Truly, it was the greatest century

DeLong on the Greatest Completed Century So Far: 

Briefly: very very roughly, approximately, and inadequately, on average what twenty workers were needed to do in 1870 with their eyes, fingers, thighs, brains, mouths, and ears, 1 worker was able to do in 2010.

It is also true that what one worker could do in 1870 required 20 in -6000. But that 20-fold amplification was an 8000-year creep rather than a 140-year sprint: a proportional growth rate of 0.04%/year rather than 2.1%/year. And from -6000 to 1870 the overwhelming bulk of the potential benefits for humans from that twentyfold upward creep of technological knowledge had been eaten up by growing resource scarcity: the land and other natural resources available to support 1 person in -6000 had to support 400 by 1870.

By contrast, the twentyfold post-1870 technological-progress wave had to deal not with a 200- but only a 6-fold multiplication of human numbers, leaving lots to be devoted to bringing about much higher average productivity.

Productivity increases really really matter. 

If there is one single nugget of insight that I want readers of my book Slouching Towards Utopia to permanently engrave on their brains, this is it: around 1870 the rate of technological progress and thus of potential wealth creation went into much higher gear. After 1870, humanity's deployed technological capabilities and thus potential prosperity doubled every thirty-five years—and with it came economic creative destruction that reduced old economic structures to rubble and built new ones, and did it again, and again, and again, every single generation. Before 1870? From 1770-1870 humanity's globally-deployed technological prowess had a doubling time of about 150 years—not 35. From 1500-1770 it had a doubling time of 500 years. And before 1500, we are looking at a doubling time of 2000 years. The difference between our world, in which technological progress creatively destroys and revolutionizes the economy every 35 years, and the world of Agrarian-Age antiquity in which the same proportional changes in technology and economy, and thus in polity and society, take not 35 but 2000 years is, I think, a master force shaping human history.

I want to hammer home the obvious to those who don't have exponential growth magnitudes in their immediate intellectual panoply: a twentyfold amplification of human technological prowess in 140 years is a REALLY BIG F---ING DEAL. To get an equivalent proportional jump in the other direction, you have to go back from 1870 to the Bronze Age— to the year -2000 or so. We are, proportionately, as separate in technology from the railroad's Golden Spike and the first transoceanic cables as those were from the earliest chariots and the sculptor of the dancing girl of Mohenjo-Daro:

A clarification on sugar taxes

A few weeks ago, Rachel Thomas at Stuff included a short bit from me on sugar taxes and a new WHO metastudy. 

The Spinoff provided a perhaps too short a summary of that in its daily newsletter. I'd sent them a brief note of clarification, figuring that it was too late to change anything since it's an emailed newsletter. But it's online, here. 

The question of a sugar tax cropped up again earlier this month. Rob Beaglehole from the NZ Dental Association argues we need to be proactive with a sugar reduction strategy because of the woeful state of water fluoridation in New Zealand. The New Zealand Initiative’s Eric Crampton says the evidence doesn’t support the argument that a tax would reduce consumption.

I'd sent a note through to them, in case the issue came up again. I'll copy it here, mildly edited:

Thanks for the mention in today’s bulletin.

No need to do anything about it, but more for any future ones.

The problem with a ton of sugar-tax studies is that they assume that any drop in spending on soda (often the only data they have – they know spend shares, but they don’t know consumption) means a drop in consumption. Some of the drop could be a drop in consumption, but some of it could be a shift to downmarket product or product that’s lower cost-per-unit.

Again – this problem comes in when researchers are using household spend data that surveys people about how much they spent on various things over the past period, then combines that spend data with some measure of average prices to try to estimate consumption. 

If you see that someone shifted from spending $20/week on soda before a tax to spending, say, $18 in total after a tax, is it because:

a) They had been spending $1/can before the tax and bought 20 of them per week, and reduced that to 9 cans at $2/can after the tax – huge decrease in consumption!

b) They had been spending $1/can before the tax and bought 20 of them, and shifted to buying four 2-litre bottles of home-brand soda at $4.50 after the tax – small increase in consumption!

c) Some unknown combination of the two?

