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.

Wednesday, 5 April 2017

That touchy-feely stuff

Life's too short, and you can't do everything, and one of the things that fell off my radar for a while was Masterchef. Lately, though, I've caught up with it again (the 'professionals' series), and I've found it as compulsively watchable as ever.

But I was struck by something that goes beyond cooking.

People aren't used to getting praise.

Especially in the early rounds, where you've got people who haven't yet climbed into the higher branches of the professional tree, you can see that they've had little or no positive feedback at all in their careers.

A kind word from any of the judges, and you have some contestants going all teary-eyed. They've rarely had people in their professional lives tell them they're doing a good job.

And it's not just a  bit of recognition from Michelin-starred Marcus Wareing that's got people going all gooey. Sure, you might be a bit overwhelmed, too, if the big guy in your line of business said you were pretty good. But a bit of appreciation from Gregg Wallace (whose autobiography is well worth reading, by the way) or from Monica Galetti will do it too. You can see that praise has been thin on the ground for the contestants, even though - almost by definition given that they've entered this competition - they're talented and motivated people.

And it got me thinking about the poor business culture we've created. There's little or no leeway for making mistakes, there's a very low tolerance for risk (manifested, for example, in businesses' very high 'hurdle rates' for investments), there's bugger all appreciation of the difficulties of making decisions under uncertainty (the RBNZ in particular tends to get it in the neck, as I've argued), and hence or otherwise there's a focus, and with 20:20 hindsight at that, on shortcomings and blame.

You ever been through one of those corporate 'performance reviews'? "Well, I see you had 12 KPIs for this year, and you've achieved ten of them. Now, let's talk about those other two, shall we?".

Some companies are finally getting the gumption to dump the damn things, as you'll find in this fine Harvard Business Review article, 'The Performance Management Revolution'. Two brief extracts: it concludes by saying that
Performance appraisals wouldn’t be the least popular practice in business, as they’re widely believed to be, if something weren’t fundamentally wrong with them
and earlier says that the something fundamentally wrong thing is
With their heavy emphasis on financial rewards and punishments and their end-of-year structure, they hold people accountable for past behavior at the expense of improving current performance and grooming talent for the future, both of which are critical for organizations’ long-term survival 
I wouldn't usually bother wandering into management theory, except that I can't help feeling that poor management practices are part of our long-standing productivity under-performance. A while back I posted about some research which found that
43.5% of the productivity gap between us and the [United] States is down to our relatively weak management capabilities (and it's interesting that Australia, with a somewhat similar business environment to ours, comes out with a similar number, at 45%)
What I didn't add at the time, but Masterchef  has now prompted me to, is that, in turn, a lot of our relatively poor overall management practice is down to bad performance management and really bad people management. As this paper found, "People management is the weakest area for New Zealand manufacturers with the country ranking fourteenth among [seventeen] participating countries". Here's what the data looked like.

Other than on the terraces at the game, or after a few jars, we don't do that inspire-y motivation-y gooey praise-y thingy. We tend not to open up, and especially not if it risks being a bit confrontation-y. Look how we score (below) on 'addressing poor performance': by international standards, we just don't want to go there. 

Everyone, this election year, seems to have a list of policies that might help turn our productivity around: the New Zealand Initiative came out with one the other day, to mixed reactions. So here are two more from me.

The less important one is, Fred in Sales and Wilma in HR have been a drag on the business for years. You know it, their colleagues know it, and you've let it drift. Fix it.

The more important one is, focus on what people have been doing well. Let them know, and help them get even better. There aren't huge numbers of win-win policies, but praising a job well done not only makes people happier, but the research shows it improves personal, business and national performance.

Beating the academic paywalls

We've all got to make a living, and people are entitled to a return on their work, but there's a justified feeling that the paywalling of academic research has gone too far - not least because in many cases we're paying for it twice, once through government funding of the original research and again through the often hefty journal subscription fees of the academic publishers.

So I was interested to find, via Twitter - hat tip to Prof Diane Coyle who retweeted the original tweet from Prof Dennis Dittrich - the announcement about Unpaywall, which is an extension for Chrome which with a bit of luck will find the full text of an academic paper you're after. Totally legal: as the folks behind it say, "it’s powered by an open index of more than ten million legally-uploaded, open access resources".

At this stage it looks mostly oriented towards the physical sciences, but toujours gai - I thought I'd give it a go and see how it worked on economics journals. So I installed the extension - a doddle - and picked an article at random from the latest issue of the American Economic Review, 'Escaping the Great Recession'.

Not that I've got anything against the AER - quite the reverse, it's cheap to get at, and one of the AEA's sister publications, the always interesting Journal of Economic Perspectives, is free to all - but just as a test run of Unpaywall.

It works, for all practical purposes. It didn't storm the ramparts of the AER itself, that's not how it works, but it did find the same article on EconStor, where it had appeared as a working paper in the Fed of Chicago's series.

So at a minimum it saves you the hassle of searching by author names on the likes of EconStor or SSRN, and cuts to the chase.

Sample of one and all that, but it worked straight out of the box. Recommended.

Tuesday, 4 April 2017

If it's tech, let it play out

After an earlier draft decision to decline, last week the ACCC definitively declined an authorisation application from three big banks (the Commonwealth Bank, National Australia Bank, and Westpac) and one decent sized one (Bendigo and Adelaide).The banks had wanted to engage in a collective negotiation with Apple over Apple Pay, its mobile phone payments app, and to engage in a collective boycott of Apple Pay in the meantime.

There were several incongruities about the application from the git go. One was the unusual spectacle of the big banks getting together to increase their bargaining power against one tech company: you don't normally have an image of the banks needing much regulatory help with their negotiations. Another was the absence of the ANZ, which has signed up with Apple Pay - you may have seen those quite good "an epic way to pay" ads on the TV - which again would have left you wondering why the other lot needed a helping hand. And yet another was the unlikelihood of Apple agreeing to what the Aussie banks wanted, even if the banks were allowed to bulk up as one bargaining entity. As the ACCC's Summary said (page v)
The ACCC notes that Apple has taken a global decision to offer an integrated mobile payment service on iPhones which does not allow open access to the NFC [I'll explain the NFC in a minute]. Apple submits that even if authorisation is granted it will not grant NFC access, and therefore the proposed conduct cannot lead to any of the public benefits claimed
However, any group is entitled to have a go at the ACCC's 'authorisation' process, if they can show that what would normally be an anti-competitive gang-up has, on the facts, benefits that outweigh the anti-competitive detriments. We have the same arrangements here.

