Friday, 29 July 2016

If all else fails, crunch the numbers

There's a very interesting article by Jonas Björnerstedt and Frank Verboven in the July issue of the American Economic Journal: Applied Economics, 'Does Merger Simulation Work? Evidence from the Swedish Analgesics Market' (here's a link but to get further than the abstract you'll need to be a member of the American Economic Association or otherwise have access to its journals).

Normally, merger simulation - formally modelling what might happen (particularly to prices) if competitors merge - is done before the event by competition authorities (and also, sometimes, by economics consultancies, generally in support of the merging parties). What the two authors of this article have done, however, is turn the process on its head: instead of asking, before the merger, what post-merger effects does the model predict, they ask, after the merger, what model would have best predicted the effects that actually happened.

Usually, this isn't doable. If a merger is cleared, and it doesn't substantially lessen competition, generally there are no obvious price effects to see. Fortunately for the authors - but rather unfortunately for the Swedish competition authority - they've got data for a clearance that went badly wrong. Prices were jacked up substantially and immediately post-merger, and to some degree by third party producers.

Here are the facts in approximate brief. Analgesics are painkillers: there are three main ones, paracetamol, ibuprofen and aspirin. The only two makers of paracetamol in Sweden applied in late 2008 to merge, and the competition authority allowed it in April 2009. The regulators relied on a broad market definition (the other two painkillers would be good substitutes, constraining any rip-off on paracetamol) and on the prospect of greater competitive constraints following an adventitious deregulation of the pharmacy sector (up to late 2009 there had been a state-owned pharmacy monopoly).

In fact, the price of paracetamol went up by some 40% immediately post-merger, and the aspirin makers cashed in too, with price rises from 7% to 18%. Ibuprofen prices didn't change much (no, I don't know why, either). Here's the graph ('ASA' is aspirin).

Clearly, the painkillers weren't in fact good substitutes for each other (the facts speak for themselves, and when they ran their models the authors also found low cross-price elasticities) and the paracetamol makers were able to coin it. There were lucky, in that an anti-drug-overdose measure was implemented around the same time, and they were required to sell 20-tablet packs instead of 30-tablet ones: they were able to smuggle in higher per-tablet prices by not reducing packet prices proportionately. The authors allow for the fact that it's more expensive to make smaller packs, but even so that would have accounted for only around 15 percentage points of the 40 percentage points price increase, leaving 25% as pure lower-competition gravy.

The authors were also able to go a long way with their main research interest - which models of producer behaviour and consumer demand best fitted the facts (answer: none perfectly, but some pretty impressively).

Okay, that's the specifics of their work, but I think their research also makes some more general points.

First, it suggests that (at least some) merger simulation models are well worth running as part of the clearance process. Our own Commerce Commission used to have a formal model, but it may have been put out to graze: a search today of the website for "merger simulation" or "Bertrand" came up empty, and the five "econometrics" results weren't relevant. This Swedish study, however, suggests there's a dance in the old dame yet. I wouldn't push the argument too far: as Stephen King, at the time one of the ACCC Commissioners, said in 2005 in 'The use of empirical methods in merger investigations'
Because of its complexity and sensitivity to particular assumptions, merger simulation is generally contentious and, at best, provides ‘back up’ input for a more complete merger analysis
That may be true, but it's beginning to look to me like a low-ball estimate of the potential value of merger simulation modelling.

Secondly, I think it says something about the potential use of more econometrics in competition and regulation analysis more generally. So far, it's been a bit of an uphill struggle:
Lawyer: So, your model rests on quite a specific set of assumptions?
Economist: Yes, but...
Lawyer: And if those assumptions do not hold exactly, the results may not be reliable?
Economist: No, but...
Lawyer: And they haven't held exactly, have they?
Economist: No, but...
Lawyer: No further questions of this witness, m'lud.
But we're in a new world of big data where crunching the numbers with better tools is getting easier and more reliable. It's time, I reckon, to fire up more models, more often. As I've said before
we may be getting being able to do a better job of taking a more robust empirical approach to measuring things like demand curves, and own- and cross-elasticities of demand. If, using things like scanner data, improved econometric methods, sophisticated consumer choice testing, and clever analysis of 'natural experiments' - what happened, say, after a fortuitous interruption to one source of supply - we can get a more scientific handle on the extent to which products are or are not substitutes for each other (and so are or are not likely to be in the same market), why wouldn't we use that information to derive empirically grounded market definition?

Wednesday, 27 July 2016

The fur is flying in Oz - and maybe will here, too

We're in the process of having a rethink about our 'abuse of market power' legislation - s36 of the Commerce Act (if you're new to this you may want to have a quick read of 'The law is an ass' and 'Get your views in on abuse of market power').

