Monday, 22 December 2014


There is a bit of a ruckus going on about the performance of MBIE, the Ministry for Business, Innovation and Employment, based on this report. I'm not interested in the point-scoring argy-bargy, though for what little it's worth I agree with the reviewers who noted (p58) their "impression of highly motivated and capable staff, doing things the hard way because they are struggling both to prioritise their efforts and to see the broader strategic context for their work".

What's irked me a bit is that there are three ideas that have gone into the MBIE hopper and haven't come out yet, even though all of them look good (or even very good), would be easy to implement, and would make the New Zealand economy a more competitive marketplace.

The first one, recommended by our Productivity Commission, and conveniently investigated in detail in an Australian context by the Aussies' Competition Policy Review, is to review s36 of the Commerce Act, the bit that aims at stopping companies with market power from interfering with competition. My conclusion, on reading the Aussie report, was "Save the time and money" on our own reinvention of the wheel at MBIE. "I say we send the Aussie Review members a thank you note and a couple of cases of our best Pinot Noir, declare victory, and go home". I know there are people in MBIE, and elsewhere, who thinks it's a big, complex issue, despite the Aussies having fortuitously solved it for us. It isn't.

The second one, again recommended by our Productivity Commission and also standard practice overseas, is to let the Commerce Commission conduct proactive fossicking ("market studies") into the state of competition. It can already do it in the telecoms market, but not generally. It would take part of a morning to write the amendment to the Commerce Act.

The third one is the state of our anti-dumping regime, which is too easily abused and which allows domestic producers to avoid competition from overseas and to rort the local consumer. In June 2014 MBIE came out with a good paper with three options, one of which clearly outclassed all the others. As I said at the time, "this should be the easiest, "where do I sign", shoo-in of a policy contest that's ever been run". So why hasn't it been?

Wednesday, 17 December 2014

Time for an interest rate cut?

"At 3.5 percent", said last week's Monetary Policy Statement, "the OCR" - the official cash rate - "is still providing support to demand".

Now, there's a sense in which this is true: a "neutral" rate, neither supportive nor contractionary, is reckoned to be around the 4.5% mark, so 3.5% is clearly on the stimulatory side.

But in terms of the overall tightness of monetary conditions, you can't look at the cash rate in isolation. It's the combination of interest rates and the exchange rate that makes life easier or harder for people and businesses. An OCR of 3.5% may be "providing support", but that doesn't mean a lot if the Kiwi dollar is so high that exporters are severely constrained. True, it would be better than 4.5% and a high Kiwi dollar, but that would be a rather moot consolation.

So here once again is my calculation of the overall tightness or otherwise of monetary conditions, as captured by the old Monetary Conditions Index, which mashes together the 90 day bank bill rate and the trade-weighted index of the Kiwi dollar into a single overall number.

The reality is that overall monetary policy conditions are tight. Tight, tight, tight. They're on a par with periods in the past when we were dealing with reasonably serious inflation pressures.

Not that there's a lot the Reserve Bank can do about it, as there's no feasible OCR that would bring monetary conditions back to neutral, let alone to the stimulatory side of neutral.

If you said that "neutral" is some kind of long-term average of the Monetary Conditions Index, then neutral would be about 500 (averaged over the whole history of the series since mid 1986) or about 350 (if you start in January 1991 after the initially brutal disinflationary period). The current MCI is around 1200: to get it to a neutral level around the mid 400s, you'd need a negative OCR at -4.0% or so.

Alternatively, if the OCR stays at 3.5%, you'd need the Kiwi $ to be roughly 14% lower for overall conditions to be neutral - say in the high 60s against the US$ rather than the current high 70s.

However, you look at it, though, you begin to come round (as I also did a wee while back) to the conclusion that, with the best intentions, and on the best decisions made in the light of the best info at the time, we've nonetheless ended up tighter than we ought to be. I've a great deal of sympathy for the view (as put by John McDermott, the RBNZ's Chief Economist, at last week's MPS press conference) that monetary policy making in real time is an evolving process of learning and adaptation as you go along. I'm beginning to think that the next step in the process ought to be a few steps backwards for the OCR.

Tuesday, 16 December 2014

Never mind the deficit

I've just spent the morning, with the rest of the usual journo and economist suspects, in Treasury's lock-up for the Half Yearly Economic and Fiscal Update. Though sometimes I wonder why I bother: Bill English's press handout essentially said that the numbers on the fiscal outcome aren't worth the paper they're written on ("Previous forecasting rounds show the outlook can change significantly between the Half Year Update and the final accounts being published").

No doubt most of the media coverage will be along "Government misses its fiscal surplus target" lines: the government had planned a fiscal surplus of  $297 million for the year to next March, and it now looks like a fiscal deficit of $572 million. And even the forecast surplus for the year to March '16 ($565 million) is partly the result of a bit of jiggery-pokery with the contingency allowance the government has for possible future spending.

But I don't give much of a hoot about that, and neither should you, for several reasons. For one, the fiscal surplus or deficit is the difference between two very large numbers (government revenue and spending), each around the $72 billion mark, and very small changes in the very big numbers can make fiscal surpluses and deficits appear and disappear, just like that (as Tommy Cooper used to say). For another, there's an entirely plausible, and benign, reason for the forecast surplus becoming a forecast deficit: inflation has turned out to be lower than expected, which means the tax take in dollar terms is lower than expected. It's not, for example, the result of letting government spending rip (spending is actually gently drifting down as a share of the economy). And for yet another, while a deficit of $572 million sounds like something substantial, it's actually only 0.2% of GDP. However you look at the "missed the target" angle, it's no biggie from an economic perspective.

There were more substantial things to focus on. I was especially interested in what Treasury's forecasts for GDP growth would look like, given that last week the Reserve Bank had upped its expectations for the economy. It's encouraging.

It's possible, too, that there's more than the usual business cycle going on here: both the Reserve Bank, and now the Treasury, have begun to wonder whether the long-term growth rate of the economy ("potential output") hasn't picked up a bit (it's one of the alternative scenarios that Treasury looked at in the Update). Some of it is down to big increases in business investment, some of it down to high levels of net immigration (we're expected to gain 52,400 people in the year to March, and keep gaining people in future years, though not at the current clip). As Treasury noted, many of these people are of working age, and "the skills, ideas and international connections of the migrants are assumed to further increase productivity growth". Xenophobes, please note.

Two other things caught my eye.

With the caveat that whatever the reliability of fiscal forecasts, exchange rate forecasts must be an order of magnitude more flakey again, Treasury is currently picking that the overall value of the Kiwi dollar isn't going anywhere over the next three years. Most of us have been operating on the assumption that the Kiwi dollar is "too high" and will drop in the none too distant future: maybe it isn't going to happen.

And the other thing is the outlook for what we earn on our exports compared to what we pay for our imports (the "terms of trade"). The working assumption is that yes, we're suffering on the dairy front at the moment, but other commodities will keep us going, dairy will recover in the end, plus we're paying a lot less for the oil we import. Maybe that's how it will indeed play out, fingers crossed, but it's a reminder that we're still vulnerable - arguably too vulnerable - to the vagaries of the commodity markets.

Thursday, 11 December 2014

Growth, inflation, and spongey brakes

Today's Monetary Policy Statement from the Reserve Bank didn't have any headline surprises - the official cash rate was kept at 3.5%, as everyone had expected, and any eventual increase is now pushed out to late 2015 or early 2016, again much in line with current market expectations.

There had been some talk that the Bank had been a bit premature with its interest rate increases - there were questions at the post-match press conference about whether the Bank had tightened too much, or had expected more inflation than has actually happened - and even that its next move might need to be a cut in interest rates. Governor Graeme Wheeler ruled that out - "we're not anticipating a cut at this stage".

So all much as expected, but that said, there was some interesting stuff in the body of the Statement.
One big thing that stood out for me was the stronger track now being forecast for GDP growth: I'd been somewhat concerned about what happens to our growth rate when the Canterbury rebuild tails off: on the latest forecasts (below), this is looking less of a worry, and all going well we should see the unemployment rate keep dropping, to below 4.9% by March '17.

