Friday, 20 October 2017

Looking for ideas?

So we've got a new government, and lots of people have been wishing things on them.

And so am I.

Here's one that's well up my list: roll out the infrastructure we need, and pull finger about it while you're at it.

The outgoing government, for all the good stuff it did in some areas, was desperately slow at getting long overdue infrastructure built: 30 year timeframes before we would even start building airport and North Shore links in Auckland were just absurd. And as I've said before and the OECD has said as well this is a once in a generation opportunity to fill our boots with unusually cheap funding to pay for it.

But you don't have to take just my word for it. Here's the IMF's wording in this month's update to its flagship World Economic Outlook (p28, Chapter 1):
Investment in physical infrastructure: Empirical evidence from advanced economies suggests that, if done right, infrastructure investment brings both short- and long-term benefits: an increase in public investment of 1 percent of GDP can raise the level of output by 1½ percent over the medium term...After three decades of almost continuous decline, public investment in infrastructure and the stock of public capital as a share of output are near historic lows in advanced economies. Many countries could take advantage of the favorable funding environment [see? see?] to improve the quality of the existing infrastructure stock and implement new projects (see Chapter 3 of the October 2014 WEO). Countries with deficits in infrastructure include Australia, Canada, Germany, the United Kingdom, and the United States [and us, as I pointed out for example here]. Priorities vary but, in most cases, include upgrading surface transportation and improving infrastructure technologies (in high-speed rail, ports, telecommunications, broadband), as well as green investments.
Fire up the JCBs.

Tuesday, 17 October 2017

Will the RBNZ hold off till late '19?

The inflation numbers we got this morning - headline annual rate 1.9%, with tradables inflation running at 1.0% and non-tradables at 2.6% - were a tad higher than expected.

The numbers are always hard to interpret. On the tradables side we get inflation dealt to us by developments in the rest of the world and  movements in the exchange rate, neither of which we can do much about. On the non-tradables side - the domestically generated inflation which is all the RBNZ can influence over the longer haul - the numbers are distorted by what's going on in the housing markets, which are currently running hot.

But at least we can strip out the housing element in various ways and see what's happening ex housing. Here's the picture (I've adjusted the data mechanically to take out the GST-related blip in 2010-11). The data starting points are driven by when they start on Stats' Infoshare database.

It doesn't really matter which ex-housing measure of domestic inflation you look at: they've all risen to a little over 2%.

So the question I'm left asking is: will the RBNZ really leave monetary policy unchanged till late 2019, as is currently its stated intention? Domestic inflation (ex housing) is already at the mid-point of the Bank's target, and tradables inflation could also easily be running at 2.0% or more: the IMF's latest World Economic Outlook has inflation in the developed world at 1.7% next year and inflation in emerging/developing economies at 4.4%. If you weight those up to get a world inflation rate, it comes out around 3.3%. Call it  3%: then if the NZ$ stays where it is, and domestic inflation (even after taking out the hot housing bits) stays at say 2.25%, then you get overall inflation running at around 2.5%.

That doesn't sound to me like a great case for leaving monetary policy on an accommodative setting all the way out to late 2019. The financial futures market doesn't think so either: 90 day bank bill futures, for example, are pricing in a 0.25% increase by the end of next year, a full year before the RBNZ says it will increase rates. Some folks think it could be earlier again: the BNZ's latest forecasts, earlier this month, see the RBNZ hiking the official cash by 0.25% in the September 2018 quarter.

Any sane central bank won't react to one quarter's numbers, and everyone - central bankers and private sector forecasters, and that includes me being as wrong as anyone else - have all been repeatedly blindsided by inflation not appearing like it was supposed to. But on the latest data I think I'd be sketching in the prospect of higher interest rates a good deal earlier than the Bank has been signalling.

How many is 'enough'?

The ACCC has been doing a fine bit of reporting on the state of competition in various petrol markets around Australia. Its latest one, out last week, is on Brisbane, where it found that motorists were paying roughly 3.3 Aussie cents a litre over the odds compared to the other large cities in Australia, which adds up to A$50 million extracted from drivers' pockets over a full year.

The reason? Less intense competition in Brisbane. Which looks a bit odd at first, when you compare the industry structure in Brisbane with that in Sydney. They don't look that different - in terms of numbers of petrol stations, both cities have the oil companies (BP and Caltex in Brisbane), supermarket outlets, independent chains, and small independents. We can only salivate in contemplation of the degree of choice both cities have compared to us (and in particular compared to our South Island).

But it's a bit more apparent than real. In Brisbane the ACCC found that the supermarkets and the independents don't always price that sharply ('RULP' in the graph is regular unleaded petrol). Coles by the way looks a bit worse than it really is, as the prices measured are pump prices, before using "shopper dockets" (those discounts you get with your supermarket receipt). I'd guess a big proportion of the drivers who belly up to Coles will be armed with the discount.

In Sydney, though, the independents go for it.

Part of the difference may be down to the pricing strategies the Brisbane companies have happened to follow. But part of it is down to the greater leeway the Brisbane players have to follow less aggressive pricing plans: there's been a degree of consolidation over the past ten years, with two independents merged into one, and 7-Eleven buying Mobil's stations.

This is sobering stuff for us on this side of the Tasman. If two supermarkets, two oil companies, five independent chains and a tail of small outlets aren't enough to constrain petrol prices in Brisbane to what's on offer in the other Aussie cities, what hope have motorists in New Zealand got of getting a really sharp price from the three big players (BP, Caltex, Z) and the regionally limited price discipline that Gull imposes?

The more time has gone by - and in the light of MBIE's petrol study (links to study here, my comments here and here) - the more I'm leaning towards the view that Dr Jill Walker, the dissenter in the Commerce Commission's approval of the Z/Chevron merger - had the right end of the stick. She said (para 40 of her dissent):
An independent Chevron also provides an ‘option value’ for increased competition in the future without the merger. Without the merger, Chevron’s assets would remain independent of Z. Importantly, this involves not simply retail assets, but an entire supply chain. Effective competition in retail fuel markets tends to be driven by retailers who are backed by their own independent supply chain, such as Gull in parts of the North Island...I am not satisfied that in the future without the merger, there is not a real chance that Chevron’s assets could be used to disrupt retail coordination and increase competition. With the merger, any real chance is permanently removed.
What the Brisbane report shows, in my view, is that you need to facilitate every bit of competition you possibly can: you need a lot of parties to get the sort of outcomes Sydney and Melbourne motorists enjoy. And the option value of one extra aggressive competitor is very high indeed when you're starting (as we are) from a highly concentrated starting point.

The other thing the Brisbane report shows - and I'm not apologising for banging on about it yet again - is what a useful thing these "market studies" are. Our Commerce Commission still hasn't got the ability to do what the ACCC has just done, and does anyone really think the ACCC report was a bad idea, or that the Commerce Commission wouldn't have done just as good a job?

Little birdies tell me that the legislation to give the Commission some limited market studies powers is getting closer and that a petrol study could well be first out of the blocks. There's even a chance that the Commission will, in time, be let do studies off its own bat instead of waiting for Ministerial direction.


Friday, 6 October 2017

They're like buses... sooner did we get a big chunk of reporting on the electricity markets on Tuesday from the Electricity Authority (which I posted about), but on Wednesday we got the latest information disclosure data on the electricity lines businesses from the Commerce Commission. Here's the (brief) media release and here's the entrance point to the data, which cover the period ending March '17.

It's an odd industry sector. Mostly, in a small economy like ours, we risk having heavily concentrated sectors with limited numbers of players, but we've also some sectors where you wonder how we go on supporting the numbers we do, and, you'd suspect, with the accompanying issues of inefficiencies of scale. The electricity lines game is one that looks like it could do with quite a bit of rationalisation: twenty-nine lines companies for 4.8 million people looks over the top, especially as some are very tiny indeed in terms of customer numbers.