There were all sorts of torpedoes running, for and against, but the banks' best argument was that if they got their way, there would be greater competition in the market for processing mobile phone payments. They hoped that their collective heft would be enough to push Apple into letting the banks access the 'NFC controller' in Apple phones - no, I didn't know before this decision what it was either, but it's the hardware and associated software that manages the close-distance wireless communication between devices like phones and check-out terminals.

That would mean that the banks could, via the the NFC controller, direct payments into their own payments systems, rather than into Apple's: everything is, typically, inhouse for Apple, and Apple Pay transactions get processed in Apple's own back office payments system. And the banks said that having the threat of diverting the payments away from Apple would constrain Apple's payments handling fees, which would benefit consumers.

And the ACCC agreed (page vi of the Summary):
NFC access is likely to result in a significant public benefit from increased competition in mobile payment services on iPhones. This increased competition, particularly in the short term, is likely to provide a competitive constraint on Apple in its pricing for Apple Pay
On the downside, however, there were problems that tipped the scale the other way.

One was that the ACCC thought there would be a loss of consumer choice between two clearly alternative models: the Apple/iOS way and the Google/Android way. If the banks got their way, the differences would be smudged over: my words, not theirs, but that was the gist. As the ACCC said (p ix)
this would affect Apple’s current integrated hardware-software strategy for mobile payments and operating systems more generally, thereby impacting how Apple competes with Google. In particular, NFC access may involve modifications to Apple’s software or hardware that lessen the degree of differentiation between the iOS platform and the Android platform
Another issue was that Apple's 'accept all kinds of cards into the Apple digital wallet' approach ('multi issuer' in the jargon). For consumers, that's a good thing because you are less locked in to any one financial institution (p ix):
Multi-issuer digital wallets such as Apple Wallet and Android Pay are likely to increase competitive tension between payment card issuers by increasing the ease of consumer switching
The banks' versions of digital wallets, however, would be likely to maintain the current system of being, to some degree, tied to one institution (page ix):
The incentives of issuers to favour their own wallets over multi-issuer digital wallets are likely to have the effect of reinforcing the use of one payment card as a default card; whereas multi-issuer digital wallets would not have the same effect...To the extent NFC access would bias the development of issuer digital wallets over multi-issuer digital wallets, these potential benefits are likely to be lost
But perhaps the big take-away from the whole thing was the ACCC's reluctance to intervene in the early stages of a fast developing market - "the emerging markets for digital wallets and mobile payment services are subject to rapid innovation and change, which is already producing an increasing variety of mobile payment services, mobile payment devices, and digital wallet apps" (p vii) - where it is anyone's guess how things will play out or what the longer-term effect of early regulatory intervention might be. The best approach is surely not to try and second-guess when even the industry gurus aren't sure, and when large amounts of money are being placed on different runners.

And to the (limited) extent the ACCC could see impacts from allowing the banks' access, it didn't like the look of them in these freewheeling tech circumstances. For example (p ix)
Assuming that Apple opens access to its NFC controller as a result of the proposed conduct, this is likely to distort competition in mobile payment services by artificially directing the development of these emerging markets to the use of the NFC controller in smartphones. This is likely to hamper the innovations that are currently occurring around different devices and technologies for mobile payments
A lot of mergers and authorisations these days have this 'where will the tech go' element: here in New Zealand it's front and centre in both SkyTV/Vodafone and Stuff/NZME. Mark Berry, the chair of our Commerce Commission, said in February when knocking back the SkyTV/Vodafone one, that "uncertainty as to how this dynamic market will evolve is relevant to our assessment".

None of this is to say that any old anti-competitive rort should be ignored in dynamic markets, because it'll all get swept away by The Next Big Thing in the end. Tech companies may well get up to stuff that breaches section 27 of our Commerce Act, or section 36, and should be pinged (if s36 were in fact practicably enforceable in New Zealand). But if Mark's view can be unpacked a bit into something like "we can see the short-term impacts, but who the hell knows what's round the corner, and anything we authorise might make things worse", then he - and the ACCC - are on the right track.

Saturday, 1 April 2017

More good books - April 2017

A history of Britain's Census may not be many people's first idea of a good read, so you'll be pleasantly surprised by Roger Hutchinson's The Butcher, the Baker, the Candlestick Maker: The story of Britain through its census, since 1801. It's full of interesting themes and 'fancy that' detail: the 1841 census, for example, was the first to record people's names and ages (the previous ones were effectively just enumerations), but among the details it got wrong was Queen Victoria's birth date ('about 1821') when in fact it was 1819. As Hutchinson says (pp60-1), "If the national census could consistently get wrong the personal details of the Queen of Great Britain and Ireland and future Empress of India, what hope had anybody else?".

But that's to do the early census takers a bit of an injustice. In the days when the IT infrastructure was paper, pens and horses, the early censuses got the job done remarkably quickly: first results from the census of March 1 1801 were published in June 1801, and 600 pages of summaries and abstracts in December 1801. I doubt if we could manage the same today. Our technology has improved out of all recognition, but so have assorted deadweight managerial costs and, especially, mission creep. You should see the form that our census enumerators will be using in 2018 to record answers to the religion question, which includes at its most detailed level 167 different 'Religions', 'Beliefs' and 'Philosophies', including Satanism, Maoism, and the Church of the Flying Spaghetti Monster (aka Pastafarianism).

Some of the recurrent themes remain highly topical. The late 19th century influx of Jews from eastern Europe, as documented in the 1891 census, got the racists slavering: as the author says (p225) "Right-wing populists denounced an 'alien invasion' which was apparently taking British jobs from British workers. Ratepayers were, according to the Manchester Evening Chronicle, being bilked of excessive poor relief" (the rates-financed social welfare of the day), just like today's incoherent reactions where immigrants are supposedly both stealing jobs and bludging on the dole. An inquiry as part of the 1901 census, however, found that in the archetypal Jewish refuge, the East End of London, "The proportions of indoor Paupers [i.e. totally destitute and reliant on workhouse relief] among the general population and among the European Foreigners were 15.1 and 1.7 per 1,000 respectively" (p233). And among those damn job stealers were people like Michael Marks (first counted in the 1891 census), who had the temerity to go on and build Marks & Spenser. Shouldn't be allowed.

