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.

Then and now

I've just finished the second volume, Everything She Wants, of Charles Moore's authorised biography of Margaret Thatcher. It covers 1982-87, and it's excellent. Whatever your political views are - and many people will be starting from a strong opinion about her -  you're likely to end up with a more balanced view. The first volume, Not For Turning, was equally good, and won multiple industry prizes.

From an economist's point of view, it's interesting to look back on the economic policy of thirty years ago. One particularly striking aspect was the bizarrely uncoordinated way of running fiscal policy, or as the book puts it (p185)

Under the British system, the Budget is not a Cabinet decision, though the Cabinet is perfunctorily consulted and informed before it is unveiled to Parliament. It belongs exclusively to the Chancellor [of the Exchequer], and 'The only person the Chancellor is obliged to consult is the Prime Minister'

Some other aspects of fiscal policy also looked questionable. One of the motivations for asset sales was the cosmetic effect of appearing to reduce the fiscal deficit by counting the sales proceeds as current revenue - a bad practice. And monopolies such as British Telecom (BT) were sold off to maximise the sale price, with inadequate controls on subsequent profiteering. Not that the UK was alone in taking the money and running - as recently as 2002, the Australian government sold off Sydney Airport on terms which effectively prevented any rival airport getting underway.

The big UK Budget set-pieces also reminded me that once-a-year adjustment of revenue and spending looked odd even back then, and has become even more anachronistic since. There may be some reasons why you can't adjust fiscal policy day-by-day (people would have some difficulty staying on top of their tax owing, as would the IRD in collecting it), but on the other hand there's been a big step forward in automating the likes of payroll systems over the past thirty years, and some of the supposed constraints on more frequent than annual tax or spending changes may well have dropped away. And there's certainly no good reason why (say) increased infrastructure spending has to wait till May 16 (our Budget date this year) for the starter's pistol to go off.

Monetary policy was relatively primitive. Early on the Thatcher government set out on a tough anti-inflation squeeze - my first mortgage, which I took out in the UK in 1979, was on a fixed 14% rate - and ran policy by trying to manage one or more of the monetary aggregates (typically 'sterling M3'). But Goodhart's Law kicked in, and Chapter 13 consequently deals with 'The death-knell of monetarism'. Monetary policy as we mostly know it today - with an independent central bank and an inflation-targetting regime - didn't arrive in the UK till 1997, under an incoming Labour government with more modern ideas.

Not that everything back then was ramshackle. The UK took a trick with a politically adroit way of allocating shares in British Telecom - "Everyone applying for 400 shares or fewer got 100 per cent of what they sought. Those who applied for 100,000 shares or more got nothing" (p198) - which sat nicely with the 'popular capitalism' aim of the sale, and which might be worth revisiting if we ever get round to future privatisations (that 45% stake in Kiwibank, maybe?).

And the Thatcher government (belatedly) came up with regulation for the likes of BT that was state of the art, including Professor Stephen Littlechild's 'RPI minus X':

This was not supposed to be the ultimate answer to the monopoly problem, but was more of a stop-gap measure until sufficient competition developed. As matters turned out, however, it stopped a great many gaps, and became a regulatory model for other privatizations (p196)

I think it can still plug a great many gaps, and I'm not sure we (and other countries) are doing a better job with highly complex and expensive 'rate of return' alternatives.

I was also reminded of the then closed, snobbish, sexist nature of the City of London, where a provincial, middle class woman with a science degree like Margaret Thatcher was, not to put too fine a word on it, outright despised:

[Cecil] Parkinson recalled meeting her returning from lunch at a big bank before her first victory in 1979. 'They had given her hell. She was very depressed. I said: "Don't worry; they'll vote for you, and they'll forget it". "They may", replied Margaret, "but I won't"' (p215)

Final words to the inimitable Denis Thatcher who was accompanying Mrs Thatcher at a Commonwealth conference in India:

At this conference, Denis's irritation with the physical arrangements boiled over. During the leaders' 'retreat' in Goa, there were constant power cuts. He emerged on the balcony of the chalet allotted to the Thatchers and bellowed: 'This place is very high on the buggeration factor' (p548n)

Sovereign irresponsibility

There was a fine article by Deborah Hart, the executive director of the Arbitrators' and Mediators' Institute of New Zealand, in Monday's Herald, making the sensible case that the supposedly controversial 'Investor State Dispute Settlement' (ISDS) process within the Trans Pacific Partnership (TPP) is actually a good idea. Read it for yourself: the gist is that ISDS "will work well for NZ" and that "Investor-state dispute settlement is therefore not something to be afraid of. It's part of being a trading nation in a globalised world".

What's baffled me most about the strong opposition to ISDS is the notion that "national sovereignty" is something that is sacrosanct, not to be jeopardised, diminished or traded away. If national sovereignty really trumps everything else, Dachau would still be open, apartheid flourishing, and every Tutsi in Rwanda and every Muslim in Serbia would be dead.