Buller Electricity, the smallest, has only 4,579 customer connections: for perspective, the median lines company has some 185,000 connections, and the biggest (Vector) has over 550,000. There's no reason barring historical accident why Buller should be a standalone entity, and why it hasn't been folded into neighbouring Westpower long ago is a mystery to me. It wouldn't be a massive efficiency - Westpower itself has only 13,448 connections - but it would be a start. Similarly for the rest of the minnows - Scanpower in Dannevirke (6,690 connections), Centralines in Waipukurau (8,496), Nelson Electricity (9,203), and Network Waitaki in Oamaru (12,710).

But we are where we are, as they say, and if you want to find out pretty much anything about the current 29, the comprehensive Commerce Commission data is where to go.

There are terrific snapshots of each one on its own if you click on the map of the lines' networks and follow the 'Download doc' link provided for each network. Here for random example is just a small part of the data on the Orion network showing the state of its lines and cables assets, and there's lots more on its operating and financial performance.

The data are not, however, the most accessible thing you'll ever use if you want to make comparisons. The summary report on each company does give some ranking information on how it compares with the others (Orion for example ranks 3rd on a lot of metrics), but if you take the view - as I do - that a good deal of the value from information disclosure regimes comes from looking at relative performance, you'll likely want more than the single-company summaries will give you.

The good news is that the information is there, but it's not immediately obvious where*. So just to make the whole thing easier, I've done it for you - here's a 'Handy ELB ranking guide', where I've also done a bit of colouring (price/quality regulated companies in red, information disclosure companies in black) plus fixed the 'return on investment' line so it better displays the return.

The data are a great starting point for analysis, and could answer any number of interesting questions: are there, for example, any systematic differences between the consumer-owned companies (subject only to information disclosure) and the rest of them (subject to price/quality control)? And what about those efficiencies of scale that I've implicitly assumed earlier? Research economists are always on the look-out for that treasure-trove of as-yet-untilled data: here's a prime candidate.

Whether anyone is, in fact, making good analytical use of this information is another question. It would probably help - and I understand the Commission has it in its plans - to put out some version of this data with interpretative commentary for a general audience, as the Telco Commissioner for example does with annual reports on the telco sector (they're here if you haven't seen them). Information disclosure as a regulatory option has its uses, and maybe those most keenly interested in the sector won't need the info spoon-fed for them, but for the bulk of the intelligent public this very useful data could do with a bit more PR assistance.

*If you go to the network map and scroll down, under 'Documents' you'll see there's a link to a spreadsheet, 'Performance summaries for electricity distributors - Year to 31 March 2017'.  Go to the 'One-pager' sheet of the spreadsheet. Top left, just under the 'Clipboard' command, there's an input box with a dropdown arrow: currently it says 'edb-name'.  Click on the down arrow, from the options that pop up pick 'r-rank', and hey presto - up come two sets of rankings of all 29, one showing the absolute values of the measures and the order showing each company's rank from 1 to 29.

Tuesday, 3 October 2017

More, please

The Electricity Authority has just come out with its latest annual report, and I was pleased to see it continues to report on the state of competition in the various electricity markets: competition, along with efficiency and reliability, are the three core things the Authority focuses on.

It's also great to see the Authority having a go at measuring whether electricity markets have actually become more competitive or not. It's good that there are specifics like the success of the What's My Number campaign, but it's better again if you can assemble some hard or hardish data on the state of overall competitive play. You're never going to pin it down exactly but this Annual Report - and previous exercises which I posted about here and here - have given it a good go.

Here are a couple of the more interesting measures the Authority has tracked (they're down the back in Appendix A). The HHI concentration index for the residential retail market is going down - though it's still on the borderline (2500 or so) between "moderately concentrated" and "highly concentrated" as the US competition authorities would describe it - and the market shares of the top 1, 2 3 and 4 suppliers (the CR measures in the right hand panel) have been slowly dropping.

Here's the HHI for the generation market. It's far from a dramatic movement, but every little helps.

Here's something a bit more complex - the percentage of time a large generator has had the field to itself in a particular area: it's the only one around who can supply energy, and it has surplus energy to provide after meeting its own retail or other contractual demand. In the industry jargon it is the "net pivotal supplier", or in plain English it can hold the rest of us to ransom and ramp up prices. Again it's good news: it doesn't happen very often. There's a net pivotal supplier only 2% of the time.

Things like market shares however don't always tell you a lot: you could, for example, have vigorous competitors going at it hammer and tongs, with their marketing efforts cancelling each other out, so market shares don't move, or you could have cosy tacit collusion, and again market shares don't move. So the Authority has chucked in some behavioural data as well. Here's how often residential customers get approached to switch suppliers. Answer: more often.

Overall, the data show some modest to decent improvement in competition across many, though not all, metrics. Good stuff.

But I'll bet there's a question already on your mind. How come we're not seeing this sort of information coming out on other important markets?

Partly, of course, it's because most other sectors don't have a sectoral regulator. But partly it's because the Commerce Commission still remains hamstrung in its abilities to have a look. There is a proposal to let it do "market studies", but (as I said here) it's very tightly circumscribed and in any event is some considerable time away from being implemented, given the glacial pace of changes to our competition law.

Yet we know that we need to find out more about the sort of competitive choice consumers are getting in other industries beyond electricity (where the Authority is doing a fine job) and telecommunications (where the Telco Commissioner is also on the ball). We know, for example, that consumers face higher prices for petrol in areas where Gull isn't a competitor, but we only know that because MBIE was ordered to look into it as a one-off investigation.

Why aren't we getting the same level of pro-consumer inquiry in other markets?

Friday, 29 September 2017

Can it keep going?

There was good news today about the volume of new housing consents in Auckland: as Stats pointed out in the release, "Monthly building consents for new homes reached a 13-year-high in August 2017, driven by a spike in apartments and retirement village units in Auckland...Some 10,265 new homes were consented in Auckland region in the August 2017 year. This compares with a peak of 12,937 new homes consented in the June 2004 year (the highest number since the series began in 1991)".

Stats included long-term graphs which put the latest numbers in some perspective, but I've gone back a bit further again (as far as the data series go on Stats' Infoshare database). Here's what the story looks like.

The 'actual' numbers in the graph are an excitable series, mainly because of chunky apartment block consents  turning up in some months but not others. They're volatile enough to turn the seasonally adjusted and trend series into best stabs at what's going on behind the noise, rather than definitive sightings of the underlying reality, so you can't be entirely sure they're on the right track. But after some wavering around the start of this year the trend series (also shown in the graph) now looks to be definitely heading in the right direction.

I've been trying to guess - no stronger - whether the numbers tell us anything about whether we can up the pace any further or whether we've hit capacity constraints. 

On the downside, over the past 25 years we've only briefly been able to keep up 1,000+ periods of monthly consenting.  Something or other has always knocked it back again. Either we've hit some sort of capacity constraint, or the business cycle has put the kibosh on it, with the GFC in particular decimating activity. The latest ANZ business survey wasn't much fun in that regard: only one month, the election and all that, but I particularly didn't like the finding that "A net 26% of businesses expect it to be tougher to get credit". That's bad news for housing developers.

On the plus side, the Auckland labour force has grown quite a bit, and there are more people around these days with building trades skills. Here's what the Household Labour Force Survey shows for people employed in construction in Auckland since 2009 (as far back as Infoshare went, and I haven't time to fossick the Census if it's got longer/better figures).

There wasn't a lot of movement till 2014, but since then employment has lifted from around 50,000 to around 80,000. Recent immigration probably plays some part in this (and maybe people shifting back from Canterbury building sites): where we live on Auckland's North Shore, a good deal of the in-fill development is by Asian developers with Asian crews, including the one literally across the road.

