unemployment rates are 'harmonised', meaning they are workably comparable across countries. How do we stack up against the 34 countries listed?

Reasonably well: our latest unemployment rate (6.2%) is clearly below the OECD average of 8.0%, and we rank equal 11th out of the 34 (an improvement from 14th of 34 in December '12). Top of the heap are Korea (3.3%) and Norway (3.4%), Australia and Germany are doing quite well (5.4%, joint 8th), France (as I've been blogging in recent days) is doing badly (10.8%, ranked 27th), though nowhere near as badly as the 'PIIGS' (Portugal, Ireland, Italy, Greece, Spain). Greece is worst of all (26.4%), and Spain only marginally better (26.3%).

Wednesday, 8 May 2013

Today's interest rate cut in Australia

Our Reserve Bank's job just got a little tougher. On a day when its fiscal stability report indicated that it has serious concerns about the potential systemic impact of lending on frothily priced housing, we hear from the ASB that its latest survey of Housing Confidence showed the highest proportion ever (63%) of respondents expecting house prices to rise, while across the Tasman the RBA has cut its cash rate from 3% to 2.75%.

As noted here earlier (see the graphs in 'The RBNZ's dilemma', April 29), easier monetary policy overseas makes the RBNZ's current problems more difficult: wider interest rate differentials, after monetary policy easings overseas, have made the NZ$ more attractive (aggravating the already overvalued NZ$), and the normal response here (a lower cash rate) is ruled out for fear of further inflating the hot housing market. No wonder our RB has been driven (as we also learned today) to trying forex market intervention to try and drive the Kiwi down by non-interest-rate means.

Eurozone risks - France (2)

I referred in an earlier post to the inability and unwillingness of the current French government to confront the main issues France faces. And there's been a lot of comment, especially after last weekend's anti-Hollande protest demonstrations made them topical, about his government's lack of grip and the President's own consequent poor standing in the polls.

It's certainly true that many current French economic policies are either wrong-headed or inadequate. Examples are Hollande's campaign pledges to hire 60,000 more teachers when the fiscal deficit is already too high, and to wind back the one headline reform his predecessor, Nicolas Sarkozy, had managed to implement  (raising the age of eligibility for superannuation to 62).

What's striking in particular is how out of date some of them are. 75% top income tax rates, one of President Hollande's cunning plans, take us all the way back to the counterproductive policies of 50 years ago. Remember when the Beatles wrote 'Mister Taxman'? - "Let me tell you how it will be, There's one for you, nineteen for me...Should five percent appear too small, Be thankful I don't take it all". Is 75% way above any kind of optimal tax rate? Is it likely to produce a flight of the most talented, internationally mobile, and most productive? Is the flight already happening? Will the policy result in a lower rather than a higher tax take? Could all of this have been predicted? Respectively, yes, yes, yes, probably, and yes.

Perhaps it's because France's Socialists rarely command all the levers of power, and when they do eventually get hold of them (as they do today at all national and virtually all regional levels), they take over with the policies in vogue when they last held sway. Whatever the reason, their policies often tend to be decades behind the times. I'm reminded that, just as the Western world was about to embark on a massive privatisation programme, the French government under President Mitterrand moved to nationalise the French banks in 1981 (prompting, by the way, banker Baron Guy de Rothschild's mordant comment, ""A Jew under Pétain, a pariah under Mitterrand. For me, it's enough. To rebuild on ruins twice in a lifetime is too much").

All that said, I wouldn't be entirely sure that Hollande is as inept as the commentariat and the latest polls would make out. Hollande is intellectually smart (an énarque, a graduate of the prestigious Ecole Nationale d'Administration), politically astute (he manoeuvred through the fratricidal currents of the Socialist Party for decades), and electorally lucky: first, the front runner for the Socialist presidential nomination, Dominique Strauss-Kahn, imploded spectacularly, and second, Hollande benefitted from the "anyone but Sarkozy" vote. He didn't have much to spare - he got 51.7% of the final run-off vote - but he knocked off a sitting President, no mean feat.

There are also some recent signs of more rational economic policy - a warmer approach to business, revisions to an ill-judged capital gains tax proposal, some changes to labour laws - and, for me, one good sign in the appointment of Jean Pisani-Ferry, previously the director of the highly regarded Bruegel think-tank, as director of the French Prime Minister's Economic Policy Planning staff. You can get a flavour of what Pisani-Ferry is likely to be advising, as well as a very good analysis of the Eurozone's issues, here.

The policy outlook, in sum, is very much in the balance right now. The Eurozone's second largest economy could be starting to move to more conventional, effective management, or it might drift on in the muddle-headed way of the past year. I'll update with any developments that indicate which path looks the more likely.

