Money - Facts and Figures [Infographic]

We all know what money is, right? We all use it, we go to work every day to earn it, we pay our bills with it. It's a part of everyday life. However, most people never think about what money really is. How it can be defined, what functions it has and what makes it valuable in the first place.

Generally speaking, money is a set of assets that is commonly used and accepted as payment for goods and services in an economy. So basically everything can be considered money, as long as it fulfills certain criteria. 

To explain this in more detail, we have created an infographic that displays some of the most relevant and interesting facts and figures about money. Take a look:

Embed Code

<a href="http://principles-of-economics-and-business.blogspot.com/2014/12/infographic-money-facts-and-figures.html"><img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEaRodwC-k68qrrhfdJRycVLNh7uAmHTV3BfPhbLGoPIIxl_VJ3XmNd8cHMvB4ttMUaKo3UaZPs9R6YyAG6JoubpaprKK5g6WJMhTSzjZfrqs1yJF5Ev8kuASyuirH7Y8yosN0hTn7fZ8/s1600/Money_Infographic_Small.png" alt="Infographic - Money: Facts and Figures"></a><br />Source: <a href="http://principles-of-economics-and-business.blogspot.com">Principles of Economics and Business</a>

JFDI, MBIE!

There is a bit of a ruckus going on about the performance of MBIE, the Ministry for Business, Innovation and Employment, based on this report. I'm not interested in the point-scoring argy-bargy, though for what little it's worth I agree with the reviewers who noted (p58) their "impression of highly motivated and capable staff, doing things the hard way because they are struggling both to prioritise their efforts and to see the broader strategic context for their work".

What's irked me a bit is that there are three ideas that have gone into the MBIE hopper and haven't come out yet, even though all of them look good (or even very good), would be easy to implement, and would make the New Zealand economy a more competitive marketplace.

The first one, recommended by our Productivity Commission, and conveniently investigated in detail in an Australian context by the Aussies' Competition Policy Review, is to review s36 of the Commerce Act, the bit that aims at stopping companies with market power from interfering with competition. My conclusion, on reading the Aussie report, was "Save the time and money" on our own reinvention of the wheel at MBIE. "I say we send the Aussie Review members a thank you note and a couple of cases of our best Pinot Noir, declare victory, and go home". I know there are people in MBIE, and elsewhere, who thinks it's a big, complex issue, despite the Aussies having fortuitously solved it for us. It isn't.

The second one, again recommended by our Productivity Commission and also standard practice overseas, is to let the Commerce Commission conduct proactive fossicking ("market studies") into the state of competition. It can already do it in the telecoms market, but not generally. It would take part of a morning to write the amendment to the Commerce Act.

The third one is the state of our anti-dumping regime, which is too easily abused and which allows domestic producers to avoid competition from overseas and to rort the local consumer. In June 2014 MBIE came out with a good paper with three options, one of which clearly outclassed all the others. As I said at the time, "this should be the easiest, "where do I sign", shoo-in of a policy contest that's ever been run". So why hasn't it been?

Time for an interest rate cut?

"At 3.5 percent", said last week's Monetary Policy Statement, "the OCR" - the official cash rate - "is still providing support to demand".

Now, there's a sense in which this is true: a "neutral" rate, neither supportive nor contractionary, is reckoned to be around the 4.5% mark, so 3.5% is clearly on the stimulatory side.

But in terms of the overall tightness of monetary conditions, you can't look at the cash rate in isolation. It's the combination of interest rates and the exchange rate that makes life easier or harder for people and businesses. An OCR of 3.5% may be "providing support", but that doesn't mean a lot if the Kiwi dollar is so high that exporters are severely constrained. True, it would be better than 4.5% and a high Kiwi dollar, but that would be a rather moot consolation.

So here once again is my calculation of the overall tightness or otherwise of monetary conditions, as captured by the old Monetary Conditions Index, which mashes together the 90 day bank bill rate and the trade-weighted index of the Kiwi dollar into a single overall number.

The reality is that overall monetary policy conditions are tight. Tight, tight, tight. They're on a par with periods in the past when we were dealing with reasonably serious inflation pressures.

Not that there's a lot the Reserve Bank can do about it, as there's no feasible OCR that would bring monetary conditions back to neutral, let alone to the stimulatory side of neutral.

If you said that "neutral" is some kind of long-term average of the Monetary Conditions Index, then neutral would be about 500 (averaged over the whole history of the series since mid 1986) or about 350 (if you start in January 1991 after the initially brutal disinflationary period). The current MCI is around 1200: to get it to a neutral level around the mid 400s, you'd need a negative OCR at -4.0% or so.

Alternatively, if the OCR stays at 3.5%, you'd need the Kiwi $ to be roughly 14% lower for overall conditions to be neutral - say in the high 60s against the US$ rather than the current high 70s.

However, you look at it, though, you begin to come round (as I also did a wee while back) to the conclusion that, with the best intentions, and on the best decisions made in the light of the best info at the time, we've nonetheless ended up tighter than we ought to be. I've a great deal of sympathy for the view (as put by John McDermott, the RBNZ's Chief Economist, at last week's MPS press conference) that monetary policy making in real time is an evolving process of learning and adaptation as you go along. I'm beginning to think that the next step in the process ought to be a few steps backwards for the OCR.

Never mind the deficit

I've just spent the morning, with the rest of the usual journo and economist suspects, in Treasury's lock-up for the Half Yearly Economic and Fiscal Update. Though sometimes I wonder why I bother: Bill English's press handout essentially said that the numbers on the fiscal outcome aren't worth the paper they're written on ("Previous forecasting rounds show the outlook can change significantly between the Half Year Update and the final accounts being published").

No doubt most of the media coverage will be along "Government misses its fiscal surplus target" lines: the government had planned a fiscal surplus of  $297 million for the year to next March, and it now looks like a fiscal deficit of $572 million. And even the forecast surplus for the year to March '16 ($565 million) is partly the result of a bit of jiggery-pokery with the contingency allowance the government has for possible future spending.

But I don't give much of a hoot about that, and neither should you, for several reasons. For one, the fiscal surplus or deficit is the difference between two very large numbers (government revenue and spending), each around the $72 billion mark, and very small changes in the very big numbers can make fiscal surpluses and deficits appear and disappear, just like that (as Tommy Cooper used to say). For another, there's an entirely plausible, and benign, reason for the forecast surplus becoming a forecast deficit: inflation has turned out to be lower than expected, which means the tax take in dollar terms is lower than expected. It's not, for example, the result of letting government spending rip (spending is actually gently drifting down as a share of the economy). And for yet another, while a deficit of $572 million sounds like something substantial, it's actually only 0.2% of GDP. However you look at the "missed the target" angle, it's no biggie from an economic perspective.

There were more substantial things to focus on. I was especially interested in what Treasury's forecasts for GDP growth would look like, given that last week the Reserve Bank had upped its expectations for the economy. It's encouraging.

It's possible, too, that there's more than the usual business cycle going on here: both the Reserve Bank, and now the Treasury, have begun to wonder whether the long-term growth rate of the economy ("potential output") hasn't picked up a bit (it's one of the alternative scenarios that Treasury looked at in the Update). Some of it is down to big increases in business investment, some of it down to high levels of net immigration (we're expected to gain 52,400 people in the year to March, and keep gaining people in future years, though not at the current clip). As Treasury noted, many of these people are of working age, and "the skills, ideas and international connections of the migrants are assumed to further increase productivity growth". Xenophobes, please note.