The unknown unknown is probably the impact of the planning process. I've no idea whether the number of consent-approvers is keeping pace with consent applications; I can surmise that (certainly over a time-scale of 25 years) the regulatory requirements to get a consent have risen; I would bet that land-use constraints have got a lot tighter. Net net - who knows, but I'd lean towards a view that planning is at a minimum no less a constraint than previously.

Overall, I'm glad to see the recent pick-up in consents to over 1,000 a month, and it might be a bit curmudgeonly to add "at long bleeding last": it's here, and it's something. But I'm not exactly jumping for joy yet. At this pace (12,000 dwelling units a year) we're still a little adrift of the numbers (14,000-ish?) that people think we need to meet new demand, let along eat into the existing shortfall (20,000-ish?). And while I'd be pleased to be proved wrong this time round, our recent track record suggests we can't keep delivering, or are blown off course from delivering, before we get the job fully done.

Monday, 25 September 2017

When agencies clash

There's a quip you sometimes hear in the competition game: why do countries have only one Monopolies Commission?

Now that the tears of merriment have dried on your cheeks and you've got your breath back, you can actually turn to a real-life example of what happens when you do indeed have two competition authorities. And they fall out with each other.

Australia's got the ACCC: if you've got a merger for 'clearance' (no competition issues), you go to them. And it's got the Australian Competition Tribunal: if you've got a merger for 'authorisation' (competition issues, but overall net benefit), they'll handle it. And then along comes the "mega-merger of the nation's two biggest gambling companies", as the Sydney Morning Herald called it here (possibly $): Tabcorp and Tatts Group, both ASX-listed.

You'll find the full history of what happened next if you google, but save yourself the bother and go to Melbourne Law School Professor Julie Clarke and her very useful Australian Competition Law blog, especially this post about the Tabcorp/Tatts deal. It helpfully includes links to media coverage, too.

The gist: Tabcorp/Tatts tried the ACCC first. No deal, the ACCC saw actual or potential competition problems (here's the Statement of Issues). So Tabcorp/Tatts bailed out and went to the Tribunal.

"Competition problems? What competition problems?" - the Tribunal didn't see them. Au contraire: "The creation of the Merged Entity will lead to greater competition particularly in online wagering" (my emphasis, from para [540] of the judgement). On net benefits, it saw at [539] assorted ups and no downs: "The benefits to the public which the Tribunal has found to exist, and which it has taken into account, are substantial. There are no material detriments weighed in the balance which are of significance or likely to arise that outweigh the benefits". Slam dunk - authorisation approved.

I can only imagine the gasket-blowing within the ACCC. But once the little red dots in front of their eyes had cleared, they took the Tribunal to the Full Federal Court for judicial review, on three grounds. CrownBet, a Tabcorp/Tatts competitor, added a fourth: it was a courageous (in the Sir Humphrey Appleby sense) claim that the Tribunal had lost its mind. Predictably, that claim crashed and burned, some bits burning more fiercely than others (at [80],"We have experienced some difficulty in distilling CrownBet’s submission about this into a readily comprehensible form").

Not so the ACCC's. Two of its claims got knocked back, but one made it, as you can read in paras [4] to [54] of the judgement: the Tribunal missed a detriment (reduced competition between Tabcorp and Tatts in online betting), and you can't be sure of the overall net benefit if you've missed a detriment. So it's back to the Tribunal to fix, and in the meantime the merger is in limbo.

So it's been an interesting exercise. As a general principle, I like the idea of more checks and balances when it comes to the exercise of regulatory (or any other) powers: as one example our High Court 'inputs methodology merits review' of how the Commerce Commission goes about the business of price control was well worth doing. But you wonder when you see two competition authorities slugging it out. That's beginning to look like overkill in a country already liberally equipped with multiple layers of governments and regulators - not that we in New Zealand can point fingers too vigorously, with our 78 territorial authorities for a total population the size of Melbourne.

By the by, we may hear a little more of this case, as it had something useful to say about how regulators should go about the weighing up of benefits and detriments, which is one of the bigger issues in the current NZME/Fairfax merger appeal.

You'll recall that the Commerce Commission took the view that the merger would involve a loss of 'plurality', less variety in the range of opinions on offer in the mainstream media. And while it didn't know what the value of that detriment was, it looked to be significantly larger than the claimed merger benefits.

Can that rough and ready, 'in the round' assessment fly? Or are you prohibited from saying one thing is bigger than another, if you have no real clue how big the first thing is?

Here I'm straying well off the economists' reservation into the lawyers' farmland, but I reckon the Federal Court's judgement is helpful to the 'in the round' approach. Here's what it said (shorn of unnecessary bits):
[7] Having examined the benefits and detriments resulting from, or likely to result from, the proposed acquisition, the Tribunal is then to determine whether the overall benefit is ‘such’ that the acquisition should be permitted. This requires a balancing exercise to determine the public benefit. The Tribunal has referred to this as a balance-sheet approach ... and this is an informative metaphor. It may suggest, however, that the detriments are to be deducted from the benefits leaving only a net benefit. This is informative but may be likely to be a little unrealistic. Many of the benefits and detriments will be incommensurable and possibly unmeasurable as well. To take an example from this case: how does one weigh the improved efficiency of the wagering market against the perils of problem gambling? It seems to us that the benefits and detriments may more usefully be assayed by means of a process of ‘instinctive synthesis’ sometimes referred to in the law surrounding the formulation of criminal sentences where a similar problem is encountered ...This may be referred to as weighing, but to refer to balancing, or a balance-sheet approach, may suggest that the essential qualitative assessment has a greater degree of precision than the statutory subject-matter permits ...
[68] ... much administrative decision making involves the weighing of imponderables or incommensurables. It would be unworkable to require the Tribunal explicitly to give a weight to each benefit and we would strain to avoid such a construction were it necessary. It is not, however, necessary so to strain. Section 95AZH(1) does not require what the ACCC suggests. The assessment of benefits and detriments must be complete and the Tribunal must, no doubt, weigh them. This is not necessarily, however, an arithmetical or accounting process. As we have said above, it may involve an instinctive synthesis of otherwise incommensurable factors.
"An instinctive synthesis of otherwise incommensurable factors": I like it, and so I imagine will the Commerce Commission's lawyers. Though I have to point out that we beat the Aussie Federal Court to the concept: back in 2011 many of us were already "internalising a really complicated situation in my head".

Friday, 22 September 2017

Who pays?

On Tuesday evening Harshal Chitale, senior economist in Auckland's Chief Economist Unit, spoke at the latest LEANZ seminar on 'Funding Auckland’s greenfield infrastructure: 'Efficiency, incentives, risk and fairness'. Tell you what - the chair for the evening, Richard Meade, didn't have to do much to encourage debate: this was one fired up audience. In a  nice way: our infrastructure deficit, especially in Auckland, is one of the hottest current issues for the economy, and gets at least a best supporting role nomination in the national slow productivity debate. Plus Harshal's talk raised knotty back-pocket and equity issues on who pays for what.

Harshal's paper will go up on the Auckland Council website in the near future* - probably here - and I should add (as he said) that the talk reflected Harshal's views and not necessarily those of the Council.

The key points I took away (and from here it's as much me as Harshal talking) were that there's a massive $20 billion infrastructural bill coming up to service greenfield development, of which the Council's share for the likes of water, waste, local roads and community spaces is some $13 billion (NZTA road funding pays for a lot of the rest). But Auckland Council's own ability to pay for this greenfield infrastructure is severely constrained. Putting the bill on the rates faces a political commitment not to raise rates more than 2.5% a year. Borrowing faces a credit rating limit: debt beyond some 270% of revenue (and it's currently 255%-ish) jeopardises the Council's AA/Aa credit ratings.