Saturday, 4 May 2013

The Auckland housing market

Snail mail is dying, as are (genuine) landline phone calls - most of the calls we get at home are the phone equivalent of spam, particularly the one that starts with a recording that says, "This is a VERY important message...". I don't know who keeps calling us with this one, as I've been too irritated to let it play out, and I'd hoped there was something down the back of the Telecommunications Act 2001 that would shut it down. I looked up the Act and found what I thought might have addressed it (s112), but it only applies to calls made with "for the purpose of disturbing, annoying, or irritating any person" (my italics), and I suppose their lawyers would argue the purpose was to sell whatever they are peddling. If they can afford lawyers: after alienating so much of their customer base, I doubt they will be rolling in cash.
In any event, about the only genuine calls and letters we have received in recent weeks, apart from intra-family stuff, have been from Auckland real estate agents. They all say the same thing: are we interested in putting our house on the market? And this isn't the normal drum-up-business marketing you get from real estate agents a lot of the time. They're desperate to get listings.
The market, in short, is hot: there isn't a lot of supply (hence the calls and letters), and there's strong demand (ditto).
I've posted before that I think the Reserve Bank's biggest preoccupation right now isn't inflation, or the value of the Kiwi dollar: it's the fevered state of the housing market. And I have to say I have a lot of sympathy for the difficulty of the judgements the Bank has to make: with hindsight, if they fail to squash a housing boom and bust, everyone will say, wasn't it obvious? Were you asleep at the wheel? And I'd say, no, it wasn't obvious, and they weren't asleep. You get strong housing markets for perfectly valid reasons (and as a matter of good economic policy, you shouldn't interfere with them), and you get overspeculative booms. They are very hard to tell apart in real time.
At a personal guess, I'd say there are enough fundamentals at play (strong demand from population movements into Auckland, various constraints on supply) to justify what's happened to date. But it could easily tip over into something malign: as housing markets elsewhere have shown, bubbles get underway first because there are genuine fundamental drivers to get the ball rolling, and second because Musical Chairs starts (yes, yes, I know, I could have said something fancier about extrapolative expectations). I still think we're in the benign phase, but I also have a feeling that the guy with the accordion is already in the taxi.

Friday, 3 May 2013

Eurozone risks - France (1)

There's been a real mix of developments in the Eurozone recently. On the positive side, Italy's finally got a government with some credibility, and Ireland is arguably in the early stages of coming out the other side of a severe austerity programme. On the negative side, the banking crisis in Cyprus materialised largely out of the blue, the rescue plans were very badly mishandled, and there are other banking problems on the horizon (Slovenia, for example). And in the middle we have the ongoing uncertainties about Greece, Portugal, and perhaps Spain. The Eurozone remains capable of generating substantial shocks  to global financial markets.

Lurking in the background is perhaps the greatest threat to Eurozone stability and recovery - the structural and cyclical weaknesses of the French economy, and the inability and unwillingness of the current French administration to come to grips with them.

Watch the French 8.00pm news any day of the week - I like TV2's coverage, which is streamed over the Internet, - and see the amount, and angle, of coverage given to any proposed redundancies. Job losses are distressing, we all know that, but we also know that employment growth happens because new job creation exceeds old job destruction. The French don't accept that: it's not much of an exaggeration to say that the French world view is that every job has a right to exist in perpetuity, and every incumbent in that job is entitled to stay there.Here's just one illustration of the issues.

Structural fiscal deficit, % of GDP. Source: IMF WEO database
The IMF calculates a measure of the true underlying fiscal position, which it calls the 'structural' balance, and is the cyclically-adjusted fiscal balance, further adjusted for any one-offs. France has been systematically worse than Germany as far back as these series go for the two countries (1991). Even if you accept the IMF's projections that both countries will get their houses in order over the next five years - yeah, right - France is starting from a worse position, and will take longer to get back to balance.

One final illustration: youth unemployment. France's rate of youth unemployment (26.5%, on Eurostat's data), is actually worse than the dire Eurozone average (24%). France doesn't break out racial or ethnic unemployment rates - "we are all equally French in the colour-blind eyes of the French State" is the official line, which is partly admirable and partly deeply convenient - but you can guess that, for the Arab and North African kids in the slum-like banlieues, it must be approaching 100%.

Financial markets at the moment have their concerns about France, though real alarm bells are still a long way off:  the 10 year French government bond trades at only a modest 50 basis points higher yield than its German equivalent. Even so, there are already people who are of the view that, if there is a big road wreck coming in the Eurozone, it could well happen on the autoroute.