The studies that have only spending data effectively assume that (a) is the only thing that’s happening. (c) is the most likely thing, but the studies can’t see it. 

So it isn’t that a tax doesn’t decrease consumption. It is likely to decrease consumption somewhat. It’s more that the campaigners assume gigantic effects on consumption, because when many people are doing (c) and some are only doing (b), the studies assume it’s all (a).

It’s a technical issue in how the estimates are undertaken. They don’t handle things well when there’s adjustment not just in quantity but also in price-point. John Gibson over at Waikato has demonstrated the problems with it. But so much of the literature just ignores the problem. And the WHO meta-study is just a complicated average across studies that did not exclude studies known to have this problem. An average that includes overestimates is going to be an overestimate.

RBNZ's obligations?

That strange speech from RBNZ Governor Orr a couple weeks ago? 

Jenny Ruth digs a bit.

From Business Desk, last week:

Robertson said the specifics of how RBNZ’s obligations relating to Māori-crown relations “are fulfilled and embedded in the bank’s core functions is the responsibility of the board and management". “In the 2020 letter of expectations that I sent to the RBNZ in my role as minister of finance, I noted that the bank’s Te Ao Māori strategy aligned with an expectation to embody the government’s collaborative approach to the Māori-crown relationship.”

I dunno. A down-the-line central banker might have replied with something like:

"A low and stable inflation rate, in combination with supervision of the financial sector mitigate risks of bank failure, is the single best thing a central bank can do for every community, Māori included. We know that both inflation and unemployment will have more severe consequences for lower income communities. Failing to maintain expectations that inflation will be within bounds over the medium term will not improve long-term unemployment, which is set by structural features of the economy. But it will harm communities with less ability to hedge against inflation risks."

In related closing-of-the-browser-tabs:

• Former RBNZ Assistant Governor & Chief Economist John McDermott critiques RBNZ monetary policy
• How the Fed and the Biden Administration Got Inflation Wrong

Len Cook on revisions to the Stats Act

I had a chat last week with former Government Statistician Len Cook about some proposed changes to the Statistics Act. A greater reliance on administrative data will see some of the Government Statistician's powers pushed down to Ministries and Agencies that might not be well placed to handle it. 

Cook covers it here as well:

Without notice by all but a scarce few, the independence of the government statistician and the transparency of government data sharing and use in New Zealand could change after this year.

The Minister of Statistics David Clark has managed to avoid the public scrutiny of the constitutional implications of the Data and Statistics Bill despite transparency being a proper expectation for such change by citizens in a democratic society.

I've not pored over the legislation, but if Cook says there's a big problem in Clause 17, and that that Clause can just be deleted without harming the rest of the legislation, Parliament ought to have a look at it. 

You can catch my chat with Cook here:

The New Zealand Initiative · Podcast: Eric Crampton Talks With Len Cook About Changes To The Stats Act

Bootleggers and Baptists - construction waste edition

Rochester political scientist William Riker celebrated great herestheticians - those adept at manipulating policy to serve their own interests. His book is classic and should be on every public policy syllabus. 

Newsroom reports on some superb herestheticians applying Bruce Yandle's lesson about bootleggers and baptists, and about the importance of raising rivals' costs in the construction sector.

If you're a construction behemoth, you can bear regulatory compliance costs a lot more easily than smaller competitors. If you're building at scale, you're probably already doing a better job in avoiding construction waste.

Construction waste going to landfill really isn't any kind of public policy problem. Tips can set tip fees that recover costs. 

That doesn't mean you can't make it a political problem. Lots of people don't understand how landfill pricing works and just hate the idea of waste - failing to realise that, sometimes, measures to reduce waste are more wasteful than bearing the waste. It's a combination of economic illiteracy and aesthetics. 

So here's what we then get:

In a rarely-seen consensus private and public players in the building industry are calling for greater government intervention on the vexing issue of construction waste

The Environment Select Committee will today hear its last submission on the topic it has been investigating for several months - how to deal with the three million tonnes of sector waste dumped in landfills annually.