The political constraint may reflect electoral reality: my suggestion that rates should be a fixed proportion (0.25% a year?) of the market value of a house, which has the pleasant property that those who've benefited most from the housing shortage will pay most to relieve it, was not met with universal delight. So we're lumbered with inadequate rates revenue: if the Council's costs are mostly wages (I'd guess they are), 2.5% rates increases will struggle to keep capex spending constant in real terms let alone boost it. And we're lumbered with the debt ceiling, too, as the ratings agencies are unlikely to buy the argument (though it's correct) that the spend today will boost the debt servicing tomorrow, plus it's not silly for the Council to stay a highly rated borrower.

So Harshal's talk looked at what other options there might be - the big ones being developer 'contributions', targeted rates, and off-balance-sheet vehicles - and how they stack up on various criteria including efficiency, having the beneficiaries pay their full whack, and incentivising development rather than land banking. Of that lot, targeted rates maybe scrubbed up best, but it's not an easy area. Apportioning the benefits created and costs incurred, for example, is not straightforward. If new Suburb A gets developed alongside existing Suburb B, for example, it may make it feasible for a new bus route to service both A and B. Who is credited with the benefit? Who ought to pay? And who actually pays in the end: will developers simply pass on all 'their' costs to the housebuyer? And are finely calibrated but expensive and complex attributions any better at the end of the day than cheap and cheerful approximations?

Personally I was left with the impression that local resourcing won't cut it, and some central government funding may be required beyond the Housing Infrastructure Fund (announced here, updated here), which while helpful doesn't get past the debt ceiling problem, since it counts against councils' debt. Relatively limited-scope entities like territorial authorities may not be well equipped to handle step-change demands like these. And Auckland's issues are an outcome in substantial part of the country's national immigration policy (a policy which I don't have an issue with, just to be clear).

Here, and everywhere else where we're short of infrastructure, the government ought to use its considerable leeway to borrow internationally on once in a lifetime cheap terms. Take a look at the chart below: at a wild guess, would you say this looks a good time to tank up? And not just on an interest rate basis, either: we could ease the capital repayments, too, by borrowing for a longer maturity. Last week Austria, a country rated similarly to us (AA+/Aa1 with S&P/Moody's, while we're AA/Aaa), issued 100-year debt. We're getting a bit better at getting longer stuff away than we used to be, but our longest current maturity is 23 years (the September 2040 issue).

Which, by the way, is also what the latest (June) OECD report on the New Zealand economy said:
The government is aiming to reduce net core Crown debt as a share of GDP from 24% in 2016-17 to 10-15% by 2025 to help cope with future periodic global shocks and natural disasters. Nevertheless, it should be possible to finance some high-priority tax reductions or expenditure increases without compromising its fiscal strategy.
So full marks to Harshal for a thoughtful presentation, to Richard for organising, and especially to David Walker of PriceWaterhouseCoopers who generously provided the venue and hosted the drinks and nibbles. Keep an eye out for future meetings: if you've got an interest in the intersection of law and economics, there's bound to be something that'll interest you.

*Update - Harshal's paper was indeed published online, on September 27

Tuesday, 19 September 2017

Big discount! Get it here!

This year's Competition Law and Policy Institute of New Zealand annual workshop is coming up on Saturday October 14 in Auckland. It's got a class act of topics and speakers, as you can see from the programme and the bio of the keynote speaker, Timothy Cowen, who among other things has been heavily involved in the big EU case against Google, and who will be speaking on 'Curbing Big Data/ Big Tech: Lessons from Europe on misuse of market power, anti-competitive agreements and remedies against this growing worldwide digital-age problem'.

Now, academics and students, listen up. Do you know of students, or are you one, who would benefit from the workshop? CLPINZ has a new and heavily discounted student rate to make the workshop more accessible to students of competition law and policy. It's - wait for it - 75% off the standard non-CLPINZ-member rate, and brings the student cost down from $900 to an affordable $225. Sorry, there's no discount off CLPINZ membership, or off the after-workshop dinner if people would like to go, but the conference itself is now much more within reach of a student budget.

You'll want to take it up, won't you? So email to get the discount code, and register here. See you at the workshop.

Thursday, 14 September 2017

Another part of the house price story

Housing is understandably high on the political agenda at the moment. But amidst all the blame-seeking and potential policy responses, one of the big drivers of our high house prices seems to be largely ignored, in part because it doesn't give the pollies any room to point the finger at their opponents.

The reason it doesn't is because it's a circumstance almost completely out of our own hands: the cost of our longer-term fixed rate mortgages is very low by historical standards, and that's almost completely because of international trends. We essentially import world bond yields - as the RBNZ's economists documented here - plus a risk premium for being New Zealand, and the banks onlend to fixed rate borrowers at that rate plus a commercial margin.

Here's a chart of current benchmark (10 year) bond yields across a range of the developed economies, using data from the Financial Times.

Long term interest rates are unusually low mainly because four of the major central banks - in the US, the Eurozone, Japan and the UK - have been keeping them very low by buying bonds (sending their price up and hence their yield down), a policy often known as 'quantitative easing' or QE. It's been part of their plan to give post-GFC monetary policy more oomph: traditionally, central banks have only bothered with short-term interest rates, whereas QE also gives them a good deal of control over longer term ones as well. Low yields in the QE countries have had knock-on effects on yields in non-QE ones like Switzerland.

And 'unusually low' doesn't even begin to describe the outcome. There are now literally trillions of dollars' worth of bonds (some US$9 trillion according to the FT) trading on negative yields: you pay the borrower for the privilege of investing in its debt. You can see in the chart, for example, that the Swiss and Japanese governments can borrow money for as long as 10 years where the investors end up paying the government. Just this week the Austrian government raised five year debt at a 'cost' of -0.165% a year.

We know that our own central bank is keeping short-term rates low - "Monetary policy will remain accommodative for a considerable period" as the latest policy decision put it - and that has been one of the elements in the recent price boom. As floating rates linked to the RBNZ's policy dropped, and household incomes kept growing, there was a surge in mortgage serviceability, which has been one of the big moving parts in the consequent boom in prices. But you knew that.

What's been less emphasised if that even if the RBNZ hadn't cut short term rates to where it has, the rest of the world's central banks dealt us substantially lower longer-term fixed rate mortgages in any event. And that boost to the demand side of the market isn't going away anytime soon. In the US the Fed is getting close to easing back on the scale of its QE (still buying bonds, but not as many), and the Bank of England and the European Central Bank may start heading the same way later this year or (more likely) next, while Japan looks set to keep its current QE going into the indefinite future. Whatever unwinding of QE that eventually materialises is going to be a slow, careful, gradual, medium-term process. There could well be local five year fixed rate mortgages around the 6% mark for quite a while yet.

There's another element to this imported easy monetary policy. Around the world there's been what the investment professionals have been calling "the hunt for yield" or, in more purple moments, "the craze for yield". The traditional widows-and-orphans assets of money in the bank and government bonds have been yielding little or nothing (indeed, US$9 trillion worth of less than nothing). So even conservative investors have been forced either to swallow the unattractive terms on their usual fare - this week Austria sold €3.5 billion of bonds with a hundred year maturity on a preposterously low 2.1% yield - or instead to head into income-yielding assets like property that offer something better.

The local  investor is making the same calculation. Even at current high prices you can still get a 3.5% to 4.0% rental yield on an Auckland house, according to the (very useful) data compiled by It's not what a conservative investor would normally be looking for from an investment property, but it beats the bank deposit and government stock alternatives. In our own little way we've got the same hunt for yield: it's not as extreme as in some places  - as the graph shows, our bond yields haven't dropped to Japanese or Eurozone levels - but it's another part of the picture.

And if you think the link between loose overseas monetary policy and New Zealand house prices sounds like the abstract reasoning only an economist could come up with, then you haven't paid enough attention to the Irish house price boom and bust. Ireland, which had been growing like topsy, was gifted eurozone interest rates that were too low for its circumstances. House prices exploded.