Another interesting development was lower domestically-generated inflation than you would normally have expected in an economy performing as well as ours currently is. Here's a chart (Figure B1 in the Statement) showing where the rate of domestic ("non tradables") inflation has actually been, compared to where you would have expected it to have been based on the strength of the economy and people's inflation expectations.

You can see that domestically-generated inflation is running about 2.5%, when economic conditions like today's would have led you to believe it should have been more like 3.25% to 3.5%. There was a bit of attempted blame-slinging from the media at the press conference about this, along the lines that that the Reserve Bank missed it (and, implicitly, raised rates too soon or too much). But as I've said before, the Bank was in good company. And in any event nobody yet really understands why it's happened here and overseas ("Research into what has caused inflation to be unusually low continues", as the Statement tactfully put it).

I don't know if John McDermott. the Bank's Chief Economist, was right when he said the Bank was less wrong about this than a lot of other central banks and forecasters. But I certainly agree with his follow-up comment that, rather than looking at it as a forecasting failure, the lower than expected inflation is actually a positive development: it means that economic expansions can be let run for longer, without central banks (as the old monetary policy saying goes) having to take the punch bowl away just as the party has got going.

Brian Fallow, the Herald's eminent economics correspondent, may have added a new monetary policy phrase to the lexicon when he asked a question about long term interest rates*. He noted that the Bank had said (in this speech) that it didn't control long-term interest rates (because they're largely set globally). But in that case, Brian reckoned, the RBNZ may lose control of some mortgage rates: people on longer-maturity fixed rate mortgages will be paying rates essentially set overseas. Will the Bank be left, as Brian put it, with "spongey brakes"?

*Brian tells me since I wrote this that it's not original to him, and he recalls it being used in Alan Bollard's day. Even so, it was a good time to dredge it up.

Monday, 8 December 2014

Let's get more serious about competition

Australia's Financial System Inquiry, aka the Murray report, came out over the weekend: you can find overviews here or here and the thing itself here.

I was particularly taken with the bit that looked at the interplay between regulation and competition: regulation can often have positive results (such as helping with the stability of the financial system) but it can also reduce competition (for example by writing rules that make it harder for new entrants).

The Aussie report, I'm pleased to say, came squarely down on the side of competition.

First it said that
The benefits of competition are central to the Inquiry's philosophy. While competition is generally adequate in the financial system at present, the high concentration and steadily increasing vertical integration in some sectors has the potential to limit the benefits of competition in the future. Licensing provisions and regulatory frameworks can impose significant barriers to the entry and growth of new players, especially those with business models that do not fit well within existing regulatory frameworks
And its Recommendation 30 consequently says that Australia should
Review the state of competition in the [financial] sector every three years, improve reporting of how regulators balance competition against their core objectives, identify barriers to cross-border provision of financial services and include consideration of competition in the Australian Securities and Investments Commission's mandate.
The Murray report comes on the heels of earlier reports from the Aussies' Competition Policy Review (which I wrote about here, here and here) which also put competition front and centre in policymaking: all good stuff.

The recommendation that Australia should look at the state of competition in the financial sector every three years reminded me that in June our Productivity Commission came out with its report on raising productivity in  the services sector, and recommended (as I wrote here) that "The Commerce Commission should be able to undertake studies on competition in any specific market in the economy".

Six months later, nowt. As the Productivity Commission says on the services report website, "The Government is considering the Commission’s report and recommendations. No timeframe has been set for the overall response"
You're left with the feeling that the Aussies are taking the benefits of competition rather more seriously than we are.

Wednesday, 3 December 2014

Move along, folks

So here's where we've got to with the wholesale price of internet services.

Internet service providers (ISPs) used to buy access to Chorus's copper lines and electronics for $44.95 a month.

This price was too high and insupportable, and everyone knew it (including Chorus, if it's being honest).

And sure enough it's just been lowered by the Commerce Commission, to $38.39.

Good outcome? You'd think so.


Chorus isn't happy. It didn't want it lowered, or at least by not that much.

ISPs aren't happy. They wanted it lowered to closer to $34.44 (the Commission's estimate of the same price overseas).

TUANZ says the ongoing uncertainty over the price is "disappointing".

Could everyone get a grip, please?

Chorus should be happy. It wasn't knocked back all the way to $34.44.

ISPs should be happy. They're getting a too-high price fixed for them - maybe not pushed as low as they'd like, but hey, this is where the technical experts say it really should be.

The government should be happy. Copper prices aren't undermining uptake of the new fibre network the government is subsidising as much as they might have.

Consumers, and TUANZ, should be happy. They've had the reduction in the price already passed through to them in better value broadband plans (if you believe the ISPs), but in any event it should reach them one way or another.

So there are two ways forward.

One is take to the mattresses in another round of rent-seeking from the regulatory process - submissions, counter-submissions, legal challenges, appeals, smoke, mirrors, subterfuge and artifice, enriching only the lawyers and the specialist economists in a negative-sum game.

And the other is to acknowledge a deal that more or less works for everyone, and get the hell on with doing what the various parties are supposed to be doing, which is making money for themselves by providing a better service for us, the consumers.

I wonder which will happen?

Tuesday, 2 December 2014


This morning the Commerce Commission released the wholesale price Chorus is allowed to charge to Internet service providers (ISPs), and which therefore is the core component of the retail prices those ISPs charge you for your fixed line broadband.

It's made up of two parts, the first being the bit for the cost of the copper line from your place to a Chorus switch (the 'local loop' or UCLL) and the second ('UBA') being the cost of the fancy electronics that Chorus can (optionally) provide to ISPs to save them having to use their own. The local loop bit will be $28.22 a month and the UBA bit will be $10.17 a month, making a total of $38.39. This compared with the previous price allowed, of $44.98.

These prices are based on explicit, detailed and complex modelling of the costs involved, and are intended to replace the interim hold-the-fort prices that the Commission had previously set, based on the cost of the same services overseas in countries who do things much the same way as we do. This 'benchmarking' exercise had set a local loop price of $23.52 and a UBA price of $10.92, making a total of $34.44.

There are all sorts of issues involved here, big and small, affecting everything from the profitability of  Chorus through to uptake of the country's shiny new ultra fast fibre network. And they directly affect you, too: already some ISPs are saying that the drop in the wholesale price (from $44.98 to $38.39) had already been passed on to you, so you won't be getting any further joy out of it.
In any event, I'd like to pick on one small aspect of the process, even though it's largely moot now, and it's about those interim 'benchmarked' prices.

I think they did a good job of providing a quick, cheap and reasonably accurate initial estimate of the eventual wholesale price. They were pretty much spot-on when it came to the UBA part ($10.92 versus $10.17), which is remarkable given that everyone was agreed that the benchmarking process had only a couple of countries overseas to use as sighting shots. And they weren't far off when it came to the local loop component, either ($23.52 versus $28.22) - especially when you consider that the fully modelled cost estimate involves a whole swathe of judgement calls made by the Commission and its modellers, and is not a glimpse into some eternal truth held in the mind of an omniscient Being.

So I'd take two lessons away from this, both involving the KISS principle.

The first is that over the next couple of years we're going to be taking a close look at the shape of our telco regulatory regime, and I'd like to suggest that we keep the cheap and cheerful benchmarking process. It's relatively fast - a particularly important consideration in fast moving markets like ICT - it's relatively transparent, it's understandable, it's relatively cheap, and it's accurate within some rough-and-ready-justice tolerance. I'd go further, and make it harder for parties to invoke the full cost modelling approach, which introduces layers of cost, delay and complexity, and all for a gain in 'accuracy' that (because of multiple modelling options) may be more illusory than real. And in general I'd like to see the 'good enough' option chosen over the one that keeps consultancies on three continents in business.

The second is that we need to think harder about the increasing complexity and cost of regulation across all sectors, and not just the telco business. I agree with Eric Crampton of the NZ Initiative, when he said on that "Too much of New Zealand’s regulatory apparatus would suit a country of forty million rather than the one we have". He's got his own examples: one I came across recently was the Commerce Commission's needing to sign off a $3 million increase in capex spending on a little Transpower project in South Canterbury. The process will take five months from start to finish, and has already spawned a 54 page initial draft decision.