About half of this is thought to be useable or recyclable.

Fletcher Building Residential and Development chief executive Steve Evans said as the country embarked on a massive bid to address the housing shortage, change was more than just a nice-to-have.

“I've been in this industry for a long time and regulations change behaviour. So you ask people to do things voluntarily and you will, of course, get those that are socially-minded or environmentally-minded, that will do it.

It would be excellent fodder as case study for any of the public policy schools - in a world in which they could recognise that this sort of thing is a problem. 

Not all of the push is crazy though. Updating the Building Act so that it's easier to re-use materials makes a lot of sense.  

But just think about the difference in cost that mandates like this would impose on small players as compared to the big guys. MBIE is helping to create another cartel, and simply doesn't care. 

Ministry of Business Innovation and Employment spokesperson Antonia Reid said a range of work was underway to encourage the reduction of waste, including investigating the barriers to reusing and recycling building materials and expanding the waste infrastructure network.

“MBIE is also progressing changes which would require reporting and measurement of new buildings’ whole-of-life embodied carbon emissions - from manufacturing building materials to disposing of them at the end of a building’s life.

“We expect this focus on embodied carbon reduction will encourage greater repair and retrofit of existing buildings, smarter building design to help minimise emissions and waste within new construction, and more deconstruction of buildings at the end of their lives if they cannot be made fit for purpose.”

For those unfamiliar with Yandle's Bootleggers & Baptists: 

Afternoon roundup

A few worthies on the closing of the browser tabs:

• Christchurch council votes to impose higher rates on vacant land downtown. I'd have preferred that they simply apportion urban rates based solely on land value, rather than land plus capital. It would have the same effect, but without fights about what's vacant. 


• A better policy process than the RUC rebate: IRD was given enough time to tell Cabinet that it wouldn't be able to roll out $100 payments to every Aucklander late last year. Good to have this kind of advice before announcing the policy. 


• Decades ago, Linda Gottfredson showed that a lot of what looks like an income gradient in health (higher income people are healthier) is really an intelligence gradient in health (smarter people earn more and are healthier). More work out consistent with Gottfredson, though I suppose it's considered polite to ignore this stuff. 


• Chris Snowdon over at the IEA notes that the number of licenced alcohol premises in the UK dropped by two thirds and alcohol advertising halved during their lockdowns. Availability theory would say that this reduces alcohol harms. Chris finds instead a small decline in alcohol consumption but an increase in alcohol-related deaths. 


• Quebec offers fourth vaccine doses to anyone over the age of 17. In NZ, you have to be 50. If you're 50, it's free. If you're 49, it is absolutely forbidden and impossible because Medsafe should be abolished. 


• Stuff runs a beat-up on fast food. Remember that Rachel Webb found no effect of fast food outlet numbers on obesity. You've gotta be careful in doing this work. HT: Stephen Riden 


• Maybe we'd have a better Covid testing system if Rako showed up at Labour fundraisers. 

Ouch

Kate MacNamara reports on problems at the Productivity Commission:

The Productivity Commission delivered a new inquiry into immigration last month, at the same time that it is facing its own story of migration: an exodus. It involves a string of departures that have not yet been stemmed by an independent HR investigation and a slew of recommended remedies.

A distinct wave of resignations began in February last year, when two of the independent Crown entity's principal advisers left. In subsequent months they were followed out the door by six more staffers, including two lynchpin managers, each of whom had been directing one of the commission's two inquiries of the time. The eight departures in 2021 made up more than half the commission's 15 employees (the head count as of January 1, 2021, including one part-timer).

An HR review called late last year found problems at the commission including a troubled transition under the leadership of Ganesh Nana, who became chair on February 1, 2021. It also found an uneasy relationship between the new chair and many staff, especially senior ones. While efforts to improve staff retention are underway, at least four more employees have resigned from the commission in the first half of this year. Of the senior leadership team described in commission documents at this time last year, only one of the five remains.