We've moved on from that, haven't we? Then you read on Wikipedia that in the 2011 UK census, "Other new questions involve asking migrants their date of arrival and how long they intend to stay in the UK; respondents also required to disclose which passports they held". But no doubt that's all intended to inform sound policy analysis. In any event, you'll find yourself following Hutchinson down all sort of interesting historical side alleys, and learning a fair amount of economic history on the way. It's a good read.

I try to stay in touch with Aussie politics, and my latest foray is David Marr's Faction Man: Bill Shorten's Pursuit of Power, a short portrait of the Australian Labour Party leader that is an updated and extended version of a 2015 Quarterly Essay. Shorten has made it to the top of Labor via the Australian Workers' Union, where he was initially an organiser, then National Secretary from 2001 to 2007, when he became a federal MP. I knew next to nothing about Shorten before this book, which broadly makes the case that he is a rough-house player of Australia's factional politics, with little commitment to any settled philosophy beyond self-advancement: a Paul Keating without a programme. I'll be interested to learn more beyond this initial worrying impression.

I've been having a good run with fiction. Top of the list is debut author Jane Harper's The Dry, a riveting and extraordinarily well written novel about murders in rural drought-ravaged Australia: even if you're not normally a crime/murder reader, make an exception for this one. I came to Jonas Jonasson backwards - I read his later Hitman Anders and the meaning of it all ahead of his earlier (and now filmed) The 100-year-old man who climbed out the window and disappeared - but they're both good, though hard to categorise (black comedy? satire on modern Sweden?). If time's short, try Hitman Anders and see if you like the style. And I very much enjoyed David Thorne's East of Innocence, where an ex City of London lawyer is now reduced to scraping by in Essex and gets involved with police brutality and the local Essex hard men.

In 'more of the same but just as enjoyable', there's the fourth (Silk Chaser) in Peter Klein's series about an Australian professional better on the horses who finds himself caught up, Dick Francis style, in industry shenanigans, this time the serial murders of 'strappers' (horse grooms). And there's the latest (Tatiana) in Martin Cruz Smith's series about Russian police investigator Arkady Renko, where an investigative journalist falls foul of the Russian powers that be.

Good intelligence/espionage novels can be hard to find, so you might want to try Alan Judd's series about a chap making his way up through the British security service. I've finished Legacy and am half-way through Uncommon Enemy, with Inside Enemy still to come. And then there's the ever reliable Gerald Seymour's latest, Jericho's War, about a semi-officially-sanctioned raid on high value Al Qaeda targets in the back blocks of Yemen. All good stuff. And let's hope that one of the great maestros of the genre, Alan Furst, gets his mojo back into top gear this year.

Thursday, 30 March 2017

Nature abhors...

...well yes, a vacuum. And that's what we've got.

Sky TV and Vodafone have been told by the Commerce Commission that their marriage is off, but while they haven't been told in full detail why, to keep their appeal rights open they've challenged the refusal in any event, without knowing which of their arguments for the marriage got thrown out or which arguments against their marriage got accepted. And people like Spark who didn't want them married in the first place had to go to court to stop them getting married, although at the time they didn't know that Sky and Vodafone wouldn't be allowed to get married, and even now still don't know exactly why they weren't, though they're happy about it.


If this seems odd to you, you can put it down in part to the Commerce Commission's current practice of announcing decisions, with detailed reasons to follow.

Before I go much further, let me put my hand up and say, I've been there, done that, and used to think the Commission's process was just fine. When I was there it made sense to me, because generally a faster decision (I thought) trumped a detailed decision.

And I've changed my mind, as I said a wee while back. Leaving people in a limbo where something's been decided, but neither those wanting it nor those opposing it know for sure why, is increasingly looking odd to me.

You might well think (in a Francis Urquhart sense) that an economist's view on due process is worth half of five eighths of the proverbial, and maybe that's true. But the other day, in the middle of something else, I got chatting to John Land, the competition lawyer, and I told him that I'd been blogging about this.

And I discovered that he'd come to the same view. A while back, John put in a submission - it was in the context of the Commission updating 'MAGs', the mergers and acquisitions guidelines - arguing that decisions without reasons at the same time was the wrong way to go.

In sum, he had three issues: decisions without reasons could be an error in law (I'm no expert there); the practice unfairly prejudices parties affected (I tend to agree); and, importantly, that "the discipline of finalising the reasons is important in ensuring that the Commission arrives at the correct decision", which sounds right. But don't take my summary of it as gospel: go read the full submission.

And I've also been rethinking the whole speed versus transparency thing. SkyTV/Vodafone came in the Commission's door on June 29 2016, and the decision to decline was announced on February 23 this year, almost eight months later. Stuff/NZME came in on May 27 last year and the decision is due (on the latest timing) on May 2 this year, which is eleven months and a bit.

I'm not bagging anyone over these times, by the way: clearances and (especially) authorisations are complex beasts to start with, and are getting trickier and trickier to determine, for a bunch of reasons, and they need to be done right.

But if these decisions are going to take nine or ten months or so in the first place, is it really worth going into the vacuum territory of decisions without reasons, for the sake of a couple of weeks' quicker announcement?

The other thing that resonates with me, and probably resonates most with anyone who's had to make a really complex judgement call on the net balance of a swathe of expert economist and legal reports, is that you'd want to see the finished product, and kick its tyres, and satisfy yourself that the whole thing hangs together. I usen't feel that way, but now I don't think, were I in their shoes, that I'd want to make the go/no go decision and subsequently hope that the whole recipe comes out of the oven okay later on. And irrespective of the decision-making process,  I'm not sure the uncertainties created for the parties are worth it.

None of this is a big deal. Life will go on either way. And we've got a bunch of more important competition regime issues stacked up and still undecided (section 36, market studies, cease and desist, the shipping lines' exemption, cartels) that should be addressed first. But it wouldn't hurt to tidy this up. It could be win-win all round: a better process for the Commission (arguably better enough to create some efficiencies, so that decisions aren't actually delayed at all), and greater clarity for the parties involved.

Monday, 27 March 2017

Still stuck

So here's the state of play.

The Commerce Commission can't do "market studies", proactive inquiries into the state of competition in particular sectors or industries. That's because of a historical - and in my view strange and misguided - court decision, but the Commission is lumbered with it in any event.

