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

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

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

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

In Oz, however, the proposed change has sailed into a new political squall. Reform of important legislation affecting big business always tends to have its tricky moments: what set it off this time was a comment by Australia's Productivity Commission in its recently released draft report on agricultural regulation (if that's your thing, the overview is here and the full report here). Along the way the Commission had said (p431)

Some competition law experts argue that pressure to amend section 46 [the Aussies' version of our s36] is based partly on wanting to shield small businesses from competition. For example:

Section 46 is designed to ensure those with market power don’t use it to insulate themselves from competitive pressure; but s46 shouldn’t be used to insulate small business … (Trindade, Merrett and Smith 2013, p. 6)

The introduction of an ‘effects’ test to section 46 is unlikely to shield farm businesses from intense competition in retail grocery markets. Shielding farm businesses from competition would also not be in the interest of consumers.

What the Commission said, in short, is that even if the effects test was enacted, it wouldn't actually serve as protectionism for farmers, and in any event protecting groups from competition would be a bad idea. All good.

But then up pops a press release from the Opposition competition spokesman Dr Andrew Leigh, quoting that bit from the Commission saying an effects test won't help farmers and adding

An effects test won’t protect producers, but it will raise grocery prices and threaten retailers with court action if they become too competitive...Labor remains opposed to the effects test as it will have a chilling effect on competition and raise prices on everyday groceries such as bread and milk

He also went on, rather incongruously for a Labor politician I thought, to recycle a number of anti-effects-test statements from the big business end of town, and finished by arguing that the effects test was in reality a plot by the National Party component of the Aussie Coalition to protect small businesses against competition from large ones.

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

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

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

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

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

Are monetary conditions too tight?

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

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

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

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

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

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

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

Still nothing

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

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

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

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

Time to revisit "hard core" cartels

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

This was your classic "hard core" cartel - secret, prolonged (14 years), deliberate, and significant. As the European Competition Commissioner said

there are over 30 million trucks on European roads, which account for around three quarters of inland transport of goods in Europe and play a vital role for the European economy. It is not acceptable that MAN, Volvo/Renault, Daimler, Iveco and DAF, which together account for around 9 out of every 10 medium and heavy trucks produced in Europe, were part of a cartel instead of competing with each other.

The European Union hasn't criminalised cartels, meaning that executives can't be jailed. Member countries weren't prepared to give the Commission the authority, and have gone their own ways: some have chosen the criminalisation route (the UK, Ireland), most haven't. But if ever there was a European case where executives needed to have their collars felt, this was it.

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

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

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

How low is it really?

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

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

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

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

Here's one solution to Auckland's housing issues

The Auckland Housing Enablement Bill, 2016

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

2. Any house up to two storeys in height may be built anywhere within the Metropolitan Urban Limit without further planning approval, provided that the construction

• is carried out by, or supervised by, a Registered Master Builder or New Zealand Certified Builder, and
• the quality of construction is signed off in writing by two, arm's length, full members of either the New Zealand Institute of Architects or the Institution of Professional Engineers New Zealand

Get your views in on abuse of market power

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

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

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

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

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

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

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

• Our competition authority, the Commerce Commission, has given up on making the current regime work despite having identified instances where it thinks there have been potential abuses of market power that it is unable to address

• Its Aussie equivalent, the ACCC, agrees with it that our system is munted

• The law is poorly phrased in the first place

• Hence and otherwise the jurisprudence on s36 has seen the legislation effectively gutted in all but the most egregiously awful cases. In particular, courts are supposed to ask, would a firm without market power have done the same thing, and if so, the firm with market power is home free. This completely subverts the whole point, that some actions when undertaken by firms with market power have anti-competitive effects

• The Aussies have, rightly and after a very extensive consultation process, decided to change their law (it's currently similar to ours) for something better

• When the Aussies change, it will be silly and inefficient to have companies facing different legislative tests on either side of the Tasman, and we should harmonise on the better Aussie approach. Harmonisation is a government priority in any event

• The arguments against change - broadly in  the categories of 'business certainty' and 'potential chilling effects' - while valid, are not strong.

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

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

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

On your marks, get set...