Two other things caught my eye.

With the caveat that whatever the reliability of fiscal forecasts, exchange rate forecasts must be an order of magnitude more flakey again, Treasury is currently picking that the overall value of the Kiwi dollar isn't going anywhere over the next three years. Most of us have been operating on the assumption that the Kiwi dollar is "too high" and will drop in the none too distant future: maybe it isn't going to happen.

And the other thing is the outlook for what we earn on our exports compared to what we pay for our imports (the "terms of trade"). The working assumption is that yes, we're suffering on the dairy front at the moment, but other commodities will keep us going, dairy will recover in the end, plus we're paying a lot less for the oil we import. Maybe that's how it will indeed play out, fingers crossed, but it's a reminder that we're still vulnerable - arguably too vulnerable - to the vagaries of the commodity markets.

Good Deflation vs. Bad Deflation

Deflation is often considered a highly unfavorable phenomenon. Although the idea of falling prices may seem appealing (at least from a consumer perspective), deflation is mentioned amongst the worst things that can happen to an economy.

However there are different types of deflation that have different implications. In other words, the effects of deflation depend to a large extent on the particular context. Thus it becomes quite obvious that deflation is a rather complex issue. To keep things simple we shall distinguish between good deflation and bad deflation. 

Good deflation

Good deflation is generally caused by a positive supply shock (i.e. an outward shift of the supply curve) that leads to the production of higher quantities sold at lower prices. In most cases, this type of deflation can be attributed to technological progress. New technologies allow companies to improve their production processes and reduce costs. As a result, the price level falls and (relatively speaking) money becomes more valuable.

An example of good deflation is the development of flat screen televisions. When they were introduced a few years ago, not many people could afford to buy one, because they were quite expensive ($3'000 - $4'000). However due to technological progress and improved production processes a flat screen television only costs about $600 - $1'000 these days. 

This example illustrates why certain forms of deflation are considered "good". On one hand consumers obviously profit because they can afford to buy more things with the same amount of money, thus they become more wealthy (relatively speaking). On the other hand suppliers can also profit from the deflation (even though prices fall) because they can reduce production costs simultaneously. This has to hold true because good deflation is triggered on the supply side.

Bad deflation

Bad deflation is caused by a negative demand shock (i.e. an inward shift of the demand curve) that leads to the consumption of lower quantities at lower prices. In other words, sellers have to reduce prices, because there is a lack of demand and they cannot sell their goods at the original price anymore. This is problematic in several ways:

• When prices fall, people tend to postpone purchase decisions because they expect prices to fall even more. That can lead to a vicious circle, since postponed purchases result in lower demand which in turn drives prices further down.
• The burden of depts increases, as the price level decreases. That is, if you were to borrow money today, the amount you would have to pay back in a year would be worth more. Admittedly, lenders profit from this situation. However, since they usually only spend a portion of the additional income, the economy will experience an additional decrease in overall spending (and thus the vicious circle mentioned above will be amplified).
• As a result of the lower revenue, companies will have to reduce costs. Because of sticky nominal wages (i.e. the fact that wages cannot be lowered without provoking resistance), they will have to let people go, thereby causing an increase in unemployment.

To illustrate this we can look at the financial and economic crisis in 2008. The burst of the "housing bubble" in the United States combined with several other factors (easy loans, questionable business practices, etc.) caused prices to fall significantly over a very short period of time. As a result, trillions of dollars of value were destroyed and both investors and consumers became increasingly cautious and restrained. However this exacerbated the situation, resulting in a vicious circle.

The example above illustrates why those forms of deflation are considered "bad". At a first glance it may look like consumers are better off. However, there are significant negative effects on suppliers that will eventually affect consumers as well. This form of deflation is especially problematic, because of the self-amplifying nature of the process that can ultimately lead to a deflationary trap.

In a nutshell:

Deflation is widely considered a harmful phenomenon for the economy. However, we need to distinguish between deflation caused by a negative demand shock (i.e. bad deflation) and deflation caused by a positive supply shock (i.e. good deflation). Bad deflation causes a vicious circle, because people postpone purchase decisions, the burden of dept increases, and unemployment rises due to sticky nominal wages. Good deflation on the other hand is mainly based on technological progress and can actually be beneficial for both consumers and producers. In conclusion it can be said that deflation may be bad, but it does not necessarily have to be.

Growth, inflation, and spongey brakes

Today's Monetary Policy Statement from the Reserve Bank didn't have any headline surprises - the official cash rate was kept at 3.5%, as everyone had expected, and any eventual increase is now pushed out to late 2015 or early 2016, again much in line with current market expectations.

There had been some talk that the Bank had been a bit premature with its interest rate increases - there were questions at the post-match press conference about whether the Bank had tightened too much, or had expected more inflation than has actually happened - and even that its next move might need to be a cut in interest rates. Governor Graeme Wheeler ruled that out - "we're not anticipating a cut at this stage".

So all much as expected, but that said, there was some interesting stuff in the body of the Statement.
One big thing that stood out for me was the stronger track now being forecast for GDP growth: I'd been somewhat concerned about what happens to our growth rate when the Canterbury rebuild tails off: on the latest forecasts (below), this is looking less of a worry, and all going well we should see the unemployment rate keep dropping, to below 4.9% by March '17.

Another interesting development was lower domestically-generated inflation than you would normally have expected in an economy performing as well as ours currently is. Here's a chart (Figure B1 in the Statement) showing where the rate of domestic ("non tradables") inflation has actually been, compared to where you would have expected it to have been based on the strength of the economy and people's inflation expectations.

You can see that domestically-generated inflation is running about 2.5%, when economic conditions like today's would have led you to believe it should have been more like 3.25% to 3.5%. There was a bit of attempted blame-slinging from the media at the press conference about this, along the lines that that the Reserve Bank missed it (and, implicitly, raised rates too soon or too much). But as I've said before, the Bank was in good company. And in any event nobody yet really understands why it's happened here and overseas ("Research into what has caused inflation to be unusually low continues", as the Statement tactfully put it).

I don't know if John McDermott. the Bank's Chief Economist, was right when he said the Bank was less wrong about this than a lot of other central banks and forecasters. But I certainly agree with his follow-up comment that, rather than looking at it as a forecasting failure, the lower than expected inflation is actually a positive development: it means that economic expansions can be let run for longer, without central banks (as the old monetary policy saying goes) having to take the punch bowl away just as the party has got going.

Brian Fallow, the Herald's eminent economics correspondent, may have added a new monetary policy phrase to the lexicon when he asked a question about long term interest rates*. He noted that the Bank had said (in this speech) that it didn't control long-term interest rates (because they're largely set globally). But in that case, Brian reckoned, the RBNZ may lose control of some mortgage rates: people on longer-maturity fixed rate mortgages will be paying rates essentially set overseas. Will the Bank be left, as Brian put it, with "spongey brakes"?

*Brian tells me since I wrote this that it's not original to him, and he recalls it being used in Alan Bollard's day. Even so, it was a good time to dredge it up.

