Wednesday, 30 July 2014

Two happy endings

Yesterday I went through the story of how an Aussie company looked to get protection against imports of tinned peaches and tomatoes, and was shown the door by the Aussie trade authorities, whereas here in New Zealand Heinz Wattie's successfully managed to keep the same South African tinned peaches at bay when MBIE once again renewed anti-dumping provision against them.

The Aussie authorities were right: righter than Maggie Thatcher turning right in Wrightington. It was always a protectionist absurdity that 23.5 million Australians should have to pay over the odds for their peaches just so that 3,000 SPC Ardmona employees should have guaranteed jobs (and cushy ones at that, as documented here). And that tends to be the stitch-up that lies at the heart of a lot of protectionism - damages spread thinly over large populations, benefits concentrated on the favoured few.

That's something that should give even anti-trade activists pause for thought. Even if you are way down the protectionist end of the political spectrum, you might want to ask whether dearer food, shoes and clothes for the whole of lower and middle income New Zealand is a price worth paying to maintain much smaller groups of manufacturing employees in their comfortable lifestyle.

And while this is an argument of no economic merit whatsoever, I'm going to make it anyway, since the anti-trade lobby tends to include assorted anti-globalisation and xenophobe loonies who might buy into it. How do you feel about import protection for those poor threatened workers on the SPC Ardmona cannery line - when the company is actually a subsidiary of Coca Cola? And even if you weren't a loony, you'd reckon that companies the size of Coca Cola can look after themselves, thanks very much, without also being granted an official licence to rip off the Aussie consumer.

In any event, there's a happy ending.

SPC Ardmona, reeling under the impact of these dastardly cheap imports, asked for A$50 million in government assistance ($25 million each from the Federal government and from the state government of Victoria). No dice.

End of terminally endangered company? Not quite.

One fan of SPC product, alarmed that it might disappear, started an online promotion campaign that hit a nerve in Australia, and went viral. The whole story's here (and lots of other places). Sales soared, Woolworths decided it was worth stocking more of the iconically popular brand, and SPC was back in business, with the CEO saying “I'm not being cute when I say this, but the refusal of that $25 million from the Commonwealth, it triggered this huge response from the public and that’s led to Woolworths saying the customer is right". At the risk of overkill, I'll just add that a bit of smarter marketing was always a better option than either the protective moat or the handout.

The heading to the post mentions two happy endings: here's the other one. Happy-ish, anyway: there are some good bits in the bag, and hopefully more to come.

The outright good news is that, in the Budget, the government suspended anti-dumping provisions that had been in place against various construction materials, and it did it for the very good reason that it would make the Canterbury rebuild cheaper and more competitive. You might well wonder why what's good for the Canterbury goose isn't good for the national gander, and why the rest of us have to put up with overpriced peaches and diaries (I'm not making this up, Chinese and Malaysian diaries are also apparently threats to the national welfare). But in any event it's another small victory for freer trade, even if it's only a temporary, three year, suspension of the anti-dumping provisions, so let's bank it.

The other goodish news is that the suspension of the construction materials barriers triggered a review of the whole anti-dumping shemozzle, and MBIE has come up with a discussion paper, where it usefully gives marks to three policy options.

Option 1 is the status quo (meh, 14/30). Option 2 is a clunky thing that to me is there to make up the numbers (though with 19/30 even clunky alternatives beat the status quo). Option 3 is the only thoroughbred in the race (25/30). This allows for discretion not to impose anti-dumping duties "where they substantially lessen competition" (as they often do) or "where negative impact on another party [like you and me as consumers] outweighs harm to domestic producer" (which again will often be the case).

Free trade often struggles to prevail against producer interests, but even so this should be the easiest, "where do I sign", shoo-in of a policy contest that's ever been run.

Tuesday, 29 July 2014

A tale of two "protections"

When I was looking at the Australian Productivity Commission's reports as background for my previous post, I discovered that somewhere along the line the Aussie Productivity Commission had drawn the short straw, and had been made the regulatory authority for what are euphemistically called "safeguard measures", or in other words emergency "protection" against imports.
And so in June 2013 the Aussie government asked it to look at the case for "safeguard measures" against those wicked underminers of the Australian economy, and of Aussie firm SPC Ardmona in particular: imports of tinned fruit and tinned tomatoes.
In December last year, the Commission ruled on both. It said, go away.
On fruit, it said:
"The domestic processed fruit industry is suffering serious injury. However, injury was not caused by an increase in imports of products under reference...Other factors have caused the injury, including: decreasing domestic demand for processed fruit; rising domestic costs of production; and decreasing export volumes. Also playing an important role were domestic competitive pressures in the retail sector, where the availability to the supermarket chain of the option to import provides the threat of reduced margins for SPC Ardmona, but where the choice of that strategy is, ultimately, a domestic decision".
On tomatoes, it said:
"While absolute imports have not increased in a sudden, sharp or significant manner during the period under investigation, domestic production has fallen significantly. This has caused an increase in the ratio of imports to domestic production that passes the test in the Agreement on Safeguards. The domestic processed tomato industry is suffering serious injury. However, the injury was caused by other factors, including domestic competitive pressures emanating from decisions made by supermarkets, the appreciation of the Australian dollar and floods in the tomato growing regions of Victoria".
SPC Ardmona had also stirred Australia's Anti-Dumping Commission into action against those damned South African peaches. No, I don't know how the Aussie Productivity Commission and their Anti-Dumping Commission share the waterfront, either, but it doesn't matter, since the Anti-Dumping Commission also told SPC to go away. It said it was "satisfied that, in relation to [two South African exporters], the goods exported by those exporters have been dumped, but the dumping margin is less than two per cent and, therefore, has decided to terminate the investigation".
Three cheers for three small victories in the never-ending battle for free trade.
However.
Back on this side of the Tasman, MBIE drew the short straw and got to do the anti-dumping stuff. Here, Heinz Wattie's has been on its case about those damn peaches, and with considerable success. It got anti-dumping duties imposed in 1996, and again in 2007/08. They were due to expire in 2013, but Wattie's made another fuss, said they still needed the protection, and got it. The duties were renewed yet again, as you can read here (I warn you, it's a rather turgid, technical read, though trade policy wonks may conceivably like it).
You'll be pleased to know that MBIE is also protecting us from those awful cheap peaches from Greece. Oh, and Spain.
So my question is this. If even the easy-to-stir-to-protectionism Aussies - remember the terrible fireblight on our apple exports? - have flagged away trying to keep out peaches and tomatoes, why are we persisting?