That's a bit of an extreme example, and I should make it clear that it's not the Commerce Commission's fault: it's been lumbered with this ludicrously over-engineered regulatory regime. And I should add that from next April the Commission won't have to get out of bed for anything under $20 million - which is, of course, where the threshold for its involvement should have been in the first place (if not higher again). And I'd have to note that bloodymindedness on the part of Transpower and its customers drew this intrusive regime on their own heads, and a bit of enlightened give and take could have avoided the whole mess.

But it's there now, and it's holding up the sector, and its cousins in other sectors are also increasingly clunky and costly. It's time for more people in the policy analyst community to do what the MD of one company I know used to do: hold up the sign that says, "Does it make the boat go faster?"

Did we move too quickly?

Business Insider Australia put up this fascinating chart yesterday (full piece here).

The gist of the article was that the Fed won't want to repeat the premature policy-tightening mistake made by a range of central banks in 2010/11, including us (briefly and marginally) and the Aussies (for longer, and to a larger extent).

But I was more struck by that little rise in the yellow line at the right of the graph - our most recent tightening moves. They're beginning to look rather anomalous.

I know, hindsight is a wonderful thing, and inflation everywhere has turned out lower than reasonable people would have expected at the time (with the recently plunging oil price adding to the decline). And I've been as surprised as anyone - I also thought the strength of our economy would have led to higher rates of inflation (especially for non-tradables) than have actually occurred.

So I'm not pointing fingers. But on a purely objective basis, knowing where we are now, with a slowing economy and inflation less of a threat than expected, I do wonder whether we've tightened too much, too early.

Monday, 1 December 2014

We're on the right policy track

Graeme Wheeler, the Governor of the Reserve Bank, gave a fine speech today at a central banking conference in Wellington. It's a fairly easy read, too, for the non-specialist, so best thing is have a go yourself. But if life's too short, here are the two big points I'd take from it.

First, next time you hear politicians say, "why don't we have a bit more inflation and a bit more growth, instead of the Reserve Bank holding us back all the time", tell them they're talking bollocks.

As Wheeler points out (p4), "In the 20 years before the [1989 Reserve Bank] Act, annual real GDP growth averaged 2.2 percent while annual inflation was volatile around an average of 11.4 percent. Since 1990, annual inflation and real GDP growth have averaged 2.3 and 2.6 percent respectively and there has been a marked decline in inflation variability".

In other words, you can have it all - the same (or even marginally better) GDP growth, and lower and less erratic inflation. It's not a trade-off over the longer haul.

Here's the graph he put up to illustrate it. You can see, more or less, that the GDP growth rate picture is much the same before and after, and you can very clearly see that inflation is much, much lower and much, much less volatile.

The other big point is about transparency and independence. Internationally, central banks have been getting much more communicative about what they are up to and why (though, as I noted here, the European Central Bank has been a slow learner), and have been given more independence from government. We score highly on this: as he said, "A recent international survey ranked New Zealand second among 120 central banks for transparency".

Again, you'll hear politicians trying to take back control of monetary policy, sometimes cloaking their eagerness to get their clammy electoral hands back on the interest rate lever in the language of "democratic control".

Ignore them: what the evidence shows - as I found when I looked up that "recent international survey" that the Governor mentioned - is that more transparency and independence result in lower and less erratic inflation. The authors say (p236) that "Disentangling the impact of the two dimensions of central bank arrangements is difficult—not surprisingly, given that they respond to similar determinants", but either separately or together the picture is consistent: higher levels of transparency and independence lead to lower inflation and less volatile inflation.

Bottom line - and this is my take, not Wheeler's words - there's good reason to be very sceptical about relaxing or overriding our current inflation targetting regime, and equally good reason to steer clear of letting the pollies back in charge of it.

Thursday, 27 November 2014

Why the shortages?

Yesterday I posted about recent trends in immigration, and made a case for taking in more talented and skilled people, especially from Europe: business conditions there aren't great, they're much better here, and there's a window of opportunity to hoover up some talent.

Along the way I got thinking a bit more about MBIE's lists of local skill shortages, which they use to prioritise people overseas who come looking for New Zealand work visas. There are two of them, the 'Long Term Skill Shortages List', which MBIE says "identifies occupations where there is a sustained and on-going shortage of highly skilled workers both globally and throughout New Zealand", and an 'Immediate Skill Shortage List', which "includes occupations where skilled workers are immediately required in New Zealand and indicates that there are no New Zealand citizens or residents available to take up the position".

On the 'Immediate' list, there's a whole bunch of medical shortages - virtually every speciality you can think of (cardiologists, haematologists,paediatricians, you name it, it's there), the technicians to support them, plus dentists, dental technicians and dental therapists.

On the 'Long Term' list, there's a equally wide range of shortages - anaesthetists, clinical psychologists, GPs, intensive care specialists, nurses of all kinds, obstetricians, physiotherapists, just to pick out a selection, plus we're short vets as well.

Why is this?

I can rule out one explanation: it's not because people aren't interested in taking up these professions. I can't speak for all of them, but I do know about some of them, and I'd be confident that the medical and vet schools aren't short of people trying to get in.

There could be benign explanations.

Maybe we just don't have the resources to turn out all the skills we need, and that could be because we're not a rich enough country or because, like a lot of governments post GFC, ours has had to prioritise pretty hard in recent years, and not everything desirable can be financed.

And then there's the possibility that we've been at home to Mister Cockup. Maybe we've made a complete hames of matching labour market supply and demand, and I'm open to that as a theory, too, especially as you don't get normal labour market incentives working in these essentially centrally planned disciplines.

And then there's a darker hypothesis: that some or all of these professions are artificially restricting local supply. Do the gatekeepers to these careers face an inherent conflict of interest when advising on the level of student intake?

It doesn't help that the possibilities I've listed aren't mutually exclusive. We might have a mixture of cyclical or secular shortage of the readies, ineffective planning, and anti-competitively narrow entry gates. So I don't have any smoking gun answers.

But we can't leave these markets the way they are. They're just not working properly.

Wednesday, 26 November 2014

Let's take in more talent from overseas - and quickly

The latest net migration figures got a fair amount of media airtime, and even though a fair slab of it was on the invidious "aren't we doing better than Australia" track, the numbers were still pretty impressive - we had the biggest ever annual level of net immigration in the October '14 year (+47,700), beating the previous records set in the August '14 year (+43,500) and the May '03 year (+42,500). Net immigration is running at over four times its annual average over the past 20 years (+11,700). If you're interested in the details, the big pdf release from Stats is here and the actual data here.

It's interesting to see how sensitive these migration flows are to economic conditions at both ends of the migration journey: a lot of the media commentary, for example, picked up on the big impact on trans-Tasman flows of the strong New Zealand business cycle, compared with the currently sub-par Aussie one. But the same mechanism also works on migrant flows from other places, and it's left me wondering whether we're missing a good opportunity to attract European talent in particular.

We know, for example, that employment conditions in France are pretty grim, particularly for younger people, mostly down to the weak French economy, but aggravated by an inflexible labour market. So it's not surprising to see that the number of French people coming here on work visas has been rising strongly, from 1,187 in the October '12 year to 2,642 in the October '14 year. Unemployment isn't anywhere near as bad in Germany, but again the local slow economy is encouraging more Germans to look for jobs here, and the numbers coming on work visas have risen from 1,703 to 2,723 over the past two years.

But these opportunities to get talented people to come here from overseas don't last forever: the flows are very sensitive to relative changes in the business cycle at both origin and destination. Ireland's the classic example: business conditions were dire in Ireland until this year, when there has been a reasonably robust recovery. And the link to the net work migration flows from Ireland has been immediate: we had 1,298 Irish people coming here on work visas in the October '12 year, and 1,378 in the October '13 year, but it's already started to ebb, with a drop to 1,032 in the October '14 year.