Speaking of adding fuel to flames, why would you increase subsidies for first home buyers? As an elementary bit of sketching supply and demand curves on the back of a shopping receipt would show you, the only immediate effect of subsidising the demand for something in fixed supply is to raise its price by the full amount of the subsidy. And it's not only ineffective, it's regressive - a straight transfer from the taxpayer (including all the low earners who pay tax from dollar one) to the house owner. In the longer run, it fattens the margins from housing development, so it could encourage more supply (assuming the binding constraint isn't land-use planning or construction capacity, and it might be), but in the long run we have all joined the bleeding choir invisible, we have snuffed it, we are no more. As a short-term policy it's worse than useless.

But that's this election for you. I'd thought we'd got past the worst of elections as they used to be, but this all-party lollyscramble, with its side dishes of daftness and deceit, is pure 1970s.

Wednesday, 6 September 2017

Competition is good for women's pay

Motu's recent paper 'What drives the gender gap', has rightly got a lot of attention: full marks to its authors Isabelle Sin, Steven Stillman and Richard Fabling. Motu has gathered a broad selection of the coverage here and if you haven't yet read the piece for yourself then here's a longish executive summary and the whole caboodle. And if you want the whole thing boiled down to 17 syllables, Motu's executive summary haiku said
Women are paid less,
but aren’t less valuable.
We blame sexism.
There's one aspect that hasn't caught much of the headlines, however, and that's the link between how competitive a marketplace a business is in, and the extent of gender discrimination it goes in for. In sum, the link is strong, and it means that if an industry is more down the monopoly end, women get treated even worse than usual.

As the paper reminds us (page 27),
Starting with [Nobel Prize winning economist Gary] Becker (1957), the argument has been made that taste discrimination [i.e. discrimination in the negative sense we use in everyday English] cannot persist in a perfectly competitive product market because firms that discriminate will lose money compared to those that do not and will be driven out of the market. This has led a number of papers to focus on the relationship between product market competition and discrimination.
The corollary to that however is that if markets aren't competitive, there aren't the same pressures on employers to make most efficient use of their staff, and can afford to pander to whatever prejudices they've got without taking much of a hit to the bottom line.

Does this happen in real life? When I was a financial journalist in Tokyo, one American banker told me that he had the pick of the Japanese labour market, because Japanese banks strongly preferred to hire men for the important jobs, leaving him a clear run at the best women graduates. Conversely I remember a Japanese banker proudly showing off his state of the art foreign exchange dealing room, and telling me that "Yes, we've got 23 people here - 17 dealers, and six women".

In New Zealand, Motu devised a measure of how competitive each industry is (if you're of the wonkish tendency, I'm about to add a technical footnote - here it is * - and the rest of us can now carry on). While they were at it, they also devised measures of how much skilled labour each industry uses, and how tight the labour market was for each industry at any point in time, which they needed to try to sort out different explanations for the gender wage gaps.

And with that out of the way, here's what they found (page 31):
There are a number of key findings. First, industry-years with a one standard deviation more skilled workforce have a gender wage-productivity gap that is 19.2 percentage points higher if they have the mean level of product market competition and difficulty hiring. Second, this gap is doubled if the industry-year is one standard deviation less competitive, or is eliminated if the industry-year is one standard deviation more competitive than average. Third, this additional effect of lower levels of competition is eliminated if the industry-year has a one standard deviation higher difficulty in hiring. Overall, we find that the gender wage-productivity gap is larger in industry-years with higher skilled workers, lower levels of product market competition, and more competitive hiring markets ['competitive' in this sentence means lots of people looking for jobs].
Let's unpack this a bit. Firms with an unusually high level of skilled workforce pay men a stonking 19.2% more than women for the same productivity contribution to the business. That's on the basis that the firm is in an industry that is about average for the level of competition going on in the sector, and also when the labour market in that sector at the time is nothing unusual. That's a whole story in itself.

But look again at that second finding. That already large pay difference is doubled - doubled! - if there's lots less competition among businesses in the sector. However the large difference goes away completely - to be consistent, completely! - if there's lots more business competition. It also goes away completely if a tight labour market is holding employers' feet to the fire and forcing them to make gender-blind hiring decisions, which is what you'd expect. We routinely see employers, for example, hiring more people from minority groups when there's been a sustained business cycle and hirers can no longer pick and choose the way they might have done.

There are people who don't like competition - the hand-wringing types who don't like the Schumpeterian real world and who'd prefer collaboration or cooperation. Get real, folks: if women want fairer pay, one highly effective approach would be to use markets to work for them. Insist on gales of competition in every industry (and, incidentally, support initiatives like the Commerce Commission being allowed to look at the competitive state of play). That way, there'll be fewer guys with cozy jobs in dozy industries ripping you off - because you'll have the real choice of going to his competitor and getting what you're worth.

* The measure of competition comes from a principal components analysis (love it as a technique) run over four measures of competition from the Business Operations Survey (eg firms reporting no competition, or only one or two competitors), plus a capital/labour ratio. Personally I can't see the relevance of the capital/labour ratio to competition or (excess) profitability - airlines for example might well have a high capital/labour ratio because of the planes but I'm not sure that tells me a lot about whether the airline game is competitive or hyperprofitable - but in any event their measure of competition (the first component) has stronger links with the competition measures than with the capital/labour ratio, so that's all right.

Wednesday, 30 August 2017

A blast from the past

A reader who'd liked my post the other day on The Shipping News pointed me towards something I'd forgotten (or possibly missed at the time). It's the European Union's submission on shipping cartels, made to our Productivity Commission's 2012 inquiry into freight forwarding.

Why, you may wonder, was the EU bothering with a freight inquiry at the far end of the world?

Two reasons. The EU - through its competition arm, 'DG Comp' as it's known - had an interest because it had relatively recently (2008) abolished the shipping lines' exemption from cartel laws in Europe. And because it wanted to tell us that it thought the case for allowing shipping cartels (as we were doing at the time) was a load of cobblers.

DG Comp said that more countries were bringing shipping under the competition law or had never exempted them in the first place: "exempting container shipping cartels can hardly be described as the global regulatory standard" (para 9). And it pointed out that "the EU repeal is very significant in that it expressed the unanimous agreement of the then 25 EU Member States. Any Member State could have vetoed the proposed legislation. Yet all Member States chose to support" (para 7). In other words, getting the whole 25 to agree on anything is normally a colossal exercise in cat herding, but the case for getting rid of shipping cartels was so obvious that even the fractious 25 were all on board.

DG Comp also said that if the shipping lines' argument for cartels - "stable rates and reliable services" (para 12) -  had any merit, then exporters and importers would support them, but they don't: "the shippers have repeatedly stated that they would rather have competitive prices than stable high prices" (para 12). And the shipping lines' claims about the downside of abolishing cartels - "exemption would lead to "destructive competition", increased concentration, lack of investment and reduced service" (para 13) - had not been borne out by what had actually happened in Europe when cartels got the flick.

And it made the excellent general point (para 14b) that
the liner industry is no different from other fixed-schedule, high-fixed costs transport industries (such as the airline sector or the rail sector) that function well under the standard competition law regime.
So the good news is that we did, after navel-gazing for nearly six years, see the sense of views like DG Comp's, and we finally brought shipping cartels within the general competition law. The bad news is that we continued to give the shipping lines special treatment, in particular allowing them to cooperate on "capacity adjustments in response to fluctuations in supply and demand for international liner shipping services" (s44A(8)(e) of our amended Commerce Act). If they end up having the ability to jointly determine capacity, then effectively they will have ended up with the ability to jointly determine prices, so we'd be back to square one as if price-fixing had never been outlawed. And there's a further bit of leeway in s44B relating to an exemption for "price fixing in relation to space on ship".

Another oddity of the special treatment for the shipping lines is that the amended Act (in sections 65A through 65D) introduced a new clearance regime for cartel provisions that are "reasonably necessary" for the purpose of a collaborative activity. If there is indeed, as the shipping lines argue, a necessary link between cartel provisions and running a shipping service, they, like any other group of businesses, have now got this new avenue to get the official seal of approval.