The case for bite-sized chunks

I wonder if it's time for the Productivity Commission to be given more bite-sized chunks of policy that it can comfortably get its jaws around.

What got me thinking about this was the Commission's services inquiry. This was an enormously broad topic, even allowing for the fact that some large service sectors, government-provided health and education services, were outside the terms of reference. I think the Commission did as good a job as anyone could do faced with a beast of that size, though clearly there was an inherent problem is trying to move from such a broad brush topic to specific recommendations.

At one point the Commission came up with a short list of some possible individual topics that had emerged as possibly fruitful lines of enquiry, and asked for votes to whittle it down. But that, while a nice thing to do from the point of view of getting citizen input, rather proves the point: they could easily have come up with several more short lists, all comprised of equally good candidates. And what they did cover was fine, and well handled. But the services sector topic was Just. Too. Big.

So where do the topics come from?  According to this explanation from Treasury, who manage the topic-selection process,
Potential inquiry topics will be selected based on the degree to which they:
  • have the potential to improve productivity and support the overall well-being of New Zealanders;
  • utilise the Commission’s unique position as an independent agency with high quality analytical ability and a focus on public engagement; and
  • require a substantial degree of analysis to resolve a complex set of issues
All well and good, and you'd have to say that all the bullet points combine to rule out putting the high-expertise Commission onto piffling topics of no great substance. But I think the balance has been struck too much down the big picture end.

Some of it is an age and stage thing: the Commission needed, for example, to look at the overall macro state of productivity in New Zealand early on in the piece before moving on to tackling (say) sectoral issues. But I reckon we could now do with more of the tighter focus topics, like the earlier housing affordability and international freight services ones.

I had a quick look at the Australian Productivity Commission's recent topics. Within a wider project called 'Relative Costs of Doing Business in Australia', they're working their way through some individual industries (currently retailing, and the dairy manufacturing industry), they'd earlier knocked off car manufacturing, and they've had some individual topics (labour mobility, public infrastructure) which, while weighty enough, weren't as wide ranging in scope as our first services inquiry or the latest one on public services.

The Aussies don't get everything right - their Treasurer and his ministerial sidekick, for example, issued a brazen, squalidly political press release after the Aussie Commission's infrastructure report - but maybe we could learn something from them about the manageability of the productivity agenda.

Monday, 28 July 2014

WACCy thoughts

All right, it's a terrible title, but how else to tempt people into a topic that usually prompts reactions of the "Goodness, is that the time already? Must dash" variety.
WACC - the weighted average cost of capital - is, obviously enough, a key concept in regulation. WACC times the regulated asset base is what regulated companies are allowed to earn. And it's back in the spotlight since the Commerce Commission said it was minded to reduce the WACC it allows to electricity and gas lines businesses.
The quick potted history behind it is that the regulated companies challenged pretty much everything about the way that the Commission went about its regulatory business, a challenge which ended up in the most enormous bunfight in the High Court. The upshot was that in December last year the companies were routed on almost everything.
But along the way the High Court judgement (rather large 4.1Mb pdf here, the relevant bits are paras 1422 to 1492 on pp475-92) cast its beady eye (or three sets of beady eyes, since the judge was, understandably, assisted through the densely barbed economic undergrowth by two expert lay members) at one feature of the Commission's WACC setting. That feature was its practice, once it had established a sort-of-statistical-distribution of possible WACC estimates, of choosing a point estimate of WACC that lay three-quarters along the distribution (i.e. well above the mean).
This was known as the "75th percentile" approach, and was done with eyes wide open, on the basis that the costs of allowing too low a WACC were worse than the costs of allowing too high a WACC. Yes, allowing the regulated companies too high a WACC might enrich their profits at consumers' expense, but that was likely, even from consumers' perspective, to be a price worth paying, as the costs of too low a WACC (and so too little investment) could be catastrophically high in the long run as insufficiently maintained networks fell over.
You can gussy up the argument in various ways - asymmetric payoffs, dynamic efficiency trumps everything, the need to keep the lights on - but the Commission's approach looked sensible however you inspected it. I was certainly on board with it. For much of the same reasons, when I was involved, I was happy to go along with the 75th percentile of overseas benchmark estimates of domestic telco costs.
And then the High Court gave me - and, as it transpired, the Commission - pause for further thought.
First, it said, at [1462], "No supporting analysis was provided by the Commission. Indeed, the propositions advanced for choosing a point higher than the mid-point seemed to be considered almost axiomatic". But, the Court said, it's ain't necessarily so, and quoted at [1468] an Australian decision which had said that "We accept that it is possible that there may be asymmetric consequences
associated with setting a WACC too high or too low. However, it is not clear to us that the asymmetry would always imply that overestimation of the WACC led to a lesser social cost than underestimation of the WACC. The nature of the asymmetric consequences of incorrectly setting a WACC is likely to depend on the circumstances of a given matter" (I've italicised the always just to bring it out).
And then the Court asked ([1472-1477]) a series of rather unsettling rhetorical questions (otherwise described as "some tentative in-principle arguments counter to the Commission’s reasoning"). Why isn't a normal profit enough? What's to prevent lazy monopoly utilities from trousering the profits instead of investing or innovating? What about the costs to other parts of the economy of higher than necessary utility bills (an especially good question, I thought, given the potential dead weight on our exporters of uncompetitive domestic service industries, as discussed here and here)? And why do so few other regulators do this sort of thing?
Outcome: [1486], "we would expect ['expect' here being the judicial, royal or parental 'expect'] that our scepticism about using a WACC substantially higher than the mid-point, as expressed above, will be considered by the Commission...further analysis and experience may support the Commission’s original position. But they may not", and another quote from that Aussie decision: "there exists as a matter of theory the potential for asymmetrical consequences should the WACC be set too low or too high. Which of these consequences will carry with it the greatest social damage is not a matter solely for theory, however, but for robust empirical examination, well-guided by theory, of the actual facts of any particular case".
I'm sure the Commission's subsequent announcement that the 75th percentile was in play had utility CFOs and their boards having kittens. The Major Electricity Users' Group, for example, had estimated as part of the High Court hearings that going from the 75th percentile back down to the mean would transfer nearly $130 million from the utilities back to consumers, so big bikkies were at stake. And there were other potential downsides, too, including some collateral damage to the regulatory process itself, if key bits were to get changed midstream.
The current state of play - there's a media release here, and the full draft decision here - is that on July 22 the Commission  plumped for a WACC at the 67th percentile (the midpoint of a range from 60% to 75%). There's a whole bunch of supporting expert reports here if you like.
My own take on it? It's broadly a good outcome. There's (for me) the odd loose end - that point the High Court had, about the costs to the rest of the economy of higher than necessary utility bills, has been magicked away in ways I don't understand - but overall, it stacks up.
The Commission's original intuition may not have been very well documented or explicitly reasoned, but it felt right, and as it transpires, when you run formal models that attempt to measure the potential benefits against the potential costs of a WACC set a bit on the high side, the high side stacks up (there, that saved you reading most of the experts' stuff). But not too high, mind: if you take a "follow the money" approach, for example, investors seemed to be willing to pay well over the regulated asset value for some of these utilities when they were allowed the 75% percentile WACC, suggesting it's a bit on the generous side.
So the Commission's decision that you need at least some uplift to the mean (the 60th percentile is as good as any), but not too much (75% tops), split the difference, call it 67th percentile - it's not pretty, but it serves, and not least by avoiding abrupt and sizeable jumps to regulatory settings. There's no precision to be found here, and as usual in regulation, and a lot of other issues besides, getting to approximately right is a good day's work.

