Wednesday, 21 June 2017

Bums on diggers

The other day I was poring over the NZIER's latest compilation of consensus forecasts - an invaluable resource from many perspectives, not least for establishing the base scenario underpinning current financial market pricing - and I came across something really interesting*, which I've highlighted in the table below. It's the one that helpfully shows not only the consensus expectation, but also the high and low stabs at each variable.

That's a pretty remarkable range of views on the outlook for housebuilding. At one extreme you've got a scenario where - I'm abstracting here, but I think it's okay - the wind-down of the Canterbury rebuild will outweigh new housing starts in Auckland, detracting from overall GDP, while at the other end the Auckland market will go gangbusters, growing far more than Canterbury will contract, and boosting GDP.

To put some numerical perspective on it, the cumulative difference between the bullish and bearish housebuilding scenarios is $4.9 billion by March '20, which is equivalent to 2.1% of our current annual GDP. That's the difference between an expansion that's vigorous enough to keep the unemployment rate trending down, and one that would see it drift back up again.

If we assume that the wind-down in Canterbury is the relatively predictable moving part, then much of the forecast uncertainty boils down to differing views about the likely strength of house construction in Auckland. Presumably the bearish view is based on either low starts to begin with, or capacity constraints of one kind or another (labour, land, planning chokepoints) preventing potentially higher numbers of starts from getting underway.

And then this morning I saw MBIE has just published the latest vacancies data. Here it is, showing vacancies by occupation (there's a similar pattern by skill level). There's strong and rapidly increasing demand for the occupations you'd likely be looking for on the building site.

It could be that employers are having no trouble filling these vacancies: all we know for sure is that the hiring signs are out, and we don't know whether they're actually finding the people they're advertising for. And so far the Auckland numbers aren't flashing red lights: as the table below shows, Auckland is in the middle of the pack for year on year increases in vacancies.

It's also encouraging (although it was a few months back now) that the NZIER's March quarter Quarterly Survey of Business Opinion found that
Building a continued easing in the shortage of unskilled labour, although skilled labour remains very difficult to find. With the surge in net migration driven by an increase in the numbers of people coming in on work visas in the trades profession, this is helping to alleviate some of the labour shortages as construction activity continues to grow.
Though the QSBO can be read different ways: as the Reserve Bank put it in its latest Monetary Policy Statement (p21)
As suggested by the March Quarterly Survey of Business Opinion (QSBO), capacity constraints are tightening. Firms are reporting labour shortages and, more recently, some increased difficulty in obtaining finance. This appears to be related to the tightening in bank lending standards for residential property development and pressures created by rising construction costs
My instinct is that capacity constraints in Auckland are likely to be a worry. I'm not temperamentally inclined to restrict immigration in the first place, but if people are minded to, they ought to be careful about the risk of impeding the housing build we need to do, and the equally necessary infrastructure build, which calls on much the same labour force skills.

The Labour Party in its latest immigration policy at least had the wit, albeit in a clunky Gordon Brownish micromanagement way, to realise there's a potential issue here. It proposed that
Residential construction firms could hire a skilled tradesperson on a three-year work visa without having to meet the Labour Market Test if they pay a living wage and take on an apprentice for each overseas worker they hire. The number of places will be limited to 1,000 to 1,500 at a given time, which we expect will be additional to the construction work visas issued under the existing rules.
At the moment, I wouldn't give two hoots about Labour Market Tests and apprenticeship quotas. If there's an Irish lad on his gap year after secondary school, or anybody else prepared to get the roof on the house or pour the cement on a road, bring it on.

*Bearing in mind that this is an economist's idea of  'interesting'

Friday, 16 June 2017

Three cheers for the OECD

Some people wonder about the point of the OECD: an expensive talking shop? A rich countries' club? A hand-wringing observer on the sidelines? I'm generally more positive: lots of good ideas and solid research come out of Paris, even if member governments don't always pay them the attention they should.

Which even the OECD itself recognises: here, for example, is a rather sad graph from the handout that came with the OECD's latest Economic Outlook, which looks at how many of the growth-enhancing reforms the OECD has suggested that countries should undertake have actually been carried out.

Conversely, governments can sometimes smuggle policy ideas into the OECD (and the IMF, and other institutions) and can then give themselves the protective cover of "See? This isn't me and my political agenda, this is the international experts talking".

But in any event, I was delighted to see the OECD (prompted or otherwise) picking up on some good ideas about improvements to our competition policy. They're in the OECD's latest Economist Survey of New Zealand, which you can read online here.

First, they've endorsed the idea of the Commerce Commission being able to conduct proactive "market studies" in a well-designed way. As they put it
market studies...would help markets work better, especially when obstacles and distortions to competition are not caused by competition law violations...Clear definition of the purpose and goals of market studies, the involvement of stakeholders, adequate funding and the capacity to demand information (including confidential information) will be important to drive the success of this initiative (p105)
I've been banging on about this for the last couple of years (here and here and here and...) as has the likes of our Productivity Commission. This is an idea that's obvious, simple, desirable, cheap, best practice, and well-canvassed (MBIE's done an exhaustive tyre-kicking consultation), and it's high time for MBIE Minister Simon Bridges to fire the starting gun.

The OECD has also had something to say about our "abuse of market power" legislation (the vexed section 36 of our Commerce Act). It's a bit disingenuous of the OECD to say "The legislative treatment of firms with market power should be reviewed" (p106), since they must know that MBIE's tyre-kicking has included a review of s36: they probably mean it more pejoratively, with a heavy emphasis on the should. In any case they go on to say
Currently, New Zealand's (and Australia's) treatment of firms with market power is unusual. Firms are prohibited from taking advantage of market power only if they are doing so for the purpose of restricting entry, preventing or deterring competitive conduct or eliminating a competitor. Framing the law around intent can be problematic as proving the purpose of commercial conduct has proven difficult for competition regulators. In Australia amending legislation has been drafted to add a mechanism that brings firms under scrutiny based on the effect of commercial conduct on competition (an "effects test") (p106)
There must have been a very funny backroom editorial debate before they settled on our "unusual" regime: "unorthodox" and "idiosyncratic" must have been plausible contenders, but however you phrase it, we're in a policy backwater of our own, and we need to get out of it.

This isn't, to be fair, as much of a walk in the park as the case for market studies: every competition policy regime struggles with these issues. But if the general tone of the OECD's advice is, go the Aussie route with their 'Harper' amendments, I'm fully behind them, for reasons I've also been pushing over the years (especially here, but also here and here and...). Another one for Minister Bridges to put to bed. And he might as well get on with it, as we'd be better off with the Aussie scheme than the European one, which we might end up having to consider if we're serious about the proposed NZ - EU free trade agreement.

There's other good competition stuff in the OECD's report. It says
Other actions to support competition include passing the Commerce (Cartels and Other Matters) Amendment Bill, which would clarify the scope of prohibited cartel behaviour and remove exemptions from the Commerce Act that allow price fixing in international shipping. As argued in previous Surveys, the exemption from Commerce Act provisions for airlines under the Civil Aviation Act should also be revoked (pp105-6)
Totally correct. Why as a trading nation we ever thought it would be a good idea to hobble ourselves with self-inflicted impediments to our freight and tourism is beyond me. It's archaic. Archaic and benign, I quite like: Latin, organ music, stamp collecting. Archaic, inefficient, and anti-competitive, not so much.

Finally, they've got a shopping list of ideas around the Commerce Commission itself, all of which look sensible to me. They've repeated, for example, their previous advice to have "periodic independent assessments of Commerce Commission decisions" (p106). The Commission has been quite good at doing its own, even though some folks (not me) believe it's a waste of space: they say, you can't easily see what would have happened, absent the Commission's decision. It's nonetheless worth attempting, and making it independent would be an improvement.

And they've got various other good governance ideas. "There are no limits", they say on p106, "on reappointment of Commissioners, which is contrary to the OECD's best practice principles. Continuity and institutional memory would be better served through staggered terms for Commissioners and the Chief Executive". As someone who served an, um, unusually long term, I'd have hated it.

But that is why it's such a good idea.

Tuesday, 13 June 2017

The future of the telco regulatory regime

Late last week Simon Bridges, the Communications Minister, reappointed Stephen Gale for a three-year term as Telecommunications Commissioner. It's a good move: like his two predecessors, Douglas Webb and Ross Patterson, Stephen's capable, intelligent and congenial, and - belatedly - a bit of continuity could go a long way.