It's partly because the Aussies have also got the ball rolling. In fact, they're ahead of us, as the Coalition government over there has decided to change the Aussie law, in line with the recommendation by their 'Harper review' of competition policy, while we're still at the consultation stage. The gist in Australia is that the law will switch from a focus on the purpose a firm with market power may have had when it did something, to a focus on the effects the firm's actions have on the competitive process.

I think it's a sensible move, and I've been arguing for doing the same here. We currently have pretty much the same wording in our law that the Aussies have decided to change in theirs, and we can get a free ride on their (very extensive) process of competition policy development. And if the Aussies change, we don't really have much choice in the matter, as we'd be left high and dry with an ineffective archaism of our own.

In Oz, however, the proposed change has sailed into a new political squall. Reform of important legislation affecting big business always tends to have its tricky moments: what set it off this time was a comment by Australia's Productivity Commission in its recently released draft report on agricultural regulation (if that's your thing, the overview is here and the full report here). Along the way the Commission had said (p431)
Some competition law experts argue that pressure to amend section 46 [the Aussies' version of our s36] is based partly on wanting to shield small businesses from competition. For example:
Section 46 is designed to ensure those with market power don’t use it to insulate themselves from competitive pressure; but s46 shouldn’t be used to insulate small business … (Trindade, Merrett and Smith 2013, p. 6)
The introduction of an ‘effects’ test to section 46 is unlikely to shield farm businesses from intense competition in retail grocery markets. Shielding farm businesses from competition would also not be in the interest of consumers.
What the Commission said, in short, is that even if the effects test was enacted, it wouldn't actually serve as protectionism for farmers, and in any event protecting groups from competition would be a bad idea. All good.

But then up pops a press release from the Opposition competition spokesman Dr Andrew Leigh, quoting that bit from the Commission saying an effects test won't help farmers and adding
An effects test won’t protect producers, but it will raise grocery prices and threaten retailers with court action if they become too competitive...Labor remains opposed to the effects test as it will have a chilling effect on competition and raise prices on everyday groceries such as bread and milk
He also went on, rather incongruously for a Labor politician I thought, to recycle a number of anti-effects-test statements from the big business end of town, and finished by arguing that the effects test was in reality a plot by the National Party component of the Aussie Coalition to protect small businesses against competition from large ones.

The notion that the proposed law change, intended to increase competition by preventing anti-competitive standover tactics from those with market power, was actually A Cunning Plan to decrease competition by protecting small businesses, has predictably sent the proponents for change well-nigh berserk.

Ian Harper, who led the Aussies' 'Harper review' of competition policy that came up with the proposed change, responded by telling The Australian newspaper* that the effects test "has been misinterpreted to an “almost wilful” degree", that "characterising the proposed reforms as protectionism was “to turn reality on its head”", and that "The point of the act is to protect the competitive process, not individual competitors".

Rod Sims, the chair of the ACCC, who supports the change to an effects test (and who has also supported our Commerce Commission in pressing for the same change here), was even blunter. He said, again in The Australian*, that "framing section 46 reform as protectionist policy driven by the National Party is “bullshit”, and has slammed big business for distorting debate around the so-called effects test laws", and "Sure, they’re (the Nationals are) in favour because they like the little guy being able to compete with the big guy. But that’s what we want: we went competition, everybody should want competition. We don’t want large companies preventing competition.”

I wouldn't be in the least bit surprised if something like this bunfight plays out here in New Zealand, too. It might be a step too far for our Labour opposition to rise in the House to champion the rights of the supermarkets and other big firms, but in the opposition for opposition's sake game that both our big political parties play, who really knows. I just hope that, in the end, the Harper and Sims views make it through the political minefield.

*I haven't included direct links to The Australian articles because there's something of a random process around The Australian's paywall - you might get through, but you might not, either. If you google 'Ian Harper slams ‘effects test’ reform critics for distortion' and 'ACCC slams big business for effects test distortion', you can usually find access either to The Australian site or to other sites that have carried the articles.

Monday, 25 July 2016

Are monetary conditions too tight?

The Reserve Bank's latest quarterly survey of expectations popped up in my inbox the other day, and as usual I was at a loss to answer the question 'What is your perception of monetary conditions'.

It's the 'conditions' bit that throws me. The question is intended "to capture respondents' broad perceptions of current monetary policy settings and their expectations of the future stance of policy in one quarter's time and one year out", which looks as if it is probing about the interest rate setting side of monetary policy.