Friday, 25 July 2014

Two good economics books

Earlier this month, at the NZ Association of Economists conference, I got pointed towards two new books, Diane Coyle's GDP: A brief but affectionate history, and Paul Dalziel and Caroline Saunders' Wellbeing Economics: Future directions for New Zealand, both of which are aimed at the intelligent layperson as much as the professional or semi-pro economist. Both are worth giving a go.

I'd read some of Diane Coyle's stuff before: her The Soulful Science: What Economists Really Do and Why It Matters is on the bookshelf behind me, I follow her blog The Enlightened Economist, and I'd read some of her contributions to the big post-GFC debate on what should be in the university economics curriculum. Her GDP is a quick and easy read - and I mean that as a compliment, given the length and turgidity of what a book on GDP might have been. In an easy style she gives us 159 pages on the history of GDP, its uses, abuses, and frailties, and ideas on where it might be taken next and what might be needed to supplement it.

You'll have your own favourite bits: for me I especially liked her reminder that GDP isn't a real thing "out there", which we try to measure with greater and greater precision and ever larger technical handbooks. It's a conceptual construct, and one that isn't even identical to the sum total of economic activity (though that's how we tend to view and use it), partly because there are arbitrary distinctions drawn between what's in GDP and what isn't. At a more nitty gritty level, I like her examples of how ropey attempts to compare countries' GDPs using purchasing power parity (PPP) can be, and I wish I'd read her bit on how to measure the output of the financial sector a year or two ago. I'd have been a lot better placed to discuss 'FISIM' (pronounced "fizz 'em", and standing for 'financial intermediary services indirectly measured') when Stats were looking at how it's compiled in New Zealand.

Don't be put off by the PPP and FISIM bits I've quoted, by the way: this isn't (thankfully) a book that spends a lot of time deep in the technical entrails of the GDP numbers. For the most part it keeps to the big picture, and you'll learn a lot about a concept that's ubiquitous in the business and political media, but not always properly understood or deployed.

Dalziel and Saunders' Wellbeing Economics is one of the recent Bridget William Books Texts, each being "a short, digital-first piece of high-quality New Zealand writing, produced swiftly and distributed globally online", mostly on current affairs. They're making quite a stir - Shamubeel Eaqub's Growing Apart: Regional Prosperity in New Zealand in particular has hit the publicity hot spot - and Wellbeing Economics is on the button, too.

The authors (both economics professors at Lincoln) list five principles of 'wellbeing economics', which they say is "a new framework...emerging internationally for understanding economic policy questions and their solutions. It aims to address issues like unemployment and poverty directly, rather than thinking these problems would be solved automatically with economic growth". At its most general level, they say, wellbeing economics starts with the principle that "The purpose of economic activity is to promote the wellbeing of persons", and they go on to look at what the world would be like if that principle - and four others, such as (Principle 3) "Economic policies should expand the substantive freedom of persons to lead th lives they value and have reason to value" - were put into practice.

In many ways this book is a liberal manifesto, and will resonate with what I suspect is the wide but unappreciated swathe of New Zealand opinion that is market-friendly but socially liberal. A lot of us would like a prosperous dynamic economy and a tolerant civilised society, and we're not well served by the libertarian flog-the-criminal freaks at one end nor by the killjoy anti-market wowsers at the other. I especially liked the book's recognition of the role markets play in enabling people to deliver what they value, such as a good paying job or a decent education, and as they say (pp71-2), "Whatever caveats we may hold about their operation in particular times and places, the universal adoption of markets to organise production and exchange is itself evidence of this institution's enduring contribution to human wellbeing".

In talking about the role of markets, they quote (New Zealander) John McMillan's superb book on the role of markets, Reinventing the Bazaar: A Natural History of Markets. It's so good, whoever I lent my copy to made off with it. You may find your copy of Wellbeing Economics doing a runner, too.

Tuesday, 22 July 2014

Why these big price increases?

The Ministry of Business Innovation and Employment, MBIE, has come out with new estimates of retail electricity prices. One of them is a unit value measure - the $ amount that retail customers paid for electricity, divided by the amount they consumed - and the other is a quarterly survey of what a 'typical' household would pay, if it took up the lowest available offer in its region.
Here is an excerpt from the quarterly survey: to save a bit of space I've shown just the North Island results.