Let's get more serious about competition

Australia's Financial System Inquiry, aka the Murray report, came out over the weekend: you can find overviews here or here and the thing itself here.

I was particularly taken with the bit that looked at the interplay between regulation and competition: regulation can often have positive results (such as helping with the stability of the financial system) but it can also reduce competition (for example by writing rules that make it harder for new entrants).

The Aussie report, I'm pleased to say, came squarely down on the side of competition.

First it said that

The benefits of competition are central to the Inquiry's philosophy. While competition is generally adequate in the financial system at present, the high concentration and steadily increasing vertical integration in some sectors has the potential to limit the benefits of competition in the future. Licensing provisions and regulatory frameworks can impose significant barriers to the entry and growth of new players, especially those with business models that do not fit well within existing regulatory frameworks

And its Recommendation 30 consequently says that Australia should

Review the state of competition in the [financial] sector every three years, improve reporting of how regulators balance competition against their core objectives, identify barriers to cross-border provision of financial services and include consideration of competition in the Australian Securities and Investments Commission's mandate.

The Murray report comes on the heels of earlier reports from the Aussies' Competition Policy Review (which I wrote about here, here and here) which also put competition front and centre in policymaking: all good stuff.

The recommendation that Australia should look at the state of competition in the financial sector every three years reminded me that in June our Productivity Commission came out with its report on raising productivity in  the services sector, and recommended (as I wrote here) that "The Commerce Commission should be able to undertake studies on competition in any specific market in the economy".

Six months later, nowt. As the Productivity Commission says on the services report website, "The Government is considering the Commission’s report and recommendations. No timeframe has been set for the overall response"
.
You're left with the feeling that the Aussies are taking the benefits of competition rather more seriously than we are.

Move along, folks

So here's where we've got to with the wholesale price of internet services.

Internet service providers (ISPs) used to buy access to Chorus's copper lines and electronics for $44.95 a month.

This price was too high and insupportable, and everyone knew it (including Chorus, if it's being honest).

And sure enough it's just been lowered by the Commerce Commission, to $38.39.

Good outcome? You'd think so.

But.

Chorus isn't happy. It didn't want it lowered, or at least by not that much.

ISPs aren't happy. They wanted it lowered to closer to $34.44 (the Commission's estimate of the same price overseas).

TUANZ says the ongoing uncertainty over the price is "disappointing".

Could everyone get a grip, please?

Chorus should be happy. It wasn't knocked back all the way to $34.44.

ISPs should be happy. They're getting a too-high price fixed for them - maybe not pushed as low as they'd like, but hey, this is where the technical experts say it really should be.

The government should be happy. Copper prices aren't undermining uptake of the new fibre network the government is subsidising as much as they might have.

Consumers, and TUANZ, should be happy. They've had the reduction in the price already passed through to them in better value broadband plans (if you believe the ISPs), but in any event it should reach them one way or another.

So there are two ways forward.

One is take to the mattresses in another round of rent-seeking from the regulatory process - submissions, counter-submissions, legal challenges, appeals, smoke, mirrors, subterfuge and artifice, enriching only the lawyers and the specialist economists in a negative-sum game.

And the other is to acknowledge a deal that more or less works for everyone, and get the hell on with doing what the various parties are supposed to be doing, which is making money for themselves by providing a better service for us, the consumers.

I wonder which will happen?

KISS

This morning the Commerce Commission released the wholesale price Chorus is allowed to charge to Internet service providers (ISPs), and which therefore is the core component of the retail prices those ISPs charge you for your fixed line broadband.

It's made up of two parts, the first being the bit for the cost of the copper line from your place to a Chorus switch (the 'local loop' or UCLL) and the second ('UBA') being the cost of the fancy electronics that Chorus can (optionally) provide to ISPs to save them having to use their own. The local loop bit will be $28.22 a month and the UBA bit will be $10.17 a month, making a total of $38.39. This compared with the previous price allowed, of $44.98.

These prices are based on explicit, detailed and complex modelling of the costs involved, and are intended to replace the interim hold-the-fort prices that the Commission had previously set, based on the cost of the same services overseas in countries who do things much the same way as we do. This 'benchmarking' exercise had set a local loop price of $23.52 and a UBA price of $10.92, making a total of $34.44.

There are all sorts of issues involved here, big and small, affecting everything from the profitability of  Chorus through to uptake of the country's shiny new ultra fast fibre network. And they directly affect you, too: already some ISPs are saying that the drop in the wholesale price (from $44.98 to $38.39) had already been passed on to you, so you won't be getting any further joy out of it.
In any event, I'd like to pick on one small aspect of the process, even though it's largely moot now, and it's about those interim 'benchmarked' prices.

I think they did a good job of providing a quick, cheap and reasonably accurate initial estimate of the eventual wholesale price. They were pretty much spot-on when it came to the UBA part ($10.92 versus $10.17), which is remarkable given that everyone was agreed that the benchmarking process had only a couple of countries overseas to use as sighting shots. And they weren't far off when it came to the local loop component, either ($23.52 versus $28.22) - especially when you consider that the fully modelled cost estimate involves a whole swathe of judgement calls made by the Commission and its modellers, and is not a glimpse into some eternal truth held in the mind of an omniscient Being.

So I'd take two lessons away from this, both involving the KISS principle.

The first is that over the next couple of years we're going to be taking a close look at the shape of our telco regulatory regime, and I'd like to suggest that we keep the cheap and cheerful benchmarking process. It's relatively fast - a particularly important consideration in fast moving markets like ICT - it's relatively transparent, it's understandable, it's relatively cheap, and it's accurate within some rough-and-ready-justice tolerance. I'd go further, and make it harder for parties to invoke the full cost modelling approach, which introduces layers of cost, delay and complexity, and all for a gain in 'accuracy' that (because of multiple modelling options) may be more illusory than real. And in general I'd like to see the 'good enough' option chosen over the one that keeps consultancies on three continents in business.

The second is that we need to think harder about the increasing complexity and cost of regulation across all sectors, and not just the telco business. I agree with Eric Crampton of the NZ Initiative, when he said on Interest.co.nz that "Too much of New Zealand’s regulatory apparatus would suit a country of forty million rather than the one we have". He's got his own examples: one I came across recently was the Commerce Commission's needing to sign off a $3 million increase in capex spending on a little Transpower project in South Canterbury. The process will take five months from start to finish, and has already spawned a 54 page initial draft decision.

That's a bit of an extreme example, and I should make it clear that it's not the Commerce Commission's fault: it's been lumbered with this ludicrously over-engineered regulatory regime. And I should add that from next April the Commission won't have to get out of bed for anything under $20 million - which is, of course, where the threshold for its involvement should have been in the first place (if not higher again). And I'd have to note that bloodymindedness on the part of Transpower and its customers drew this intrusive regime on their own heads, and a bit of enlightened give and take could have avoided the whole mess.

But it's there now, and it's holding up the sector, and its cousins in other sectors are also increasingly clunky and costly. It's time for more people in the policy analyst community to do what the MD of one company I know used to do: hold up the sign that says, "Does it make the boat go faster?"

Did we move too quickly?

Business Insider Australia put up this fascinating chart yesterday (full piece here).