But interest rates are only part of overall monetary conditions as experienced by firms and households: the other big factor is the exchange rate (and arguably there are others - the willingness of banks to lend, the ability of firms to raise capital through bond or equity issues). So I'm never too sure what (say) the CFO at a big company might be feeling overall about monetary conditions: is the crimping effect of low export profit margins when the exchange rate might be high more important than the availability of cheaper finance when interest rates might be low?

And so every now and then (last time was in February) I'm driven to power up the spreadsheet and recalculate the old Monetary Condition Index (the 'MCI'), which attempts to blend interest rates and exchange rates into an overall assessment of the tightness or looseness of monetary conditions. Here is is, using RBNZ monthly data up to June and last Friday's data (after the RBNZ's economic update) for July.

It looks as if we are experiencing overall monetary conditions that are modestly on the tight side of our long-term average: going by the MCI alone, you'd say that the RBNZ definitely ought to cut the Official Cash Rate at its next opportunity on August 11. You'd want overall monetary conditions to be on the easier side, not the tighter side, when inflation is tracking below target.

"Going by the MCI alone" is a big qualification, though. For one thing, businesses don't seem to be feeling very squeezed by the exchange rate, as you can see in this chart from the ANZ's latest Business Micro Scope survey of small businesses. The exchange rate is listed there as a problem for a few, but it's well down their list of worries compared, in particular, to finding skilled employees (and compared to the burden of regulation, which is a topic for another day). And of course there's the potential impact of lower interest rates on floating rate mortgages and the housing market (aggravated by the fact that lower bond yields are feeding through to lower fixed rate mortgages as well).

So who knows - maybe the RBNZ will stay its hand on August 11. But if the be-all and end-all of monetary policy is overall monetary conditions conducive to getting inflation where it ought to be, the MCI logic says, cut the OCR.

Still nothing

Nine months ago I went and had 'A visit to a Special Housing Area' near to us. Three months later I went and had another look: nothing had happened on site, which led me to wonder, 'How 'special' are Special Housing Areas?'

And yes, you've guessed it, I went along again, over the weekend. The big tree has lost its leaves, but otherwise all is as before - still no sign of the apartment block that the Special Housing Area was meant to fast track.

On the other hand the non-fast-tracked apartment block at 1/23 Bute Road, just down from the Special Housing Area, is coming along just fine, as you can see below.

So: I'm prepared to believe that Special Housing Areas were a well-meaning initiative. And I agree, this is a sample of one. But my question would be: where is the evidence that they have made any positive difference?

Friday, 22 July 2016

Time to revisit "hard core" cartels

Earlier this week the European Commission fined four truck makers €2.93 billion (NZ$4.6 squillion at the current exchange rate). A fifth, the German company MAN, wasn't fined because it ratted the others out, and under the Commission's cartel leniency policy (and our own Commerce Commission's), the first company in the door to renege on the others gets off any fine (though it and its cartel mates remain exposed to civil suits for damages). A sixth company, Swedish based but Volkswagen controlled Scania, didn't settle with the Commission and is being pursued separately. Full details here.

This was your classic "hard core" cartel - secret, prolonged (14 years), deliberate, and significant. As the European Competition Commissioner said
there are over 30 million trucks on European roads, which account for around three quarters of inland transport of goods in Europe and play a vital role for the European economy. It is not acceptable that MAN, Volvo/Renault, Daimler, Iveco and DAF, which together account for around 9 out of every 10 medium and heavy trucks produced in Europe, were part of a cartel instead of competing with each other.
The European Union hasn't criminalised cartels, meaning that executives can't be jailed. Member countries weren't prepared to give the Commission the authority, and have gone their own ways: some have chosen the criminalisation route (the UK, Ireland), most haven't. But if ever there was a European case where executives needed to have their collars felt, this was it.

By coincidence, a couple of days earlier the ACCC announced that NYK, the Japanese shipping company, had pleaded guilty to criminal cartel conduct involving the shipping of vehicles from Japan to Australia in 2009-12. It's been a while coming: this was the first criminal case since the Aussies criminalised cartels in mid 2009. We don't know who the other alleged parties to the cartel are. We don't know if anyone at NYK is packing their toothbrush.

When I see cases like these, I can't help thinking - again - that we made the wrong decision last December in flagging away cartel criminalisation in New Zealand. I've posted before that "Hard core" cartelists are criminals and what our response should be: Let hard core cartels off the hook? Nah.

Bear in mind that I'm a bleeding-heart raised-in-the-Sixties liberal, and I'm hard to convince that we should imprison people for anything short of grievous bodily harm or broadcasting reality TV programmes. Bear in mind, too, that I'm generally pro business, strongly pro markets, and slow to buy into heavier regulation or enforcement without an industrial strength, convincing, evidence-based case. But when these genuinely "hard core" cartels crop up, even I am prepared to reach for the handcuffs.