The Commission's overlord, MBIE, can do market studies. It's been asked to do one on petrol prices. So the policy Ministry will be doing the operational work, and the operational agency will be sucking its thumb.

And on top of this strange demarcation process, while MBIE has talented people, they're starting near ground zero, while competition analysis is the Commerce Commission's day job, and it's good at it.

It's a botch and a bungle, in sum. Which is why allowing the Commerce Commission to do market studies has been one of the agenda items on MBIE's mini-review of the Commerce Act.

But that appears to have gone to ground. As I've noted before, it's one of a number of competition reforms that have run out of oomph in the past few years.

Meanwhile the Aussies just press ahead: I read in today's Australian Financial Review that their government is "ordering the competition watchdog to conduct a review into retail electricity prices" (article here though it may be paywalled). No judicial nitpicking for them over asking their competition authority to do something that should obviously be within its remit.

It's possible that the change of bums on seats as Minister of Commerce may be holding things up. The previous Minister, Paul Goldsmith, had gone round the traps and taken soundings about the mini-review of the Commerce Act, and may well have been on the verge of pressing some buttons. It's possible that the new Minister, Jacqui Dean, is still forming her own views.

But once everyone's got their heads around the issues, could we, finally, see some progress on some long overdue improvements to our competition regime?

Friday, 24 March 2017

Take advice? Moi?

Most years - they skipped 2016 - the OECD comes out with one of its Going For Growth reports. They're a big thing for the OECD: its Director General says that "Going for Growth is the OECD’s flagship publication on structural policies. Its purpose is to help policymakers set reform agendas for the wellbeing of their citizens and to achieve strong, sustainable, balanced and inclusive growth".

Don't know why they bother, frankly, if New Zealand's reactions are typical. We give the reports close to zero coverage in the media, and our governments sleepwalk on, taking too little heed of the OECD's advice. From time to time we do some patchwork or catch-up improvements, but rarely if ever deal to the issues properly. All of the recommendations in the 2013 version, for example, were still there in the 2015 one (if you want to see previous years, they're here).

And that's a real shame, because if you're in New Zealand's position, where we seem to be doing quite a lot of good things but getting little payoff by way of faster productivity growth, you'd think that we would be lapping up informed ideas on how to get more traction.

So, what are they saying we should do?

The OECD's got two approaches. One is a "what everyone should do" piece, which you can read here, and the other is a country-specific piece, which for New Zealand is here.

At the "everyone" level, the OECD has a long shopping list, some of which don't apply a lot to us, because - while we've still things left undone - we did a pretty good reform job in the Eighties and Nineties. But some do, and I was especially interested in their recommendations on infrastructure. As I've mentioned before, we're currently chronically unable to roll out enough infrastructure in good time: the OECD says that

The most direct contribution of policy to growth of the whole-economy capital stock comes from public investment and recent empirical work suggests a large positive effect on productivity. Solving infrastructure bottlenecks, such as those in transport, can also contribute to stronger labour utilisation, through enhanced labour mobility, and to better environment protection, through lower carbon emissions. Considering the post-crisis fall of government investment as a share of GDP...and the current macroeconomic context, enhancing core public capital, and in particular the capacity and regulation of infrastructure, is a priority for both member and non-member countries.

Everything we do (and we're not alone in this) is a dollar short and at least a decade late, and I have a strong suspicion that it's one of the bigger reasons for our relatively poor productivity performance by international standards (have a look here). With financing costs at historically low levels, we ought to be getting on with it in any event, but it would be nice to think that the OECD's advice will give a further rark up to the government's Budget plans on the infrastructure spend.

For New Zealand, the shopping list is:

  • Reduce barriers to FDI [foreign direct investment] and trade and to competition in network sectors
  • Improve housing policies [a new one added since the 2015 report, and no surprise given what's happened to house prices]
  • Reduce educational underachievement among specific groups
  • Improve health sector efficiency and outcomes among specific groups
  • Raise effectiveness of R&D support

There are detailed policy recommendations under each of the headings. On housing, for example, the report says by way of preface that "Reducing the scope for vested interests to thwart land rezoning and development that is in the public interest would result in greater agglomeration economies and housing affordability, which would disproportionately benefit lower-income households", and it says we should

Implement the Productivity Commission’s recommendations on improving urban planning, including: adopting different regulatory approaches for the natural and built environments; making clearer government’s priorities concerning land use regulation and infrastructure provision; making the planning system more responsive in providing key infrastructure; adopting a more restrained approach to land regulation; strengthening local and central government emphasis on rigorous analysis of policy options and planning proposals; implementing pricing to reduce urban road congestion; and diversifying urban infrastructure funding sources.

That's a pretty good summary of the choke points - each of us might emphasise one rather than another, but they're all there - and of what to do to relieve them, and the same goes for their other detailed recommendations.

But our track record on responding quickly and fully is, sadly, poor. Oscar Wilde said he could resist anything except temptation: New Zealand governments can take anything except advice.

Postscript (March 24): Michael Reddell has also written about this latest Going for Growth report in his post, 'What does the OECD really have to offer us?'. As his title suggests, he's less enthused about the OECD's ideas. And that's okay: opinions make markets.

Thursday, 23 March 2017

Faster by elephant

Back in the early Nineties I went on a short business visit to Bangkok, which was infamous at the time for its traffic gridlock. Sure enough, our taxi got stuck: nothing moving in any direction, other than an elephant (with rider) which ambled past us. Elephants only go about 7 kilometres an hour, but even so it was going to get where it was headed faster than we were.

Since then, Bangkok has got its airport act together. There's the toll road - TripAdvisor says "The most direct route is via the raised freeway between [the airport and the CBD], which incurs toll of 70 Baht and airport tax of 50 Baht - total 120 Baht (approx [US]$4)" - plus "The much-awaited Airport Rail Link (06:00-midnight) that connects downtown Bangkok with Suvarnabhumi International Airport is a smart alternative to the airport’s express buses or taxis. The City Line makes six stops between downtown (Phayathai Station) and the airport, completing each run in 30 minutes, making this a quick and convenient transport option for getting in and out of Bangkok" (as you can read here).

The rest of the traffic is pretty much as bad as ever - TripAdvisor says "the Bangkok traffic...can sometimes appear to be a permanent traffic jam as there are about 13 million vehicles in Bangkok" - but the airport link, at least, is sussed.