But no: it's one law for the rest of the country and one law for the shipping lines. And this for a sector that's been revealed to have been a global competition scofflaw.

Friday, 25 August 2017

What the Cabinet read

Yesterday the Cabinet paper on what to do in the light of MBIE's targeted review of the Commerce Act went up on MBIE's website.

It made for interesting reading. It was very largely on the side of the pro-competition angels: it showed a good appreciation of how more effective competition can improve our relatively low productivity and lower our relatively high prices. And as part of the process the Minister, Jacqui Dean, got the green light to publish Promoting Competition, a welcome programme of work that will be part of the overall Business Growth Agenda.

Mostly, the Cabinet paper got the 'market studies' bit of the review right. It picked up on the current inconsistencies - Cabinet itself had recently encouraged more market studies by the Telecommunications Commissioner (part of the Commerce Commission) while still not letting the rest of the Commission do the same, the Electricity Authority can run ones in its bailiwick - and pointed to the unsatisfactory outcomes when ersatz studies are run as a second best substitute.

As it said in para 55, "Following the conclusion of the Fuel Market Financial Performance Study it is likely that the Government will still not have a good understanding of the severity of competition problems in the market". Which is exactly where I'd got to: "This half-baked time round, we ended up with just about the worst outcome, for everyone, of suspicions left unresolved. And we're now going to have to do the full, proper inquiry that should have been done in the first place". No offence, as I also said before, to the professional folk who did the petrol study: the problem was the mandate, which tried to do a quick and poorly scoped study, on the cheap, without full information gathering powers.

It was good, too, that for market studies "the funding approach should be agreed at the same time" (para 57): there have been times when the Commission's got lumbered with new jobs but no new money to do them. As the paper said (para 57 again), "if the power is granted but not funded and the Minister directs the Commission to use it then the Commerce Commission is forced to trade off their adjudicative or enforcement activity with work on market studies. This would be detrimental to the competition regulatory system as a whole". Quite right, so there's going to be a (maximum of) $1.5 million a year allocated. I quite like the idea of a maximum, and I'm sure businesses will do, too: it should act as an efficiency incentive on the Commission.

But the Cabinet paper dropped the ball when it came to letting the Commission initiate market studies. It reviewed international practice, and found that as a general rule competition authorities could either initiate on their own, or it was a policy combo where authorities could initiate on their own, but could also be asked to do one: "A small number can only undertake a study if it is externally initiated (e.g. by Ministers)". And then the Cabinet paper opted - very oddly in my view - to go with the "small number" rather than with international standard practice, and then only with additional controls that require the Minister to satisfy a "why do this" test and get the buy-in of Cabinet as a whole.

There was, I felt, a tone in this part of the paper that an empowered Commission might go rabid, and that the Rottweiler consequently needed to be well chained up. Paragraph 53 went to some pains to point out that even after been given these (constrained) market powers, there would still be lots of other constraints that would stop the Commission running amok and biting people. If I were having a quiet word in the Commission's ear, I think I'd be advising it to do more to polish up its perception in political circles. And I'd especially be encouraging it to point out - if politicians have been hearing too much from businesses not fond of the Commission - that the primary victim of business rorts can very often be other businesses.

Which brings us to section 36, and anti-competitive use of market power. As readers will know, I think the current law is an ass, and want it changed to match Australia's, and have said so in various places. But those of us of that view (including the ACCC, the Commerce Commission and Consumer NZ) were in the minority in submissions to MBIE's targeted review. So the law is not going to get changed, at least for now.

That said, I think I can live for the time being with where the Cabinet paper got to. For one thing, the Minister said (para 71) "I am of the view that there are problems with section 36 and that it is an important provision to get right in a small market like New Zealand". She went on to qualify that, but I intend to regularly requote the first part of that sentence in particular, and in various tones of voice: "there are problems with section 36", "there are problems with section 36".

In any event it makes some pragmatic sense, as proposed in the paper and also supported by Treasury, to spend the next year and a bit researching how big a problem we might or might not have with abuse of market power, and also waiting to see how the Aussies get on with their reformulated version of the law, assuming it gets through the madhouse that is the Aussie Senate.

Towards the end of the paper, paragraph 123 reads
Legislative change to the Commerce Act will be required in relation to cease and desist, enforceable undertakings and market studies. In this regard, a Commerce Amendment Bill has a [word redacted] priority on the 2017 legislative programme.
I don't like that redaction. As a general rule, on any policy issue, I think a government should be prepared to tell us whether it thinks it's a big deal and we can expect something done about it soon, or whether it doesn't, and we shouldn't. In this particular case, given that the last amendment to the Commerce Act took nearly six years, I'm afraid that the word redacted could well be "low".

Thursday, 24 August 2017

In the undergrowth of the Prefu

The Pre-election Economic and Fiscal Update - the 'Prefu' - came out yesterday when I was away giving some expert evidence at the Board of Inquiry into the proposed East-West Link motorway in Auckland. You've probably got the big picture about the Prefu already - if not try the ever reliable Rob Hosking's 'Joyce unveils rosy pre-election economic update' in the NBR (probably $, and worth the sub) - but now that I've read it, here are some additional perspectives.

There's an interesting difference of opinion between Treasury and the Reserve Bank about the outlook for interest rates and the Kiwi dollar. For Treasury, "The Official Cash Rate is expected to begin rising in mid-2018 as the Reserve Bank seeks to achieve its objective of stabilising inflation at the 2.0% mid-point of its target range. From around 2.0% in June 2018, short-term interest rates are forecast to rise to around 3.8% in June 2021" (p20 of the Prefu). For the RBNZ, as it said in Table 2.1 on p11 of the latest Monetary Policy Statement, the OCR is going to stay where it is all the way out to late 2019. For what it's worth, the financial markets (going by current futures pricing) lean more Treasury's way.

The difference on interest rates feeds into different views of where the overall value of the NZ$ is heading. As shown below, the Bank has it peaking around now and then going on a progressive slide, whereas Treasury (in Table 2 of the 'Additional information' bit of the Prefu) have it rising a little more and then staying there.

Another thing to note is the scale of the fiscal boost to the economy. The headline numbers on fiscal surpluses don't tell you much about whether tax and spending plans boost or brake the economy: instead, the 'fiscal impulse' is a go at figuring out what fiscal policy is doing, once you've stripped out all the cyclical things that happen to the fiscal books (like good times boosting the tax take, as they are now).

Estimates of the impulse are always iffy, although other sighting shots at it have come up with much the same as Treasury's. Here it is (again from the 'Additional info').

After years of grinding away at rebuilding the state's coffers - six successive years of tighter fiscal policy - it's now all systems go, with a fiscal boost in the year to June '18 amounting to some 1% of GDP, plus a bit more the following year. People will have all sorts of reactions to that, from a cynical quelle surprise in election year, to why not address some real needs now that the money's more available (the Family Incomes Package is in that boost).

Dull and boring macroeconomists however are likely to say that loosening fiscal policy in good times - 'procyclical' policy as we call it in our game - isn't usually the best of plans, though I'm prepared to cut some slack when some of the boost also addresses our infrastructure shortfall.

The final thing worth digging out of these fiscal updates is the outlook for profits. New Zealand's a bit short on profits data: Stats are working on it, but we don't yet have quarterly profits numbers, unlike for example Australia, the UK or the US. So anything that throws some light on what is one of the key moving parts in a market economy is always welcome. That's where Table 3 in the 'Additional info' comes in handy, as it has forecasts for 'operating surplus, net' (profits, essentially) for both agriculture and the rest of the economy.

They're only annual, but it all helps. Here's what the numbers look like (percentage changes aren't in the original table, so I've added some).