Monday, 18 July 2016

How low is it really?

You'll have likely seen the news that overall inflation has come out lower than the Reserve Bank's target, and lower than forecasters had expected: 0.4% in the year to June, made up of tradables prices down 1.5% and non-tradables up 1.8%. Full details from Stats here.

With the overall CPI at the mercy of exchange rates and international commodity, things that the Reserve Bank has little or no control over, I like to look at one of the sub-components that gives us a better idea of how domestic inflation is going - non-tradables inflation (i.e. generated domestically), but excluding housing and the housing utilities group, which as we all know is running hot. And yes, the housing inflation is a real phenomenon in its own right, but for present purposes I'd like to see how everything from the school fees to the vet's bill are going. Here it is. I've included a mechanical "but for the GST rate increase in 2010" adjustment.

If you're the Reserve Bank, this is (at best) slightly encouraging. Domestic inflation has stabilised, and it's a bit higher (0.9%) than the headline 0.4%. But it too is just below the bottom of the 1% to 3% target band, and well adrift of the 2% mid-band point the Bank is aiming for.

Thursday's economic update from the Reserve Bank is going to be interesting...

Friday, 15 July 2016

Here's one solution to Auckland's housing issues

The Auckland Housing Enablement Bill, 2016

1. The purpose of this bill is to accelerate and increase the supply of well-built housing in the Auckland area.

2. Any house up to two storeys in height may be built anywhere within the Metropolitan Urban Limit without further planning approval, provided that the construction
  • is carried out by, or supervised by, a Registered Master Builder or New Zealand Certified Builder, and
  • the quality of construction is signed off in writing by two, arm's length, full members of either the New Zealand Institute of Architects or the Institution of Professional Engineers New Zealand

Get your views in on abuse of market power

Right - you've got till 5.00pm next Thursday, June 21, to get your views in to MBIE on their targeted review of the Commerce Act.

It's important, and while I know we've all got other things to do, you'd be doing the economy a favour if you took some time out this week-end (when you're not watching the Warriors take on Manly in Perth, 7.30pm Saturday) to make a submission, particularly on our current approach to abuse of market power - the infamous section 36 of our Commerce Act.

All the background and how to submit can be found here. While technically MBIE is calling for 'cross submissions' on earlier input, anyone can put in something from scratch, though for good form you should probably phrase it as being a response to something already on the record.

There are three issues being canvassed, one big, one medium, one small.

The big one is potential reform of s36, the abuse of market power provision of the Act. In my opinion, and others', the thing is banjaxed. The law is poorly designed, has been interpreted strangely by the courts (both the old UK Privy Council and our newer Supreme Court), and in practice allows behaviour to go unchallenged that would not be countenanced in jurisdictions with better arrangements.

If all this is news to you, read the paper I gave at this year's NZ Association of Economists' conference, 'Abuse of market power: the end of "make-believe" analysis?'. If you'd like to see opinions saying no, everything's hunky-dory as it is, you'll find them in the original set of submissions to MBIE (try the law firms' ones). Whichever way you go on the issues, get your opinion on the record: these issues are too important to be left to 'the usual suspects'.

My cross-submission (I put in a submission first time round, too) is going to be along the general lines of my recent post on s36, 'The law is an ass', and will say:

  • Our competition authority, the Commerce Commission, has given up on making the current regime work despite having identified instances where it thinks there have been potential abuses of market power that it is unable to address
  • Its Aussie equivalent, the ACCC, agrees with it that our system is munted
  • The law is poorly phrased in the first place
  • Hence and otherwise the jurisprudence on s36 has seen the legislation effectively gutted in all but the most egregiously awful cases. In particular, courts are supposed to ask, would a firm without market power have done the same thing, and if so, the firm with market power is home free. This completely subverts the whole point, that some actions when undertaken by firms with market power have anti-competitive effects
  • The Aussies have, rightly and after a very extensive consultation process, decided to change their law (it's currently similar to ours) for something better
  • When the Aussies change, it will be silly and inefficient to have companies facing different legislative tests on either side of the Tasman, and we should harmonise on the better Aussie approach. Harmonisation is a government priority in any event
  • The arguments against change - broadly in  the categories of 'business certainty' and 'potential chilling effects' - while valid, are not strong.

There are two other issues you might want to look at.