Meanwhile we're on our way to become the Old Bangkok of the South Pacific. For traffic times to Auckland Airport, we're now worse than Bangkok: there's no new elevated highway, there's no rail link, and you now need to leave at least 90 minutes ahead of check-in time if you're trying to get to the airport from where we are on the North Shore. And while Auckland's overall traffic (not just the airport route) isn't as horrendous as it is in some places, it's still poor, and getting worse.

TomTom's recent global Traffic Index, for example, ranked us 40th out of 189 cities (of 800,000 population or more) for our traffic congestion. TomTom uses a colour coding system: red is awful (four cities, including Bangkok), and browny-orange is pretty bad. We're in the bad basket, ranking 36th out of 106, which means we're up there as bad goes. There's a decent sized limey-yellow group of 60 where things are meh, and then there are a green 18 where the traffic is okay (though they're all in the US).

Meanwhile I read in our local community newspaper, the North Shore Times, that "Trains are on track for Shore", because the Northern Busway "will reach its capacity in 2026 - 20 years earlier than originally expected". Jolly good - and then at the bottom of the article you read that an Auckland Transport spokesman "stresses any rail upgrade to the Northern Busway can not occur before the Additional Waitemata Harbour Crossing is built, which is projected anywhere from 2030 to 2048".

When you see timeframes like that, you're tempted to conclude that this isn't planning to build infrastructure: it's planning not to build.

I wonder if that elephant is still available?

Tuesday, 21 March 2017

Jobs and spin

Politicians everywhere spin the economic data, and the labour market data in particular. So it's no surprise that the Trump administration does it, too, nor that the Trump numpties do it with more more ineptitude and hypocrisy than most. Having claimed on the election trail that the official American employment and unemployment numbers were variously either bad measures or outright faked, the Trump team is now claiming the latest official data (a big rise in jobs and a fall in the unemployment rate in February) are mysteriously unfaked after all, and the right things to focus on.

Plus they've dissed a Federal regulation saying that Federal officials can't comment on official data until an hour after their release - a quid pro quo for the dubious practice of giving the President (via the Chair of the Council of Economic Advisers) advance access to the numbers, since it would be all too easy otherwise for incumbent Presidents to use that access to screw the first impression scrum.

We haven't followed the Americans down that path to privileged access for the executive, and good job, too. We do have pre-release 'lock ups' for the media for important statistics, which I see as a useful evening-the-playing-field device to ensure that independent, informed comment goes out at least as quickly as Executive spin. From that perspective it's also a shame that some thoughtless nerk led the Reserve Bank to cancel its lock ups for the Monetary Policy Agreements: not everyone agrees, but the Governor's take having the airwaves to itself for an uncontested hour is a step backwards, compared to the previous arrangements where journalists had a way to put out their own considered view at the same time.

Not that we're always saints and the Americans always sinners: if, for some great sin in a previous life, you listen to our Parliamentary Question Time long enough, you'll find the same smart-alecking going on about our own employment and unemployment numbers, though not to the shameless Trump standard. Some Minister will point to the low official unemployment rate, and some Opposition member will say "Aha! But if you look at the underemployment rate...". And they will of course swap positions on the data when they swap roles.

So as a bit of an air-clearer, here's how we've been travelling, based on our new and improved Household Labour Force Survey.

The graph shows three ways of looking at unemployment. The green line is the headline, official, unemployment rate. The orange line adds in people who are underemployed - people working part-time but who are available to work full-time, and would like to. And the red line adds in what Stats calls the 'potentially available' workforce, which is made up of two groups: people who aren't actually looking for a job right now but would be available and willing to take one on if it cropped up, and people who are looking and willing and will be able to take up a job in the coming month, but not right now.

All these are valid ways of looking at unemployment and underemployment, and depending on what you're most interested in, you'll follow one rather than another. But what's also very clear is that the trend is almost exactly the same across all three series. So next time you hear a politician saying, "Well, the official unemployment rate may be getting better, but the underemployment rate isn't", or some variation thereof, you'll know that you've got a gasbag talking his partisan position, just like the Yanks have been doing.

The other thing that occurred to me as I trawled my way through the data is that I'm left unsure about the solidity of estimates of the 'natural' rate of unemployment. That's the rate when the labour market has become so tight that employer competition for scarce staff starts to bid up pay rates and eventually the national rate of inflation.

There are sophisticated ways of measuring it: the latest I'm aware of is Weshah Razzack's Treasury Working Paper 'New Zealand Labour Market Dynamics: Pre- and Post-global Financial Crisis', which estimated the natural rate in recent years to be around 4.5%. But I wonder. Let's suppose that the official unemployment rate did indeed start going below 4.5%: is it really likely that wages/inflation would start accelerating at that point, when there are currently 115,000 people who are working part-time and would like to work longer hours? A more likely initial response is more employers wanting, and more employees agreeing, full-time hours.

Or another way of putting it is that I suspect the sky would not fall if our unemployment rate went into the low 4s or even below. Sure, institutional arrangements vary, and you can't always (or even often) say that what works in one country will work everywhere else. But there are countries, as you can see in the table below, which have got their unemployment rates down to lower levels than ours, without inflation starting to roar away (or even raise its voice much).

Monday, 6 March 2017

Gone but not forgotten

Remember that court case Spark took last month, to put a delay on the proposed merger between Sky TV and Vodafone? Spark wanted the merger put on hold until the Commerce Commission's reasons for approving it were available, and Spark would have had an opportunity to see the reasoning and potentially appeal against it.

Spark won: the judgement is here, for competition law tragics, but in the event the whole thing became moot when the Commerce Commission declined to approve the merger.

Even so, the whole thing has left me thinking, and thinking in particular about the Commission's practice of issuing a decision first, and the full written reasons later. And while I didn't think it was odd at the time I was there, now I do.

For one thing, it doesn't fit with what other judicial bodies do, and normally the Commission tends to follow legal practice (in recent years, for example, it has adopted standard judicial citation style for its decisions). You don't get High Court decisions first, and reasons later: the judgement is the judgement is the judgement.