It's well worth reading the whole thing. 

Kate picks up what I'd considered to be the most scathing part of the Review.

Under the heading "staff engagement with the Commissioners", the report found: "With two Commissioners being relatively new, a greater level of presence and interaction with staff, both formal and informal, would help build the relationship to support communication and the interchange of information and ideas. This is especially important for the Chair, with some staff having limited understanding of how he sees his role and what he brings, both as an economist and as a person."

Ouch.

I'd also received the Review by OIA. If you wanted to read the full report, I've put it up here. Not sure if ProdComm has it more widely available. 

I still remember when BERL was a swear-word in Treasury, for stuff like its report on alcohol costs...

MacNamara's piece is well worth the Herald subscription charge, if you want to learn more about the gutting of Wellington's institutions. 

They didn't know. That's why they couldn't answer.

Newsroom's Jo Moir had been frustrated that Minsters at press briefings wouldn't give a straight answer on how the fuel tax holiday would apply to diesels.

The simplest explanation seemed almost certain to be the correct one: they didn't have any clue, because they'd given officials no time at all to think about it. It was a politically driven policy, not one that made any darned sense. It was a knee jerk response to the combination of rising fuel costs with the war in Ukraine, and declining polling numbers. 

Why would you ask officials' advice if the ones who'd have to implement it were likely to tell you the policy was just stupid and shouldn't be undertaken?

So I figured that nobody had bothered asking NZTA for advice about it. They'd be the ones stuck figuring out how to apply the fuel tax holiday to diesels, which pay Road User Charges rather than excise - for the obvious reason that the per-litre cost they impose on roads is far more variable than is the case for petrol vehicles. Petrol vehicles don't vary all that much by weight. Diesels span the range from tiny mini trucks to enormous transport units. And NZTA would likely point out all the difficulties in applying it to RUC.

Their response was fulsome. A hefty amount of correspondence about costing and then applying the road use discount - which began just before 3 pm on the Sunday afternoon before the government announced the policy. NZTA wasn't asked for advice. They were just asked to cost it. 

It was my column in Newsroom last week. I should have blogged it earlier - sorry. I also threaded the timeline from the hundred-odd pages of released correspondence. You can read the full OIA results if you like: their letter of response which includes a restatement of my request; their first set of documents covering the Sunday and Monday; and, the second set of documents where they start working things through after the announcement. 

This really is how the way the OIA should work - rather than getting tons of blank pages withheld as free and frank advice. We here get to see exactly how policy is made under the Labour government, and what officials have to do in the background.

From the conclusion to my column - but please do read the twitter thread laying out the entire timeline so you can judge it for yourself. 

A diesel subsidy equivalent to the petrol excise discount could have been simpler. But the press release from the Beehive had already announced a cut to road user charges, before anyone had had time to think about it.

So we wound up with a high-trust system and many potential stockpiling issues.

NZTA did an admirable job, under circumstances that should not be faced except under real emergency.

There was no emergency that required inventing policy on less than 24 hours’ notice to officials, forcing them to work past 11pm on a Sunday night.

There was only a political emergency caused by Labour’s drop in the polls, resulting in a ruined weekend for officials, extensive and imperfect backfilling of details afterwards, and theft from the Covid fund to cover road costs.  

It is a terrible way to run a country.

Jo Moir followed up with the Minister, who claimed officials had been given more than 24-hours notice. It's likely he'd chatted with the Ministry of Transport - which is supposed to be the policy shop. But NZTA would have to run implementation on it, and would be far more able to see the obvious problems in applying it to RUC. And they started work on the thing about 20 hours before the cabinet meeting, and 25 hours before the policy was announced.  

We're heading into some worse economic times. I do not expect it will lead to better policy. Rather the opposite. 

Why America Can't Build

An awful lot of this piece over at Palladium also applies to New Zealand. 

Once upon a time, it was possible to build infrastructure at scale and on time.

And then environmental management legislation was passed requiring a lot of proof that environmental effects would be mitigated.