We've also got a clearer idea of the regulatory agenda Stephen will manage: earlier the Minister had announced the final decisions on reform of our current telco regulation regime and included a helpful Q&A thingie for the non-obsessed. True telco tragics can read the detailed Cabinet paper.

A lot of the agenda had been signalled from afar - you can follow the trail here - and there have been no major last minute surprises. We've known for a while, for example, that from 2020 Chorus and the other companies rolling out fibre networks will  be regulated as utilities, using the same sort of rate-of-return 'building blocks' regulation that has been applied to electricity lines businesses under Part 4 of the Commerce Act.

Can't say I'm enthralled by the form of regulation: it's a clunky and expensive 1950s process, and you'd think we'd have been better off with something off a more modern 'incentive regulation' menu. And as a side effect we're going to get another process where the Commission (as it currently does for Transpower) will need to approve new investments going into the regulated asset base.

I can see the rationale as an anti-gold-plating device, but government agencies choosing which private sector investment projects get the go-ahead is a bit on the medieval side for me, and is another argument for something more hands-off, with a greater role for Chorus (and others) wearing more of the downside but potentially keeping more of the winnings. But here we are. At least we won't have to reinvent the wheel as we've already given the Part 4 process a thorough going over in the courts, and if you're going to go the rate of return route, the Commission's way of going about it is as good as any.

But rate of return regulation aside, there's quite a lot to like in this policy package. There's a useful focus on rolling back regulation when it's no longer needed, most obviously deregulation of the Chorus copper network in areas where fibre has been rolled out, but also more generally. As an earlier 2016 Cabinet paper had said (reproduced in para 73 of Appendix 1 of this latest Cabinet paper)
Another important regulatory design principle is to provide for active deregulation where appropriate. I propose that the Commission be required to review whether any geographic area, service, asset or market should be deregulated prior to each regulatory reset. This would include looking at whether any competition has emerged for rural copper services such that they could be deregulated
Oddly, though, the current requirement  in s157AA to periodically revisit the Telco Act itself  has been dropped. I'm no fan of makework policy analysis, but I do wonder whether the package should have included an ongoing requirement to review the telco regime from time to time.

The two hot spots that Stephen Gale and his team will have to deal with are the wholesale mobile market, and the bunch of issues around service quality and customer complaints.

On the mobile side, there's no knock-out evidence that the wholesale mobile market isn't working as well as it might: the low level of 'MVNOs' (mobile virtual network operators, who stick their retail brand on a wholesale input they get from the big guys) is suggestive, but by no means definitive. If there are issues, the sticky points appear to be the efficacy or otherwise of colocation and roaming agreements, and the Commission is going to get a more streamlined process for more effective regulation if needs be. Currently colocation is a 'specified' service, which means that the non-price elements are set by the Commission, but it could be tightened up a notch to 'designated', which would also set the price.

The Minister said that he will "be writing to the Commission requesting that they undertake a study of the wholesale mobile market". Good. But that yet again underlines how stupid our current arrangements are on what the Commission can or cannot look at. The Telecommunications Commissioner (who is part of the Commission) must report annually on the state of the telco market. And the Minister (as he's just said he's going to) can also ask him to look at particular telco issues. But the rest of the Commission can't take a proactive look at anything else. The sooner this nonsense collapses under the weight of its own absurdity, the better.

The other hot spot is the sector's poor customer record, and that's something senior management in the industry should have thought harder about earlier on: when you have papers going to Cabinet pointing out that "The telecommunications sector generates more consumer complaints than any other sector in New Zealand", you're positively inviting the government to wade into your industry. As it has: the Commission will start reporting on the level of quality (yet another bizarre example of how it's allowed to look at some things but not others), will have the power to devise and impose codes of conduct, and will periodically review how the industry's own Telecommunications Disputes Resolution Scheme (TDRS) is travelling, with the explicit threat that it will be replaced by a new body if it doesn't hit the spot.

The Cabinet paper says (para 8) that "the current regulatory settings...are over-reliant on industry self-regulation". Maybe that's right in this case, and in any event self-regulation has been falling out of favour as a a consumer protection policy option. Personally I think it's the first option that should be on the table, not least because if there are problems, the onus for fixing them should lie on the problem-makers in the first instance. If that falls over, then of course tougher measures should follow, but we should try and make the light-touch options work first. Hopefully the TDRS will get the message.

Quite apart for doing a better job for their customers, I also think industry sectors ought to get their self-regulatory act together in their own enlightened self-interest. If, for example, the various parties in the electricity sector hadn't feuded among themselves over the shape of an industry-led Electricity Governance Board, they wouldn't have had the price control provisions of Part 4 of the Commerce Act and an Electricity Authority foisted on them.

It's only a minor detail in the whole package, but I was irritated by the flimsy rationale for hiding the increased costs the Commission would face from its new consumer roles. It can't be a huge or sensitive number - might be perhaps a couple of million dollars a year, chickenfeed in the greater fiscal scheme of things - but the dollar number has been redacted from the Cabinet paper.  The excuse is the section of the OIA that says hiding it is "necessary to..maintain the constitutional conventions for the time being which protect...the confidentiality of advice tendered by Ministers of the Crown and officials", which translates into "it's being kept secret because if we told you what we said it wouldn't be secret anymore". Give us a break: we ought to be able to see the cost of what's been proposed.

Thursday, 1 June 2017


All over New Zealand there are High Court judges cowering in corners, whimpering "please don't let it be me, please don't let it be me..."

Because someone's going to get lumbered with the Sky TV / Vodafone appeal against the Commerce Commission, while someone else is going to draw the short straw for the NZME / Fairfax appeal. You can imagine the goss over the G&Ts in the beaks' bar: "There'll be economists. And counterfactuals. And TSPs and two-sided platforms and a UFB. Why me?"

The Skyfone one shouldn't be too bad. It's essentially a "yes it is", "no it isn't" kind of argument: how could the Commission have drawn the conclusions it did from the evidence it considered? However it goes, I doubt that it's going set any big precedents for how the Commission interprets the Commerce Act.

There is one line of argument that might say something about how the Commission should go about assessing the "likelihood" of counterfactuals. For those fortunate enough not to follow these kinds of cases, the Commission assesses the effect of things like a Sky TV / Vodafone merger by comparing it with what would have happened in any event otherwise (the 'counterfactual'). Sometimes that's not clear: there might be several different but plausible things that might happen. And in that case, as para 2.32 of the Commission's  Merger and Acquisitions Guidelines says, my italics,
If competition would be substantially lessened in the scenario with the merger compared to any one of those likely states of competition without the merger, then the merger will have a likely effect of substantially lessening competition.
The Skyfone appeal argues (at 2(I)(iv) on pp7-8) that the Commission
Failed to stand back and consider whether each of the preconditions for the Commission’s theory of harm would all be likely to occur – which would have led the Commission to conclude that the cumulative probability of these preconditions occurring is remote.
That's a plausible runner about the likelihood of the counterfactual world, and we'll see how it is received. Overall though I'd say the appeal will face heavy going: as a general rule arguing that an expert tribunal has ballsed up its day job isn't the easiest thing to push uphill. But everyone's entitled to have a go, and in Sky TV's case, it's a completely rational thing to do. Sky TV lost some $220 million in market value after the merger decline was announced (share price from $4.35 to $3.78, times 389.1 million shares, equals $221.8 million). That's worth spending quite a bit, even on a long shot, to regain.

The NZME / Fairfax one will be trickier. It does have the same "yes it is", "no it isn't" components that Skyfone has, particularly around the issue of what markets are affected, but it could also lead to new case law on the Commerce Act, and it also questions the Commission's processes.

On the factual bunfight, the Commission said, for example in para 628 of its final decision, that there were three affected markets: online New Zealand news, Sunday newspapers, and community newspapers. The appeal says that each of these should have specifically been analysed as a two-sided market (readers on one side of each platform, advertisers on the other), and that on a proper view of the evidence there would be no loss of competition in any of them. The appeal also runs an alternative line that there might be a single two-sided market for everything: I wouldn't bet the house on that one, guys.

The appeal raises some wider issues. The big one is what should be counted as benefits or detriments, and how. The Commission had said that the big downside would be the loss of editorial diversity, a 'loss of plurality' from two big media groups merging. I had no trouble with that: as I argued here, a loss of product range options can clearly be seen as a consumer detriment. And even if it couldn't, I'm with the Commission when it said (at X39, my emphasis) that "it is clear from previous legal cases and common sense that we can and should take all the consequences of the merger - positive and negative - into account". But it didn't help (although what it said was in my view absolutely right) that the Commission looked as if it was philosophising on what is or is not an essential bit of the social infrastructure of a democracy.