As you can see, MBIE has split out the total retail bill into an electricity lines component and an "energy and other" component, which we can assume will be dominated by the cost of the electricity itself.
I'm struck by some very high percentages increases (highlighted in yellow) in the lines component of people's electricity bills. If it's all down to price increases allowed by the Commerce Commission, fine. But if it isn't, what on earth is going on?

Smoking gun found as drug deals go down

I've been a bit exercised by these "pay for delay" drug deals where patent holders buy off generic drug competition - see here and here - and I know I'll have to let them go, and get on with other things, but one final post on the topic, as I've been pointed towards a brand new piece of empirical research on them that finds that they are very likely anticompetitive.

Up front, I should say that I'm normally minded, when I see some business behaviour that doesn't look like it fits with what the economics theory would suggest a firm would do, to look for a benign, rational explanation. Businesses will often have logical and proper reasons for what they do, even if on first inspection an economist can't see what those reasons are. And I've even changed my mind on some things that I would once have regarded as out of hand anticompetitive (retail price maintenance, for example) and I can now see why a company might have a legitimate reason to do it, and why consumers might not be harmed or could even benefit.

But at first blush these "pay for delay" delays looked suss to me, and although there are respectable and even heavyweight competition economists (Willig, for example) who believe they are, or can be, above board, I'm at a minimum still of the view that most "pay for delay" deals are rorts on the consumer.

So I was intrigued when a blogging colleague put me on the trail of "Do "Reverse Payment" Settlements of Brand-Generic Patent Disputes in the Pharmaceutical Industry Constitute an Anticompetitive Pay for Delay?", by Keith M. Drake, Martha A. Starr, and Thomas McGuire, NBER Working Paper No. 20292,July 2014, © 2014 by Keith M. Drake, Martha A. Starr, and Thomas McGuire (the copyright thingy is there because the NBER papers say third parties citing them have to put it in).

You can see the abstract here and you can read the whole thing if your organisation has a sub to the NBER or if you fork out US$5 online. If you're in the teaching trades, and in particular if you're in the competition teaching trades, you might want to share it with your students, as the topic is interesting, the writing's accessible, and the maths and stats are fairly easy.

The researchers looked at settlements of patent drug litigation between incumbent patentholder companies and generic competitors, and split them into two buckets - those where there were "reverse payments" from the patentholder to the generic, and those where there weren't. "If, in settlement, the brand manufacturer in effect buys a longer period of monopoly sale by “paying for delay” with a “reverse payment,” expected profits to the brand go up", they reasoned (p12) - "longer" here being longer than the average outcome that would have been expected from fighting on in the litigation. So they looked for the stock price impact of news of settlements, which should quickly reflect that rise in expected profits by way of higher share prices. And, since it's at least possible that settlements might have been struck for good reasons that weren't anticompetitive, they were especially interested in whether the settlements with reverse payments had a bigger effect on stock prices than the ones that didn't.

They were pretty careful, too, to isolate the impact of the news of the settlement, by comparing the actual share price movement with three different measures of what might have happened to the share price in the absence of the settlement. So they looked for "abnormal" or "excess" returns over and above what the company or the share market might have delivered in any case.

This is their key result (pp26-7): "For multiday event windows" - that's where the share price impact is measured over a few days - "cumulative abnormal returns for the reverse payment settlements are 5.5% to 6.0% higher than those for the other settlements and in all cases the difference is significantly different from zero...the incremental stock price jump of approximately 6% upon announcement of a settlement with indication of a reverse payment compared to one without is consistent with the hypothesis that reverse payments buy an anticompetitive delay in generic entry".

Incidentally, they also looked at trading volumes (again compared with the volume that might have been expected in any event), and again the same pattern came through. Investors were much more interested in news that the money had changed hands than in news that it hadn't.

Maybe I'll have my mind changed by some new evidence, but on this showing, if there are strong incentives to wreak a rort (check), and it looks like a rort (check), and it's carrying a large sack of non-consecutively-numbered dollar bills under one arm (check), it's a rort.

Friday, 18 July 2014

Dumbing down the data

If macroeconomics isn't your main thing, you may have missed out on the big debate that's going on about the degree of slack in the American economy.
Come back, come back - it's important! If there's lots of slack still around, then there's no issue of inflation on the horizon, and the Fed's probably going to stay with its ultra-supportive monetary policy for some time yet. On the other hand, if the output gap is closing up fast, or has even closed up such that we're already somewhere near the NAIRU, then rising inflation is a real possibility, and the Fed will take back some stimulus faster than the financial markets currently expect. Which would have very large consequences for global financial markets: many asset classes have been carried up to expensive levels by the Fed's high tide of liquidity. The stratospheric levels of the NZ$ (in particular) and the A$ (to some degree) are also artefacts of the Fed's money printing (increased supply of US$, lower levels for the US$), so we've got a dog in the race, too.
There's a good summary of various views in this blog roundup from Bruegel, the European think tank, if you'd like to get up with the play on the substantive issue.
I've got a different point I'd like to talk about, and that's the role of the statistical agencies in helping us understand where economies are at.
By way of background, the US GDP figures, which are obviously the key data in all of this, come from the Bureau of Economic Analysis, which has three goes at it - an advance estimate not long after the quarter, a second estimate roughly two months after the end of a quarter, and a third estimate around a month after that. The BEA, by the way, reports US GDP as a (seasonally adjusted) annualised rate, rather than the quarter on quarter change we use in these parts. Enough background, on to the action.
On April 30, the BEA released the advance estimate for March quarter GDP. It showed that GDP was marginally higher: growth in the March quarter was +0.1% at an annualised rate, which was outside the range of advance forecasters' estimates, which ran from +0.5% to +2.0%. On May 29, the BEA released the second estimate, which was an annualised decline of -1.0%; the surprise number was again outside the range of advance estimates (-0.8% to +0.2%). And on June 25 it followed up with its bombshell third estimate, which made the decline a much more substantial -2.9%, and once again outside the range of advance guesses (-2.4% to -1.0%).
Three surprise numbers in a row on probably the most globally important macro statistic, would, you'd think, warrant some sort of explanation from the BEA.
What did we get?
Sweet FA is what we got. The only thing that's remotely relevant is the (boilerplate) statement that the second estimate "is based on more complete source data than were available for the "advance" estimate" and that the third estimate - wait for it - "is based on more complete source data than were available for the "second" estimate issued". Bear in mind that the underlying reason for the string of wildly unexpected numbers was the incredibly awful northern hemisphere winter: was there any analytical attempt to figure out how much that might have been responsible? No. Almost unbelievably, there wasn't even any mention of the weather at all.
You'll have your own favourite expression for exasperated incredulity: where I grew up, Holy Mother of God! was quite popular.
Now, I know that statistics in the States is a political battlefield. Nutters claimed that the official unemployment statistics were being manipulated in the run-up to President Obama's re-election, for example, and even how the US Census is done has drawn political flak (because if done properly it might affect the size and ethic composition of electoral districts). So if I were the BEA confronted by the Looney Tunes that is the present-day US Congress, I might veer away from offering interpretive analysis, too.
But even if the BEA didn't have the dingbats to face down, a lot of statistical agencies don't believe that providing interpretation or analysis is properly within scope for an official national statistics office. Their releases basically amount to reading out the numbers in the tables. It's not just the BEA that's down the read the numbers end: if you want to see an almost comically typical example, read this Australian Bureau of Statistics release on March 2014 corporate profits.
Frankly, in my view, this won't do any more. There are better ways, and I'm pleased to say our own Stats folks are among the more enlightened. Here, for example, is a little paragraph that was included in this week's CPI release (it was in this bit of the release):