I'd say we have a short but highly promising opportunity to get more skilled people to come here from the recessionary Eurozone. Jobs fairs in Australia are all well and good: but what about also doing a one-off liberal offer of work visas around Europe?

And by liberal, I mean one that doesn't pay too much mind to MBIE's 'Long Term Skill Shortage List', the thing that prioritises the kinds of skills we're normally looking for, partly because the list looks to me rather odd in places - I can believe we're short of engineers of all kinds, a fair array of medical specialists, and anything to do with ICT, but social workers? chefs? education lecturers? statisticians? external auditors? quantity surveyors? - and partly because we can't actually achieve that degree of precision in knowing what we'll need or in linking credentials to innovation or entrepreneurship. For all we know the next big app could be written by a self-taught enthusiast who left school with no qualification.

So I'd be inclined to hoover up as many of Europe's skilled and talented people as we can, while we can, and I'd relax the current immigration criteria to do it. Paper Marseilles and Düsseldorf with easy to complete work visa forms, and see what happens.

It can only be good for us. And if you're not too sure that immigration is good for a country, then read this opinion piece from the Brookings Institution, "Even Piecemeal Immigration Reform Could Boost the U.S. Economy", which says
High-skilled immigrants are good for America, and we should encourage more of them to come here given recent trends in entrepreneurship, where more firms are dying than being created every year. But high-skilled immigrants could help turn that trend around — they are twice as likely to start businesses as native-born Americans. This is especially true in high-tech sectors, where immigrants are not only more likely to start firms, but also to patent new technological discoveries
A bit of piecemeal immigration liberalisation would work for us, too.

Friday, 21 November 2014

The ref shouldn't reach for his pocket

You've got a valuable piece of intellectual or physical property. What, from a competition law perspective, can you do with it?

That might seem a daftly broad (or broadly daft) question to ask, but it keeps coming up, and it rather bothers me, since if there isn't a clear answer, you'd imagine that there could be a potentially costly chilling effect on the (often sizeable and specialised) investment involved.

What got me thinking about it, again, is the current fuss in the UK over the television rights to live coverage of Premier League soccer games. Ofcom, the relevant regulator, has agreed to take a look: here's its news release, which doesn't give a great deal of context, so here are a piece in the FT and a piece in the Daily Telegraph which give some background (hopefully neither is paywalled for the casual browser - I can't easily tell, as I've got a sub to both of them). Or here's the Guardian's coverage.

The gist is that the rights to the Premier League coverage have been vigorously contested at auction by Sky and BT, sending the price up, and in turn (allegedly) leading to high prices for end consumers watching the games on the box. Virgin, who have lost out on the rights, have complained. Ofcom has said it'll have a look, while pointing out that agreeing to have a look doesn't mean it's accepted that there is indeed a competition issue.

I don't think there is. For the life of me I can't see a competition problem here.

I don't see any issue with the clubs getting together to sell the rights to all the games. Alternatives would have large, inefficient transaction costs and wouldn't be attractive to broadcasters or end consumers. And in any event I'd say a football league would fly through any 'joint venture' provisions in competition law.

And I don't see any issue with an auction of the rights to the highest bidder. Competition for the market is fine by me, especially (as seems to be the case here) the auction opportunities come along reasonably often and are open to anyone with enough zeroes in their bank account. Indeed, I would say that Virgin's gripe is entirely because there has been robust competition for the prize.

And I'm not enamoured of the logic behind the European Commission's approach, which (I gather) at one point required the rights to go to at least two parties. Should J K Rowling have had to offer the Harry Potter books to two different publishers?

I can see instances where there may be an essential piece of infrastructure (spectrum, for example), where (unless you're a rapacious sell-the-airwaves-for-the-most-I-can-get government, and if you don't believe they exist, then you didn't notice how the Aussies privatised Sydney Airport) you wouldn't want to award a monopoly because of the adverse consequences of downstream market power.

But football?

I'm not saying that it's always going to be in football's own best interest to maximise their short-term profit: a longer-term view of the end game might see a better outcome from a wider consumer base rather than a narrower one, for example. It may not even be in a broadcaster's best long-term interests to hoover up all the rights on offer: not if you don't want to make yourself the target of populist regulation. And sometimes non-economic factors will need to get a look in, too (in spectrum allocation, for example, you might want to think of concentration of media ownership from a democratic point of view).

But normally, if someone's decided, eyes wide open, that they want to auction a right for the best short-term price, and someone's decided, also eyes open, to put the cash down and buy it, I can't see from a competition perspective why anyone should stand in the way.

And while we're in the general territory of football and what people can do with what they own, can the owner of a football stadium provide the chips and beer itself? Or must it allow third parties access to the chips and beer 'markets' at its stadium? Will it be okay (Premier League style) to award the concessions for beer and chips to the highest bidder, or must it spread the market around? And if you think this a fanciful example of competition law overreach, it's actually cropped up in New Zealand: can an airport award one onsite 'duty free' franchise to the highest bidder?

There'll be exceptions, but for me, there won't often be good reason to interfere with a competitive auction where willing buyer meets willing seller.

Thursday, 13 November 2014

Decile funding - pros and cons

There's been quite a bit of reaction in the social media to the news that 'Poorly targeted' school decile funding may be dropped. It's not easy to make much of a case for anything in 140 character bursts, so I thought I'd take a bit more space to wonder if the case against decile funding isn't being oversold.

Here's some data, from the same article, which shows the percentage of students in different decile schools who are well below the national standard for maths (I gather you'd get the same picture if you looked at other subjects). What would you conclude from this chart?

You'd have to say that there is some at least rough and ready correlation between decile level and school performance. Performance worsens as you move down from decile 10 to decile 1 (other analyses have found the same pattern). You'd be inclined to keep a school's decile status in play as an explanatory factor, rather than junking it.

Since this is the picture after schools have had decile-related resourcing, you'd have to suspect that the relationship would have been even more pronounced pre-resourcing. You could, I suppose, make the argument that decile funding has been completely ineffective, and the relationship in the chart is the same pre and post decile-related funding, but that seems to me to be a big stretch to the rather unlikely counterfactual that funding levels make no difference at all to educational outcomes. There's an even more unlikely possibility, that decile funding was counterproductive, and that the decile/performance relationship would have been less pronounced without greater funding to lower decile schools, but I can't see how that would work, certainly not at any systemic national level. So you'd be inclined to believe decile funding has had some positive impact.

But self-evidently, the decile-related funding has not completely equalled out school performance. One part of the answer is that the link between a school's socio-economic profile as summarised by its decile classification and a school's performance isn't 100%, and it's unlikely that it ever could have been. So you'd be sympathetic to arguments that would tweak or supplement the decile funding system, though not to wholesale junking of the approach.

Another part of the answer, though, is likely variation in teaching quality at different schools. In the chart, there's a clear pattern of poorly performing outliers at every decile level. It's unlikely that all of that pattern is down to slippage in the relationship between decile level and educational outcomes, though some of it will be. For example, that outlier decile 2 school, the worst in the chart, could well be facing tougher challenges than most of the decile 1 schools, either because it got mismeasured in the decile process or because the things that matter outside the decile criteria weigh especially heavily on it (equally there could be schools that have been coasting, and their performance reflected an easier catchment challenge in reality than the decile ranking suggested). But some of it, as in most endeavours in life, is likely to be down to variations in the quality of the provider.

Either way, you'd be inclined to hone in on those outliers from two perspectives. One is that, if there is indeed something missing from the decile approach, and there seems to be, then these outlier schools are the most likely place to find it. And the other is that if they're just bad schools, you'd want to sort them out.

Thursday, 6 November 2014

Report from the GEN conference

Wednesday was the Government Economics Network's annual conference at Te Papa in Wellington. This year the theme was "The relevance of economics in a changing world".