And then activists weaponised that legislation to prevent any development that didn't address whatever concern they had.

And then nobody was able to build anything on time or on budget any more. 

Sound like New Zealand?

Sepulveda’s numerous lawsuits and stakeholder conflicts are an example of a phenomenon that can be traced back to the passage of the National Environmental Policy Act (NEPA) in 1969. NEPA mandates developers to provide environmental impact statements before they can obtain the permits necessary for construction on huge swathes of infrastructure. 

Shortly following the passage of NEPA, California’s then-governor Ronald Reagan signed the California Environmental Quality Act (CEQA) into law, which required additional environmental impact analysis. Unlike NEPA, it requires adopting all feasible measures to mitigate these impacts. Interest groups wield CEQA and NEPA like weapons. One study found that 85 percent of CEQA lawsuits were filed by groups with no history of environmental advocacy. The NIMBY attitude of these groups has crippled the ability of California to build anything. As California Governor Gavin Newsom succinctly put it, “NIMBYism is destroying the state.”

It is also destroying the U.S.’s ability to build nationally. The economist Eli Dourado reported in The New York Times that “per-mile spending on the Interstate System of Highways tripled between the 1960’s and 1980’s.” This directly correlates with the passage of NEPA. If anything, the problem has gotten worse over time. Projects receiving funding through the $837 billion stimulus plan passed by Congress in the aftermath of the financial crises were subject to over 192,000 NEPA reviews.

The NEPA/CEQA process incentivizes the public agencies to seek what is often termed a “bulletproof” environmental compliance document to head off future legal challenges. This takes time, with the average EIS taking 4.5 years to complete. Some have taken longer than a decade. A cottage industry of consultants is devoted to completing these documents, earning themselves millions in fees.

The NEPA consultants are just one of the numerous types of consultants that benefit from the way we build. Most infrastructure in the U.S. is built through a huge number of state and local agencies: for example, there are 51,000 community water systems alone in the U.S. This decentralized structure makes it much more difficult to develop the depth of expertise needed to manage the complexities posed by megaprojects. Often, the multiple public agencies that are involved with projects also have overlapping authorities, creating bureaucratic delays and slowing decision making. 

The expertise problem is compounded by the fact that agencies are often staffed with a workforce of people either just at the beginning of their careers or near the end of them. Those at the beginning tend to leave if they are ambitious, which leaves senior positions in the hands of agency lifers. Because of this dynamic, and the fact that it is not economically feasible to have the wide range of expertise needed in-house, public agencies employ engineering consulting firms. These firms fill a valuable niche. If you are building a complex project—say, a long-span bridge or a desalination plant—you want advice from someone who has designed and built dozens of them. The problem arises when you become too dependent on such advice. 

Afternoon roundup

The closing of the many tabs:

• EU trade talks with NZ are on. European consumers who worry about food security, food prices, and access to the only lamb that, to the best of my knowledge, Peter Signer has granted caveated ethical approval - they should be telling their governments to ditch the tariffs and quotas on NZ ag exports. 


• Elizabeth Rata has a blog.


• That doesn't solve the problem, Camus. Like sure, you're right - but in a trivial sense. You've just pushed the question up a level. 


• How not to build a stadium. Or, better, perhaps they shouldn't be building a stadium. 


• NZ fares poorly in the latest world competitiveness rankings.


• It's especially when you have low-quality informal institutions that competent mayors matter. I wonder what a replication of this work for NZ would look like. 


• NZ has a lot of options for drivers who want to take jobs on apps. Uber, obviously. But also Lyft, Ola and anyone else can enter the market if they want. The Employment Court is trying to decide whether Uber drivers are employees. It's an odd kind of employment if someone can have three or four different apps open at the same time, taking jobs as they come. Macfie takes a very union-sympathetic position; haven't seen other reporting on the court case.  


• A new taskforce to try to unblock building materials, with a focus on plasterboard. Looking to consenting will matter, but the overarching issue will still be getting councils out from under joint-and-several liability. 