That's been seized on in the appeal, where para 16 argues that the Commission must stick to the economics, and that (as case law puts it) it mustn't go in for "pure speculation" or "mere intuition". Para 17 goes on to say that even if the Commission is allowed to count things like plurality, it didn't do it right, and that other benefits (mostly cost savings) outweighed any plurality losses.

It doesn't throw in (as I would have) that the Commission didn't have any go at quantifying what the plurality loss might look like: the Commission said at para 1654 that "Such effects are unable to be quantified". And it would have been a heroic exercise, yes, we know that. But absent some numbers, an appeal could argue, "The Commission says the loss is significant. It says that implicitly it must be more than $200 million, the top end of the potential benefits. But how does it know? For all the Commission knows, the loss could be big, like the Commission says - $150 million maybe - but that would be less than the benefits. So how does it know the loss is more than $200 million?"

There are also some questions around the Commission's processes. Some of them look unfounded: "granting extensive anonymity and confidentiality to a large number of third parties submitting in opposition" doesn't fly for me, on either the facts or the logic. But there's possibly a more substantive point where the appeal says, you sprung a big surprise on us very late in the day about what counterfactual you had in mind. From the outside it's hard to tell exactly what's going on there, though there was a late flurry of correspondence between the Commission and the applicants well after the Commission's conference last December, which was somewhat unusual. Nobody - including the Commission - wants a process that doesn't tickle out all the evidence and give it a fair go, so the court running a health check on how it operates may be quite a good thing.

There's also an "appearance of predetermination" argument. As an article by Nick Grant in the NBR surmises ('NZME, Fairfax 'go full noise' with StuffMe appeal') it might be a complaint about an ill-judged 'StuffME' hashtag the Commission briefly used: not as professional as it should have been, but not a hanging matter, either. I doubt if it was enough to taint the whole proceedings.

We can't see everything - there's a wholly blacked-out bit in paragraph 19(c), for example, in the 'Natural justice and fairness' section of the NZME / Fairfax appeal - but on what we can see, what are the umpires likely to do with these appeals?

I'll be surprised if I see the Commission trudging back to the pavilion.

Saturday, 27 May 2017

Good books - May 2017

Leading off with economics, George Mason University professor Tyler Cowen's The Complacent Class: The Self-Defeating Quest for the American Dream (with its dedication "To the rebel in each of us") argues that America has become more static and less risk-taking, pointing  for example (on p177) to "lower residential mobility, less building in America's most productive cities, more segregation by income and status, a much greater concern with safety and risk, the coddling of our children, and fewer start-ups and slower growth in living standards, among others", including a reduced willingness and increased inability to undertake grand projects like those of the past (a moon landing, the interstate highway system). He also reckons the current zeitgeist of complacency will have nasty geopolitical results - along Minsky lines, a long period of stability encourages increasing risk-taking, culminating in the GFC in the economic sphere and who knows what in international politics.

I'm not sure what I think about his ideas, though if he's right people should be deeply concerned, in particular, about higher economic and social immobility: for us economic liberals (why, yes I am) high equality of opportunity is one of the bedrocks of a fair - and efficient - society. Could we be going the same way in New Zealand? It's possible: you look at deeply regressive ideas like ever more prevalent, and tighter, school zoning in Auckland, for example, or our inability to progress infrastructure build-out to any defensible timeframe, and you can see aspects of the same issues. In any event, it's very well written and well worth a read.

Not every economist, to put it mildly, writes so well. If you want to improve your own writing style (and want to understand why you should), or you're teaching economics students, who may get little (and possibly no) formal in-faculty communications training, try Deirdre McCloskey's Economical Writing. It's short (only 98 pages including the index), geared to economics examples, spot on in its advice, and (if you've got cash-strapped students), cheap. My copy arrived from The Book Depository for $27.24, delivery included.

In politics, the definitive account to date of the Brexit campaign is Sunday Times political editor Tim Shipman's All Out War: The Full Story of How Brexit Sank Britain's Political Class. It's a big book, and there's a cast of thousands at the beginning to get your head around, but stick with it. It's enormously well informed, and persuasive. One thing I learned is that David Cameron didn't fight the Remain side as hard as he might have, because (a) he thought he was going to win anyway and (b) he was thinking strategically about the embittered and disunited Conservative party he'd have to manage later if everyone had earlier put the boot in hard. Another was that I'd been inclined to blame the European Union for their short-sighted churlishness in not giving Cameron a renegotiation 'win' to wave in front of the UK voters. They're not blameless, but as it happens Cameron never asked for as much as he might have. And finally Cameron himself comes as a decent human being - one of the very few to keep their cool through the dramas of the campaign, even on election night as the shock vote came through - which is more than can be said for practically everyone else involved.

Which leads me to now freelance journalist (and previously with the Daily Mirror and Daily Telegraph) Rosa Prince and her Comrade Corbyn A Very Unlikely Coup: How Jeremy Corbyn stormed to the Labour leadership. Talk about unintended consequences: a Labour electoral system specifically designed to produce a short list of candidates acceptable to the parliamentary Labour party, before going to the wider electorate of unions and members, was subverted to produce the exact opposite. Oddly, at one level, I came away with a somewhat better opinion of Corbyn himself: he's loyal, honest, a hardworking and locally respected constituency MP, and (for the most part) straight up about what he believes in, unlike the trimmers and hedgers he faced in the run-off for leader. But a lot of what he believes in is either misguided or obnoxious: in particular, he strongly believes in "my enemy's enemy is my friend", leading to his support for the likes of the IRA and Hamas.

He's also got one asset that none of the other contenders had, and none of his plausible future rivals have, either: he's paid his dues over decades and decades. No demo was too small, no fund-raiser too insignificant, no campaign too tiny: he turned up for all of them. He's consequently built a devoted, well left of centre, activist supporter base that eats out of his hand, and which got a further big boost from the "three pound vote" feature of the leadership election. My guess is that there's little chance he'll resign if (as seems likely) he loses next month's general election: why would he? His 'Momentum' group has finally succeeded in grabbing control of Labour, where earlier 'entryist' conspiracies had failed. They won't be going away.

We were tweeting each other about something else, and Westpac's acting chief economist Michael Gordon reminded me that I'd never got round to reading Irish Times columnist Fintan O'Toole's Ship of Fools: How Stupidity and Corruption Sank the Celtic Tiger. It does what it says on the tin: it's a devastatingly hard-hitting, and accurate, critique. It perhaps underplays the role of joining the euro, which for already red-hot Ireland meant getting the monetary policy of slow growing Germany (and which helped do for Greece for similar reasons), but is otherwise bang on the mark.

My father used to tell the story of how one Irish MP would find out when constituents were due to receive the old age pension, and would write to them saying, "I've been in touch with the Department, and I'm pleased to be able to tell you that as a result of my inquiry you will get a pension of...". Shabby stuff - but the really shabby thing is that constituents expected MPs to deliver goodies by using 'influence' within the system. In one example in Ship of Fools, a building developer got a biddable politician to change the postal district of his development, so it would be reclassified into a more upmarket area. There are very good reasons for keeping MPs away from micromanagement of personal cases.

In fiction, we've sadly reached the end of the road for Peter Corris's epic Hardy series of Australian private eye stories, with the 42nd and last, Win, Lose or Draw, where Hardy is on the very cold trail of the abducted daughter of a wealthy businessman: she may or may not have been sighted, in very bad company, in Norfolk Island. Corris is flagging it away, after diabetes induced blindness has got too much for him. It's a real shame: the series is one of the classics of the private eye genre.

Joseph Knox's Sirens is a debut novel about police detective Aidan Waits in Manchester, who is called in to help rescue the runaway daughter of an important politician and goes undercover in her drug-running circle. She eventually dies from adulterated heroin as do seven middle class kids at a party (they turn blue). There's vivid detail about drug use and gang wars: one minder is force fed black and white paint, for reasons I'll leave you to discover for yourself. It's a complex plot, maybe almost over complex at the start, but otherwise it's very well written.

Another debut is L S Hilton's Maestra, where a  low on the totem pole woman at a posh art auction house rumbles a crooked art deal, gets fired, but ends up getting her revenge: it  involves a sting on Mafia art dealers (plus a lot else). Violent, with remarkably explicit sex from a female point of view: it ends 'To be continued'. I'm looking forward to the next instalment.