The gist of the article was that the Fed won't want to repeat the premature policy-tightening mistake made by a range of central banks in 2010/11, including us (briefly and marginally) and the Aussies (for longer, and to a larger extent).

But I was more struck by that little rise in the yellow line at the right of the graph - our most recent tightening moves. They're beginning to look rather anomalous.

I know, hindsight is a wonderful thing, and inflation everywhere has turned out lower than reasonable people would have expected at the time (with the recently plunging oil price adding to the decline). And I've been as surprised as anyone - I also thought the strength of our economy would have led to higher rates of inflation (especially for non-tradables) than have actually occurred.

So I'm not pointing fingers. But on a purely objective basis, knowing where we are now, with a slowing economy and inflation less of a threat than expected, I do wonder whether we've tightened too much, too early.

We're on the right policy track

Graeme Wheeler, the Governor of the Reserve Bank, gave a fine speech today at a central banking conference in Wellington. It's a fairly easy read, too, for the non-specialist, so best thing is have a go yourself. But if life's too short, here are the two big points I'd take from it.

First, next time you hear politicians say, "why don't we have a bit more inflation and a bit more growth, instead of the Reserve Bank holding us back all the time", tell them they're talking bollocks.

As Wheeler points out (p4), "In the 20 years before the [1989 Reserve Bank] Act, annual real GDP growth averaged 2.2 percent while annual inflation was volatile around an average of 11.4 percent. Since 1990, annual inflation and real GDP growth have averaged 2.3 and 2.6 percent respectively and there has been a marked decline in inflation variability".

In other words, you can have it all - the same (or even marginally better) GDP growth, and lower and less erratic inflation. It's not a trade-off over the longer haul.

Here's the graph he put up to illustrate it. You can see, more or less, that the GDP growth rate picture is much the same before and after, and you can very clearly see that inflation is much, much lower and much, much less volatile.

The other big point is about transparency and independence. Internationally, central banks have been getting much more communicative about what they are up to and why (though, as I noted here, the European Central Bank has been a slow learner), and have been given more independence from government. We score highly on this: as he said, "A recent international survey ranked New Zealand second among 120 central banks for transparency".

Again, you'll hear politicians trying to take back control of monetary policy, sometimes cloaking their eagerness to get their clammy electoral hands back on the interest rate lever in the language of "democratic control".

Ignore them: what the evidence shows - as I found when I looked up that "recent international survey" that the Governor mentioned - is that more transparency and independence result in lower and less erratic inflation. The authors say (p236) that "Disentangling the impact of the two dimensions of central bank arrangements is difficult—not surprisingly, given that they respond to similar determinants", but either separately or together the picture is consistent: higher levels of transparency and independence lead to lower inflation and less volatile inflation.

Bottom line - and this is my take, not Wheeler's words - there's good reason to be very sceptical about relaxing or overriding our current inflation targetting regime, and equally good reason to steer clear of letting the pollies back in charge of it.

Why Zero Profit Equilibria Can Subsist

In the long run equilibrium, firms in competitive markets make zero profit. This may seem odd, considering all the effort and time that has to be put into running a company. So why should these firms stay in business?

The answer to this question lies in the definition of the term profit. What most people think of when they hear profit is a number on the balance sheet of a firm. We call this the accounting profit. However, for many economic issues, considering accounting profits may not be sufficient. In those cases, we need to look at a different type of profit as well; the so-called economic profit.

Accounting profit

As mentioned above, accounting profit is the surplus we can find on a balance sheet. It can be calculated as the difference between total revenue and costs. However, the important aspect here is that accounting profit only includes explicit costs. That is, it only accounts for costs that result in an outflow of money (or an increase in dept) for the firm.

For example, think of an ice cream seller who wants to open a new business. Let's assume he faces costs of $100'000 for equipment and ingredients. At the end of the year, he has sold ice cream for a total of $150'000. Thus he makes an accounting profit of $50'000 ($150'000 - $100'000).

This approach is rather business-oriented. It includes everything that is relevant to set up a balance sheet. However, since we are looking at the issue from an economic perspective, we need to include some additional aspects. Therefore, we shall look at economic profits.

Economic profit

Economic profit is defined as total revenue minus total costs. That means in addition to the explicit costs it also includes implicit costs, such as opportunity costs. In other words, economic profit also accounts for the time, money and effort an owner puts into his company.

Regarding the zero profit condition, this suggests that in the long run equilibrium, owners need to be compensated for their opportunity costs. Hence the company must actually generate a positive accounting profit in the amount of the opportunity costs incurred. Therefore it will generate at least the amount of profit that is needed to maintain the factors of production (labor, capital, etc.). This profit is referred to as the normal profit.

To illustrate that idea, let's go back to our ice cream seller. If he had decided not to set up his business, he could have for instance deposited the $100'000 (i.e. the explicit costs) in a bank account to earn $5'000 in interest. In addition to that he could have worked for another ice cream producer to earn $45'000 a year. As a result, his opportunity costs add up to $50'000. If we include those costs in the calculation of the accounting profit above we get the economic profit for this case, which will amount to zero ($150'000 - $100'000 - $50'000).

This shows that even if economic profits are zero, producers still earn positive accounting profits. They have no reason to go out of business, because they receive compensation for their opportunity costs, so there is no alternative that would generate higher profits for them.

In a nutshell

In the long run equilibrium, firms in competitive markets make zero profits. This may seem odd at a first glance. However it makes sense because the statement refers to economic profit. It is important to note that unlike accounting profit (i.e. revenue minus explicit costs), economic profit (i.e. revenue minus explicit and implicit costs) includes opportunity costs. As a result according to the zero profit condition, competitive firms in the long run equilibrium are compensated for their opportunity costs. That means there is no superior alternative for them so they have no incentive to go out of business. On the contrary, they may still generate substantial accounting profits.

Why the shortages?

Yesterday I posted about recent trends in immigration, and made a case for taking in more talented and skilled people, especially from Europe: business conditions there aren't great, they're much better here, and there's a window of opportunity to hoover up some talent.

Along the way I got thinking a bit more about MBIE's lists of local skill shortages, which they use to prioritise people overseas who come looking for New Zealand work visas. There are two of them, the 'Long Term Skill Shortages List', which MBIE says "identifies occupations where there is a sustained and on-going shortage of highly skilled workers both globally and throughout New Zealand", and an 'Immediate Skill Shortage List', which "includes occupations where skilled workers are immediately required in New Zealand and indicates that there are no New Zealand citizens or residents available to take up the position".

On the 'Immediate' list, there's a whole bunch of medical shortages - virtually every speciality you can think of (cardiologists, haematologists,paediatricians, you name it, it's there), the technicians to support them, plus dentists, dental technicians and dental therapists.

On the 'Long Term' list, there's a equally wide range of shortages - anaesthetists, clinical psychologists, GPs, intensive care specialists, nurses of all kinds, obstetricians, physiotherapists, just to pick out a selection, plus we're short vets as well.

Why is this?

I can rule out one explanation: it's not because people aren't interested in taking up these professions. I can't speak for all of them, but I do know about some of them, and I'd be confident that the medical and vet schools aren't short of people trying to get in.

There could be benign explanations.