For another, there's an element of justice being seen to be done. Parties are entitled to know, at the time, why a decision went the way it did. The Commission likely feels that the gap in timing is kept as short as possible - in its latest Statement of Performance Expectations it aims for 10 business days - and so isn't such a big deal. But that really doesn't cut it: in principle, I'd now argue, decisions and reasons together are a fairer way to go, and in practice the gap causes real problems.

There's the one Spark identified: by the time Spark gets round to challenging the Commission's reasoning, it might be too late, and the omelette can't be unscrambled. And there's the opposite problem: merging parties left in limbo, when 10 days can be an eternity in the capital markets and the market for corporate control. Last month Kraft's US$143 billion hostile bid for Unilever was announced on a Friday, called off on a Sunday: while that deal was more high farce than high finance, the reality is that there can indeed be brief windows of opportunity that won't survive two weeks (or more) of swinging in the wind.

And finally I think that it might improve the Commission's own internal decision processes. "Here's the decision as it will look in the shop window" is a better document for Commissioners to sign off on than "Here's a likely decision. There'll be more supporting stuff later".

There are arguments both ways: some will see the trade-off of decision quicker, reasons later as a reasonable package, and indeed I used to, too. But having had a rethink, I now prefer make a decision and publish the reasons at the time. It avoids the vacuum problem that the Spark case pointed out, and I think it's a bit fairer to all parties involved.*

*In an earlier version I had said that "Anything else" - other than reasons at the time - "falls short", but that was too black and white. People (as I mention in a reply to a comment below) can reasonably put different priorities on tradeoffs between speed versus transparency.

Friday, 3 March 2017

Slow, slow, slow

Reading a new biography of Paul Keating, I came across a good example of how the Aussies in recent years are pushing on with reform while we dilly dally. It's in an area close to my heart - competition policy.

The biography tells me that in Oz the National Competition Policy Review (the 'Hilmer' review) started on October 4 1992 and was published on August 25 1993: ten and a half months. It got buy-in from Australia's state premiers on February 25 1994, six months later, and essentially went live from April 11 1995. Start to finish, two and a half years. Call it three years to allow for pre-Review debate on whether to press the green button.

The latest Aussie Competition Policy Review (the 'Harper' review) was announced on December 4 2013, got underway on March 27 2014, and published its final report on March 31 2015: sixteen months. Legislation to implement its big recommendation (reform of the abuse of market power) is well underway: last month it got through the Aussies' Senate Economics Legislation Committee. There's horse trading to come, but it could well pass this year. Start to finish, call it four years.

Meanwhile, in New Zealand there's been no comparable root and branch review at all.

The best we've managed is some useful recommendations from the Productivity Commission (again featuring reform of abuse of market power) in May 2014. The government decided on a follow-up 'targeted review', and in November 2015 MBIE produced an issues paper on three issues (market power, market studies, cease and desist). The consultation and submission process wrapped up in July 2016. And then the trail goes cold. There's been no further news: it'll soon be three years since the Productivity Commission set the ball rolling, and we don't even have policy decisions, let alone laws passed.

And on another part of the battlefield, we thought we had some bright ideas to reform how we treat cartels (notably criminalising them). A bill was introduced to that effect in October 2011. Over five years later, it hasn't reached the floor of the House for a final vote, and has had the criminalisation bit dropped.

So here's the tally. Australia: two major competition reviews, one done and dusted in good time, the other well on its way. New Zealand: no decision on a limited subset of issues, and five years delay (and counting) on a hamstrung cartel bill.

Let's recall that the Hilmer review alone was worth many billions of dollars to the Aussie economy. The Aussie Productivity Commission had a go at measuring it in 2005, and found (pXII) that
National Competition Policy (NCP) has delivered substantial benefits to the Australian community which, overall, have greatly outweighed the costs. It has:
– contributed to the productivity surge that has underpinned 13 years of continuous economic growth, and associated strong growth in household incomes;
– directly reduced the prices of goods and services such as electricity and milk;
– stimulated business innovation, customer responsiveness and choice; and
– helped meet some environmental goals, including the more efficient use of water 
and (pXVII) that
Previous model-based projections by the Industry Commission suggested that the major elements of NCP could potentially generate a net benefit equivalent to 5.5 per cent of GDP. More selective analysis, undertaken for this inquiry, indicates that the observed productivity and price changes in key infrastructure sectors in the 1990s — to which NCP and related reforms have directly contributed — have increased Australia’s GDP by 2.5 per cent, or $20 billion....And such modelling does not pick up the ‘dynamic’ efficiency gains from more competitive markets 
So we've spent years navel-gazing on the fine differences between cease and desist orders and injunctions, and missed the opportunity (which the Aussies seized) to add at least 2.5% to our GDP.

Nice work, guys!

Books for politics junkies

With our mainstream media generally undercovering our closest geographical and philosophical neighbour, you'll have to educate yourself about Australia. For your latest edification, try Troy Bramston's Paul Keating: The Big-Picture Leader, which as the author says "offers a broadly favourable but not uncritical account of of Keating's public life and legacy". It's well written, convincing, highly informed: Bramston has talked to everyone who was anyone. I didn't know, for example, that Keating was the ultimate 'numbers man', with a Lyndon Johnson ability to steer issues through factions, caucuses and Cabinets. It will get you thinking, in particular about the future of once successful combos of social liberalism and economic reform - Hawke/Keating, Lange/Douglas, New Labour in the UK (Blair was influenced by Keating) - who now find themselves uncomfortable coalitions of Chardonnay socialists and the old union-centred left, and have yet to work out a renewed, electorally viable role.

As you read, you'll find many parallels with New Zealand. Critics of our 'Rogernomics' like to think we went on a weird extremist trip of our own, but as this book shows, Australia started before us (1983), as did the UK and the US, and although we blitzed the Aussies for a while with the speed and depth of our own reform programme, and in some respects (eg fiscal policy) we're still ahead, by and large they've kept going while we've slacked off. Few would doubt that (as this book demonstrates) Australia's reforms in Keating's time formed the bedrock for the recession-free period Australia has enjoyed since, and conversely our low productivity record suggests unfinished domestic agendas.