Down the farm you can see the huge impact of the recovery in dairy prices from their previously dire levels. Elsewhere it's not been the profits bonanza you might have expected from such a decent run for the overall economy - another part of our productivity paradox, perhaps? 

Wednesday, 23 August 2017

The Shipping News

Earlier this week I mentioned that it had taken the thick end of six years for the Commerce (Cartels and Other Matters) Amendment Bill to work its way through the parliamentary grinder. It didn't help along the way that the government had second thoughts - or cold feet - about one of its original provisions, to criminalise hard core cartels, and yanked that bit. But on August 14 what was left of the Bill finally staggered over the finishing line.

There are various summaries around the place - take your pick of Russell McVeagh's, Chapman Tripp's, or Bell Gully's - but the bit I'd like to pick up on is the new regime for shipping. Up to now, the shipping lines had been exempt from the Commerce Act, in my view for no good reason, and our Productivity Commission was absolutely right when it said as part of its 2012 inquiry into international freight services that
Current exemptions for shipping companies from the Commerce Act should be removed so that normal competition laws apply. This change would outlaw any agreements between shipping lines that fix prices and/or limit capacity unless the Commerce Commission judges that their public benefits outweigh any anti-competitive detriments
In the event the Bill dealt to shippers price-fixing, but it did allow shipping lines to cooperate to do these "specified activities" listed in s44A(8) (provided they improve the service):
(a) the co-ordination of schedules and the determination of port calls;
(b) the exchange, sale, hire, or lease (including the sublease) of space on a ship;
(c) the pooling of ships to operate a network;
(d) the sharing or exchanging of equipment such as containers;
(e) capacity adjustments in response to fluctuations in supply and demand for international liner shipping services.
No doubt some of these activities could well be efficient and helpful for both the shippers and their customers. But you're also left with the feeling that if shipping lines are able to jointly set capacity, as in subsection (e), they've effectively been left with the ability to set price in any event.

Does it matter? Oh yes. In another of those odd coincidences that have been happening recently, shortly before our shipping provisions become law the Aussie courts fined NYK, a Japanese shipping line, A$25 million for being part of an enormous and long-running global shipping cartel. It was the second highest cartel fine in Australia (behind the A$36 million fine on Visy Board in 2007 for a cardboard packaging cartel) and the first case under Australia's criminalised cartel regime.

As the judgment makes clear, NYK and a bunch of other shipping lines had been operating a global cartel since 1997. At [46] it says
From at least February 1997, NYK and a number of other shipping companies, including the [eight] Carriers [servicing Australia], had arrived at an arrangement or reached an understanding to the effect that, as a general proposition, they would not seek to alter their existing market shares or otherwise win existing business from each other. That overarching arrangement or understanding was generally referred to as “maintaining the status quo” or giving and receiving “respect”. It may conveniently be called the “Respect Agreement”.
The "Respect" agreement - I rather like the overtones of Mafia protocol - had everything a cartel prosecutor could ask for: not just the  'freight rate provision' (price-fixing) but also a 'bid rigging provision' and a 'customer allocation provision'.  And it had all the cloak and dagger stuff of your hard core cartel. At one point NYK's internal compliance people got antsy, for example, so the managers involved decided to tighten up security. At [158]
NYK employees in the Car Carrier Group continued to engage in communications with their counterparts at the other Carriers. Those communications were generally conducted orally over the telephone or in face-to-face meetings. They were rarely documented. Where the discussions were conducted by telephone, the employees generally conducted the conversations away from their desks, in hallways, lift lobbies, outside the office or in a room referred to as the “phone booth”. The phone booth was a small, glass enclosed room about the size of a phone booth. Some employees were specifically instructed to conduct such telephone calls away from their desks to minimise the risk of junior staff overhearing the conversation and reporting the conduct to the Fair Trade Promotion Group.
NYK was lucky in a way. It has been up to its ears in proceedings in other jurisdictions: the judgment mentions Japan, the US, South Africa, Chile and China, and it is likely others have yet to surface. But in Australia it pleaded guilty, fully cooperated with the Director of Public Prosecutions and the ACCC, expressed genuine contrition, and explained that it have made real efforts to improve head office culture, including withdrawing from all shipping line 'conferences' it used to be party to. As a result it got a 50% discount on what would otherwise have been a stonking A$50 million fine. As Justice Higney concluded at [300]
Cartel conduct of the sort engaged in by NYK warrants denunciation and condign punishment. It is inimical to and destructive of the competition that underpins Australia’s free market economy. It is ultimately detrimental to, or at least likely to be detrimental to, Australian businesses and consumers. The penalty imposed on NYK should send a powerful message to multinational corporations that conduct business in Australia that anti-competitive conduct will not be tolerated and will be dealt with harshly. That is so even where, as here, the decisions and conduct are engaged in overseas and as part of a global cartel. As has already been explained, but for NYK’s cooperation and willingness to facilitate the administration of justice, the penalty would have been substantially higher. That should serve as a clear and present warning to others who may have, or may be considering or planning to, engage in similar conduct.
You'd wonder, though. If the NYK judgement had come out a year or two back, rather than this month, would the Minister at the time (Paul Goldsmith) still have flagged away criminalisation, at least for cases like this? And would the Commerce Select Committee has been as willing to give the shipping lines such a soft pass on collaboration?

Monday, 21 August 2017

No cheap cars please, we're Aussies

What a bestiary Aussie politics is these days - and I don't mean the dogfights over second citizenships, though it would be nice if some of the oddballs who got in at the last election have at least one Irish grandparent, making them Irish citizens by descent and ineligible to keep their seats.

Away from the citizenship headlines, some of the pollies have been up to an unpleasantly protectionist bit of business which has seen the Aussie government rat on its previous commitment to consumers to allow some second hand car imports into Australia.

Infrastructure Minister Paul Fletcher's media release, 'New Road Vehicle Standards Act to Better Protect Consumers and Provide More Choice' (!) was dolled up in the dress of consumer welfare ("appropriate consumer awareness and protection arrangements") but none of the arguments he made looked convincing. The world Fletcher painted - of high administrative costs and no big net benefit to consumers - bears no relationship to the reality we've experienced in New Zealand. A reference to "price reductions estimated to be less than 2 per cent across the market" in particular looks a very lowball number, and I suspect the "across the market" reference, decoded, means "not a lot of change for some, but quite large reductions for others". As well as not conforming to the facts as we have actually lived through them, maintaining the ban flew in the face of advice from a variety of Australian bodies including the Harper review of competition policy.

Perhaps, despite their flimsiness, the Aussie government believes its justifications, but that may not all that is going through its mind. For the Aussie Financial Review, "It is understood that heavy lobbying by politically influential car sellers - as well as backbenchers such as John Williamson, Warren Entsch, Andrew Broad and Ian Macdonald - prompted the government to dump the option" (in  'Car buyers lose out as government backflips on parallel import rules', which may be paywalled, but if you haven't got a sub, get one).  Whatever the government's possible mix of intentions, an end effect was to do a big favour for a small, and, let's face it, rather unloved set of characters at the expense of doing a big favour for many millions of car buying households. And where, incidentally, were those tribunes of the people, Australia's Labor Party? They went along, too, as quoted in the AFR article.

A week earlier, by the way, the ACCC had come out with its draft market study into the selling of new cars. The media release said that "Complaints to the ACCC about new car manufacturers have risen to more than 10,000 over the past two years. Our draft report highlights the urgent need to address widespread issues in the industry". Not, in short, a sector that deserved ongoing favourable treatment, and I'd argue that the protectionist moat they're allowed to live behind is precisely the source of those "widespread issues" the ACCC found.

This latest proactive ACCC market study was another good example of the progress market studies can make to advance consumers' interests and promote more effective competition. So it's a shame that our own Commerce Commission isn't going to be able to do the same thing. As MBIE has said (at the foot of this webpage) the Commission isn't going to be able to start ones off its own bat: "The Commerce Commission’s market studies power will only be exercisable at the direction of the Minister of Commerce and Consumer Affairs", and then only after the Minister has satisfied an (as yet to be defined) "I smell a rat" test.