Maybe we just don't have the resources to turn out all the skills we need, and that could be because we're not a rich enough country or because, like a lot of governments post GFC, ours has had to prioritise pretty hard in recent years, and not everything desirable can be financed.

And then there's the possibility that we've been at home to Mister Cockup. Maybe we've made a complete hames of matching labour market supply and demand, and I'm open to that as a theory, too, especially as you don't get normal labour market incentives working in these essentially centrally planned disciplines.

And then there's a darker hypothesis: that some or all of these professions are artificially restricting local supply. Do the gatekeepers to these careers face an inherent conflict of interest when advising on the level of student intake?

It doesn't help that the possibilities I've listed aren't mutually exclusive. We might have a mixture of cyclical or secular shortage of the readies, ineffective planning, and anti-competitively narrow entry gates. So I don't have any smoking gun answers.

But we can't leave these markets the way they are. They're just not working properly.

Let's take in more talent from overseas - and quickly

The latest net migration figures got a fair amount of media airtime, and even though a fair slab of it was on the invidious "aren't we doing better than Australia" track, the numbers were still pretty impressive - we had the biggest ever annual level of net immigration in the October '14 year (+47,700), beating the previous records set in the August '14 year (+43,500) and the May '03 year (+42,500). Net immigration is running at over four times its annual average over the past 20 years (+11,700). If you're interested in the details, the big pdf release from Stats is here and the actual data here.

It's interesting to see how sensitive these migration flows are to economic conditions at both ends of the migration journey: a lot of the media commentary, for example, picked up on the big impact on trans-Tasman flows of the strong New Zealand business cycle, compared with the currently sub-par Aussie one. But the same mechanism also works on migrant flows from other places, and it's left me wondering whether we're missing a good opportunity to attract European talent in particular.

We know, for example, that employment conditions in France are pretty grim, particularly for younger people, mostly down to the weak French economy, but aggravated by an inflexible labour market. So it's not surprising to see that the number of French people coming here on work visas has been rising strongly, from 1,187 in the October '12 year to 2,642 in the October '14 year. Unemployment isn't anywhere near as bad in Germany, but again the local slow economy is encouraging more Germans to look for jobs here, and the numbers coming on work visas have risen from 1,703 to 2,723 over the past two years.

But these opportunities to get talented people to come here from overseas don't last forever: the flows are very sensitive to relative changes in the business cycle at both origin and destination. Ireland's the classic example: business conditions were dire in Ireland until this year, when there has been a reasonably robust recovery. And the link to the net work migration flows from Ireland has been immediate: we had 1,298 Irish people coming here on work visas in the October '12 year, and 1,378 in the October '13 year, but it's already started to ebb, with a drop to 1,032 in the October '14 year.

I'd say we have a short but highly promising opportunity to get more skilled people to come here from the recessionary Eurozone. Jobs fairs in Australia are all well and good: but what about also doing a one-off liberal offer of work visas around Europe?

And by liberal, I mean one that doesn't pay too much mind to MBIE's 'Long Term Skill Shortage List', the thing that prioritises the kinds of skills we're normally looking for, partly because the list looks to me rather odd in places - I can believe we're short of engineers of all kinds, a fair array of medical specialists, and anything to do with ICT, but social workers? chefs? education lecturers? statisticians? external auditors? quantity surveyors? - and partly because we can't actually achieve that degree of precision in knowing what we'll need or in linking credentials to innovation or entrepreneurship. For all we know the next big app could be written by a self-taught enthusiast who left school with no qualification.

So I'd be inclined to hoover up as many of Europe's skilled and talented people as we can, while we can, and I'd relax the current immigration criteria to do it. Paper Marseilles and Düsseldorf with easy to complete work visa forms, and see what happens.

It can only be good for us. And if you're not too sure that immigration is good for a country, then read this opinion piece from the Brookings Institution, "Even Piecemeal Immigration Reform Could Boost the U.S. Economy", which says

High-skilled immigrants are good for America, and we should encourage more of them to come here given recent trends in entrepreneurship, where more firms are dying than being created every year. But high-skilled immigrants could help turn that trend around — they are twice as likely to start businesses as native-born Americans. This is especially true in high-tech sectors, where immigrants are not only more likely to start firms, but also to patent new technological discoveries

A bit of piecemeal immigration liberalisation would work for us, too.

The ref shouldn't reach for his pocket

You've got a valuable piece of intellectual or physical property. What, from a competition law perspective, can you do with it?

That might seem a daftly broad (or broadly daft) question to ask, but it keeps coming up, and it rather bothers me, since if there isn't a clear answer, you'd imagine that there could be a potentially costly chilling effect on the (often sizeable and specialised) investment involved.

What got me thinking about it, again, is the current fuss in the UK over the television rights to live coverage of Premier League soccer games. Ofcom, the relevant regulator, has agreed to take a look: here's its news release, which doesn't give a great deal of context, so here are a piece in the FT and a piece in the Daily Telegraph which give some background (hopefully neither is paywalled for the casual browser - I can't easily tell, as I've got a sub to both of them). Or here's the Guardian's coverage.

The gist is that the rights to the Premier League coverage have been vigorously contested at auction by Sky and BT, sending the price up, and in turn (allegedly) leading to high prices for end consumers watching the games on the box. Virgin, who have lost out on the rights, have complained. Ofcom has said it'll have a look, while pointing out that agreeing to have a look doesn't mean it's accepted that there is indeed a competition issue.

I don't think there is. For the life of me I can't see a competition problem here.

I don't see any issue with the clubs getting together to sell the rights to all the games. Alternatives would have large, inefficient transaction costs and wouldn't be attractive to broadcasters or end consumers. And in any event I'd say a football league would fly through any 'joint venture' provisions in competition law.

And I don't see any issue with an auction of the rights to the highest bidder. Competition for the market is fine by me, especially (as seems to be the case here) the auction opportunities come along reasonably often and are open to anyone with enough zeroes in their bank account. Indeed, I would say that Virgin's gripe is entirely because there has been robust competition for the prize.

And I'm not enamoured of the logic behind the European Commission's approach, which (I gather) at one point required the rights to go to at least two parties. Should J K Rowling have had to offer the Harry Potter books to two different publishers?

I can see instances where there may be an essential piece of infrastructure (spectrum, for example), where (unless you're a rapacious sell-the-airwaves-for-the-most-I-can-get government, and if you don't believe they exist, then you didn't notice how the Aussies privatised Sydney Airport) you wouldn't want to award a monopoly because of the adverse consequences of downstream market power.

But football?

I'm not saying that it's always going to be in football's own best interest to maximise their short-term profit: a longer-term view of the end game might see a better outcome from a wider consumer base rather than a narrower one, for example. It may not even be in a broadcaster's best long-term interests to hoover up all the rights on offer: not if you don't want to make yourself the target of populist regulation. And sometimes non-economic factors will need to get a look in, too (in spectrum allocation, for example, you might want to think of concentration of media ownership from a democratic point of view).

But normally, if someone's decided, eyes wide open, that they want to auction a right for the best short-term price, and someone's decided, also eyes open, to put the cash down and buy it, I can't see from a competition perspective why anyone should stand in the way.