Data influencers

Price changes may be influenced by specific events. Factors that affected the June 2014 quarter CPI are listed below. 
  • The annual increase of 10.2 percent in cigarette and tobacco prices was influenced by an 11.28 percent rise in excise duty from 1 January 2014.
  • The strong New Zealand dollar has had a downward influence on the retail prices of internationally traded goods including cars and appliances.
  • The rise in the price of vegetables was influenced by seasonally higher prices for tomatoes, lettuce, and cucumber.
  • The fall in the price of fruit was influenced by seasonally lower prices for kiwifruit and apples
See - that wasn't so hard, was it? So why don't more agencies do the same thing?

Thursday, 17 July 2014

Calm down, folks

Yesterday Stats told us that inflation in the June quarter was 0.3%, a little less than the 0.4% that forecasters and the Reserve Bank had expected. And out came all sorts of OTT reactions, mostly along the lines that the RBNZ would now hold off on some interest rate hikes, or had been running too tight a monetary policy all along. The kiwi dollar dropped a cent against the US dollar.
Puh-leez. Let's get a grip here.
One. Even in a world where Stats measured the CPI with complete precision, there is no real difference from any perspective whatever between a 0.3% inflation rate and  a 0.4% rate. Especially as the numbers have the capability of setting off entirely spurious tripwires because of the rounding process. Yesterday's "0.3%" was actually 2.517%. If the CPI index had been the teentsiest bit lower, it could have been 2.499%, in which case we'd have had a headline rate of 0.2% and forex dealers leaping to their deaths from their dealing rooms. All on the basis of the third decimal point in a percentage change between two large numbers. Give me a break.
Two. Stats doesn't measure the CPI with complete precision (and this, I think, is going to be my only original input into the conversation). The CPI numbers come from a survey, and just like opinion poll surveys get reported these days with their "margin of error", the CPI number has some uncertainty around it. Somewhat oddly, after I read all the CPI release stuff, even the rather boring and technical (but important) bits way down the back, I couldn't find what the CPI's margin of error was.
So I rang The Man, who in this instance is the ever helpful CPI guru Chris Pike at Stats (and everything from here on is my view, not his, by the way). It transpires that I hadn't made a cockup of browsing the Stats website: there aren't, in fact, published estimates of the margin of CPI error.
The reason is that the CPI isn't a random survey, where you can use standard statistics to estimate sampling error: it's a purposeful survey that decides on certain outlets and certain product lines. But just because we don't know exactly what the survey error is, that doesn't mean there isn't any. There surely is, for example because the CPI relies on other surveys such as the Household Expenditure Survey which have their own sampling errors. The HES might say, for example, that households spend 23% of their income on food, and Stats will use that as an expenditure weight in the CPI,  but it might be 22%, or it might be 24%. And of course the CPI will have its own survey errors as the price collectors wander through the aisles and misread the label on the baked beans. And so on.
So not only would a real difference between 0.3% and 0.4% not matter a damn,  there may not even be a real difference in the first place. Allowing for survey error, 0.3% and 0.4% could well be statistically indistinguishable. I don't know what that margin of error is, but it's highly plausible that numbers only 0.1% apart fall within it.
Three. Even if 0.3% is absolutely beyond doubt the right number, and definitely different to 0.4% or 0.2%, the over-excited "lower than expected inflation" and "pressure off the Bank" and "overzealous inflation fighting" reactions don't make much sense to me. Brian Fallow, as is his balanced wont in his article in the Herald, made the key points: the headline figure is being flattered by the high NZ$, which lowers import prices,and in any event it's more important to look at non-tradables inflation (the inflation in purely domestic sectors, like most of the services sectors). And there you don't see inflation at a comfortable level. The CPI may be running at a 1.6% annual rate. But non-tradables inflation, which for monetary policy matters more, is running at a 2.7% rate. Even if you take out the housing and household utilities bits (which are running hot at the moment), core non-tradables inflation is either 2.2% (ex housing and household utilities) or 2.6% (ex purchases of new houses).
I've gone on about this before (here and here, for example) but our domestic non-tradables inflation keeps trundling along, as the chart below shows (the hump in 2010-11 is the effect of GST going from 12.5% to 15%, so don't pay that too much mind), and generally towards the top of the RBNZ's 1%-3% target band.


It's pretty evident that as and when the kiwi dollar goes for a burton, we're going to see some very ugly headline inflation numbers indeed, unless the non-tradables inflation rate drops, and so far it's shown a remarkable ability to hang in there. I'd also point out the sizeable and unhelpful contribution of central and local government charges to the non-tradables inflation. Okay, there's an element of sin taxes in there that maybe I can go along with (ideally if it's taxes on the other fellow's fags and not on my Côtes du Rhône). But it looks very much to me as if large swathes of central and local government still feel as if they can write any number they like on the price ticket.
Bottom line - park all that guff about unexpected victory in the battle against inflation.