Still on politics, the upcoming French presidential election is in the near term one of the bigger risks to currently richly-priced financial markets and in the longer term to the prospects for the eurozone and the global economy. If, like me, your knowledge of French history goes a bit hazy between the French Revolution/Bonaparte and the World War Two Resistance, then the book for you is Jonathan Fenby's The history of modern France: from the revolution to the present day. He's got some sharp insights: "Successive presidents and governments had applied a self-serving logic in refusing structural change to the economy - if times were hard and growth was low, reform was impossible; if things were going better and there was no expansion, there was no need to change anything. It was an evasion of reality, and of necessity" (p484), which explains why France has been running a Nordic social welfare system but not paying for it (the fiscal budget been in deficit for 35 years).

Does history give us any tips on how the election might go? If you're worried about Le Pen (as you should be), you won't take much comfort from Fenby's conclusion that "the various narratives of the last two centuries have shown that the country invariably opts for right over left with occasional eruptions to prove that its revolutionary legacy is not dead" (p463). Nor from "The idea of the Hexagon [France] as a model for the world is not one which many people could objectively defend in the twenty-first century, but it remains a potent reason to repel change of foreign influences. The French want to see their country as the bearer of a special mission bequeathed by their history...If the present really contradicts such a vision...this leaves them deprived of what they believe should be theirs by historic right and opens them to the temptation of extremist illusions" (p461).

History also reminds us of the suicidal factionalism of the French Left. In 2002 Marine Le Pen's dad Jean-Marie came second (with 16.8%) to Jacques Chirac (19.8%) and made the run-off second round, principally because the Left split between Lionel Jospin (16.1%) and 10 (!) others. And guess what? This year the Left has fielded two big name candidates - the official Socialist, Benoît Hamon, polling around 13%, and independent far-left Jean-Luc Mélenchon (around 11-12%). Unsplit, the left vote could see off the right's François Fillon (around 19%) and give the independent Emmanuel Macron (low to mid 20s) a real run for the second run-off slot, behind Le Pen. What is it about déjà vu the French left doesn't understand?

Wednesday, 22 February 2017

Are interest rates really biting?

"Increasing mortgage interest rates", the Reserve Bank said on page 18 of its latest Monetary Policy Statement, "combined with a tightening of loan-to-value ratio (LVR) restrictions in late 2016, have contributed to a slowing in the housing market".

Moderating the heat of the housing market may be welcome - though previously low interest rates are far from being the only thing that's been inflaming the market - but otherwise I got a bit worried that higher rates might be crimping the economic outlook. If the average or marginal household is now carrying a bigger mortgage, and mortgage interest rates go up, the impact on already cramped family budgets could see unpleasant things happening (via consequent necessary cutbacks in household spending) to the currently strong state of the economy.

And then I thought, hang on a sec. Yes, it's true that some mortgage interest rates have started to increase. The chain of events is, US bond yields have risen, especially after Trump was elected; NZ bond yields and other local long term interest rates have gone up as well (they tend to track the US rates plus a credit premium); and this has fed through with a lag (via higher funding costs for the banks) to higher fixed mortgage rates. The graph below shows the past year's trends for some of these rates*. Rates bottomed out around the middle of last year and have risen a bit since.

But how much these increases have been contributing to a slower housing market (or indeed slower anything else) is debatable. The first time borrower may be finding it slightly tougher going. But for existing borrowers, most folks these days are on fixed rates - at the end of December last, there were $182 billion worth of fixed rate mortgages compared to $53 billion of floating rate - and they won't have noticed anything, because they haven't come to the end of their existing fixed rate arrangement.

And then I wondered, well, what happens when they do roll over from their existing fixed rate? Will they roll over into something that will have the household worried about how to balance its books?

Quite the reverse, actually. Here's what a borrower who took out an x-year fixed rate mortgage x years ago would pay to roll over into another x-year fixed rate mortgage today (or at least at the end of December, the  latest available RBNZ data, though today's rates are very similar).

Other than for the 1-year fixed rate, where it's effectively the same, the household with an expiring fixed rate mortgage will be rolling over into a lower borrowing cost for another mortgage of the same maturity as before. Large falls in fixed rates in recent years dominate the small increases in the last few months. For most borrowers in coming months, the mortgage rollover will boost disposable income, not restrain it.

There's also the possibility, though, that local fixed rates will keep on rising and upset the calculation. Let's suppose that US interest rates rise by 0.5% during the course of this year (roughly in line with what the latest, February, Wall Street Journal poll of US forecasters expects for US 10-year yields). And let's assume all local rates rise by the same amount. By the end of this year, 3-, 4- and 5-year fixed borrowers would still be rolling over into cheaper loans, but 1- and 2-year borrowers would be paying a bit more, as would first time borrowers. Overall, this wouldn't represent a big squeeze (or possible any squeeze) on household budgets.

So I'm inclined to think that rising mortgage rates will not be any near-term threat to the economic outlook, and somewhat unconvinced that they can have have played much part to date in a slowing housing market. There may be other reasons for a national cyclical slowdown - the latest BusinessNZ/Bank of New Zealand survey of manufacturing had a hint of the construction sector hitting capacity constraints, though on the other hand the equivalent survey of services showed there is still "swift, broad-based, growth occurring in the services sector" - but interest rates, to date, don't look like much of an actual or potential brake.

*Local fixed rate mortgage rates come from the RBNZ's site, but they're not where might think they are (you'd likely expect in 'Statistics', 'Exchange and interest rates', 'B3: Retail interest rates on lending and deposits'). However you can find the full range of fixed mortgage rates in 'Statistics, 'Registered Banks', 'S8: Banks' mortgage lending ($mn)'; they're in section E6. For the very latest rates, if you go to the bottom of the 'Mortgage Rates Table' in the 'Mortgages' part of the Good Returns website, you'll find the up to date median floating and fixed (1,2 and 3 year) rates.

Thursday, 9 February 2017

Bits and bobs from the Bank

We all know the big news from today's Monetary Policy Statement - the official cash rate stays on hold, as unanimously expected by the forecasting community, and, assuming the world pans out the RBNZ thinks it will, an eventual rate rise is a bit closer than before.

But there's always less important, but still interesting, stuff to be found in the nooks and crannies of the MPS and in the Governor's 10.00am press conference afterwards.

Here's one thing worth noting from the MPS, as a corrective to anyone who thinks our big rise in net immigration is mainly or wholly because we're being swamped by Asians.