Finally I broke one of my own best rules - don't read private eye books where the private eye has a silly name - but I'm glad I did. George Galbraith, aka J K Rowling, is now up to three in her series about ex-military London private eye Cormoran Strike. Galbraith/Rowling is excellent at characterisation and tension-building: I loved the first, The Cuckoo's Calling; was okay with the second, The Silkworm (which may have elements of a roman à clef in the publishing world), though my wife thinks it's just as good as the first one, so what do I know; but in any event Rowling is back on song in the latest, Career of Evil. I gather there's a fourth on the way. Recommended.

Friday, 26 May 2017

The real increase in infrastructure

The government made a decent effort in the Budget to boost the spend on infrastructure, as it showed in this graph, taken from the 'Capital at a Glance' document handed out yesterday as part of the Budget material.

But if you thought that we will have an extra $32.5 billion worth of shiny new infrastructure in four years' time, think again.

All these numbers ignore depreciation. But, as we all know, road surfaces get worn, bridges develop cracks, classrooms get leaks, equipment wears out. How much of the budgeted $32.5 billion is actually going to get us new stuff, and how much is going to maintain, repair or replace existing stuff? Repairs and maintenance are of course a good and necessary thing, and nobody's begrudging that spend, but how much of the infrastructure is going on maintenance of the stuff we've already got, and how much on genuinely new additional stuff?

The answer is, at least a good half of the announced spend is keeping the existing stuff in good nick, and only around half, at most, is for new stuff.

Here's the calculation, which I've taken from Note 15 to the Forecast Financial Statements on page 107 of the Budget Economic and Fiscal Update (the 'BEFU').

You'll see that the table says that the government is planning to add $28.8 billion to the stock of infrastructure. This is less than the $32.5 billion in the graph, because the numbers in Note 15 don't include some $4 billion of new spending that hasn't been allocated to anything specific yet. But even if you add that $4 billion to the $28.8 billion in the table, you get a gross addition of $32.8 billion, and on the (generous) assumption that there is no depreciation at all on all this extra $4 billion, the answer comes out, gross addition $32.8 billion, depreciation $18.4 billion, net addition $14.4 billion. Maintaining existing stuff 56%, adding new stuff 44%.

All these numbers involve some forecasting, and the forecast events may or may not happen, and they also involve some judgement calls about what assets are worth. Valuation can be a bit of an art sometimes, though having looked at how these assets are valued and depreciated (which you can read for yourself in the 'Accounting policies' bit of the BEFU's 'Additional information' document, pages 43-6) the methodologies look reasonable enough to me. All that said, let's round things off massively to allow for the uncertainties: very roughly, of every $2 that's going to be spent on infrastructure over the next four years, $1 will go on new stuff and $1 will keep the old stuff going.

To recap. There's nothing wrong with counting maintenance in the total spend: there are too many countries which roll out new facilities and don't maintain them properly, so it's good that we allow for it. And it's good that we're upping the total spend. It's rather late in the day, and there is still a huge infrastructure deficit, built up under a succession of governments, to tackle - as I've noted before, there are Third World countries making a better fist of building links to their airports than we've been able to manage - but we are at last getting more serious about it. 

That's all good. But next time you see a big spend-up announced, calm down, and remember to take $4.5 to $5.0 billion a year off the headline number, to get some feel for the extra stuff we're actually getting.

Thursday, 25 May 2017

Budget 2017 - the big picture

What's the very, very first thing you should look for in any Budget? It's not the headline surplus or deficit, no, nor the spend-ups, nor the tax breaks, nor the gimmicks (does anyone ever track the effectiveness of this year's grant scheme or last year's incentive?).

It's whether the Budget boosts or brakes the economy. And how would you know? By digging out the 'fiscal impulse'. Which isn't the easiest thing to find: it's never in the big Budget bumph, but is relegated with the horoscopes and crossword to an 'additional information' document (this year's is here). And that's partly because Treasury are a bit embarrassed by it: the calculations involved can be on the arbitrary side, and you wouldn't want to bet anything valuable on the accuracy of the outcome.

But for all its flakiness, it's the only thing we've got. What it does, is strip out all the cyclical stuff from last year's Budget and this year's. It could be, for example, that last year's Budget showed a surplus solely because the economy was doing well and the GST take was pouring in, and this year's surplus is even bigger because the economy is doing even stronger still (not a million miles removed from what's actually happened). Both surpluses, and the increase from the first to the second, may have sweet eff all to do with careful stewardship of the nation's finances, and may not tell you anything about the overall impact of the Budget.

So what you do, is you strip out the fortuitous cyclical stuff from both Budgets, taking out (for example) the happenstance of higher GST in good times or lower GST in bad times. You might have to take out one-offs like earthquakes as well, to get a proper feel for the real 'normal times' state of the government's books. And when you've done that, then you compare the true, 'underlying', 'structural', 'cyclically adjusted', outcome - call it what you will - in the two Budgets. If, for example, last year's Budget had a true deficit of 1% of GDP, and this year's has a true surplus of 1%, that's a turnaround of 2% of GDP, which by fiscal standards would be a reasonably significant tightening of fiscal policy - a clear brake on the economy (last year injecting some money into the economy, this year taking some out). And conversely a larger true deficit, or a smaller true surplus, would be a boost.

We know, too, that Ministers of Finance ought to do the right counter-cyclical thing - in good times (like now), fiscal policy doesn't need to be, and shouldn't be, a stimulus to the economy. In bad times, it does, and should. So, how'd Joyce go? Here's the fiscal impulse.

The good news is that he didn't go for a pro-cyclical splurge in election year. Overall, the stance of fiscal policy won't be making much of a difference, either way, to our current business cycle. There is a mildly pro-cyclical fiscal stance for 2018 and 2019 (acknowledging, again, the ropiness of these kinds of calculations), and the heavy lifting of getting government debt down has been pushed out to 2020 and 2021 and beyond.

That said, I for one don't mind too much if we take a while to get net government debt below the target 20% (which on current forecasts will be in the June 2021 year) if instead we spend up large on our severely deficient infrastructure. The Budget speech said that "Through this new capital spend [$11 billion] and existing commitments the Government and its key infrastructure agencies will invest a total of $32.5 billion over the next four years in new infrastructure". It may sound odd to say that $32.5 billion is only a start, but that's the reality: the infrastructure deficit has been allowed to balloon to a level that is now difficult to grapple with, even in $32.5 billion chunks. And even these higher levels of spending will result in indefensibly slow improvement (30 year timeframes for rail to Auckland's North Shore come to mind).

What else?

The tax thresholds. Yes, of course they should have been adjusted upwards, good job they were. And it's good to see the bulk of the increase concentrated on raising the lowest threshold (where the 10.5% rate applies) from $14,000 to $22,000. Leaving them unadjusted had been an insidious and regressive way to raise the tax take: people barely into middle-class incomes, paying the top marginal tax rate, along with the millionaires? Give us a break.

Mr Joyce did not, however, take a principled approach and commit to keep on adjusting them every year. While (I guess) he thinks that's clever politics - keeping a lolly up his sleeve for future years' scrambles - it's not good, either as economics or politics. The economics is obvious: we'll soon have teachers and police constables back paying the millionaires' tax rate. Politically, it would have been smarter to commit to indexing the thresholds, gaining all the moral high ground, and watch the opposition parties squirm if they didn't match it. And if you really want to inherit the technocratic, managerial mantle of Bill English, a valuable political asset built up over many years, you do the fiscally right thing, even if it costs you the option of a cheap political stunt every year.

Lowering the target for net government debt to 10% to 15% of GDP by 2025 is fine by me. If there's anything we've learned over the past decade, it's that you need to leave a lot more 'fiscal space' or 'fiscal leeway' than you might have thought in pre-GFC days. You don't want to go into whatever the next unpleasant surprise may be carrying significant amounts of debt (as countries like France may discover) and even countries like Ireland, which appeared to be in a decent net debt starting point, found that, in fact, it wasn't enough to cope with the implosion of their banking system.

Finally, the economic forecasts. At first squizz they look reasonable enough - perhaps a tad on the optimistic side - but there's an interesting wrinkle in the details, where housing construction is expected to barely grow in the year to June '18 (+0.3%) and then perk up a lot (up 8.7% in the year to June '19, and another 8.8% in the following year). As the forecast document says, "There is considerable uncertainty associated with the judgement that this slow-down will be temporary", and that a building boom in the Auckland market is on the horizon. I really hope there is. But then I look at our capacity constraints, and our planning delays, and I wonder.

Monday, 22 May 2017

The state of telco play - 2017

We pay too much attention to bad stuff, so here's some good news that has come out of the Commerce Commission's latest annual report on the state of the telco markets (media release here, quick infographic here, whole thing here).