And while we're in the general territory of football and what people can do with what they own, can the owner of a football stadium provide the chips and beer itself? Or must it allow third parties access to the chips and beer 'markets' at its stadium? Will it be okay (Premier League style) to award the concessions for beer and chips to the highest bidder, or must it spread the market around? And if you think this a fanciful example of competition law overreach, it's actually cropped up in New Zealand: can an airport award one onsite 'duty free' franchise to the highest bidder?

There'll be exceptions, but for me, there won't often be good reason to interfere with a competitive auction where willing buyer meets willing seller.

Perfect Competition vs. Imperfect Competition

Firm behavior in competitive markets is probably one of the most fundamental subjects in economics. That is mainly due to the fact that most markets we encounter in reality are competitive, at least to a certain degree.

Competition is characterized by a multitude of firms offering the same (or a similar) good or service or a close substitute. In general it can be said that the more similar the goods or services are, the more competitive the markets will be. However, the competitiveness of a market is still highly dependent on firm behavior. For example, companies engaging in collusive behavior may result in a significant impediment to competition. For now, we will assume that firms do not engage in such activities.

As mentioned above, competitive markets may experience different degrees of competition. To explain the principle of competitiveness, it is useful to distinguish between two different market structures: perfect competition and imperfect competition.

Perfect competition

As the name suggests, perfect competition is considered the purest form of competition. For a market to be perfectly competitive, the following criteria need to be met:

• The goods that are sold need to be homogeneous. In other words, they need to be exactly the same and can thus be substituted at no cost.
• There must be no preferences between different sellers. For the customers it should not matter from which seller they buy their products.
• No actor should have the ability to affect the market price. That means, both buyers and sellers do not have any market power and can thus be considered price takers.

Looking at these criteria, it becomes apparent, that they will hardly ever be met in reality. Even so, an example that comes fairly close to perfect competition is the market for rice. There are thousands of buyers and sellers and the products are mostly identical. But it will never be perfectly competitive, as there will always be minor differences in products, preferences between sellers and so on.

However, at this point it is important to note that the idea behind perfect competition as a theoretical construct is to help explain various market mechanisms and economic behavior. So even though we may not find perfectly competitive markets in reality, the concept is still extremely relevant.

Imperfect competition

In contrast to perfect competition, imperfect competition is a fairly common market structure in practice. It is defined by the following characteristics:

• The goods that are sold are differentiated. That means, even though they mostly satisfy the same needs, there are minor differences that allow customers to distinguish the products from one another. 
• Due to the differentiated goods, customers develop preferences for some sellers. Thus, they are willing to spend more money on goods from specific sellers.
• As a result, the sellers may exert a certain degree of market power and charge a price premium. Hence, they can directly influence the market price to a limited degree and are no longer pure price takers.

An example of imperfect competition is the market for cereals. Just think about the cereal aisle at your local supermarket, you will find dozens of different cereals (Cap'n Crunch, Lucky Charms, Froot Loops, Apple Jacks, etc.). Out of those brand you probably have a favorite, like most people. However, if you think about it, those cereals are actually not that different. Ultimately, they all serve the exact same need; providing you with a tasty breakfast.

In a nutshell

Competitive markets are characterized by a multitude of firms offering the same (or a similar) good or service or close substitutes. They can either be perfectly competitive or imperfectly competitive. In perfectly competitive markets the goods are homogeneous, consumers have no preferences, and neither buyers nor sellers can influence the market price. Imperfectly competitive markets on the other hand are distinguished by differentiated products, consumer preferences, and as a result a certain degree of market power for sellers.

Decile funding - pros and cons

There's been quite a bit of reaction in the social media to the news that 'Poorly targeted' school decile funding may be dropped. It's not easy to make much of a case for anything in 140 character bursts, so I thought I'd take a bit more space to wonder if the case against decile funding isn't being oversold.

Here's some data, from the same article, which shows the percentage of students in different decile schools who are well below the national standard for maths (I gather you'd get the same picture if you looked at other subjects). What would you conclude from this chart?

You'd have to say that there is some at least rough and ready correlation between decile level and school performance. Performance worsens as you move down from decile 10 to decile 1 (other analyses have found the same pattern). You'd be inclined to keep a school's decile status in play as an explanatory factor, rather than junking it.

Since this is the picture after schools have had decile-related resourcing, you'd have to suspect that the relationship would have been even more pronounced pre-resourcing. You could, I suppose, make the argument that decile funding has been completely ineffective, and the relationship in the chart is the same pre and post decile-related funding, but that seems to me to be a big stretch to the rather unlikely counterfactual that funding levels make no difference at all to educational outcomes. There's an even more unlikely possibility, that decile funding was counterproductive, and that the decile/performance relationship would have been less pronounced without greater funding to lower decile schools, but I can't see how that would work, certainly not at any systemic national level. So you'd be inclined to believe decile funding has had some positive impact.

But self-evidently, the decile-related funding has not completely equalled out school performance. One part of the answer is that the link between a school's socio-economic profile as summarised by its decile classification and a school's performance isn't 100%, and it's unlikely that it ever could have been. So you'd be sympathetic to arguments that would tweak or supplement the decile funding system, though not to wholesale junking of the approach.

Another part of the answer, though, is likely variation in teaching quality at different schools. In the chart, there's a clear pattern of poorly performing outliers at every decile level. It's unlikely that all of that pattern is down to slippage in the relationship between decile level and educational outcomes, though some of it will be. For example, that outlier decile 2 school, the worst in the chart, could well be facing tougher challenges than most of the decile 1 schools, either because it got mismeasured in the decile process or because the things that matter outside the decile criteria weigh especially heavily on it (equally there could be schools that have been coasting, and their performance reflected an easier catchment challenge in reality than the decile ranking suggested). But some of it, as in most endeavours in life, is likely to be down to variations in the quality of the provider.

Either way, you'd be inclined to hone in on those outliers from two perspectives. One is that, if there is indeed something missing from the decile approach, and there seems to be, then these outlier schools are the most likely place to find it. And the other is that if they're just bad schools, you'd want to sort them out.

Profit Maximization

In economics it is often assumed that companies try to maximize profit. That is, they try to maximize revenue while at the same time minimizing costs. In order to do that, firms need to look "at the margin". That means, they have to keep an eye on changes in revenue (i.e. marginal revenue) and changes in costs (i.e. marginal costs) for every additional unit sold.

To introduce the principle of profit maximization, it seems reasonable to focus on firms in a competitive market first. However, as we will see later on, this principle can be applied to most firms in various market situations (monopoly, oligopoly, etc.).

As mentioned above, to maximize profits, a firm needs to examine changes in revenue and costs for every additional unit sold. As long as the resulting increase in revenue is larger than the increase in costs, total profit can still be raised by producing more. This will hold true until marginal revenue (MR) equals marginal cost (MC). In other words, a profit maximizing firm will produce until MR=MC.

This can be illustrated by looking at a simple diagram that shows the relations between output and costs or revenue respectively. Though, before we can do this, we need to find out what the relevant marginal cost and marginal revenue curves look like.

Marginal Revenue

Computing marginal revenue in a competitive market is actually pretty simple. In fact, it is always equal to the price of the good or service sold.To explain this, we shall look at a characteristic of competitive firms. They are said to be price takers. That is, they do not have enough power to influence market prices (unlike for example a monopolist), since they only control a small share of the market. So no matter how much a competitive firm produces, price  will not change and revenue for each additional unit sold will be equal to the given market price. As a result, the marginal revenue curve will be a horizontal line at the level of the market price.