The keynote presentation was from Stanford's Paul Oyer, "The more things change, the more they stay the same: Four economic ideas everyone should know". His core theme was that, although many people post the GFC have criticised economics for not predicting it, or not understanding it, or even for causing it, economics has core concepts that were valid pre-GFC and are just as valid now. He picked four - cost-benefit analysis, equilibrium, thinking on the margin, and the limits of markets, all operating in the context of people aiming to maximise something in an environment of limited resources - and gave lively examples (funeral parlours in Tennessee, dog care services in Georgia) where these principles played out in real life. However, he also felt (quoting Princeton's Alan Blinder) that too much of economists' attention is taken up with arcana, and that the practical, useful, workaday economics, far from the bleeding edge academic frontier, was relatively neglected. That said, he ended up by saying that economics remains a powerful way of better understanding the world we live in, of helping to operate businesses more efficiently, and of setting policy for the greater good.

Not everyone agreed with his view - there was one pointed statement-cum-question from the floor saying that economics had fairly and squarely walked us into the GFC mess, and that the economics trade is in denial if it thinks it didn't - but I felt Oyer was broadly on the right track. The babies and bathwater criticism of economics has always seemed overdone to me, and I'd probably chuck in some further concepts that have also had enduring value (trade-offs, for example).

The next session was on "Economic analysis for policy", which exposed us to some applied techniques. Leo Dobes from the Australian National University talked about options, and the importance of allowing for the value of options in making decisions, and Caroline Saunders from Lincoln showed us examples of choice modelling, trade modelling, and modelling of sectoral comparative advantage. The choice modelling in particular was fascinating: Caroline showed us a real world example of how it had been used to identify the importance of various consumer criteria (such as safety, sustainability, country of origin) to overseas purchasers of our agricultural exports, which in turn could be used to profitable marketing effect in different overseas markets.

The next session, on "Teaching economics at university", wasn't so great.

The first speaker, Michael Mintrom from Monash, spent a good deal of his time on bringing an investment perspective to public policy development, which I thought was fine in itself, but not fully on-topic. He did get round to what you might want to teach people in university, if they're going to provide that perspective, albeit late in the piece. And it was quite good when we got there: I jotted down cost-benefit analysis models, experimental design with control groups, comparative institutional analysis, ex post opportunity cost studies, how economic insights can support social outcomes, learning from policy mistakes and near-failures, setting students 'capstone' projects which combine theory and application.

I didn't enjoy the presentation by Victoria's Morris Altman at all, principally because the delivery was painful to sit through (screen after screen of text paragraph bullet points, read verbatim). His core point was that it is a good idea to bring a mix of techniques and perspectives to any given problem.

Ashleigh Cox, a master's student at Waikato, gave us an interesting perspective from the other side of the lectern. She was concerned that her undergraduate economics hadn't seemed to give her the insights she'd have liked on issues such as exchange rates, housing, or inequality, and that it was only later and further reading that left her better equipped (mind you, I'd say that's probably true of a lot of things, and most of us have learned more about a subject post school or post college than we ever learned at the time). And she was also concerned about what (I think) she called "economics imperialism", or economics attempting to be a Grand Theory of Everything, and not doing it well at all.

Her comments got the discussion going, both in the hall and around coffee afterwards. Mostly I got the impression that all is not as well as it might be with teaching economics in New Zealand (and there are similar discontents overseas). Comments I picked up: not enough real-world applied economics on the menu; three-year, short-trimester economics degrees don't leave enough room to add the bits that would give a broader perspective to an economics education (such as economic history, or the history of economic thought); not enough effort going into making sure that students have an intuitive understanding of concepts, as opposed to parroting back equations (I was suddenly reminded of a piece George Orwell once wrote about a rote-leaning school student in the UK blindly reciting, "The root cause of the French Revolution was the oppression of the nobles by the people"); and degree courses being overdesigned for the student on the PhD track (heavy on the maths and the theory).

I snuck in a "mostly" qualification earlier, and that's because I also talked to some (younger) people who were very satisfied with what they'd got in New Zealand. As was I with mine in Ireland (Trinity), but then I did get some economic history, and some compulsory politics options, that rounded things off better than some modern economics courses seem to manage.

And we finished with an excellent session on the "Economist as Policy Advisor", from two battle-hardened pros - Graham Scott, formerly Secretary to the Treasury, and the NZIER's John Yeabsley - who've seen it all, and have the war stories to prove it. Graham had led off with an impressively erudite history of the role of advisers to rulers, but we moved on from Athenian democracy to wrestling with Muldoon in short order. I'd guess the many policy analysts in the room will have taken away good ideas on how to handle some of the trickier issues - notably how to present advice that your Minister does not want to hear.

At the end we had an unscheduled appearance by one of those very Ministers, Max Bradford, who made two points that I recall. One was that the greatest difficulty he'd faced was breaking with the inertia of the status quo. The other was that it might have been useful to have had some Ministerial customers of policy advice on the panel for the session, to give their perspective, and I think he was right.

The picture of health

This chart, from the OECD's latest Health At a Glance publication, is going the rounds of the social media, and it's a bit of a reality check, in a good way. If you'd thought that we were all going to hell in a handbasket because of binge drinking, bad driving, obesity and all the rest of it, think again.

The graph shows people's self-reported state of health, and we're very near the global top. Even if you take off a positive bias for the way the question was asked in some countries (our score is 5-8% higher than it would be if measured the same as in most countries), we're still well up there.

How people feel about their health is one reasonably important outcome, but if we go away from perception and look at some of the hard numbers, we stack up pretty well, too. Here's life expectancy.

The wealthier OECD countries are all pretty much of a muchness, really, but again we're in a pretty good place. Interestingly, as the next graph shows, we have much less of a gap in life expectancy between the well-off and the poor than exists in most countries. No idea why this should be, but there you go - another pretty good outcome.

From an economist's perspective, it's interesting to see that we've got better health (measured by life expectancy) than you'd expect for a country of our income level, and better health than you'd expect for the amount we spend on healthcare, as the next two graphs show. In both cases you want to be north of the fitted black line, and we are. And it's interesting to see that some of the stylised facts we all 'know' about global healthcare are, indeed, true, notably the hopelessly inefficient level of the health spend in the US.

I know, I know, we could be even healthier again, and if we did a better job of managing the booze, the weight, the fags, the exercise, the diet and the heavy foot on the accelerator, we'd all be even better off. But at the same time we ought to take on board that as far as comparisons with countries like us are concerned, we're already making a pretty good fist of health outcomes.

That "heavy foot on the accelerator" isn't a random comment, by the way. I'm recently back from Ireland, where I couldn't help noticing how much more polite and orderly the driving is than here in NZ. And it shows in these OECD stats, too: neither country is a smash palace along Brazilian or eastern European lines (and America doesn't show to advantage, either), but Ireland's death rate on the roads is clearly lower than ours. Which is something you could think about next time you cut me off on the motorway.

Wednesday, 5 November 2014

Too many rules, not enough houses

Last month I wrote about some residual absurdities in Australia, where there were still bizarre examples of nutbar regulation of the retail trade, and this despite decades of economic reform that one might have expected would have swept away the last of the most egregious nonsense.

It left me feeling that "there are still thickets of regulation that are absolutely bonkers". At the end of the post I said that "the good news is that both Australia and New Zealand now have Productivity Commissions that are able to turn over the flat stones and tell us what they're finding underneath", and wondered "what we'd find if, for example, we turned over some flat stones of our own".

I didn't have long to wonder.