The latest move from the ECB

The European Central Bank's 0.25% cut in its main lending rate, to 0.5%, and its restated commitment to open-tap funding of the Eurozone's banks, come as no surprise after the latest statistics from Eurostat. The Eurozone's unemployment rate rose a bit further in March, to 12.1%, while inflation had eased in April, to 1.2%. This left the door widen open for a cut, though apparently (if the report in the May 2 edition of the FT is correct) at least one member wasn't in favour of a cut.

What's more surprising, to me, is how long it's taken for inflation to reflect the depressed state of activity in the Eurozone. As recently as January, inflation was still tracking along at 2% - high for a region running hugely below capacity. It's a reminder of that old 'Eurosclerosis' - the lack of flexibility in the Eurozone's product and labour markets.

Wednesday, 1 May 2013

Brand value

I'm fond - my wife would say over-fond, and she's right - of red wine. If I was to face the execution squad in the morning, it would be Cabernet Sauvignon tonight.

The other day, I got a bottle out of what I'm pleased to call my 'cellar', or (in everyday language) the wine racks in the garage. It was Fox Creek's McLaren Vale Cabernet Sauvignon 2004, not a hugely expensive wine to begin with - I got it through the NZ Wine Society, which I recommend - and the label said it would keep for up to five years. I'm not paid in any way for this, and wouldn't like to be, but as recompense for a great wine, here's a link:

Nine years from vintage, it was terrific. Even my wife, who's no Cab Sav fan - she'd rather a Shiraz, or a Merlot, or a Pinot Noir, or, let's face it, pretty much anything other than a Cab Sav - loved it. So I e-mailed the makers, and told them what a good wine they had made. And I got a lovely message back, saying they were pleased it had done so well, and that they would fossick around and see if they had any bottles left over of the 2004 vintage, so they could form their own view, too.

Right: the economics of what's going on here.

One: produce a really good product, and there's a chance you get disproportionately rewarded for it. I'll recommend Fox Creek to anyone, and I'll do it wholly on the merits. The real world is often a world of monopolistic competition - the overall wine market is by anyone's definition workably competitive, though no wine is a perfect substitute for any other wine, but each has its individuality - and a small investment in (say) extra quality can pay off big time. Except in France, which supposedly fossilised what is a good wine back in the 19th century. This is a somewhat unsubtle way of signalling that the next few posts are going to be about structural reform in France. Never mind, moving on...

Two: here's a company that listens to its customers. I could go on about being redirected, by many other companies, to a call centre in God knows where, but here, self-evidently, is a company that sees feedback as a value-generating activity rather than as a cost-sucking activity to be minimised.

One of the things I've learned, especially at the BNZ but also at Public Trust, is that consumer feedback - good or bad - is extraordinarily helpful. Occasionally, when a complainant would come through to me personally, I'd tell them, "Look, thanks for letting me know", and they'd be nonplussed. How could I be happy getting my ears ripped off?

But, honestly, I meant it, most of the time. Not always: you get the genuine public, but you also get the deluded,  the rip-off artists, and the professionally vexatious (not mutually exclusive categories). But if you're not listening to your customers, how else will you know how your product is travelling in the marketplace? Going back to Microeconomics 101: if 'revealed preference' means anything, and it likely does, then you ought to be sensitive to it. When I lived in Japan, I was struck by the attention Japanese executives paid to market share. To an economist, this was somewhat strange: why wouldn't you give greater attention to things like return on equity? And the answer is, market share tells you, all up, that your combination of price and quality is gaining traction in the marketplace. That's an important thing to achieve, and to monitor. It's not everything, but it's an important something.

Three: this may be more of an MBA thing than an economics thing, but there's clearly also something in the idea of 'under promise, over deliver'. Keep for five years, Fox Creek said on the label, and yet it's terrific at nine - that's really powerful, especially as (I would imagine) it would have a spillover effect on all the other varieties and vintages. It's certainly coloured my view, for the better.

Four: what is brand value, anyway? The accountants have their own ideas about what, and how much, can be put on balance sheets, and they have their own logic for that.. Brand value (wearing economists' goggles, and I don't want any cheap shots about goggles blinding your vision)  has to be in some sense the present value of the degree to which you have successfully differentiated yourself (in a monopolistic competition sense) from the pack. I wouldn't want to have to be the guy who had to quantify it, but I can imagine that above-the-pack SPQR (service, price, quality, range) can be measured, and if even it can't, it ought to be what you are aiming for.

And now, two complete digressions.

I don't know who came up with the 'SPQR' tag, but good on them. As you might be aware from previous posts, I like Latin, and SPQR originally stood for 'Senatus Populusque Romanus' (the Senate and the people of Rome). Here's a crossword clue for you: "Sexy classicist" (5,5).

And no matter what my wife might think, the best wine to go with lamb is a Cab Sav. Leave a comment if there are Cab Savs you especially like (or if you misguidedly but sincerely have a different view).