Speeds are up. Congestion is down. Value for money is better. Prices generally compare well with other countries. Competition is working. Investment is high, with a big slab of dollars going into the rollout of the Ultra-Fast Broadband (UFB) fibre project. And even though the telco team at the Commission don't say so in the report, I'd give them credit for helping to make this happen.

There are lots of ways to illustrate the good stuff: here's just one, on fixed line broadband, which speaks for itself.

As I said in my piece on last year's equivalent report, the Commission's comparison of our broadband download speeds with other countries' could be a bit better and doesn't sweep in some of the comparator countries you'd normally expect to see, but even on a wider set of comparators we're doing better than we were. If you go to the source Akamai document the Commission used, we now rank 34th globally for download speed - not enormously flash, but better than the 41st we scored a year earlier. And we're a little better against European country standards, where we would now tie for 19th rather than 21st. Room for improvement, as they say in the school reports, but as the UFB builds out and more people sign up for it, we've got good prospects of climbing the rankings a bit more.

The UFB trends in the report also spell out Sky TV's ongoing corporate nightmare: the rollout and adoption of a whole new way to deliver movie and sports event quantities of data. There are now 368,000 UFB connections, and growing like fury, and nearly half of households are on unlimited data plans, and the proportion is rising rapidly.

Have we got unfinished business? I speculated last year that maybe it is time to revisit our regulated mobile termination rate: it's still unrevisited, at a left-high-and-dry level by comparison to current overseas rates, for no obvious reason that I can see. And there's an ongoing issue with the high cost of mobile data downloads to data-only devices (see pp28-29 of the report).

The other bit of unfinished business is the ludicrous arrangement whereby the Telecommunications Commissioner is required to monitor the telco industry, and the Commerce Commission is forbidden to monitor any other industry. MBIE went through a whole process in 2015-16, in its targeted review of the Commerce Act, which included the option of fixing this nonsense. Ten months have gone by since the final cross-submissions (including mine) darkened MBIE's door.

Come on MBIE. This is getting embarrassing.

Thursday, 11 May 2017

No change to interest rates? Really?

Today's Monetary Policy Statement wasn't quite what I expected.

I thought we'd get something along the lines of, "One quarter's CPI is neither here nor there, so we'll wait and see if the June one is also unexpectedly high, but if the March quarter outcome is repeated, we'll probably start raising the OCR a bit earlier than we've previously indicated". Instead we got exactly the same projected track for the OCR as we had in the February Statement - no increase until late 2019, and then only one 0.25% increase.

Can't see that happening, myself, and neither can the financial markets. Today's 90 day bank bill yield is just below 2%: the futures market has it at 2.77% by the end of 2018, which would be equivalent to three 0.25% increases next year. The futures market can be a flighty beast, and futures sentiment can change quickly, but having had the best of today to think about it, it's currently saying there it doesn't believe a word of "nothing till late 2019".

What explains the gap in viewpoints?

Three things, I'd reckon.

One is the possibility - I'd put it no stronger - that the Bank is institutionally scarred by its premature tightening in 2014. It wasn't, in my view, a strange thing to have done at the time, but as things panned out it had to be reversed (and then some). So it's possible that the Bank has decided, whatever mistakes it's going to make in the future, premature tightening isn't going to be one of them. The risk, though, is that it gets "behind the curve", as the jargon goes, chasing after inflation that's got away from it.

The second is that we're actually at an inflexion point in trend inflation - it's been unusually low, but is on the turn - and turning points are notoriously hard to pick in real time. I'm not surprised that "uncertainty" and its variants turned up 38 times in the Statement. So these are genuinely tricky times for the Reserve Bank, and irrespective of whether it is battle scarred or not, it might well want to wait for clearer signals.

For what it's worth, I think the inflation tide is definitely coming in. I like to look at non tradables inflation, ex the cost of new houses, as a rough and ready guide to domestically generated inflation pressures (the only ones the Bank can ultimately influence). As the graph shows (and I've included an alternative, non tradables ex housing and ex household utilities, as an extra perspective), domestic inflation is on the up.

The third is even trickier again: what if the economy isn't behaving the way it used to? As the Bank found on its latest visits to businesses, "wage pressure remains surprisingly limited". It's not clear whether the employers, or the Bank, were surprised - maybe both - but in these strong cyclical conditions, on past experience, people would be asking for pay rises and threatening to move on if they didn't get them.

But "on past experience", that's the thing. As the visits found (p26 of the Statement), "Contacts suggested this may in part reflect the negative impact of the GFC on employees’ expectations of wage growth and employers’ willingness to offer substantial wage increases". I have some sympathy for this view that the post-GFC world is (at least for now) structurally different to the pre-GFC one, though not quite enough to believe it has changed enough for the Bank to leave policy "accommodative for a considerable period". We'll see.

Two final thoughts. Businesses also reported that "it is difficult to find workers with the right skills", which may be partly cyclical (the one with the skills are already spoken for) but also, I suspect, reflects all not being entirely well with our education system and our 'active' labour market policies. And they said that they "also expected to increasingly look offshore for labour": I don't expect this will make a blind bit of difference to the current anti-immigration sentiment and its backers,  but it's a reminder that tightening up immigration in a boom labour market doesn't look like the smartest idea.

Friday, 5 May 2017

Common sense - at last

Yesterday I warned you that I was writing a piece for competition policy tragics, and this is it. In the event it's not terribly technical, so give it a go even if you're not a tragic - especially as it shows how we've got, finally, to a better place when it comes to assessing things like the NZME/Fairfax merger. Plus it's got some pirates in it.

First some context. The Commerce Commission when it gets the likes of NZME/Fairfax has to decide, if there's a loss of competition (as there was), whether to authorise the thing anyway, because there are, overall, net benefits to New Zealand: the good stuff (cost savings, international competitiveness, whatever) outweighs the bad (mainly the increased market power of the new entity).

Here's a completely general, utterly uncontroversial little diagram of all possible benefits and detriments.

The 'net of realisation costs' in the table is fairly simple, too. Let's say there is a cost savings benefit - scrunching two head offices into one, for example. You should count any costs involved (redundancy payments, for example) when putting a number on the cost savings benefit. All good. All clear.

Where it starts to go strange, however, is in the Commission's Authorisation Guidelines, where you find this.
37. In our assessment we regard a public benefit as any gain to the public of New Zealand that would result from the proposed transaction regardless of the market in which that benefit occurs or whom in New Zealand it benefits. We take into account any costs incurred in achieving benefits.30
38. In contrast, in assessing detriments we only consider anti-competitive detriments that arise in the market(s)31 where we find a lessening of competition (whether substantial or otherwise).32
39. To illustrate the difference in our approach to benefits and detriments, if a transaction gives rise to a lessening of competition in market A and benefits in market A and market B, then:
39.1 the public benefit is counted across both markets A and B; and
39.2 only those detriments arising in market A are counted.
In terms of the diagram, when it comes to things like NZME/Fairfax, the Commission would count A, subtract B, add C, but ignore D.

This makes no sense from an economist's or indeed any commonsensical perspective, as I've argued before, and any lawyers who thought the case law on the Commerce Act required it need to go away and have a good lie down until they come to their senses. Why ignore D - if the merger caused some large detriment outside the markets the merger is taking place in, why on earth wouldn't you count it?

In what I think may have been the best single para I've ever written in this blog, I finished my previous post about this nonsense with this:
All this may seem technical and picky, and maybe nothing will ever turn on it. In practice, though, every imaginable set of business circumstances sooner or later comes in the Commission's window, and it's possible a merger or a restrictive trade practice will indeed involve a sizeable D, a detriment to the community that is being ignored. If the courts have said you can safely take a better, more logical route, why wouldn't you?
And what indeed happened?