• Radio New Zealand cheering on the creation of a new cartel, mostly because they have no clue how occupational licensing works. 


• Bad news for beer drinkers - price is going up (as it is for everything else).


• AML rules still killing remittances.


• Jenny Ruth picks up Geof Mortlock's worries about RBNZ.

Smokatunity?

The draft legislation for the coming changes to the smoking rules are out.

There's a lot of nuttiness in there: a cap on the number of tobacco vendors that will create rents for incumbents as the lid presumably sinks; a lifetime ban on smoking for my daughter but not my son (and a fine for me of up to $50k if I handed her a cigar in a public place; and, a requirement that a cap on nicotine content in smoked tobacco be set.

But let's ignore all that for now.

Section 3AA just updates the numbering of some parts, including rules around smoking and vaping indoors.

Some time ago, I'd argued that the whole mess around defining an outdoor area, for purposes of the Smokefree Environments Act, should be flipped. Instead of taking out measuring tapes and figuring out whether 50% of an area has a ceiling, or what fraction is enclosed by walls, just set an air quality standard. Stick a CO2 monitor in a prominent spot. If it stays under 600 (say), it's an outdoor place. The air cycles frequently enough that everyone's cumulative exhaust doesn't hit the sensor. 

And I'd noted that you could do away with all the rules around indoor smoking and vaping on the same basis. 

Ok.

There has been reasonably compelling argument in favour of updating air quality standards to deal with the pandemic. Whatever was considered good enough for indoor air quality prior to Covid - the optimum has to be higher than that now, right? Now it might not meet CBA for retrofitting existing places, but it's definitely in the realm of things worthy of more detailed analysis. It could make sense.

Nobody except for the public health people have been pushing this barrow. Government has basically given up on Covid and I expect would recoil at anything of this sort that would impose costs on businesses. 

But what if we could set an air quality standard that, if met, meant indoor smoking couldn't possibly be a problem - and simultaneously protected against Covid? Either maintaining a low CO2 level by cycling air through frequently enough, or running the air through a set of filters including a proper HEPA filter frequently enough, would do the trick. 

Define that standard, then say that smoking and vaping are allowed in any place that meets the standard. 

By definition, smoking can't impose any noticeable harm on others if you've set that standard appropriately. And it would give venues a reason to want to meet the standard - they could cater to a broader set of customers. 

Now it's a pig of a thing relative to a first best. 

There was never any case for regulating indoor vaping. It should always have been left to the decision of property owners, and then people could choose which venue to attend based on their own preferences. And really, the same holds for indoor smoking. 

And if a tighter air quality standard meets CBA, it shouldn't matter whether the venue wants to cater to smokers and vapers. And really, restaurants and bars should be competing on this margin if they don't want to have staff that are constantly out sick and if they want to attract Covid-averse people like me. Their failure to do so suggests, strongly, that my Covid-aversion is increasingly idiosyncratic and nobody else cares about it. A tiny number of venues might start competing on this margin - but I've yet to really find one. 

But if there are places that would like to be able to cater to vapers and the tiny number of remaining smokers, and if this kind of setup would let them do that, and if the marginal cost of simultaneously making it safe from Covid is pretty low if you're upgrading anyway....

Maybe there's a smokatunity here. 

I'd actively seek out cigar bars, because the rules making them safe for smoking would simultaneously and more importantly protect me from Covid.

A permanent petrol holiday?

Just a terrible dynamic here.

Transport NZ CE Nick Leggett argues for an indefinite extension of the road user charge discounts.

New Zealand’s road transport industry has today called on the Government to extend the reduction in fuel excise and road user charges (RUC) indefinitely.

“Extending the reduction is vital in order not to increase the pressure on hardworking families and struggling businesses,” says Ia Ara Aotearoa Transporting New Zealand Chief Executive, Nick Leggett.

“Many kiwis are only just keeping their heads above water at the moment and we need the Government to do what it can to help them through.”

The current fuel excise reduction scheme is set to come to an end in the coming months.