Still, it's something, and I suppose we should be somewhat grateful for the half a loaf we've got, or might eventually get. " Parliament", MBIE says, "will need to legislate for change to the Commerce Act for the market studies power to be introduced".

Oh goody. The most recent change to the Commerce Act - the Commerce (Cartels and Other Matters) Amendment Bill - took only five years, ten months and one day to go through the sausage factory.

Thursday, 17 August 2017

Timely cooperation

Collaborative working groups are a necessity in many industries: if you want your luggage transferred from one airline to another, or exam results at one university credited to another, or a gizmo to work in a USB port, you're going to rely on the backroom folks who have got together and worked out the protocols that make it all happen. Consumers unambiguously benefit.

Industry associations can sometimes go over the (not always obvious) line between consumer-friendly collaboration and producer-friendly collusion. The latest in the gun may be technology working groups in the German car industry, which are alleged to have colluded on collectively introducing cheaper but less effective technology to control diesel engines' exhaust. The airlines went too far when they colluded on air cargo surcharges. And it was interesting to note that the Commerce Commission's latest Competition Matters conference had a session on 'The anti-competitive potential of industry groups', possibly signalling that they've become an issue of greater interest locally, too.

But as a reminder of the large amount of welfare-enhancing cooperation that well-meaning working groups can achieve, here's a question for you: where did the time zones in the US come from?

A lot of people tend to assume it must have been the guv'mint. But as this plaque on the corner of La Salle Street and Jackson Street in Chicago reminds us, it was actually entirely the work of the private sector. The US railroads got together on the site of the plaque on October 11 1883, agreed on four time zones each an hour apart, and implemented the whole thing five weeks later on November 18. As soon as they did, it became immediately obvious that this was a hugely sensible idea, and everyone else, including the federal and state governments, fell in behind.

Can you imagine a modern western government managing to do anything as effective as quickly as the railroads did? As it was, it took the US government more than 34 years to formally ratify what the railroads arranged in five weeks.

Welfare economists are fond of 'Pareto optimality', but real life examples tend to be hard to find. I'd like to propose the US time zone setting: there can't have been anyone much inconvenienced by dropping the old system, and uncountable numbers of people had their lives simplified.

Saturday, 12 August 2017

Economics by walking around

You can read all the official data and reports you like, but I reckon nothing quite beats the insights you get from a spot of Economics By Walking Around - though an alternative interpretation is that I never quite switch out of my economics day job, even on holiday. Either way, and based on my first visit to the US in a long time, here in no particular order are what I found.

The US economy's doing fine - One of the things I always look out for in any country is the 'help wanted' signs in the windows: they're an excellent indicator. My trip wasn't a representative sample (San Francisco, Seattle, Portland, Chicago) but the short answer is, 'Now Hiring' signs were all over the place. The official labour market data for July came out when I was there: 209K new jobs, a rise in the participation rate, and a drop in the US unemployment rate to 4.3%, lower than ours.

You ain't seen nuthin' yet - all that hype about Uber and Airbnb and all those other online disintermediary threats to the established order? Believe it. They've become the new way of doing things. At the Navy Pier tourist trap in Chicago, for example, there are now designated pick-up points for Uber and Lyft (a competitor, and one we happily used). I wouldn't necessarily assume, as I think some investors do, that all of these markets are going to be network-effects-driven 'winner takes all': we found Lyft at least as good as Uber, and HomeAway better than Airbnb, and coexistence may be more likely than one-firm domination, or alternatively, they might default to one winner, but it may not be the current front-runner. And while investors could well be somewhat overexuberant, I can now see a bit more clearly why the sharemarket is prepared to pay 18.3 times expected earnings for the US IT sector. It's on a roll.

We are not alone - go to Seattle and Portland and you'll hear exactly the same sentiments about the housing market as you'll hear about Auckland's: first homebuyers can't get a look in, outsiders are buying up what's available, lower and middle income people can't buy homes near where they work (it's far worse again in San Francisco and the wider Bay area, and has been for some time). So we oughtn't think Auckland is a problem entirely unto itself: it's an outcome, like the US markets are, of generationally low interest rates, overall economic growth, regional concentration of growth sectors, demographics (including internal and external migration), and assorted supply constraints (notably planning and NIMBYs).

Public transport can work - there are days when I throw up my hands at the mismanaged mess that is Auckland transport, including the day we got back and tried to get through the chaos that is Auckland's North Shore, on a rainy day, towards the end of rush hour, with the schools back. Yet there are cities in the States who have made the thing work. Import someone from San Francisco or Portland, give them plenipotentiary powers and $5 billion a year, and tell them to get on with it. Preferably including light rail.

Are we falling behind? 1 - we like to think we're a bit ahead of the curve when it comes to social policies, but we're just tiptoeing towards issues like cannabis when it's already completely legal in some US states: we saw highway billboards in Seattle, for example, plugging the Ganja Goddess brand ("Taking Seattle cannabis to a new high"). Similarly with the taxi over-regulation revealed by Uber: the US has got on with it, we're still working it through. And it would be an interesting question which country is now the more regulated overall. Random examples: you can buy melatonin (a jet lag/insomnia thing) in your US supermarket, it's more tightly controlled here; cigar stores haven't been hounded out of existence in the US; you can buy your spirits in a San Francisco supermarket, you can't here; and dogs are welcome everywhere (including supermarkets and craft breweries), and nobody dies.

Are we falling behind? 2 - America's now our biggest export wine market. Excellent: looks like we're making great headway. Only we're a one-trick pony (Sauvignon Blanc, 86% of all exports by volume) that may be peaking - in a supermarket I saw one of our Savvie brands pitched as "low price, high quality", not where you want to be - whereas the quality of the US product is rising by leaps and bounds (try some outstanding Oregon Pinot Gris sometime). Ditto their beer and (at long bleeding last) their coffee.

We're still ahead - we're not perfect, but we have a more effective safety net than the States does. Very public homelessness and untreated mental illnesses are everywhere, particularly in San Francisco. And we should make a takeover bid for Washington state, because we sure would work it harder than its current farmers do.

The pollies have lost the plot - are the US politicians addressing issues like the homelessness? No. On the wall at breakfast in our Chicago hotel were three huge TV screens, one each for CNN, Fox, MSNBC. All of them were broadcasting as their big story - welfare? growth? homelessness? - no, a nasty intra-conservative row about whether President Trump's National Security Advisor was conservative enough. At the same time the pols were trying to restrict ordinary families' insurance access to the world's most exorbitantly priced medical care. Everything you've read about the intensely partisan and deadlocked US political system falls short of the disgraceful reality.

One step forward, one step back - we did the tourist things, especially art galleries. On the plus side, US galleries no longer care whether you photograph the exhibits (other than ones that would be damaged by camera flashes), even the ones in special exhibitions (we did Munch and Gauguin). On the minus side, when are they going to install ticket-vending machines and get rid of the entrance queues? San Francisco's Museum of Modern Art, that means you. The problem is, they're addicted to price discrimination (oldies/students, residents/nonresidents, members/nonmembers) but they've forgotten about the costs of running it. The ferry from West Seattle to downtown Seattle, for example, dispenses tickets on an ATM honesty basis (you can pick the 'senior' option if you want), and the sky doesn't fall.

A word of caution - I spend a lot of my time in front of a computer screen, so I've got a large 17.1" screen laptop. But taking it through US airport security currently makes you a marked man. As well as the whole body scanner that everyone goes through, twice I got picked out for the full pat-down search and the chemical swabbing. No dramas in the end, they let me through, and I understand what they're worried about. Just be aware, if you bring your own laptop, it'll be a bit of a performance.