Progressives everywhere ought to welcome international controls on appalling behaviour by "sovereigns" - a useful crutch for the world's kleptocratic tyrants to lean on - as they have since (at least) the founding of the League of Nations in the wake of another fine exercise of national sovereignties, the Great War.

What "sovereigns" are demonstrating when they resist principles-based restraints - when, for example, neither China nor the US will participate in the International Criminal Court - is that they prefer the option of unprincipled behaviour. When countries sign up to the likes of the ICC, or to the ISDS provisions in the TPP, they're saying the opposite: we'll play fair, and we don't mind being judged on it. That's exactly where New Zealand should be.

Are the rates out of control?

Last week's write-up of the latest CPI by Stats NZ included this graph. It showed how the prices of various components of central and local government charges have been behaving since 2006.

The colours aren't that easy to tell apart, but the top line is local authority rates, which appear to be on an inexorable rise, through good times and bad. The line that drops sharply at the end is 'other private transport services', where you see the big impact of recently lower ACC levies on the cost of licensing your car.

That remorseless rise in the rates bill got me thinking, so I've done a little bit of research, and here is how the rates, average weekly total earnings, and overall inflation have behaved over the same period, all rebased to 1000 in mid 2006, and all seasonally adjusted. Over the whole period, prices in general rose by 20%, weekly earnings rose by 35%, and the rates - well, the rates rose by 60%.

Maybe we shouldn't be worried. The rates, after all, are subject to some sort of political discipline, and presumably the voting citizenry either don't mind what's happened, or even asked for it, if they felt (for example) that councils finally needed to get on with building adequate local infrastructure.

But I can't help feeling that there's an argument that the electoral discipline doesn't look very binding. At a national level, it's true that politicians can generally no longer get away with bribing the electorate with its own money - there's a great deal more transparency about the costs of lolly scrambles - but is the same scrutiny as effective at local authority level? And even assuming that all is politically hunky dory, did councils really deliver a 33% real (above inflation) increase in services to us all over that period? Doesn't feel like it. And I don't see any efficiency dividend from Auckland amalgamation in the rates graph*.

I don't have the answers, but I do have a question: are rates rises out of control?

*Addendum Oct 28 - Subsequent (separate) comments have pointed out that Auckland has had one of the lowest increases in rates since 2006, and that total rates collected in Auckland have fallen since 2009, so there may be an efficiency dividend after all.

If it ain't broke...

Every general election, we the people get offered proposals to change our monetary policy regime. Some are predictable: "debauch the currency and devalue ourselves into prosperity". Some want to wind back the clock: "more jobs, not less inflation". Some are bizarre: "let's try some of that quantitative easing stuff they're mainlining overseas".

And that's all fine. In a democracy we're entitled - even obliged - to give the central bank its marching orders. But just for once, I'd like to see our politicians give it a miss in 2017 and leave the damn topic alone.

I felt like that anyway, but I've also just read an article in the latest issue of New Zealand Economic Papers, "Monetary policy and interest rates under inflation targeting in Australia and New Zealand". I'd post a link for you, except that NZEP, the scholarly journal of the New Zealand Association of Economists, is unfortunately one of those traditional charge-for-it academic journals (I should have raised this at the recent Association AGM, but never mind). If you're in academia, you've probably got a subscription: if not, I looked in the usual places for you, to see if there was a work-around by way of Working Paper or what have you, but no luck. Moving right along.

The authors are experienced monetary policy guys (Hakan Berument at Bilkent University in Turkey,  Richard Froyen at the University of North Carolina, Chapel Hill, in the US). And the gist of what they found is that our inflation targetting regime has brought about a step change in people's expectations about inflation. They now think it will be stably low, and that belief has consequently also affected the volatility of long term interest rates, which now don't jump about anything as much as they used to. People have greater confidence any shorter-term shocks will be just that, shorter-term, and that the central bank is on the case.

The authors wondered if our inflation targetting would do even better than a well dug in central bank (they chose the Fed) that doesn't explicitly do the inflation targetting thing. The answer was no...

Our results are, however, consistent with inflation-targetting regimes in Australia and New Zealand having resulted in inflationary expectations as well anchored as in the United States - a substantial change from less stable pre-inflation-targetting regimes

How much better are we than we used to be? Pre targetting (April '85 to January '90), the variance of the (monthly) 10 year Government stock yield was 4.1%. Over the targetting period February '90 to October '12, the variance was 3.1% - but that included the gyrations of the GFC. Ex GFC (February '90 to August '08) the variance was 2.6%. Better, but not massively better.

Significantly, the Reserve Bank changed how it implemented policy in April '99 from a system only monetary policy tragics could understand (targetting 'cash settlement balances') to one everybody could understand (the cash rate). That made a huge difference to people being able to form a clearer view of what was going on: the variance in the 10 year yield for the cash rate period went down to a very much smaller 0.6% (including the GFC) and to a minuscule 0.2% (ex GFC).