The medium sized one is whether someone - probably the Commerce Commission - should have the ability to go out and proactively look at the state of competition in a particular sector. The short answer to that, is yes, of course it should. If you want a very quick potted summary of the case for, try my post 'The case for market studies - again', and if you'd like something more comprehensive there's my paper at last year's NZAE conference, 'Is the competition toolkit missing its torch? The case for market studies'

The smaller one is around the Commerce Commission's enforcement powers, and especially the 'cease and desist' process. I'm very sympathetic to some kind of quick-response tool for competition authorities, but there are arguments that the current 'cease and desist' process isn't working the way it ought. This is probably one for the lawyers amongst you.

On your marks, get set...

Thursday, 14 July 2016

Give the guy a break

Graeme Wheeler, the Reserve Bank governor, and the Reserve Bank more generally, have been copping quite a bit of criticism.

Shamubeel Eaqub's recent piece for Stuff, 'What makes a good Reserve Bank governor?', for example, noted that Wheeler and his predecessor Alan Bollard "are introverts – in an intensely public role", that hence or otherwise "The RBNZ's communication has diminished in quality over time. It is at a low ebb now", that there are central bank leaders overseas (he chooses Mark Carney at the Bank of England and Raghuram Rajan, formerly head of the Reserve Bank of India) who are doing a better job, and that the Bank and its people "are scarcely able to explain low inflation without leaning on failed models". He feels that when the next governor is picked in 2017, it should be from "a long list of strong candidates who possess the right skills for the job".

And it is not hard to find other critics. Hamish Rutherford, also in Stuff, had a piece, 'The Reserve Bank's job is not to keep people guessing', again focusing on communication, and concluding that Wheeler shouldn't be optimistic about getting the nod for a second term next year. And there are plenty of other mainstream and social media pieces along similar lines.

So let me put a few items on the positive side of the ledger. I've had a few goes at this in the recent past - 'Hold the rotten tomatoes', based on the Reserve Bank of Australia's recent experience, and 'Where are we? Where are we?' based on the RBNZ's - but as they self-evidently haven't made much of an impact on people's perceptions, let me try again.

First, it is indeed true (as Shamubeel says) that the RBNZ's forecasts of inflation and interest rates have been been too high, and for quite a while, and that the Bank hasn't been able to get low inflation back up to the middle of its target range.

But neither has any other developed economy's central bank. None of these gung-ho communicators - not Mark Carney, nor Janet Yellen, nor Yellen's predecessor Ben Bernanke, nor Mario Draghi at the European Central Bank, nor Haruhiko Kuroda at the Bank of Japan - has managed to get inflation up to their target levels, either. And other forecasters have similarly been systematically wrong: the Wall Street Journal, for example, does a monthly poll of a large panel of US forecasters, and they've been wrong for yonks as well. The consensus from the latest (June) poll, for example, thinks that the 10 year Treasury bond yield will be 2.2%: a year ago, the same panel of forecasters had picked 3.3%. That's a big miss by macroeconomic forecasting standards, and this in the most intensively analysed economy in the world.

So it should be obvious that the same thing happening in New Zealand can't be laid wholly or even mostly at Graeme Wheeler's door. And the reason comes down to those "failed models" that Shamubeel mentioned.

Between the end of World War Two and the mid to late 1970s, economists used to have a good working handle on how western economies worked. But it broke down when confronted with the stagflation of the Seventies, and was replaced by another workable model that lasted from the early 1980s through to the GFC and which brought us the 'Great Moderation' of that period - ongoing growth with low inflation. Now that model in turn has broken down, and the economics community globally is trying to build a new one, which is likely (among other things) to incorporate a greater role for credit and the financial sector, for globalisation, and for technological change.

But the economists are not there yet. No-one's got the new economy of 2016 sussed. And again it's obvious that Graham Wheeler isn't the cause of this ignorance, and that he's not alone in being blindsided by the structural changes of the past few decades. At least the Reserve Bank, as its Assistant Governor John McDermott said in a speech yesterday, is doing its bit to understand the new environment - "The Bank has shifted its resources in recent years towards more fully understanding this low inflation environment, and this is a strategic priority in the Bank’s 2016 Statement of Intent. The Bank has completed a range of research topics that have shed some light on the drivers of low inflation" - though to be honest I don't expect the big puzzles to be cracked here in New Zealand.

I'm not even convinced by the prevailing "poor communicators" argument.

For one thing, their communication does not seem to have done much damage to the Reserve Bank's credibility in the marketplace. I've looked up the inflation forecasts from the big four banks, and they have a shared degree of reasonable confidence that the Reserve Bank will have got inflation back around 2% next year. While ASB is least confident - they do "expect inflation to gradually return to the 2% mid-point", but they think not till 2018-19 - the other banks are on board with the RBNZ getting there or thereabouts next year. For inflation in 2017, the ANZ is picking 1.7%, the BNZ 2.4% and Westpac 2.1%.