Wednesday, 16 July 2014

Drug deals busted

A wee while back I posted about obnoxious "pay for delay" arrangements between drug patentholders and generic drug manufacturers, which involved the patentholders paying - I would say bribing - the generic makers not to produce when the patent expires, thereby extending the patentholder's monopoly pricing power.

I didn't know about these kinds of arrangements before the Economist wrote about them, but to my mind they are such a breath-taking interference with competition that I've done a bit of mugging up since.

My first reaction had been that they were clearly, and rightly, illegal under New Zealand's competition law (bang to rights under s27 of the Commerce Act), but that I didn't know what the legal state of play was overseas. Here's an update.

It's illegal in the European Union under Article 101 of the Treaty on the Functioning of the European Union which says "The following shall be prohibited as incompatible with the internal market: all agreements between undertakings...which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:...(b) limit or control production, markets, technical development, or investment" (italics mine). And often enough it'll also trespass against the misuse of substantial market power provision in Article 102.

The Europeans have been able to sheet the law home, too. According to this press release from the European Commission, just this month Servier, a French drug company, and five generic manufacturers got pinged nearly €430 million (call it NZ$670 million): "Servier made payments to the generic companies against the certainty that they would not enter the market and refrain from legal challenges [to Servier's patents]  for the duration of the agreement. In one case, the settlement was not based on cash payments but on a market-sharing arrangement with the generic company".
The Commission (which has a couple of other pay for delay scalps on its belt) summarised by saying that Servier "tried hard to unduly prolong its exclusivity. And it managed to do so not through innovation or the strength of its patents, but thanks to its deep pockets and in complicity with its generic rivals. Such behaviour is prohibited in the European Union. When companies break these rules, they will be pursued and penalised accordingly. Pharmaceutical companies should focus their efforts on innovating rather than attempting to extract extra rents from patients and taxpayers". I'm no great fan of the Brussels machine, and even in the competition area I think they've lost the plot from time to time, but on this one they've nailed it.

In the States, it's not so clearcut. There, the case that matters, at least for now, is last year's Federal Trade Commission (FTC) vs. Actavis Pharmaceuticals (in the background I can hear the collective heavy sigh of competition lawyer readers as yet another economist clambers awkwardly over the fence into their territory). Competition tragics can find the full decision here: if life's too short, it has a summary at the front, and there's a good Wikipedia article on it, but in any event the gist of it goes like this.

The drug companies said they had a patent dispute, that the supposed "pay for delay" payments were part of the patent settlement, and that what was legal under patent dispute litigation was home free and not subject to antitrust litigation review. The FTC wanted "pay for delay" ruled always and everywhere illegal.

The FTC lost in its first two outings in lower courts, but won the penalty shoot-out 5-3 in the Supreme Court. Or sort of: the court didn't go the whole hog and say "pay for delay" was always wrong - "This Court declines to hold that reverse payment settlement agreements are presumptively unlawful" - but it did say that they couldn't hide behind the skirts of patent law and could be found to be anti-competitive if challenged. There could be “potential for genuine adverse effects on competition", and "Payment for staying out of the market keeps prices at patentee-set levels and divides the benefit between the patentee and the challenger, while the consumer loses". Sometimes the arrangements might be okay, but it would come down to the facts, and the court was minded to look especially sceptically at large brown paper bags being passed under tables: "The size of the payment from a branded drug manufacturer to a generic challenger is a strong indicator of such  power", "such power" meaning the power "to work unjustified anticompetitive harm".

There was a withering dissent from three of the judges (including the Chief Justice), so who knows how settled the matter is. But at least it's good to see that the FTC has been given the opportunity to take on these rorts. I'm sorry for any genuine patent disputes that might end up wearing some collateral damage by having to go through the antitrust mill to prove they're above board. But I haven't a skerrick of sympathy for the collusive jack-ups.

Wednesday, 9 July 2014

How fast can we grow?

John McDermott, the Reserve Bank's Chief Economist, gave a speech to the Wellington Chamber of Commerce today, about 'potential output', which he said is, colloquially, "how fast the economy can expand without generating inflation" (you can read the speech on the Bank's website here, or download it as a pdf). There is that inflation angle, but I was more interested in the Bank's estimates of potential output for other reasons.

Here's the Bank's take on how fast the economy can grow on a sustainable basis.


The grey bars show how much extra we could produce in any given year, and the three coloured lines show the contribution of three different things to that increased ability to produce. We can put more people to work (the red 'Labour' line), we can give them more equipment to work with (the blue 'Capital' line), or we can work more cleverly (the black 'Productivity' line). The three lines add up to the grey bar. John, I'm sure, would be amongst the first to agree that estimates of potential output, let alone of its components, are very much a work of art, that different researchers can (and do) come up with sometimes very different results, and that the estimates in the graph are more in the nature of indicative than accurate to two decimal places, but even so, let's go with them as being more or less the underlying reality.

My first thought, when I saw the estimates for the latest few years, is that they're not that flash, are they? Being able to generate growth of 2.75% a year leaves many parsnips unbuttered, especially if you take off population growth, since per capita incomes would only be growing by something like 1.75% a year.

You look, in particular, at the contribution of investment. Right now, the high exchange rate is making capital equipment (which is largely imported) cheaper than usual, the interest cost of financing it is also unusually low, and the economic cycle is very strong. If ever there was a time for a bigger than usual boost to growth from a surge in capital spending, this is it, but it doesn't seem to be happening. The contribution from capital isn't significantly up from previous levels, and that's a bit of a bijou problemette, since that's the only lever you can pull on in the short-term. Higher immigration tends to take a while to organise (even if you can find a political way to sell it to the xenophobes), and how to boost productivity is still something of a mystery.

All up, it leaves you feeling a bit downbeat about our longer-term growth prospects, and wondering what we'll do for an encore when the Canterbury rebuild winds down. And others, I see, are starting to feel the same way. The latest forecasts from the economists at the BNZ have GDP growth of 4.1% this year (excellent), 3.5% in 2015 (jolly good), and 1.8% in 2016. Oops.