Along comes NZME/Fairfax, where there is indeed a big D, a detriment outside the immediate markets involved: as the Commission said in paras 75-77 of its decision (irrelevant footnote omitted):
the proposed merger of NZME and Fairfax has the potential for negative consequences that may extend beyond the reader and advertising markets in which competition is affected.
In particular, a loss in plurality might impact on New Zealand society more generally...
A significant reduction in plurality would affect all New Zealanders, whether they directly consume news content or not. A loss in plurality may therefore have effects that extend beyond the reader markets in which competition is affected.
As you can imagine, the lawyers for NZME/Fairfax told the Commission, stick to your own Guidelines. They referenced the Guidelines, and, for good measure, the Commission saying the same thing in an OECD Working Party, and said (at para 27) that
the Commission's inclusion of plurality effects in its detriment analysis is contrary to the statutory scheme, its previous positions, case law and its own restatement of the correct legislative framework within the Draft Determination
The Commission, in short, found itself boxed into an untenable position: big detriments that it had said wouldn't be counted under its usual approach. As it pointed out (para 81 of the decision)
The implication of the Applicants’ approach is that we might have to authorise a merger that in our assessment was not in the public interest. That is, if we considered that there was a negative consequence that outweighed the positive aspects of a proposed merger, we might still have to authorise depending on where those negative impacts were felt
So how did the Commission extricate itself from the daftness of the Authorisation Guidelines and navigate its way back to Planet Earth?

First (here come the pirates) it used the Captain Barbossa approach in Pirates of the Caribbean where he reneges on an apparent deal with Elizabeth 'Turner' made under the pirates' code, by pointing out that "the code is more what you'd call "guidelines" than actual rules", or as the Commission put it (footnote 72, page 34), "the Guidelines are necessarily general and we must apply them flexibly according to the facts of each application. The Guidelines do not, and cannot, address every issue that might arise".

The Commission also found a little escape hatch in footnote 32 of the Guidelines. The footnote says that in the key case on benefits and detriments ('Godfrey Hirst 1' as it is called in the decision), "while the court endorsed this settled approach [i.e. of  ignoring D], it observed that ‘disbenefits’ or negative benefits that arise outside the affected markets may be relevant to the public benefit test". Of course, that rather raises the question why the Commission said it wouldn't usually count them, but never mind.

And it also made the (to me not very persuasive) argument that the law has moved on ('Godfrey Hirst 2') and the Guidelines have yet to be updated.

In any event we got to a good place. The Commission has now definitively said (para 134.1, my emphasis) that
we can consider all negative consequences arising from the proposed merger, in our consideration of whether the merger will result, or will be likely to result, in such a benefit to the public that it should be permitted
which in this case enabled them to get to the right conclusion, that (para 134.2)
irrespective of whether the plurality consequences of the proposed merger are ‘in market’ or ‘out of market’, we will consider any plurality losses as ‘disbenefits’ or ‘negative benefits’
So it's been a bit of a journey, but it's now very likely the next edition of the Authorisation Guidelines will reflect this eminently more sensible approach.

Thursday, 4 May 2017

Yup, as expected

By now you're likely reaching saturation point on the NZME/Fairfax merger decision - every newspaper in the country seems to be running an editorial on it this morning, with the Herald for example saying 'Blocking this merger is a big mistake' and the Dominion Post going for 'The Commerce Commission doesn't get it' - so I'll try and say something new.

First thing is, I have a fair degree of sympathy for the folks in the two companies. They're on leaky ships that are taking in water, and even though the merger lifeboat wouldn't have held all of them, enough of them would have clambered on board to live for another day. You can understand why they've reacted with everything from disappointment to rage.

But that's commercial life, folks. Technologies  improve, customers switch preferences, economic policies change, businesses lay their plans best they can, and the best plan (by luck or design) wins, and sometimes wins big, as it should given the risks involved. And the losers, well, lose. The whole process - and you'll realise I'm just channelling Schumpeter here - works out for us in the end as businesses are highly incentivised (by stick and carrot) to do their level best to be the most appealing option to us customers. As an American judge once said - oddly enough, in a media case - "society has an interest in competition even though that competition be an elimination bout".

And that's my second point. The Commission did a good job explaining why ongoing competition would be a better long-run option than permitting the substantial loss of competition the merger lifeboat would have caused.

It's a perennial battle to make that case, because people tend to have odd but partly understandable ideas about competition: the ideas make some sense because there are some facts which appear to support them.

At the one end there are the people who see competition as a race to the bottom - who can deliver the nastiest barebones bundle at the cheapest price. You get a lot of that kind of reaction when anyone suggests more private provision of education or health services, for example, but you can see why people think it could apply to the media, too. As I write, the latest 'News' on the Herald's website includes 'Princess Diana's biggest fear over Camilla revealed', and 'Kanye's Met Gala absence due to fury over Kardashian's butt photo'.

At the other there are the people who argue that less competition means better resourced competitors, who are better able to meet consumer demands or fight an effective fight against rivals (one of the big themes in  NZME/Fairfax). Too much competition, and nobody in a skinny-margin industry will have the funds for R&D, too little and you'll get lazy monopolies who'll gouge the customer, but in a sweet spot in the not-too-much-competition middle, companies will be making enough money to be able to fund research and innovation. There's some evidence for this, too, as I mentioned the other day in the context of the mobile phone business.

But I thought the Commission made a good fist of arguing the case that competition typically enhances quality, rather than reducing it, and that more competition is more likely to hold companies' feet to the fire than less. As the Commission put it (in paras 26 and 27 of the Executive Summary)
we consider that competition between NZME and Fairfax leads them to produce higher quality content than would exist with the merger. Competition incentivises investment in editorial resources, motivates journalists and editors in their day-to-day work, and ensures diversity of editorial approaches. Competition also leads to greater investment and innovation in the way that content is presented to readers.
Fairfax and NZME compete to be the first to unearth and break news. When they have been beaten to a scoop each works quickly to catch up and look for new angles. Under the proposed merger this rivalry and the benefits it delivers is likely to be removed. In our view this would negatively impact the quality of news and breadth of coverage produced.
My final point is that the decision represents a rare triumph for generic competition law over sectoral regulation. Many countries have given up on the competition law of the land as an effective way to rein in unwanted problems and have turned to sector-specific regulators instead. In the UK, for example, there are Ofgem (gas and electricity), Ofwat (water) and Ofcom (communications), and we've gone down that road, too, with a Telecommunications Commissioner and an Electricity Authority.

But we haven't gone down the route of a media overseer, though many countries have: as the Executive Summary said (para 42), "there are no media ownership restrictions or other mandatory journalistic regulations that would be effective enough, in our view, to materially constrain the merged entity". For once, the Commerce Act has been able to step into the breach and play that role, without erecting another bit of complex sectoral regulatory infrastructure. That's a plus.

There's a lot else in the decision, mostly around process and the technical pros and cons of the various economic and legal arguments, but when we've already had wall to wall coverage, I'll keep my tragically tragic post for tragically tragic competition tragics for another day.

Tuesday, 2 May 2017

Only one more sleep...

...until the release of the blockbuster NZME/Fairfax decision by the Commerce Commission.

What'll they do? Bear in mind that any of these big set-pieces that come into the Commission are always tangled, could-go-either-way affairs, and (just to be clear) I have no dog in the fight, but my guess is they'll reaffirm their decline.

For one thing, while they have to have an open mind to the late flurry of submissions, and I'm sure they do, it's going to be rather hard to walk back from this (para 1012 of the draft decision, footnote omitted):
Even in the face of a changing media landscape, the Commission cannot lose sight of the fact that is being asked to authorise a merger that would provide a single organisation with control of nearly 90% of all print media, New Zealand’s two largest news websites, and one of New Zealand’s two largest commercial radio companies. This would be an unprecedented level of media concentration in a well established liberal democracy
And from this (para  1016)
We consider that the level of media concentration brought about by the proposed merger would not be in the public interest. We have weighed the cost-savings arising from the merger against the increased levels of media concentration, the ability of the merged entity to influence opinions and lead the news agenda and the overall detriments to plurality. In an industry where there are substantial costs of entry to achieve the scale of a large news publisher, we consider that the loss of plurality that arises from the proposed merger is likely to be significant and potentially irreplaceable
The parties and their lawyers and consultants have had a good go at the "changing media landscape" and "detriments to plurality" points (and others, including how the Commission has applied the 'net benefits' test, which we will hear more of if there is indeed a decline and a subsequent appeal).

Their final submission essentially said that the merged entity would not be a colossus bestriding the old-economy print media, but just one player in a much wider and rapidly evolving media market and one moreover with its own new-economy giants (the likes of Facebook and Google).

And on plurality, they argued (my paraphrase) that you'll lose some of the plurality you've currently got if the current standalone companies go down the gurgler, or as Russell McVeagh put it in an earlier letter to the Commission, "none of the alternative, potential wished for Plan Bs that have been postulated for either business make any difference to their financial trajectory, nor to their ability to maintain the quality of journalism which they currently produce".

One thing that struck me about the whole thing is the prominence of the "plurality" discussion, which partly reflects the effectiveness of some submissions (I'd pick out this one in particular, from a group of academics).