Mr Leggett said 93% of New Zealand’s freight travels on the back of a truck and the road transport sector continually strived to drive efficiencies in their businesses.

And the railways want a subsidy to compete with the now-subsidised trucks, and the ports will want the same. Nick Leggett is helping to push us back to the bad old days of a government-directed transport system. 

A clean system would start from user-pays. Roads would be built when they could pay their way. Users would cover their costs. Goods would ship by rail when that was the most cost-effective, as judged by users, facing the real costs of transport. And same for coastal shipping. 

There's some work to get there. Congestion charging, with fees set to maximise system throughput, would help. It would also provide a price signal about places where more investment might cover its cost. Flipping petrol excise over to RUC, and then looking at getting more tolls on roads as a way of financing the things. 

But Leggett's path doesn't lead to any sensible system. If you run land transport out of general revenues or the Covid fund instead of out of fees from users, why should the system even care about driver demand? If government decides to ban trucking between places that could be served by coastal shipping, regardless of cost, what principled leg does Leggett have to stand on?

The best thing that happened in the 80s reforms was that businesses all agreed to stop doing this kind of thing. Leggett is trying to push us back to a rent-seeking equilibrium, and probably has no clue that he's doing so. 

Reader mailbag - RBNZ edition

Geof Mortlock, a former central banker with fairly broad experience in the sector, wrote an open letter to RBNZ Chair Neil Quigley and Finance Minister Robertson about what's been going on at the RBNZ. 

A dozen or so others were cced, including a couple of journalists, and the thing crossed my inbox. With Geof's permission, I've copied it here as I've not seen it picked up elsewhere.

Dear Mr Quigley, Mr Robertson, 

I am writing to you, copied to others, to express deep concern at the increasingly political role that the Reserve Bank governor is performing and the risk this presents to the credibility, professionalism and independence of the Reserve Bank. The most recent example of this is the speech Mr Orr gave to the Central Banking Global Summer Meetings 2022, entitled "Why we embraced Te Ao Maori", published on 13 June this year.

As the title of the speech suggests, almost its entire focus is on matters Maori, including a potted (and far from accurate) history of the colonial development of New Zealand and its impact on Maori. It places heavy emphasis on Maori culture and language, and the supposed righting of wrongs of the past. In this speech, Orr continues his favourite theme of portraying the Reserve Bank as the Tane Mahuta of the financial landscape. This metaphor has received more public focus from Orr in the last two years or so than have the core functions for which he has responsibility (as can be seen from the few serious speeches he has given on core Reserve Bank functions, in contrast to the frequent commentary he makes on his eccentric and misleading Tane Mahuta metaphor).

For many, the continued prominent references to Tane Mahuta have become a source of considerable embarrassment given that the metaphor is wildly misleading and is of no relevance to the role of the Reserve Bank. For most observers of central bank issues, the metaphor of the Reserve Bank being Tane Mahuta fails completely to explain its role in the economy; rather, it confuses and misrepresents the Reserve Bank's responsibilities in the economy and financial system. It is merely a politicisation of the Reserve Bank by a governor who, for his own reasons (whatever they might be), wants to use the platform he has to promote his narrative on Maori culture, language and symbolism. 

If one wants to draw on the Tane Mahuta metaphor, I would argue that the Reserve Bank, as the 'great tree god' is actually casting far too much shade on the New Zealand financial 'garden' and inhibiting its growth and development through poorly designed and costed regulatory interventions (micro and macroprudential), excessive capital ratios on banks (which will contribute to a recession in 2023 in all probability), poorly designed financial crisis management arrangements, and a lack of analytical depth in its supervision role. Its excessive and unjustified asset purchase program is costing the taxpayer billions of wasted dollars and has fueled the fires of inflation. In other words, the great Tane Mahuta of the financial landscape is too often creating more problems than it solves, to the detriment of our financial 'garden'. Some serious pruning of the tree is needed to resolve this, starting at the very top of the canopy. We might then see more sunlight play upon the 'financial garden' below, to the betterment of us all.