Along came the Issues Paper (pdf) for the Productivity Commission's latest project, on the availability of land for housing. And even at this early stage it has found multiple examples of over-prescriptive, inconsistent, complex, inefficient, expensive and (I would say) largely rationale-free regulation.
Here are some examples, direct quotes from the paper.
(1) A Ministry for the Environment review of Christchurch City Council planning and resource consent processes described the two Christchurch District Plans as:
…large, cumbersome and difficult to navigate. The City plan is effects-based, while the
Banks Peninsula plan is activities-based. There are a total of 109 different planning zones,each with varying provisions (p28)
(2) Auckland Council is currently in the process of developing its first Plan as a unitary council. The Proposed Auckland Unitary Plan (PAUP) will replace the existing Regional Policy Statement and 13 district and regional plans. Given the breadth of the material covered in the PAUP it is not surprising that the document is lengthy, but at 6 961 pages (at the time of writing) the PAUP is very unwieldy. Supplementary documentation acknowledges that the Plan is complex, but also suggests that users must read the full document:
       The Unitary Plan is a complex document that consists of many interlinked parts. One        must not look at any provision in isolation, but read it as a whole (p29)
 (3) the Ministry for the Environment notes that plans prepared by “the eight largest
territorial authorities showed 123 different terms were defined, with more than 450 variations of those definitions”...
A comparison of two Plans’ rules around car parking demonstrates the variation. The Käpiti Coast District Council’s Rules and Standards states that "All buildings shall be designed so that wherever practicable sufficient manoeuvring space on site will ensure no reversing onto the road is necessary." In contrast, Nelson City Council’s Residential Zone Rules state that "Reverse manoeuvring is encouraged on unclassified roads and is part of ensuring a low speed environment and people orientated streetscape." (p37)
(4) One way of enabling new types of land use is to change a Regional or District Plan. Changes to Plans can be sought by a local authority or a private party...
The average timeframe taken to complete a Plan change in 2012/13 was 24 months. This was an increase from 2010/11, where council-initiated Plan changes took 17 months to complete and privately initiated Plan changes took 16 months (p47)
No doubt some processes are working well, but in spots we've got regulations of a complexity that would tax a Talmudic scholar, a glacial pace of administration, and an absence of compelling logic, with things forbidden in one jurisdiction being encouraged in the next. And all this against a background of a bloated local administration superstructure. We're a small country, but even after a programme of local authority consolidation, we're still left with this (p16):

No wonder we get this outcome (p7).

The Issues Paper isn't all about the dead hand of local authority micromanagement - I've focussed on those aspects as I've got an interest in good regulation - and it canvasses a wide range of other factors affecting the availability of housing land. The Productivity Commission is looking for people to tell it whether it's on the right track with its initial ideas, and whether it's missed anything: in particular it has a list of 74 specific questions where it is looking to get feedback and information, though people are also welcome to submit their views outside the 74-question format (contact details are in the paper and here).

The state of the housing market is one of the bigger economic issues right now: take the opportunity to have your say on what's going on and what should be done about it.

Monday, 3 November 2014

The economy's still in good shape

Treasury's latest Monthly Economic Indicators came out today. Here's a selection of some of the bits I found interesting.

First, the current growth cycle is still in good shape. The NZIER's survey measure of firms' trading activity in September suggests the economy was still growing at about a 3% rate. As I've said before, I love these survey measures: they're quick, relatively cheap, and usually have dependable relationships with the big macroeconomic statistics.

Looking ahead, prospects are still pretty upbeat, too. In the chart below I've shown firms' hiring intentions, but I could as easily have picked firms' expected trading activity or firms' expected investment. It's all good.

You might well feel that we've had a bit of a blow to our export incomes given the degree of attention that's been given to lower world dairy prices, and while that's true to a degree, as the chart below shows it's not the whole story. For one thing, dairy products aren't the only things we sell: overall export prices have been hanging in there. And for another, import prices have been falling (and may well fall quite a bit further, if world oil prices keep sliding), so our overall purchasing power - our terms of trade, what we can buy with our export income - has actually been rising sharply.

And finally there's that unexpectedly low inflation rate that we've been having. As the chart below shows, there's generally been a fairly close link between various survey measures of firms' price setting and overall inflation, but over the last eighteen months or so actual inflation has come out lower than the surveys would have led you to believe. Some people have been climbing into the Reserve Bank for overestimating the likely inflation rate: well, don't be too quick to rush to judgement. On the traditional relationships, they were making a sensible call.

Why the relationship appears to have broken down, at least for now, is a big question, and one I'll probably come back to, but we are not alone. In many places around the developed world, inflation is turning out to be lower than central banks were steering for, as the chart below, from this article in the Economist, shows: look where the dark brown marker lies relative to the bright blue one (or to the white range between blue markers). Another reason not to get too into finger-pointing at our RB: there's evidently something happening at a global level here that's blindsided a whole bevy of central banks (or whatever the collective noun for central banks might be).

Friday, 31 October 2014

Are we asleep?

On Wednesday I was passing through Dublin Airport on my way back to New Zealand, when I saw poster ads promising people up to 150,000 euros as a reward, if they've been responsible for introducing a new foreign company as a direct investor in Ireland. You can see how the scheme works here.

It's a clever idea, and it comes on top of an already impressive track record in attracting foreign direct investment (FDI) into Ireland. The agency involved, IDA Ireland, is widely regarded as one of the best of its kind: as one example, in the 'Achievements' bit of its website, it says that "2013 was a record year for FDI in Ireland as IDA client employment reached its highest ever level at 166,184. FDI alone created 25,000 jobs in 2012 and 2013".

And it is quality investment. As a recent report from an IBM unit says:
For most countries it is not just the number of jobs created that is of interest, but also the type of investment projects and their value to the economy. Comparing countries on what
projects are attracted, and not just the number of jobs, is therefore an increasingly important metric for gauging inward investment performance. To this end, IBM-Plant Location International has developed an FDI value indicator that assigns a value to each investment project, depending on the sector and the type of business activity. This value indicator assesses the added value and knowledge intensity of the jobs created by the investment project. Using this measure, Ireland continues to be the top performer in the world, resulting from the country’s success in attracting research and development (R&D) activities in life sciences and ICT coupled with high-value investment in financial services. 
It's left me wondering whether we are doing anything at all in New Zealand to attract inward FDI, let alone anything comparably slick or substantial or successful. Quite the contrary: I can recall people arguing against the desirability of FDI in the first place (repatriated profits would supposedly weaken the balance of payments) and some crassly populist criticism of the cost of wining and dining potential investors.

While Ireland's got some unique advantages - it's a low tax, business friendly, English speaking base within the EU -  we have our own selling points. But when's the last time you saw any recent government making a serious attempt to capitalise on them? And why aren't we getting our share of the FDI that's creating those high value added and knowledge intensive jobs?

Thursday, 23 October 2014

The way we live now

Today's release of the September quarter Consumer Price Index incorporated the latest three-year review (pdf) of spending patterns, and some other changes, notably using technology to capture the prices of many consumer electronic goods. Instead of Stats people visiting physical stores or browsing electronic retailers' websites, info will now be gathered from retail transaction data collected by market research firm GfK.

It's another fine example of how using data collected for one purpose can be cleverly used by Stats for another - something that Stats has become quite adept at (and from casual observation, rather better at than many other national statistical agencies). In this case, it's a rich data set: "The data includes price and quantity information, as well as information about the characteristics of individual products. This allows us to use sophisticated methods to measure price change". In areas like electronic goods, where the grunt of the microchip or the amount of RAM or the quality of graphics is changing all the time, it can be quite hard to figure out how much of an apparent price rise is down to quality changes in the goods being bought. A laptop might have gone up 10% in price, but could well be effectively cheaper if you're actually getting 20% more performance. With this rich data Stats can figure out the trade-offs.

The other interesting thing in the new improved CPI is the list of items being dropped from the CPI shopping basket. Here it is: it's an interesting squint at the way we live now. The common theme is how new technology is making once ubiquitous products obsolete, with smart phones and tablets in particular dealing to a variety of other products.

What's gone into the basket? Pets, mainly - not because we've all suddenly decided in the past three years to become petowners when we weren't before, but because Stats used to reckon that it couldn't get a good price series for puppies and kittens, and now it reckons it can. Here's the full list.

We're apparently drinking more cider (excellent), using ferries more (good), but grabbing an UP&GO or similar as we rush out the door (not my ideal breakfast, though Sanitarium say it's "a nutritious liquid breakfast range that's designed for people who live life on the go" and that "Not only does UP&GO taste great, it's also good for you", so what do I know). And then there's that damned post-Canterbury-quake nuisance, having to hire someone to get you an accurate fix on rebuild costs for your house insurance.

So it's another interesting peek into changing lifestyles. Stats has been doing this for just over 100 years now, and it's fascinating to look at the patterns. If you've never seen it, head over to '100 years of CPI', and in particular the link there to '100 years of CPI - Basket change', which is an "Interactive basket visualisation showing when selected goods and services were added or removed from the CPI". It's almost a complete social history in itself.