In overseas jurisdictions, plurality has generally been shoe-horned into merger authorisations as an additional but separate public interest that merger authorities are allowed to take into account, over and above the usual nitty-gritty of expected changes to competition. As this article notes, for example, the EU allows for additional consideration of "three legitimate public interests...public security, plurality of the media and prudential rules (of relevance in the area of financial services)".

I have trouble seeing it that way. Media plurality seems to me to fall squarely within the usual competitive effects analysis. When we are looking at effects on consumers, for example, we tend to focus on the money price - will the merged entity charge more, or offer less - but we can forget that "price" is really just a shorthand for the whole menu of consumer effects, sometimes described by the SPQR acronym: service, price, quality, range. If the end result of a media merger is clickbait tat (quality) from a 600 pound gorilla (range), there's your result. I don't need to start wandering off-piste into what is the appropriate social infrastructure for a liberal democracy.

To that extent that it looked as if the Commission was doing that, I can see where NZME/Fairfax were coming from: "The Applicants’ view was that issues of media plurality are not relevant to our analysis and fall outside of the scope of the merger authorisation process" as the Commission said (draft decision, para 905). But on the substance, I think NZME/Fairfax were wrong: plurality and quality fit squarely within the usual competitive effects box.

Friday, 28 April 2017

Mobile network mergers - what happens?

If you've got any interest in what happens when competition increases or decreases in an industry, you've got to read this excellent paper, "Evaluating Market Consolidation in Mobile Communications". Especially as it's not only important, but easily missable: I only came across it by accident thanks to this helpful post on The Irish Economy blog site, which referred me to this conference.

The three authors set out (as they say on p3) to "study the relationship between prices, investments, and market structure in the mobile telecommunications industry. We use an empirical approach by looking at the experience of thirty-three countries in the period 2002-2014. We collect what is, to our knowledge, the largest dataset employed to-date for works of this kind".

And you'll be pleased to know that, unusually, the data include New Zealand. While our official statistics have got better (and will get better still), across official and private sector data we can be short of what's available overseas, and I've lost count of the number of cross-country econometric studies where we don't feature. This time we do, though we don't get any country-specific mentions.

First, here's a rather amazing finding - what's happened to prices in the mobile market, with national prices converted into euros at PPP rates.

As the authors say (p10), my italics, "Overall prices steadily declined by almost 50% during this period, amounting to an average decline of 2.2% per quarter". Isn't that remarkable? And, in passing, doesn't it leave you wondering how, despite this massive technological progress and similar advances in the rest of the ICT sector, official measures of countries' productivity growth appear to show a slowdown.

But on to their main focus. "The dataset", they say (p3) "spans a time period long enough to capture changes in market structure (especially entry via licensing, and exit via mergers) that provide ideal variation in the data to assess how market structure impacts on prices and investments, holding other factors constant".

And what they find is pretty dramatic.

On prices, they find strong positive links between concentration and prices:
prices decrease by about 15.9% in markets with four operators compared with the comparison group of two or three operators (p17)
an increase in the HHI has a positive and significant impact on increase in the HHI by 10 percentage points (for example from 0.3 to 0.4)* would increase prices by 20.37%. Similarly, a 4-to-3 merger in a symmetric industry (raising the HHI by 8 percentage points from 0.25 to 0.33), would increase prices by 16.3%. This is an average effect based on the sample of all countries post-2005. While this effect is statistically significant, it has a relatively wide 90% confidence interval, between 7.9% and 24.7%...How important is this effect against the background of the general price drop of 47% over the same period of eight years? Given that the price trend is -2.2% per quarter, a hypothetical merger that increases the HHI by 10 percentage points is roughly equivalent to going back to the price level of about 8 or 9 quarters ago (p18)
On investment, they also find strong positive links with concentration:
An increase in the HHI by 10 percentage points raises investment per operator by 24.1% using the first instrument set... and by 27.9% using the second instrument set...In both cases, the effect is statistically significant at the 5% level. Perhaps more concretely, a 4-to-3 merger in a symmetric industry (raising the HHI by 8 percentage points) would raise investment per operator by about 19.3% (under the first instrument set) (p19)
They can also use their modelling to estimate the effects of some real world mergers, which is also highly interesting. Full details are in their Table 6: there are wideish confidence intervals, but in every case prices went up, but so did investment.

And that makes merger approvals very tricky indeed: their research
is the first time that the dual impact of market structure on prices and investments has been assessed and found to be very relevant in mobile communications, both from an economic and from a statistical point of view. Our findings are therefore of utmost importance for competition authorities, who face a trade-off when confronted with an average merger similar to one captured in our sample. Ceteris paribus, a merger will have static price effects to the detriment of consumers, but also dynamic benefits for consumers to the extent that investments enhance their demand for services (p29)
They say that efficiency arguments pointing to the possible pro-consumer benefits of higher investment get short shrift, at least in Europe:
In European merger control, merging parties face tough hurdles when putting forward an efficiency defence and, as such, it remains questionable whether efficiencies will ever play an important role in decisions under the EC Merger Regulation in any but the most exceptional cases. However, this is not to say that advisers should abandon enquiries about the rationale for mergers or any anticipated efficiency gains (p29)
But in jurisdictions where there's an more open mind - and I'd include New Zealand and Australia - I'd suggest these arguments are worth running with. Higher prices, but 5G or 6G or Umpteen G three years faster than you'd get it otherwise - that could be both correct and have some persuasive local resonance, given that we are already down the totem pole when it comes to global rollout of some goods and services.

If I were a regulator, I wouldn't necessarily be a sook for every "we need higher prices to fund good stuff" line: after all, what are the capital markets for? But on this evidence, there might be a stronger case than you might have previously thought.

*They use a HHI with a scale from 0 to 1 rather than the more familiar 0 to 10,000. So what they call an increase from 0.3 to 0.4 is what we'd usually describe as 3,000 to 4,000.

Thursday, 20 April 2017

An "ugly casserole" indeed

So we've tightened up our immigration settings, again. Opponents are saying it's fiddling at the margins. I hope the critics are right: while it's dismaying that they've felt the need to bend with the prevailing political winds at all - "an ugly casserole of prejudice, resentment, economic envy and xenophobia from which New Zealand is not exempt", as Vernon Small put it in his īnsightful Dom-Post article - I hope it's the absolute minimum the government could get away with.

Not that it's without its own political dangers.Throwing scraps of meat out of the sleigh as the wolves close in may delay the chase, but wolves soon learn to chase sleighs for reward, and will be after you fitter and faster than before.

And I certainly didn't like the "Kiwis first" messaging around the thing. That's more the sort of jingoism you expect from the Aussies, and indeed got this week in their own tightening of their immigration regime, which more obviously pandered to the likes of One Nation and is more likely to do real economic damage. Early reactions suggest they've shot themselves in the foot, making it harder for employers to fill hard-to-recruit vacancies.

Let's not pretend, either, that there's anything remotely linked to the economy behind this. It's pure politics.

For one thing, the cyclical state of the labour market is very strong. Wanna see a picture of a thriving labour market? Here's one from the ANZ's Bank's latest tot of job ads.

Wanna see another? This is MBIE's latest tot of vacancies - jobs available right now. High, and climbing steadily,

If you're concerned that unskilled emigrants are driving down wages and stealing the everyday battlers' jobs at the hard end of the labour market, the greatest rise in vacancies in recent years has actually been for unskilled and semi-skilled jobs.

So it's extraordinarily hard to make any case that immigrants have soaked up the available jobs. Despite a recent large increase in net migration, there are more vacancies available than ever, even at the low wage end.

As for the fable that immigrants are putting pressure on already stressed infrastructure, it's either a marginal effect or complete bollocks. Higher levels of net immigration are a relatively recent phenomenon - the last three years or so - whereas the infrastructure, especially in Auckland, was already stuffed every way to Sunday well before that. 

Here's the clincher: as an economist colleague helpfully pointed out when I was tweeting about this, there was very little difference between Statistics New Zealand's population projections for Auckland's population ten years ago and what has actually happened. We knew there was a surge coming, and didn't plan for it, and still aren't - that's the reality, under national and local administrations of all political hues. It's got very little if anything to do with migration, and everything to do with systematic underfunding of infrastructure and obstructive land-use and other regulation. Our politicians have preferred to run dairy farms, mine coal, deliver letters and keep prime housing land to grow onions, rather than deliver the social and physical infrastructure for a high-income economy.