So we've bagged one of the big benefits claimed for inflation targetting - as they quote the Harvard economist (and chess grandmaster) Kenneth Rogoff saying,

with long-term inflationary expectations more firmly anchored, long-term interest rates might jump around a bit less, and businesses and investors might find it easier to draw up long-term contracts

As one example, the fact that we've got a working market in longer-term fixed rate mortgages is one of the side benefits of the inflation targetting regime.

So my plea to the pollies is this.

Back off. We've got a working system that's done what it said on the label. It takes forever for new monetary systems to get bedded in and for people to get their heads around them: a central bank's credibility takes decades to lock down. We've got there: let's stay there.

Unfinished work - and what it's costing us

There's been some discussion on Twitter and elsewhere about whether enough has been done under the current or previous governments to achieve 'transformational' change - something big enough to make a real difference to New Zealand's potential rate of growth and future standard of living.

As it happens, the OECD  has got something useful to add to this debate, both on the issue of whether enough is being done, and on what the transformational changes might be. Its Going for Growth series has been coming out every other year since 2005, and is squarely aimed at identifying priority policies that would raise countries' rates of economic growth. You'd have thought that it would have received a ready hearing in New Zealand, where relatively slow growth over long periods of time is our number one economic issue, but strangely enough the amount of media attention it gets is generally minimal - this year's version also came and went (in February) with little local coverage.

One thing the latest version says (press release, summary etc here and the whole thing online here) is that appetite for transformational change has waned across the developed economies: it's not just us. After a burst of 'we've got to do something' fervour during and immediately after the GFC, "The pace of structural reform has been slowing in the majority of advanced countries across the OECD over the last two years" (p16). And that means that large, 'transformational' potential gains in GDP are being left on the table. As the OECD calculates it

The OECD's also done a country-by-country calculation of how much GDP would increase if its proposed reforms were put in place: here's the result (extracted from Figure 4.5 on p120) of the 'moderately ambitious' one (the OECD also had one scenario that was less ambitious and one that was more ambitious again). We'd actually gain more than the average OECD country if we got on with it.

What sort of reforms does the OECD have in mind we should carry out?

Before showing the full list, it's worth pointing out that the OECD puts its policies into two boxes - the 'labour utilisation' box holds the policies designed to get people into work (eg liberalising labour market regulation), and the 'labour productivity' box holds the ones designed to boost how much people can do when they are employed. In our case, the focus is almost completely on the 'labour productivity' box, as this graph (extracted from Figure 1.5 on p29) shows. It explains how much of each country's income level, relative to the average level of income in the top half of the OECD, is down to labour use and how much down to to labour productivity. In our case, it's entirely down to labour productivity: we're actually better than many other countries at getting people into work, but we lag when it comes to what they produce when they're employed.

So here's the full set of proposed policies.

It's a balanced list. Yes, there are things there that won't appeal to the lefter-wing end of the world (such as privatisations). But equally there is a strong emphasis on fixing socially inequitable outcomes in education and health. Because of the mix, it's probably unlikely that any one government is going to be able to pick them all off: at best we might get one government doing one subset, and the next government doing the rest (and hopefully not unpicking the first lot).

Hopefully we can work our way through them one way or another: as long as they're left undone, we're some 8% poorer than we need be.

Northland jobs: fact or fiction?

There was, apparently, a bit of a stoush at last night's meeting of the Northland by-election candidates in Kaikohe. The National candidate Mark Osborne claimed that "seven and a half thousand" new jobs had been created over the past year in Northland, while Winston Peters asked whether anyone had actually seen one of them, and said the claim was "pulling a stunt" (you can listen to Radio NZ's piece on the meeting here, where you can hear what both candidates said).

So, who's right? It should be a simple matter to find out, and it is.

According to the Household Labour Force Survey for December 2014, the latest available data (available as an Excel spreadsheet here), the total number of people employed in Northland in December 2013 was 66,700, and in December 2014 it was 74,100, an increase of 7,400. So Mr Osborne's claim is correct. Just for the record, the other HLFS statistics on Northland also show good employment outcomes, with the unemployment rate down from 9% to 8%, and the participation rate up from 60.9% to 63.8%.

Not that Mr Osborne's version did him any good, when he went on to overegg the pudding by saying "What I will do...is to continue growing jobs". It's not clear whether the ensuing mockery was to do with him looking as if he was claiming unjustified personal credit, or because voters these days know that governments don't create jobs (or not the bulk of them, at any rate). Governments can often, and fairly, take credit for allowing or facilitating or improving the environment for job creation, and that's no small thing: just look at all the counter-examples, from France to Venezuela, where governments have been incompetent managers of the macroeconomic environment. But job creation itself? Nah.