In food, for example, saveloys came into the basket in the drear 1970s (1974) but we progressively got our culinary act together, with fancier cheese (1988), avocado, courgettes, capsicums, fresh pasta (all 1999), and hummus and free-range eggs (2008), which is also when saveloys got ejected from the basket. And if you want a bit of "I don't know whether to laugh or to cry" reminiscing - press the 'Really?' button, where you'll see the rise and fall of the tinned herring, the waterbed, and, most poignantly of all, the Buzzy Bee toy.

Good news from charter schools

Radio New Zealand told me this morning that, according to copies of Education Review Office reports RNZ had been shown, two of the early group of charter schools have been found to be doing well ('Big ticks for charter schools').

I'm delighted to hear it. Charter schools have the potential to address what is one of our main educational challenges: the long tail of underachievers in our public schools. To be clear: our educational performance on average is pretty good, and we score well on international comparisons like the PISA ones. But there's a large group at the bottom who struggle. For one reason or another, the standard state school isn't working for them.

What's encouraging about the experience overseas is that the main positive impact of charter schools tends to be the improved performance of precisely those groups who struggle most in the traditional schools. Here's what the big (many would say definitive) study of charter schools in the US had to say (executive summary here, pdf):
Looking back to the demographics of the charter school sector in the 27 states, charter school enrollment has expanded among students in poverty, black students, and Hispanic students. These are precisely the students that, on average, find better outcomes in charter schools. These findings lend support to the education and social policies that focus on education as the mechanism to improve life chances for historically underserved students. Charter schools are especially beneficial learning environments for these students (p18)
Enrollment and persistence in charter schools is especially helpful for some students, particularly students in poverty, black students, and English language learners all of whom post significantly higher learning gains in both reading and math. Hispanic students are on par with their TPS [traditional public school] peers in both reading and math. For students with multiple designations (such as being black and in poverty), the impacts of charter schooling are especially positive and noteworthy (pp23-4)
It's interesting to see that on these early ERO findings the same thing is happening here. RNZ quoted the ERO report on Vanguard Military School as finding that "A significant proportion of students have not experienced success in their previous schools. At this school they are responding positively to adults' high expectations".

Just what you'd expect when you get a variety of options, where students have more opportunity to match up what they want with a school that provides it. As usual, greater choice, more competition and more innovation work, and they work most for those who had least choice previously - typically those on the outer, for one reason or another.

Neither of these two schools, by the way, would have worked for me or my wife or our kids - Vanguard, according to an earlier report by RNZ, has gone for "the ethos and training methodology of the military", and South Auckland Middle School for "project-based learning based on Christian philosophy and values". But then there are lots of people who'd have hated the school I did well at (and others did well there too, if they were either academic or rugby-playing - the rest, not so much).

And that's the whole point. Students need to be able to access the approach that best suits them. Vanguard and South Auckland are just the ticket for some kids who would otherwise have floundered.
More choice is an excellent idea: we shouldn't be lumbered with markets in important areas like education and health, where there are limited "one size fits all" options on offer, and especially when the losers from limited choice are towards the bottom of the social and economic ladder.

Friday, 17 October 2014

Do we need some JOLTS?

...JOLTS being the Job Openings and Labor Turnover Summary that the American Bureau of Labor Statistics (BLS) publishes every month. You can find the text of the latest one here and it's on FRED (the St Louis Fed's economic database) if you'd like to download the data or create some graphs of your own.

Right now, the financial markets and the mainstream media have been heavily focussed on the big statistic that the BLS publishes - the monthly jobs report - and that's fair enough. So have I, in one of my day jobs as a tracker of the main macroeconomies.

But as I've got to know it a bit better I've found the JOLTS data actually gives you a much better feel for what's going on in the US labour market than the big headline jobs and unemployment numbers, and I'm beginning to think we could do with the same insight into what's going on in our own economy.

In the US, for example, in the most recent month there were some 4.6 million hires, offset by some 4.4 million 'separations', for a net employment gain around the 200K mark. 'Separations' were made up of 2.5 million 'quits' (people who voluntarily leave their jobs), 1.6 million layoffs and discharges (involuntary moves), and 0.4 million 'other' (retirements, deaths, disability etc). And yes, the numbers don't add up exactly, because of rounding, but that's the internal logic of the numbers. What the media mostly report - the net 200K gain - is actually the net resultant of giant (by comparison) gross flows, as I mentioned before in commenting on an excellent graphic display of some of these trends.

Looking at separations, here's the layoffs and discharges component. The shaded areas are recessions. There are always large numbers of layoffs, in good times and bad, because the US labour markets tend to be very flexible, but they're now way down on where they were during the worst of the GFC. Indeed they're down to the levels typically seen in pretty good times.

And here's what has been happening to quits. As you can see, quits drop sharply in tougher times: people are less prepared to risk leaving what they've got, plus there are fewer opportunities to move to. Interestingly, from this perspective, the US labour market hasn't yet got back to its buoyant pre-GFC level of quits.

And that's not because the opportunities aren't there. As the graph below shows, the number of job openings (red line) has actually just climbed back to its pre-GFC level. Actual hires, though (blue line), haven't quite got back there.

Overall, you'd say that this adds up to a positive picture. The haemorrhaging of layoffs has dropped to relatively low levels, and the number of job openings (which I'd take as the most forward-looking indicator in all of this) is back up at a robust level, though there seems to be some residual caution on both the employer (hires) and employee (quits) sides of the market. You don't get anything like the same degree of insight from the monthly new jobs number, or the monthly unemployment rate.

I think there's a good case for having the same sort of insight into our own labour market. I'm pretty sure that we don't have these American-style gross statistics (I did have a quick re-look at the Quarterly Employment and Household Labour Force surveys, and couldn't find them, but if I'm wrong, no doubt someone will put me right).

Yes, we know (say) what the total number of filled jobs was each quarter, so we know what the change in jobs was from one quarter to the next. But we don't know if a 10,000 increase in jobs was down to 10,000 hires, no quits, no sackings, or 100,000 hires, 60,000 quits and 30,000 layoffs. And I'm not sure you can make a good enough fist of either tracking the economic cycle or devising labour market policy without some clearer sighting of those gross flows.

We're even more in the dark on job openings (in US terminology) or vacancies (ours). That's not to knock MBIE's vacancies index (latest reading shown below), which is a useful macroeconomic indicator in its own right. But it's an index, of the main online job ads only, and not the sort of 'ask the employers directly' numbers the US collects.

I'm just about the last person who'd wish an extra or unnecessary burden on Stats - I've been up close and personal with them for a long time, and I know the pressures on resources - but I'm starting to think we could do with better tracking of the dynamics of our labour market. And we could probably do it cheaper than the Americans do, as we're more adept at re-using 'administrative data' (like the IRD's) that's been collected already for other reasons (the Americans use a separate standalone survey).

As it happens, it looks as if Stats think so, too. I dug out Stats' list of the important Tier 1 statistics (background here, list itself here as a pdf). 'Job and worker turnover' is listed as a currently produced Tier 1 statistic, though I'm not sure the 'turnover' part is comprehensive and I reckon this could usefully be expanded on JOLTS lines. MBIE's vacancies index was recently made a Tier 1 statistic, but is not yet anything like a full headcount of job openings. And layoffs, unfortunately, is on the long finger: 'redundancies' is at the research stage, with no decision thus far on how often the data might be collected, or when the exercise might start.

In sum, we know that the JOLTS data give us much better understanding of the US economy; we can be pretty sure they'd do the same for us if we had their equivalents; and we've agreed that they should be on the Tier 1 list. Maybe time to get on with it?

Wednesday, 15 October 2014

Three decades later, still bonkers

Last week the Australian Productivity Commission came out with a couple of reports, on the Aussie dairy trade (pdf) and on Aussie retailing (pdf). I wrote up the dairy one because it had various angles relevant to us, notably some discussion of our Fonterra-centred industry structure, a good smackdown of the 'national champions' idea, and some useful analysis of the economics of the global dairy trade.