And that's something else the anti-immigration crew are missing. Far from being a burden on the economy, many migrants are actually alleviating the roadblocks to growth we've inflicted on ourselves. Across the road from us, one of those terrible Asian property investors - probably got one of those suspicious Chinese-sounding surnames - has started to turn two houses into five. Round the corner another of these awful leeches has already redeveloped one house into three. Employment for two gangs of tradies, five extra houses. Not bad for two parasites.

Maybe I shouldn't be surprised about these latest turns of events here and in Australia. Liberal values and sensible economics are under attack pretty much everywhere, from the clowns in Washington to the Brexit-deluded in the UK through to the more sinister operators in (for example) France, Hungary and Poland. It's especially sad to see people "of the left", who might be expected to take a more progressive, internationalist view of the world, going along. 

But maybe there's hope around the corner. As this excellent article, 'In defence of liberalism', points out, the liberal values and better economic policies that created post World War Two prosperity are certainly under attack. But it concludes
the things we value can’t all be realised simultaneously and made compatible with each other. A liberal society is the best method yet devised of recognising this multiplicity of aims. It stresses value pluralism in the face of political and religious dogmatism, and of spurious appeals to national unity for the common good. I’ll doggedly stick to it.
So will I, even though in the short run the probability of a socially liberal, economically responsible government emerging from our next election looks to be half of five eighths of sod all.

Tuesday, 18 April 2017

A quiet word in your ear...

First of all, a quiet word in the ear of parties appearing before the Commerce Commission.

Look at para 38 of the written reasons for the SkyTV/Vodafone decline. I've bolded the bit that's most important. The para reads
We collected and reviewed some useful evidence from which to construct the factual and counterfactual and our competition analysis. However, we also note that a number of parties provided some submissions on the merger that did not seem, to us, to accord entirely with statements made by the submitters elsewhere, including in internal records. We did not consider that all evidence of past or present conduct or events provided a reliable predictor of future likely impact.
This, folks, is somewhere in the general territory of a reproof, rebuke, and warning, and it's a good reminder (as I've advised before) not to take an opportunistic approach to competition or regulation proceedings. One of your biggest assets is your credibility, and your advisers'. While you will be tempted - of course you will - to run arguments that are inconsistent with what you've said somewhere else, to run with the incumbent hare and hunt with the new entrant hounds, don't do it.

And a quiet word in the Commission's ear, too.

At [15] the Commission says (I've italicised the bit I want to talk about)
We make a pragmatic and expert assessment of what is likely to occur in the future with and without the merger
which rang a bell, since something very like it appears in the Mergers and Acquisitions Guidelines, except that there (in para 2.35) it reads
We make a pragmatic and commercial assessment of what is likely to occur in the future with and without the merger
Perhaps this upgrade is a good 'deference' card to have in your hand in the appellate courts. But on the other hand you wouldn't want one of them saying something like, "We have difficulty seeing how an 'expert' tribunal could come to those conclusions on the facts before it", would you?

Bit more humility, lads and lasses. It's the Kiwi way.

The details of SkyTV/Vodafone

Just before the Easter weekend the Commerce Commission published its written reasons for turning down the SkyTV/Vodafone merger. Like other competition tragics, I read it over the holiday - all 566 paragraphs of it.

Like everything that comes in the Commission's door these days, the Sky/Vodafone fell in that twilight zone where you can make a decent case for both sides. In the event, the Commission said No: the merged entity would be able, and incentivised, to offer Sky Sport based bundles of pay TV and broadband/telco services that other Internet Service Providers (ISPs) and telcos wouldn't be able to match. There would consequently be a real chance of a substantial lessening of competition (SLC) as Sport-less rivals were less able to compete.

Sky/Vodafone was especially problematic because it fell into two of the more difficult areas for regulators to assess - the alleged use of market power in one market to gain advantage in another, and allegedly exclusionary bundling. These are always going to be line ball calls: the ACCC for example stopped the Aussie supermarkets from giving out large petrol discount vouchers ("shopping dockets") to buy petrol from them, because they thought the supermarkets were using their market power in the grocery trade to drive the petrol stations out of the petrol game (I thought the ACCC could be wrong about that).

And anti-competitive bundling is just as tricky, not least because the economics is not settled (you lawyers at the back, stop sniggering). As the abstract from one review article said
While the [economics] literature has demonstrated the possibility that bundling can generate anticompetitive harm, it does not provide a reliable way to gauge whether the potential for harm would outweigh any demonstrable benefits from the practice. As a result, the widespread application of the antitrust laws to bundling by firms can generate significant error costs by erroneously condemning or deterring efficient business practices. In the future, economists should seek to expand their understanding of both the anticompetitive and procompetitive reasons firms engage in bundling.
So given all the inherent uncertainties, I think the Commission came to a reasonable conclusion. And I think it fits well with what regulators should do in fast-moving sectors, which (as I argued here) is take a conservative view (though it is not always obvious whether doing something or not doing something is the conservative course), don't give leg-ups to anything, and generally try to let events unfold, but deal with any anti-competitive rorts that survive the Schumpeterian storms.

What struck me most about the whole thing was, why did Sky and Vodafone go for a clearance ("there is no SLC") rather than an authorisation ("there is an SLC, but there are compensating benefits")?

Maybe they genuinely believed there would be no SLC; maybe they didn't want the relative hassle of an authorisation (typically longer and more expensive, and the associated conference process isn't everyone's cup of tea, either). But having gone that route, they were stone cold dead if the Commission found an SLC (or, strictly speaking, couldn't be satisfied that there wouldn't be an SLC). That can prove a difficult barrier to get over when, as here, it's a dynamic sector where anything might happen, and it only takes one plausible enough ("real chance") scenario where there might be an SLC for the Commission to throw its rider at the fence.

But with an authorisation, you're still alive with the second leg of your argument: there are SLC downsides, but more than compensating benefits. And there were benefits: as the Commission said, for example at [198], "consumers may be better off in the short term as the merged entity offers better bundles (including better prices) and rivals react with their own bundles (and lower prices)", or again at [226], "it is likely that the bundles offered by the merged entity would be lower priced and/or higher quality, with more additional features than those available without the merger, or compared to those available on a standalone basis".

The Commission may still have jibbed at an authorisation, because it clearly worried that any short term consumer benefits would be taken back when the Sky/Vodafone entity had seen off some of its competitors, but it would have been a better route to go. An argument along the lines, "clear short term benefits in the (semi-predictable) near to medium term, but uncertain detriments in the (much less predictable) medium to long term" was a real runner, particularly as the Commission said at [358] that it is "difficult to predict with any certainty what effects might occur in the medium to long term". A bird in the hand today, versus more heavily time-discounted and more uncertain detriments sometime in the future, could have snuck through.

Especially (if Sky and Vodafone are minded to appeal) as the Commission has taken a somewhat debatable view on how hard it would be for ISPs to get into the post-merger game. The evidence shows that there are heaps of them today, all giving it a go despite the much heavier firepower of the big guys. This suggests easy conditions for entry.

Of course, the Commission would respond, that was then, what about the post-merger world?  But I for one would be inclined to think that (for example) a determinedly "cheap and cheerful" barebones ISP (or several of them) could still keep the merged entity honest. I wouldn't rule out the possibility of some other innovative bundling by competitors, or other attractive add-ons. And I also had quite a bit of sympathy for the point that NERA made, quoted at [454]: "NERA advised that if consumers were attracted to the merged entity’s discounts, then they would equally revert back to other TSPs [telecommunications service providers] if those discounts were reversed. If so, the merged entity would not be able to exercise market power".

If there was anything else I'd quibble with, it was the Commission's view that content and the means of delivering the content are becoming more the same thing in consumers' eyes. For example it said at [170] that
As services become more converged, consumers are likely to start associating them as part of the same purchasing decision – the content and the method of delivery become more closely linked in the minds of consumers
and again at [386.4] where it said that
broadband and mobile services become more closely aligned with the delivery of content
Personally, I'd agree that delivery services are indeed converging, but I'd argue that they're becoming commoditised, and that content is increasingly standing alone, which is what the rest of 386.4 says:
the importance of content to competition in relevant telecommunications markets is also likely to increase
Who provides Game of Thrones, and over what infrastructure, is of the utmost indifference to me. They're not - for this sample of one - becoming all the one deal, wrapped up with the series itself. Rather, they've become markedly more separate. Though if you follow that logic further, you start to think dark thoughts about entities monopolising a market for premium sports content (the Commission found at [259] that there is one). There's a lot happening in the commercial and policy space around telecoms and convergence: I wonder if some regulation of 'fair access' to premium sports is lurking in the mix.