Marginal Costs

Most firms face increasing marginal costs as output increases. This is a result of diminishing marginal products.To give an example, think of a car factory that is currently producing at a low capacity. There are only few workers employed and the machines are barely used. If the factory increases production, idle capacities can easily be put to use and additional workers can add a lot of value. In other words, marginal costs are low and marginal product is high. However, if the factory is already running at full capacity, increasing production will be more expensive (e.g. because machines are overused) and additional workers will not add much value (e.g. because they have to wait to use equipment). Therefore, when output increases, marginal product diminishes and marginal cost increases. As a result, the marginal cost curve will slope upwards.

Illustration

As mentioned above, we can visualize the principle of profit maximization in a simple diagram (see below). The x-axis represents output quantity (Q), while the y-axis stands for costs and revenue respectively (C and R).

Illustration 1: Profit Maximization

The Marginal revenue curve (MR) is a horizontal line at the level of the market price (p*). The marginal cost curve on the other hand (MC) is upward sloping, as described above. The intersection of the two lines (O*) is located at the profit maximizing level of output (q*) for the given price level. It becomes apparent that shifting MR will affect the output quantity, but not the price level. Thus, profit maximization for competitive firms means, finding the optimal level of output for a given price.

In a nutshell

Firms in a competitive market can maximize profits if they produce up to the point where marginal revenue equals marginal cost (MR=MC). Marginal revenue for competitive firms is constant and equal to the price of the good or service sold. Marginal costs on the other hand are usually increasing as output increases, due to the diminishing marginal product.
It is important to note that even though marginal revenue and marginal cost curves may look differently for firms in other market situations (e.g. monopoly, oligopoly, etc.), the profit maximizing level of output will still be located at the intersection of the two.

Report from the GEN conference

Wednesday was the Government Economics Network's annual conference at Te Papa in Wellington. This year the theme was "The relevance of economics in a changing world".

The keynote presentation was from Stanford's Paul Oyer, "The more things change, the more they stay the same: Four economic ideas everyone should know". His core theme was that, although many people post the GFC have criticised economics for not predicting it, or not understanding it, or even for causing it, economics has core concepts that were valid pre-GFC and are just as valid now. He picked four - cost-benefit analysis, equilibrium, thinking on the margin, and the limits of markets, all operating in the context of people aiming to maximise something in an environment of limited resources - and gave lively examples (funeral parlours in Tennessee, dog care services in Georgia) where these principles played out in real life. However, he also felt (quoting Princeton's Alan Blinder) that too much of economists' attention is taken up with arcana, and that the practical, useful, workaday economics, far from the bleeding edge academic frontier, was relatively neglected. That said, he ended up by saying that economics remains a powerful way of better understanding the world we live in, of helping to operate businesses more efficiently, and of setting policy for the greater good.

Not everyone agreed with his view - there was one pointed statement-cum-question from the floor saying that economics had fairly and squarely walked us into the GFC mess, and that the economics trade is in denial if it thinks it didn't - but I felt Oyer was broadly on the right track. The babies and bathwater criticism of economics has always seemed overdone to me, and I'd probably chuck in some further concepts that have also had enduring value (trade-offs, for example).

The next session was on "Economic analysis for policy", which exposed us to some applied techniques. Leo Dobes from the Australian National University talked about options, and the importance of allowing for the value of options in making decisions, and Caroline Saunders from Lincoln showed us examples of choice modelling, trade modelling, and modelling of sectoral comparative advantage. The choice modelling in particular was fascinating: Caroline showed us a real world example of how it had been used to identify the importance of various consumer criteria (such as safety, sustainability, country of origin) to overseas purchasers of our agricultural exports, which in turn could be used to profitable marketing effect in different overseas markets.

The next session, on "Teaching economics at university", wasn't so great.

The first speaker, Michael Mintrom from Monash, spent a good deal of his time on bringing an investment perspective to public policy development, which I thought was fine in itself, but not fully on-topic. He did get round to what you might want to teach people in university, if they're going to provide that perspective, albeit late in the piece. And it was quite good when we got there: I jotted down cost-benefit analysis models, experimental design with control groups, comparative institutional analysis, ex post opportunity cost studies, how economic insights can support social outcomes, learning from policy mistakes and near-failures, setting students 'capstone' projects which combine theory and application.

I didn't enjoy the presentation by Victoria's Morris Altman at all, principally because the delivery was painful to sit through (screen after screen of text paragraph bullet points, read verbatim). His core point was that it is a good idea to bring a mix of techniques and perspectives to any given problem.

Ashleigh Cox, a master's student at Waikato, gave us an interesting perspective from the other side of the lectern. She was concerned that her undergraduate economics hadn't seemed to give her the insights she'd have liked on issues such as exchange rates, housing, or inequality, and that it was only later and further reading that left her better equipped (mind you, I'd say that's probably true of a lot of things, and most of us have learned more about a subject post school or post college than we ever learned at the time). And she was also concerned about what (I think) she called "economics imperialism", or economics attempting to be a Grand Theory of Everything, and not doing it well at all.

Her comments got the discussion going, both in the hall and around coffee afterwards. Mostly I got the impression that all is not as well as it might be with teaching economics in New Zealand (and there are similar discontents overseas). Comments I picked up: not enough real-world applied economics on the menu; three-year, short-trimester economics degrees don't leave enough room to add the bits that would give a broader perspective to an economics education (such as economic history, or the history of economic thought); not enough effort going into making sure that students have an intuitive understanding of concepts, as opposed to parroting back equations (I was suddenly reminded of a piece George Orwell once wrote about a rote-leaning school student in the UK blindly reciting, "The root cause of the French Revolution was the oppression of the nobles by the people"); and degree courses being overdesigned for the student on the PhD track (heavy on the maths and the theory).

I snuck in a "mostly" qualification earlier, and that's because I also talked to some (younger) people who were very satisfied with what they'd got in New Zealand. As was I with mine in Ireland (Trinity), but then I did get some economic history, and some compulsory politics options, that rounded things off better than some modern economics courses seem to manage.

And we finished with an excellent session on the "Economist as Policy Advisor", from two battle-hardened pros - Graham Scott, formerly Secretary to the Treasury, and the NZIER's John Yeabsley - who've seen it all, and have the war stories to prove it. Graham had led off with an impressively erudite history of the role of advisers to rulers, but we moved on from Athenian democracy to wrestling with Muldoon in short order. I'd guess the many policy analysts in the room will have taken away good ideas on how to handle some of the trickier issues - notably how to present advice that your Minister does not want to hear.

At the end we had an unscheduled appearance by one of those very Ministers, Max Bradford, who made two points that I recall. One was that the greatest difficulty he'd faced was breaking with the inertia of the status quo. The other was that it might have been useful to have had some Ministerial customers of policy advice on the panel for the session, to give their perspective, and I think he was right.

The picture of health

This chart, from the OECD's latest Health At a Glance publication, is going the rounds of the social media, and it's a bit of a reality check, in a good way. If you'd thought that we were all going to hell in a handbasket because of binge drinking, bad driving, obesity and all the rest of it, think again.