I've only just got round to taking a squizz at the retail report, and it's equally good. It points out, for example, that a lot of planning/zoning regulation can be both inefficient and anti-competitive, and that there's a reasonably straightforward path to fixing both problems:
Two reforms have been identified as being of particular importance: first, the need to
reduce the number of business zones and increase the permissible uses of land (to reduce
prescriptiveness) within these zones; and second, to remove consideration of the effects on existing individual businesses from the approval process for development applications (to avoid anticompetitive outcomes) (p11)
The Commission is strongly of the view that state, territory and local governments can
assist consumers and the retail sector by developing and applying zoning policies that
ensure the areas where retailers locate are both sufficiently large (in terms of total retail
floor space) and sufficiently broad (in terms of allowable uses, particularly those relating to business definitions and/or processes). This would allow new and innovative firms to enter local markets and existing firms to expand (p11)
As an example of how those reforms would work, the Commission had heard submissions about high rents being charged to retail outlet tenants by shopping centre owners, and while it noted that following best practice in leasing wouldn't be a bad idea, it also found that "the root cause of most retail tenancy lease problems are unduly restrictive planning and zoning controls that limit competition and restrict retail space, particularly in relation to shopping centres. Addressing the latter would also resolve many of the problems in the retail tenancy market" (p12).

More generally, the report got me thinking about how far Australia, and New Zealand, have got with pro-growth, pro-efficiency, pro-competition deregulation. Because, as this report found, despite years and years of economic reform, there are still thickets of regulation that are absolutely bonkers.

Three examples. I'll let them speak for themselves, other than to note the Aussie Commission comment (p113) that "In many cases, these [trading] rules are anachronistic and have no apparent rationale".

Here's a map of trading hours regulation in Western Australia (p7, repeated on p113).

And here's a decision tree on whether you're allowed to open for business in Australia on Easter Monday (p114).

And here's what Woolworths discovered about trading rules in Western Australia for its Masters Home Improvement Stores (which are like Mitre 10 or Bunnings Warehouse megastores):
in Western Australia, regulations prevent Masters Home Improvement stores from trading in line with the hours enjoyed by other hardware stores. To be eligible to trade as a ‘domestic development shop’ Masters must only sell those goods that are prescribed by the Retail Trading Hours Regulations 1988. The regulations prescribe a list of what a ‘domestic development shop’ can sell, which gives rise to all sorts of inconsistencies and anomalies. The regulations allow the sale of:
• light bulbs but not light fittings
• outdoor lighting but not indoor lighting
• kitchen sinks but not dishwashers
• wood-fire heaters but not gas heaters
• indoor television antennae but not outdoor television aerials (p10)
I suppose the good news is that both Australia and New Zealand now have Productivity Commissions that are able to turn over the flat stones and tell us what they're finding underneath, and there's the occasional one-off inquiry like Australia's recent Competition Policy Review that has been doing the same thing (have a read here in particular). It's good to know that there's still some kind of following wind to keep the momentum of reform going.

But isn't it strange, and a bit dispiriting, that after the best part of 30 years of progress in both countries, we're still lumbered with this kind of malarkey. And while I suspect we may not be as bad as the Aussies on most shop regulation (though I could be wrong about the  Easter trading, where our regime is probably as chaotic as theirs), I wonder what we'd find if, for example, we turned over some flat stones of our own. I wonder what's underneath the occupational qualifications one?

Monday, 13 October 2014

Did we lose the fiscal plot?

I've been engaged in a bit of tweeting to and fro about the rise in New Zealand's government debt in recent years, and what's behind it.

The background is that there's been a fair bit of political point-making going on about the large rise in debt on National's watch, with some people arguing that National seems to have got the kudos for responsible economic management while simultaneously presiding over a very large rise in government indebtedness.

Personally I don't care for or about the political point-scoring, and my take on it is that practically any New Zealand government, of virtually any political persuasion, would have ended up doing what National found itself doing - supporting the economy in the grim days after the GFC hit, and paying to rebuild the infrastructure destroyed by the Canterbury earthquakes. And there would have been a lot of completely appropriate questioning along the lines of 'have you forgotten the lessons of the Depression', and 'does the name John Maynard Keynes mean anything to you', if there hadn't been that support. I don't reckon there was a great deal of policy leeway for any incumbent government in these very unusual circumstances.

But it's kind of hard to make any kind of fact-driven argument in 140-character bursts, so I thought I'd take a bit of space to deal with one strand of the debate, namely how much of a fiscal boost did the government provide to the economy in the wake of the GFC.

Here are Treasury's estimates. They come from the 'Additional Fiscal Indicators' document which was part of the 2014 Budget Economic and Fiscal Update. The 'fiscal impulse' shown in the graph is the size of fiscal policy changes, measured by changes in the true underlying surplus or deficit, when you've taken out any cyclical effects affecting it. Bit of a mouthful, I know, but there you are.

What is shows is that there was a big boost to GDP, of the order of 3.5% of GDP, in the year to June 2009, and another fairly sizeable one, of about 1.75% of GDP, in the year to June 2010. In money terms, that's about $6.5 billion in the June '09 year, and about $3.4 billion in the June '10 year. Call it a round $10 billion or so for the whole package (you could probably add in a little more for another bit of fiscal support in the June '11 year). Formally, yes, $10 billion worth of fiscal boost occurred on National's watch over the two years, but I think it a very high probability that something similar would have happened - and should have happened - no matter who was at the helm.

But there's another way to see what might have happened if someone else's hand was on the tiller, and that's to look at what other governments did in exactly the same situation. So I've rounded up a bunch of the usual suspects and I've calculated the same 'fiscal impulse'. These data come from the IMF's World Economic Outlook database. Positive numbers are fiscal tightening, negative numbers are fiscal loosening.

You'll see that nobody was doing a lot in 2005, 2006 or 2007. Then fiscal policy gets loosened a good deal in 2008 (we're in the middle of the pack), even more again in 2009 (we're again in the middle of the pack), and generally was loosened a bit more in 2010, where we let it rip a bit more than the others. You'll note, incidentally, that at that point the UK took the 'austerity' route (a big fiscal tightening).

Over the three worst GFC crisis years, 2008-10, our cumulative fiscal boost was 6.7% of GDP, in the same ballpark as Australia's 6.1%, and a bit more than America's (5.6%) or Canada's (4%). The UK had chosen a completely different tack, and was taking back support in 2010, so its cumulative boost was least, at 3.1%.

Bear in mind that these numbers, while looking precise, are very spongy indeed (as even their creators will tell you), so they only tell a broad picture story, and the overall story is that everyone loosened fiscal policy, and everyone loosened appreciably, with us and Australia doing a bit more of it than the others. On the other hand we clawed back a good deal more than everyone else in 2012, so there's not a lot in it over a five year view (ex the UK). All of us took a distinctly Keynesian tack. So it's kind of hard to argue that there was something distinctively National about our absolutely typical response. Ditto if it had been Labour at the wheel.

Finally I came across a nice picture of US fiscal policy, for those of you who like graphs more than tables of numbers. It's from the Hutchins Center on Fiscal and Monetary Policy at the Brooking Institution. They call it their 'fiscal barometer', and you can see the original graph and read about the methodology here. It's a broader measure than the 'fiscal impulse' calculations mentioned thus far, so the numbers tend to be a bit bigger when it comes to measuring the fiscal impact. You want to look at the dark blue line.

You'll see that in 2007 US fiscal policy was not adding to GDP at all, shifted to a boost of around 1% of GDP by the end of 2008, to a boost of around 2.5% by the end of 2009, and peaked out at around 3% of GDP in 2010. That's a total of about 6.5% of GDP - pretty much identical to our cumulative fiscal impulse over the same period.

Look at it any way you like, the answer keeps coming up the same. A lot of countries, hit with the same sort of shock, responded in much the same way and to much the same extent, and appropriately so. The colour of the political rosette on the incumbent's lapel generally didn't matter a damn, except later in the piece in the UK. There was nothing unusual about our part in the proceedings.