That's the pessimist's reading of John's results, but there's also an optimist's version. John produced an alternative way of measuring potential output, namely what the economy actually managed to do over extended periods, since almost by definition "The average rate of output growth over longer periods of time can provide us with a rough gauge of the growth capacity of an economy", as he put it. So he showed a series of 10-year averages, in the chart below.


This seems to me to accord with the stylised facts of the economic history of New Zealand over the past 50 years - good performance in the Sixties, progressively worse performance in the Seventies and Eighties thanks to external shocks, grossly inept domestic economic management and the upfront disruption of structural reform, slightly better performance in the Nineties, and somewhat better again more recently.

The bad news may be that we still haven't built - or rebuilt - up to the sorts of rate of growth that would make a real difference to living standards in short order, but the good news is that we're in better shape than we've been.

Though that tangentially reminds me of the old joke about Brezhnev's economist, who came to him with good news and bad news.

"Give me the bad news, comrade", says Brezhnev.

"Well, comrade General Secretary, the bad news is that Soviet GDP this year is well down on last year", says the economist.

"I know that, dammit, give me the good news".

"Comrade, this year's GDP is much higher than next year's".

Tuesday, 8 July 2014

A great paper on global income inequality

Last week's annual conference of the New Zealand Association of Economists was a big success - you can see the programme here (click on '2014 Conference Programme' and select '2014 Timetable'), a fair proportion of the papers have downloadable links if you'd like to follow them up - and as usual the papers covered a very wide variety of topics. Rather oddly, though, there was almost nothing on competition or regulation (one paper by AUT's Lydia Cheung on the use of the Upward Pricing Principle in analysing the competitive effects of mergers), a gap I'm planning to fill at next year's conference.

At wide-ranging conferences like this, there tend to be moments where you come across something startling or significant that you didn't know before, and for me - and quite a few others, going by the tweets (#NZAE14) at the meeting - the real stunner was a graph showing trends in global inequality over the past 20 years. Covec's Aaron Schiff called it 'The graph of the century', and I've discovered that a Financial Times columnist has called it 'The chart that explains the world'.

It took me a little while to track down the source, but its origin was an event at Columbia University's Heyman Centre for the Humanities in February 2013, where three speakers - Prof Joseph Stiglitz, Prof James K Galbraith, and Branko Milanovic, lead economist in the World Bank's Research Department - spoke on the topic of 'Global Inequality' (this was pre-Piketty, by the way). Of the three presentations, only Milanovic's has been archived, and we're fortunate it was, as it was the source of the graph.

On the face of it the paper doesn't sound a thriller - 'Global income inequality by the numbers: in history and now - an overview' - but it's terrific from various perspectives. Not only does Milanovic explain different concepts of inequality in a remarkably accessible way - a secondary school class in economics could easily follow it - but he's got some fascinating results to show. You can download it here:  it's well worth doing.

Here's the graph that had conference attendees oohing and aahing.


The graph's reasonably self-evident: the main thing you need to realise is that this is the global distribution of individual incomes, and it only runs from 1988 onwards because for large parts of the world there weren't good official national surveys of income distribution before then.

Isn't it fascinating? You might have thought that the very rich were going to be the big beneficiaries of the globalisation of recent years, and it's true that they've done well, but they haven't done quite as well as the big surge in income for the world's  lower and middle classes, which in turn is principally explained by strong rising incomes in China and India.

And there are two groups that have missed out.

One is the very poorest, where the bottom 5% of the global population have had no growth in income for the past 20 years, and for which we can point the finger (or, better, the rifles of the execution squad) at the Mobutus and the Mugabes of this world.

And the other group - including, very likely, a fair few of the readers of this post - is in the vicinity of the global 75th to 90th percentile. Milanovic says "These people, who may be called a global upper-middle class, include many from former Communist countries and Latin America, as well as those citizens of rich countries whose incomes stagnated". It's an odd grab bag - the nomenklatura and the apparatchiks, the hangers on of the juntas, the semi-skilled in the developed world whose jobs can be done in the developing world, the managerial jobs that have been automated away - but they've all been left behind by the surge in a global middle class and what Milanovic calls "probably the profoundest global reshuffle of people’s economic positions since the Industrial revolution".

He also suggests, albeit on quite a short time series for this measure of global income inequality, that "perhaps for the first time since the Industrial Revolution, there may be a decline in global inequality. Between 2002 and 2008, [the] global Gini [coefficient] decreased by 1.4 points. We must not rush to conclude that what we see in the most recent years represents a real or irreversible decline, or a new trend, since we do not know if the decline of global inequality will continue in the next decades. It is so far just a tiny drop, a kink in the trend, but is indeed a hopeful sign. For the first time in almost two hundred years—after a long period during which global inequality rose and then reached a very high plateau—it may be setting onto a downward path". The world, in short, may not be developing as all the acolytes of Piketty might believe.

There's lots more - the much greater importance these days of where you live, for example, as opposed to the lower importance of where you are in your country's income distribution, in determining your income level - and if you've got any interest at all in the great sweep of human economic development, this paper's a must read.

Monday, 7 July 2014

"I can't be bothered..."

People have been banging their heads for some time against New Zealand's "productivity paradox" - we've got good institutions, good policies, and ready access to the best technology, but can't seem to generate the same income from those opportunities that other developed countries do - and often the search for answers starts pointing towards innovation creation and uptake, or in other words to that vast area of general ignorance known to economists as "multi factor productivity".

I got thinking about this over the weekend when I re-read one of the more startling items to come out of the Productivity Commission's recent report on raising productivity in the services sector. I'd noted it myself first time I saw it, and thought "that's odd", and put it aside, but the other week I was in a group talking about the services report and found the other group members all thought it was pretty strange, too, so I thought I'd draw it to more people's attention.

But before going there, a preamble on innovation.

You're having a barbecue. Everything's good to go, till you fire up the burners and discover the LPG bottle has run out. Quick dash to the nearest petrol station where, until recently, this happens.

You get the attention of one of the attendants (sorry, "forecourt concierges"), they kit themselves up in goggles and gloves, check your bottle is still fit for use, weigh your empty gas bottle on the gas machine, figure out (with a calculator) how much gas it would hold, attach it to the machine, fill it up, detach it, test it for leaks with soapy water, you pay, and away you go.