There's little evidence from inflation expectations that the rest of the community has lost the faith, either. The RBNZ compiles an 'inflation expectations curve', which shows expected inflation at various time horizons, compiled from a range of different surveys. Here's the latest one, from the June Monetary Policy Statement. It leans towards ASB's view of the world, with a relatively slow 2-2½ timetable for inflation getting back to mid-target, but it gets there. And longer-term expectations are well anchored at close to 2%. There's not a lot of evidence there that the RBNZ is leaving people confused about the inflation outlook.

One of the communications gripes critics have, apparently, is that earlier this year the Bank said it wasn't likely to cut interest rates, but then unexpectedly did. The obvious answer to that is what Keynes is reputed to have said (but may not have): "Well when events change, I change my mind. What do you do?". Forward guidance - the (welcome) practice of central banks saying what they are likely to do, given what they know today - is just that: guidance. It's not graven in stone, and can't be.

As for communications style, I'd say that I don't know Graeme Wheeler's well at all: we might nod to each other if we passed on The Terrace, but that's about it. All I can observe is how he goes at the Monetary Policy Statements. He comes across as a bit more diffident than Don Brash or Alan Bollard (or my old mate Rod Carr, who got to make one monetary policy decision as acting governor), but perfectly competent. And for what it's worth I've quite liked the way he's taken a somewhat collegial approach to answering the media's questions, bringing in the likes of John McDermott or Grant Spencer.

As for being an 'introvert', again I don't know him well enough to be sure, but I strongly suspect that you don't get to be governor of any central bank by being a blushing violet. And I'm also left scratching my head over Shamubeel's description of Alan Bollard being one, too: this would be the shy and retiring Alan Bollard who's been head of the NZIER, head of the Commerce Commission, head of the Treasury, novelist, artist, and currently chief cat-herder at APEC? Think what he might have achieved if only he'd been an extrovert.

Me, I'd be careful about taking pot shots. If you are ever in a meeting and you start thinking to yourself, well I'm the smartest person in this room, then you'd better check very carefully that Alan Bollard isn't sitting behind you.

Wednesday, 13 July 2016

Lies, damned lies, and Irish statistics

In March, Ireland's statistical agency, the Central Statistics Office (CSO), estimated that Ireland's GDP had grown in real terms in 2015 by 7.8%.

Yesterday the CSO came out with a revised estimate. It now says that Ireland's GDP in 2015 grew by - wait for it - 26.3%.

This is both absurd, and yet technically correct. Absurd, because as the Irish Times commentary headline put it, 'Crazy growth figures bear scant relationship to reality'. Yet technically correct, because the CSO says it follows the methodology of the "European version of the current UN mandated international standards for national accounts statistics, the System of National Accounts (SNA) 2008". And there's nothing wrong with doing that: our own Statistics NZ uses the same UN approach (details here if you're ever looking for them).

What's actually happened is that, for assorted tax reasons, over a short period of time in 2015, a number of international companies shifted the domicile of patents they own, or aircraft they lease, or their own corporate domicile, to Ireland. And, apparently, if you apply the standard national accounts methodology to those transactions, you get 26.3% GDP growth. I say "apparently" because the logic of some of the accounting escapes me, but let's take it at face value that the Irish statisticians cranked the right handles and out came the "right" UN-consistent answer.

There is now, as you can imagine, a big barney going on in Ireland about the reliability of the GDP statistics and how can people tell how the economy is actually behaving, but I was struck by two other thoughts.

One was the complete absence of any helpful explanation from the CSO. Here is the complete text of their statistical release.

Is there any attempt to reconcile their earlier 7.8% stab at it with the new 23.6%? No. Is there anything helpful at all about what actually drove the new results? No. Nothing. Zip. Nada.

Or in Irish, neamhní, faic, dada, rud ar bith*.

The relevance to us in New Zealand is that there's been a bit of a debate, here and overseas, about how far statistical agencies ought to go in providing analysis or commentary on the statistics they produce. Statistics New Zealand, I'm pleased to say, is down the right end of this debate, and goes some way to help users understand what's going on.  As an example, the commentary on the latest GDP release, for the March quarter, told us that "The anticipated El Niño weather pattern was not as severe as expected. The normal seasonal fall in milk production was less pronounced than usual, resulting in seasonally adjusted volumes of milk produced increasing slightly", which is helpful when you're trying to make sense of the agricultural production component of GDP.