In 2012, we had essentially a breakeven net immigration position (for the record, a small loss of 1,165 people). Since then net immigration has soared to last year's net intake of 70,588. That's a turnaround of 71,753. By far the biggest moving part in the turnaround isn't Asian at all. It's what has happened trans-Tasman, Over the same period, fewer Kiwis decided to go to Australia, and more Kiwis (and some Aussies) decided to come here, as our economic cycle picked up and theirs slowed down. As a result we moved from a net loss to Australia of 38,796 people in 2012 to a small net gain of 1,563 in 2016, a turnaround of 40,359. That's 56% of everything right there.

From the press conference, John McDermott, the Bank's Head of Economics, picked up on a question from the NBR's Rob Hosking, who had asked about the multiple references to 'uncertainty' of one kind or another, and said we should all have a look at "Nick Bloom's website".

This is what (I reckon) he meant - the Economic Policy Uncertainty website, which has some wonderful indices measuring the level of economic policy uncertainty in various economies, and globally. Here's the latest global picture, as at November 2016. No wonder people are talking about high levels of uncertainty: while the index hasn't been going forever (it starts in 1997), current global policy uncertainty is at an all-time high for the period.

Fascinating site - you can read their methodology, and download the data for quite a range of countries (sadly not including us). But the Aussies are there: here's what they look like.

And finally there was a casual reference from the Governor, responding to a question about the future track of interest rates, where he said that in the November MPS, there had been a 20% probability of an OCR cut built into the OCR forecast, but it has now been removed in this latest one.

I don't recall ever reading (or hearing) about these probabilities before. I don't have a problem with them - they would seem to be an eminently reasonable way of thinking about things - but if they are indeed an established part of the policy thinking, I'd quite like to have more detail at future Statements. Central banks seem quite comfortable these days indicating an easing or a tightening bias: sharing some probabilities around it wouldn't go amiss.

Has planning been worth it?

There was a big turnout on Tuesday night in Auckland at the latest Law and Economics Association of New Zealand (LEANZ) event - a panel discussion featuring three members of the Auckland Unitary Plan Independent Hearings Panel. In fine interdisciplinary LEANZ style, they were Judge David Kirkpatrick (the Panel chair), planner Jan Crawford, and economist Stuart Shepherd.

Chatham House rules, so I can't say anything specific about who said what, but I can safely say that all three were very good speakers - informed, persuasive, congenial, thoughtful, and able to put technical stuff into plain (or at least a good deal plainer) English. So full marks to the organisers, Richard Meade (AUT and Cognitus Advisory) and Andreas Heuser (Treasury) for putting it all together. Special thanks to Simpson Grierson who kindly hosted the event: the LEANZ caravan would be unable to travel on without these corporate oases.Though you can help, too: here's that LEANZ site again, so you can pay your $75 sub ($50 for students).

So, noting again that these are my views and not what the presenters may or may not have said, what did I take away from it?

Clearly the members of the Panel did the best they could with the machinery they had to drive, and in particular they aimed to get the availability of housing land up to where it needs to be (though there may be a developing, and less known, shortage of land for business purposes). And they had the added complexity of having to amalgamate the previous jumble of territorial authority plans into one overall plan for the new one-city Auckland, as well as being lumbered with a process not of their choosing. In the circumstances, they did a fine job.

But it's also clear that the planning process for Auckland has become enormously top-heavy and inefficient. Like other parts of our regulatory apparatus (such as the price control 'Part Four' bits of the Commerce Act) it badly needs paring back to something quicker, more targeted, cheaper, and more efficient.

In part the current clunkiness comes from importing an industrial-strength First World planning policy infrastructure, without paying enough mind to what might work for a small distant economy with not-quite-First-World incomes to pay for it. And in part it's because plans have been allowed to become voluminous grab-bags of miscellaneous agendas (price control, income redistribution, architectural design preferences). I've written previously about one bonkers 'food security' provision, where growing vegetables was prioritised over housing development.

The complexity largely speaks for itself, but here, as just one tiny example, is the legend you'll need to understand the Unitary Plan maps.

Six kinds of residential zone. Five kinds of 'open space'. Ten - ten! - kinds of business zone. Five kinds of rural zone (not counting the Waitakeres and the Hunuas, which are two more zones of their own). And seven kinds of coastal zone. 'Micromanagement' doesn't even begin to describe it.

And it's not just a matter of economic inefficiency, though the purely economic costs must surely be substantial: a fair slab of potential housing development, for example, reportedly got put on hold until the Unitary Plan finally saw the light of day at the end of a nearly three year process. It also carries social costs. The process is now so cumbersome and protracted that it is very difficult for non-experts to have their say - a level of difficulty that could threaten to undermine the perceived legitimacy of the outcome amongst the wider public. .

I'm also not sure that the planning process has fully got to grips with what you would imagine would be one of the core outputs of any plan: integrating the plan, infrastructure provision, and the intentions of owners/developers of resources. All three need to be aligned for anything significant to happen. Nor are enough people making even back of an envelope attempts to estimate the net benefits (widely defined) of plan provisions. What about those 'volcanic viewshafts', for example, which protect people's ability to see (say) Mount Wellington from their home? I wonder how Tokyo would have got on if it had to be designed so everyone could see Mount Fuji: not very well at all, I'd say. And if people were given the choice of their kids getting houses (say) $200,000 cheaper but without a view of Mount Albert, which would they pick?

Which brings me to my final point - the role of markets. Yes, we all know that plans may be needed to help address the externalities and coordination issues that can crop up in dense conurbations. But the role of markets and prices (and indeed economic analysis) hasn't been so much assisted as largely displaced. In particular, the housing market has been distorted and suppressed.

The Salvation Army's latest State of the Nation Report, for example, says (p50) that
based on an average occupancy of three people per dwelling...and given that Auckland’s population grew by an estimated 45,000 people for the year to 30 September 2016, accommodating this number of people required 15,000 additional dwellings. Consents for new dwellings over the same period lagged this number by 5000.
Over the past five years, the cumulative shortfall in new housing to cater for Auckland’s population growth is estimated to be almost 18,000 dwellings. 
The Sallies snarked that the recent level of consents (10,000 a year) "has been celebrated as proof that Auckland’s housing problems are being resolved by the market", but that "in a slightly longer context this record is, however, not remarkable". The reality isn't that the market has delivered, but inadequately. The reality is that the market has not been allowed to work properly, or, for some places and activities, not allowed at all.

In sum, on the one side, you have an uncertain quantum of planning benefits, and on the other, clearer and large costs. I wonder what the net outcome has been?