Then some bright person brings in Swap'N'Go. You give your old bottle in, they give you a full new one, you pay, done.

God knows how much cost has been taken out of the LPG bottle business by Swap'N'Go, but I'd bet it's very large. One central depot to fill the bottles takes out all the sets of petrol station filling equipment, plus all the training costs at the stations, plus the cost of attendants' time spent doing gas bottles. Plus it's safer (I'll bet the training at the one specialised depot is a lot better than it used to be when you were trying to train multiple shifts of transient attendants), and quicker for everyone involved. Quality up, costs down, time shortened, productivity an order of magnitude higher.

And it's a completely low tech (or even no tech) innovation, entirely down to smart business reorganisation. I seem to remember one of  the more recent Nobels in economics going to someone who'd figured out that business innovation along these lines had made a very large contribution to economic growth over the ages - no doubt someone will remind me who it was - and I'm not surprised.

Right. Back to innovation in New Zealand. If business innovation is important for growth, then we need to be alert to the need for continuous innovation, and we need to be as diligent at it as other places if we want to match their living standards.

But the Productivity Commission came across this rather suggestive piece of evidence that says New Zealand businesspeople's heads aren't in the right innovation space at all. They ran a survey which among other useful things asked businesses that hadn't invested recently in ICT, why not.

What would you think the lead answer was? Cost? Complexity?

Not a bit of it.

The top answer was, "I couldn't be arsed", which is my rough translation of the complacent result shown below.


"It would be cause for concern", the Commission said (pp177-8), "if this response reflects a large number of firms with no aspirations to expand or that face little competitive pressure". Indeed, and with knobs on when it comes to that point about "little competitive pressure", though as the Commission says, in what's either judicious analysis or one of the longer kicks for touch you've ever seen, "The response is, however, challenging to interpret. It could also cover cases where respondents are simply unaware of the possibilities of using ICT to improve their business. Equally, it could cover businesses that invested significantly in ICT more than two years ago or where there are small benefits from investing in ICT. Without further information it is hard to read more into this result".

My feeling is that the Commission was onto something important, and I think it could have been very productive if the government had chosen, as the Commission's next line of enquiry, some deeper analysis of what's going on here. Maybe economists aren't the best people to investigate business management - with exceptions (eg Baumol, Varian), economists tend to see the business production function as a "black box" with inputs in and outputs out, and they don't typically take the lid off the box - but this looks to me like one of the more likely keys to fit the productivity paradox lock.

Thursday, 3 July 2014

Drug deals gone bad

I was shocked - shocked! - to read in the Economist last week that drug companies, faced with the prospect of superprofits on patented drugs evaporating when the patents expire and the off-patent drugs can be substituted by much cheaper 'generics', have been paying generics producers not to enter the market.

The Economist says "Since the early 2000s “pay for delay” agreements have become more common. A company with a patent due to expire strikes a deal: it pays potential entrants a fee not to compete, preserving its monopoly. A pay-for-delay deal between AstraZeneca and three big generic manufacturers helped to protect Nexium from competition between 2008 and May 2014".

I don't know what the legal status of these contracts is in the US, but I do know what our competition law says. "No person", says s27 of the Commerce Act, "shall enter into a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market", and if "pay for delay" isn't one of those contracts, agreements, or understandings, then I don't know what is.

The American Constitution wisely forbids "cruel and unusual punishments", which is just as well, as otherwise there would be a good case for tattooing the words of s27 or its American equivalent in large letters on the foreheads of the corporate executives involved.

Wednesday, 2 July 2014

Updates from the NZ Association of Economists conference

I'm at the NZAE's annual conference in Auckland over the next three days. I'll likely post some longer pieces on the conference later, but in the meantime if you'd like some on-the-hoof coverage, head to #NZAE14 on Twitter where I and a bunch of others are doing some running commentary.

Tuesday, 1 July 2014

What is it about transport?

So Uber, the DIY taxi service app, is up and running in Auckland, according to this report this morning from Radio New Zealand.

Good.

More competition is just what's needed, especially in Auckland. When the taxi fare from Auckland Airport to our place on the North Shore routinely runs to $120-140 - sometimes more than the return airfare to Wellington - some additional competitive alternatives are a jolly good idea. There are some already - I've recently shifted to a shuttle bus service, which costs $62 - but more won't hurt.

I have some sympathy, though, for the incumbent taxi companies who claim to be competitively disadvantaged by the regulatory overhead they've got to carry. Ideally, this could be resolved by lessening the burden on the taxis rather than piling regulatory requirements onto Uber drivers.

But I can't say I'm optimistic about seeing rational, efficient, pro-competition transport policy. Globally, transport seems to be one of those sectors where policymakers can't leave the damn thing alone - either lumbering it with excess regulatory baggage, or, alternatively, favouring the producer interest of transport incumbents with anti-consumer jackups.

A classic example is the Irish taxi industry. As detailed in this new (short) report from my old stamping ground, Dublin's Economic and Social Research Institute,  the Irish have gone back to the bad old system they used to have, of limiting the number of taxi licenses, with the explicit aim of assisting the taxi trade, and despite the clear evidence that consumer service worsens with reduced taxi availability.

What is it about transport that attracts these bad policies?

It's not as if there's some sort of market failure that these policies, however cackhandedly, are trying to solve. There are perfectly adequate and economically efficient mechanisms for the market to work its own problems out if it's got any - prices can fall, taxi drivers can leave, shipping lines and airlines can add or subtract routes - whereas the regulatory routes are typically inefficient (in all three senses of the economics term) and often inequitably anti-consumer. And there are functioning secondary markets for transport equipment - not just for taxis, but also for aircraft and ships - which means there are no issues of catastrophically stranded sunk costs to bother about.

Perhaps the answer is that passenger safety is the Trojan horse that's being used as the pretext for producer protection or superfluous regulation of transport businesses, in the same way that patient safety has been misused as a pretext for anti-competitive behaviour in the medical profession.

In any event,  I wish Uber well - and I hope the policy environment let's us enjoy a good, clean contest between Uber and the rest of the industry.