We don't want Stats to veer off the reservation into opinion or editorial, but we most certainly do want them, at a minimum, to keep up the level of explanation they currently provide. As for the CSO, it badly needs to develop some customer focus and join the 21st century**.

The other thought I had was the silliness of some media and financial market reactions to small changes in GDP from what they had expected. As the Irish example has inadvertently reminded us, GDP is an estimate, a more or less rough stab at the aggregate level of economic activity. It comes with various kinds of measurement and survey error, and has complex and debatable inbuilt assumptions, and not just the Irish ones around intellectual property and official domicile. The measurement of the output of the financial sector, for example, is a contentious issue.

Our latest official stab at GDP growth for the full year to March is 2.4% (or 2.8% just comparing March '16 with March '15). The reality is that "low to mid 2's" is probably just as good a description.

*Pronounced navnee, fack, dodduh, rud er bih, though the 'd's are more like the 'th' in the English 'the'. I particularly like faic, as in "the statistics make faic-all sense".

** (Update July 14) This is too harsh. While I'm still of the view that the statistical release was inadequate, the CSO did supplement it with a separate press release (see comments below). Yesterday the CSO also announced that, while it will continue to estimate GDP/GNP according to the international rules (as it is obliged to), it is also convening a new consultative group to look at "how best to provide insight and understanding of all aspects of the Irish economy", including "whether new presentations of existing information would improve understanding". That's a good move. In that context I hope they have a look at moving on from bare bones presentation of the data.

Monday, 4 July 2016

Good books - July 2016

Although readers (going by page views) seem to like the odd diversion into the world of books, I haven't had the time to do many recent reports, the latest being 'Then and now', my look at the latest volume of Charles Moore's excellent biography of Margaret Thatcher (before that, I'd written up The Fall of the Celtic Tiger, and earlier GDP: A brief but affectionate history and Wellbeing Economics: Future directions for New Zealand).

Now, along has come another great new biography - Volker Ullrich's Hitler, Ascent 1889-1939, with a follow-up second volume in the works. It's both very readable (Ullrich is as much journalist as historian) and professional: Ullrich has gone back to many of the original sources and found new takes on them.  People at every end of the political spectrum have loved it: the Guardian's review called it "an outstanding study" and the Telegraph's review called it "chilling and superb".  Even if you've already read Joachim Fest's Hitler: A Biography and Ian Kershaw's Hitler 1889-1936: Hubris and Hitler 1936-1945: Nemesis, you'll get a lot out of this book.

His overall approach, responding to the question that German media asked abut the 2004 film Downfall, "Are we permitted to depict Hitler as a human being?", is to say, "The only answer is: not only are we permitted, we are obliged to". It would certainly be easier, he argues, to explain Hitler away as either a criminally energetic cretin or a psychopathic monster, but one-dimensional perspectives miss important parts of the story. He concedes that what he regards as the key chapter, "Hitler as Human Being", has a "somewhat unsettling title" but goes on to say
To depict Hitler in human terms is not to elicit sympathy for him or to downplay his crimes. This biography seeks to show the sort of person he was since the 1920s: a fanatic Jew-hater, who could tactically conceal his anti-Semitism but who never lost sight of his aim of 'removing' Jews from German society
For me the key takeaways were two. One was that the idea of Hitler as a confused grab-bag of incoherent noxious ideas is wrong: all the evidence is that he had a long-held, mutually consistent set of them, melding the Treaty of Versailles and the 'stab in the back', the need to restore German power through rearmament and to claim lebensraum in eastern Europe, and hatred of Jews and Bolshevism (he may have caught his particularly virulent dose of anti-semitism in Vienna, which is an easy place to catch it). And the other was the total shallowness of the Nazis' pretence at being a democratic party: within weeks they had suborned virtually every civil institution - the public sector, trade unions, professional associations - into executive arms of the Nazi party. If you ever needed one insight into the nature of the Nazi regime, it's this: Hitler was appointed Chancellor on January 30, 1933. Dachau opened on March 22.

As a colleague recently wrote to me, "The fact that we study Hitler biographies to understand our own times is frightening". So it is, but here we are, with very ugly movements underway in the US and parts of Europe (and undercurrents of them in Brexit). Time to wise up on how and why these things get going, and why they need to be stopped. And if any of this has piqued your interest, then move on to Richard Evans' wonderful three volume set, The Coming of the Third Reich, The Third Reich in Power, and The Third Reich at War.