The graph shows people's self-reported state of health, and we're very near the global top. Even if you take off a positive bias for the way the question was asked in some countries (our score is 5-8% higher than it would be if measured the same as in most countries), we're still well up there.

How people feel about their health is one reasonably important outcome, but if we go away from perception and look at some of the hard numbers, we stack up pretty well, too. Here's life expectancy.

The wealthier OECD countries are all pretty much of a muchness, really, but again we're in a pretty good place. Interestingly, as the next graph shows, we have much less of a gap in life expectancy between the well-off and the poor than exists in most countries. No idea why this should be, but there you go - another pretty good outcome.

From an economist's perspective, it's interesting to see that we've got better health (measured by life expectancy) than you'd expect for a country of our income level, and better health than you'd expect for the amount we spend on healthcare, as the next two graphs show. In both cases you want to be north of the fitted black line, and we are. And it's interesting to see that some of the stylised facts we all 'know' about global healthcare are, indeed, true, notably the hopelessly inefficient level of the health spend in the US.

I know, I know, we could be even healthier again, and if we did a better job of managing the booze, the weight, the fags, the exercise, the diet and the heavy foot on the accelerator, we'd all be even better off. But at the same time we ought to take on board that as far as comparisons with countries like us are concerned, we're already making a pretty good fist of health outcomes.

That "heavy foot on the accelerator" isn't a random comment, by the way. I'm recently back from Ireland, where I couldn't help noticing how much more polite and orderly the driving is than here in NZ. And it shows in these OECD stats, too: neither country is a smash palace along Brazilian or eastern European lines (and America doesn't show to advantage, either), but Ireland's death rate on the roads is clearly lower than ours. Which is something you could think about next time you cut me off on the motorway.

Too many rules, not enough houses

Last month I wrote about some residual absurdities in Australia, where there were still bizarre examples of nutbar regulation of the retail trade, and this despite decades of economic reform that one might have expected would have swept away the last of the most egregious nonsense.

It left me feeling that "there are still thickets of regulation that are absolutely bonkers". At the end of the post I said that "the good news is that both Australia and New Zealand now have Productivity Commissions that are able to turn over the flat stones and tell us what they're finding underneath", and wondered "what we'd find if, for example, we turned over some flat stones of our own".

I didn't have long to wonder.

Along came the Issues Paper (pdf) for the Productivity Commission's latest project, on the availability of land for housing. And even at this early stage it has found multiple examples of over-prescriptive, inconsistent, complex, inefficient, expensive and (I would say) largely rationale-free regulation.
Here are some examples, direct quotes from the paper.

(1) A Ministry for the Environment review of Christchurch City Council planning and resource consent processes described the two Christchurch District Plans as:

…large, cumbersome and difficult to navigate. The City plan is effects-based, while the
Banks Peninsula plan is activities-based. There are a total of 109 different planning zones,each with varying provisions (p28)

(2) Auckland Council is currently in the process of developing its first Plan as a unitary council. The Proposed Auckland Unitary Plan (PAUP) will replace the existing Regional Policy Statement and 13 district and regional plans. Given the breadth of the material covered in the PAUP it is not surprising that the document is lengthy, but at 6 961 pages (at the time of writing) the PAUP is very unwieldy. Supplementary documentation acknowledges that the Plan is complex, but also suggests that users must read the full document:

       The Unitary Plan is a complex document that consists of many interlinked parts. One        must not look at any provision in isolation, but read it as a whole (p29)

 (3) the Ministry for the Environment notes that plans prepared by “the eight largest
territorial authorities showed 123 different terms were defined, with more than 450 variations of those definitions”...

A comparison of two Plans’ rules around car parking demonstrates the variation. The Käpiti Coast District Council’s Rules and Standards states that "All buildings shall be designed so that wherever practicable sufficient manoeuvring space on site will ensure no reversing onto the road is necessary." In contrast, Nelson City Council’s Residential Zone Rules state that "Reverse manoeuvring is encouraged on unclassified roads and is part of ensuring a low speed environment and people orientated streetscape." (p37)

(4) One way of enabling new types of land use is to change a Regional or District Plan. Changes to Plans can be sought by a local authority or a private party...

The average timeframe taken to complete a Plan change in 2012/13 was 24 months. This was an increase from 2010/11, where council-initiated Plan changes took 17 months to complete and privately initiated Plan changes took 16 months (p47)

No doubt some processes are working well, but in spots we've got regulations of a complexity that would tax a Talmudic scholar, a glacial pace of administration, and an absence of compelling logic, with things forbidden in one jurisdiction being encouraged in the next. And all this against a background of a bloated local administration superstructure. We're a small country, but even after a programme of local authority consolidation, we're still left with this (p16):

No wonder we get this outcome (p7).

The Issues Paper isn't all about the dead hand of local authority micromanagement - I've focussed on those aspects as I've got an interest in good regulation - and it canvasses a wide range of other factors affecting the availability of housing land. The Productivity Commission is looking for people to tell it whether it's on the right track with its initial ideas, and whether it's missed anything: in particular it has a list of 74 specific questions where it is looking to get feedback and information, though people are also welcome to submit their views outside the 74-question format (contact details are in the paper and here).

The state of the housing market is one of the bigger economic issues right now: take the opportunity to have your say on what's going on and what should be done about it.

The economy's still in good shape

Treasury's latest Monthly Economic Indicators came out today. Here's a selection of some of the bits I found interesting.

First, the current growth cycle is still in good shape. The NZIER's survey measure of firms' trading activity in September suggests the economy was still growing at about a 3% rate. As I've said before, I love these survey measures: they're quick, relatively cheap, and usually have dependable relationships with the big macroeconomic statistics.

Looking ahead, prospects are still pretty upbeat, too. In the chart below I've shown firms' hiring intentions, but I could as easily have picked firms' expected trading activity or firms' expected investment. It's all good.

You might well feel that we've had a bit of a blow to our export incomes given the degree of attention that's been given to lower world dairy prices, and while that's true to a degree, as the chart below shows it's not the whole story. For one thing, dairy products aren't the only things we sell: overall export prices have been hanging in there. And for another, import prices have been falling (and may well fall quite a bit further, if world oil prices keep sliding), so our overall purchasing power - our terms of trade, what we can buy with our export income - has actually been rising sharply.

And finally there's that unexpectedly low inflation rate that we've been having. As the chart below shows, there's generally been a fairly close link between various survey measures of firms' price setting and overall inflation, but over the last eighteen months or so actual inflation has come out lower than the surveys would have led you to believe. Some people have been climbing into the Reserve Bank for overestimating the likely inflation rate: well, don't be too quick to rush to judgement. On the traditional relationships, they were making a sensible call.

Why the relationship appears to have broken down, at least for now, is a big question, and one I'll probably come back to, but we are not alone. In many places around the developed world, inflation is turning out to be lower than central banks were steering for, as the chart below, from this article in the Economist, shows: look where the dark brown marker lies relative to the bright blue one (or to the white range between blue markers). Another reason not to get too into finger-pointing at our RB: there's evidently something happening at a global level here that's blindsided a whole bevy of central banks (or whatever the collective noun for central banks might be).