On the fiction side, there are some great books set against the backdrop of the Second World War and the run-up to it. If you'd like thrillers generally around the general themes of intelligence agencies' manoeuverings and resistance against German occupation, often entangling civilians and often in obscure parts of central Europe, then you'll appreciate everything Alan Furst has written: I've just finished his latest, A Hero in France. Each is self-contained: you can start anywhere. Another great series is Phillip Kerr's one about Bernie Gunther, an officer in the Berlin criminal police during the war. Best read chronologically: last time I was in the University Book Shop in Dunedin, they were selling a cheap omnibus edition of the first three books, marketed as Berlin Noir. You'll also have to go chronologically through David Downing's Furst-like six book espionage series about an Anglo-American journalist in Berlin from the late 1930s onwards: they're named after Berlin railway stations, starting with Zoo Station and finishing with Masaryk Station.

On a darker note, there's Jonathan Littell's The Kindly Ones, a huge book formally about SD officer Max Aue, actually an allegory about the German people's relationship with Nazism. As flavour, in one incident, Max is with the Nazi annihilation squads in Eastern Europe:  they go to find a clearing in a forest to bury/hide the corpses, only to find all of the clearings already full of victims.

What else have I been reading that's worth a look? Christopher Petit's The Butchers of Berlin, another Berlin police story from 1943. John Guy's Elizabeth: The Forgotten Years, excellent biography of Elizabeth I. Andrew Taylor, The Ashes of London, a fine whodunnit set in the immediate aftermath of the Great Fire of London in 1666. And although I'm not usually a great one for legal thrillers, try Gianrico Carofiglio, who in real-life is an anti-Mafia prosecutor and has written a series set against that background: I enjoyed his latest, A Fine Line. And though they're aimed at younger readers, anyone of any age will enjoy Neil Gaiman's The Graveyard Book and Katherine Rundell's The Wolf Wilder. And for something completely different, Antoine Laurain's The President's Hat (translated from French, the president being Mitterand).

Not much economics in that lot, I know, but I'll make up for it with two I've got on the bedside table, Richard Grossman's Wrong: Nine economic policy disasters and what we can learn from them, and David Evans' and Richard Schmalensee's Matchmakers: The New Economics of Multisided Platforms. Also lined up to go: Philippe Sands, East West Street: On the origins of "genocide" and "crimes against  humanity"; Timothy Garton Ash, Free Speech: Ten Principles for a Connected World;  and Ann Patty, Living with a Dead Language: My Romance with Latin.

Saturday, 2 July 2016

The law is an ass

My paper, 'Abuse of market power: the end of "make-believe" analysis?', drew a good crowd at the NZ Association of Economists' annual conference. That's partly because people like to session-hop at conferences and listen to areas outside their usual specialty - a fair few in the audience were folks who don't usually 'do' competition - and partly, I'd guess, because people reckon it's an important policy issue: markets won't work as we'd want them to, if competition is subverted by players with market power.

From the discussion, it was clear that people were left shaking their heads at the folly of our statutory wording (in s36 of the Commerce Act) and its subsequent jurisprudence in the courts. Very briefly, the folly consists of:

  • statutory wording that looks for a 'purpose' to knacker competition and the 'taking advantage' of market power, but
  • 'purpose' is subjective (barring careless e-mail trails) and often business behaviour has multiple purposes, many benign, which can veil the bad stuff, while 
  • 'taking advantage' has been interpreted by our courts as meaning you're home free if you've done something that a firm without market power would have done
  • which completely misses the point that something done by a firm with market power can have very different effects than the same thing done by a firm without market power, and
  • leads to an examination of what would have happened in a fantasy counterfactual world, and
  • nowhere looks at the important issue of what are the actual or likely effects of the behaviour in the market, and
  • Australia's just come to the view that their regime (very like ours) is not fit for purpose, and 
  • in sum the whole shebang comes close to giving firms with market power a free pass on pretty much anything that isn't the most obvious of rorts.

But you knew that (and if you didn't, there's chapter and verse in the paper).

The reason I'm raising it again is that there's an opportunity for people who may be concerned about the current toothless (and internationally idiosyncratic) state of affairs to do something about it.

Last year, MBIE started a 'targeted review of the Commerce Act', which included looking at the operation of s36. An initial issues paper drew 39 submissions. But now there's an opportunity for cross-submissions: you don't have to be one of the original submitters to get into the fray. You have till July 21 to get any views you've got into the policy pot. Full details of the process thus far can be found here, including links to the previous submissions and the logistics of submitting your own.

I'd emphasise that this isn't an anti-big-business agenda. The primary point here is the proper functioning of markets, for everyone's benefit, businesses and consumers alike. The big loser from anti-competitive behaviour is often other businesses.

In any event, get your views on the record. If you're not in, you can't win.