There is nothing of substance in Orr's speech on the core functions of the Reserve Bank, such as monetary policy, promotion of financial stability, supervision of banks and insurers, oversight of the payment system, and management of the currency and foreign exchange reserves. Indeed, these core functions are treated by Orr as merely incidental distractions in this speech; it is all about the narrative he wants to promote on Maori culture, language, the Maori economy, and co-governance (based on a biased and contestable interpretation of the Treaty of Waitangi).

I imagine that the audience at this conference of central bankers would have been perplexed and bemused at this speech. They would have questioned its relevance to the core issues of the conference, such as the current global inflation surge, the threat that rising interest rates pose for highly leveraged countries, corporates and households, the risk of financial instability arising from asset quality deterioration, and the longer term threats to financial stability posed by climate change and fintech. These are all issues on which Orr could have contributed from a New Zealand perspective. They are all key, pressing issues that central banks globally and wider financial audiences are increasingly concerned about. Instead, Mr Orr dances with the forest fairies and devotes his entire speech (as shallow, sadly, as it was in analytical quality) on issues of zero relevance to the key challenges being faced by central banks, financial systems and the real economy in New Zealand and globally.

I have no problem with ministers and other politicians in the relevant portfolios discussing, in a thoughtful and well-researched way, the issues of Maori economic and social welfare, Maori language, and the vexed (and important) issue of co-governance. In particular, the issue of co-governance warrants particular attention, as it has huge implications for all New Zealanders. It needs to be considered in the light of wider constitutional issues and governance structures for public policy. But these issues are not within the mandate of the Reserve Bank. They have nothing to do with the Reserve Bank's functional responsibilities. Moreover, they are political issues of a contentious nature. They need to be handled with care and by those who have a mandate to address them - i.e. elected politicians and the like. The governor of the central bank has no mandate and no expertise to justify his public commentary on such matters or his attempt at transforming the Reserve Bank into a 'Maori-fied' institution.

No previous governor of the Reserve Bank has waded into political waters in the way that Orr has done. Indeed, globally, central bank governors are known for their scrupulous attempts to stay clear of political issues and of matters that lie outside the central bank mandate. They do so for good reason, because central banks need to remain independent, impartial, non-political and focused on their mandate if they are to be professional, effective and credible. Sadly, under Orr's leadership (if that is what we generously call it), these vital principles have been severely compromised. This is to the detriment of the effectiveness and credibility of the Reserve Bank.

What is needed - now more than ever - is a Reserve Bank that is focused solely on its core functions. It needs to be far more transparent and accountable than it has been to date in relation to a number of key issues, including:

-  why the Reserve Bank embarked on such a large and expensive asset purchase program, and the damage it has arguably done in exacerbating asset price inflation and overall inflationary pressures, and taxpayer costs;

-  why it is not embarking on an unwinding of the asset purchase program in ways that reduce the excessive level of bank exchange settlement account balances, and which might therefore help to reduce inflationary pressures;

-  why the Reserve Bank took so long to initiate the tightening of monetary policy when it was evident from the data and inflation expectations surveys that inflation was well under way in New Zealand;

-  how the Reserve Bank will seek to balance price stability and employment in the short to medium term as we move to a disinflationary cycle of monetary policy, and what this says about the oddly framed monetary policy mandate for the Reserve Bank put in place by Mr Robertson;

-  assessing the extent to which the dramatic (and unjustified) increase in bank capital ratios may exacerbate the risk of a hard landing for the NZ economy in 2023, and why they do not look at realigning bank capital ratios to those prevailing in other comparable countries;

-  assessing the efficacy and costs/benefits of macroprudential policy, with a view to reducing the regulatory distortions that arise from some of these policy instruments (including competitive non-neutrality vis a vis banks versus non-banks, and distorted impacts on residential lending and house prices);

-  strengthening the effectiveness of bank and insurance supervision by more closely aligning supervisory arrangements to the international standard (the Basel Core Principles) and international norms. The current supervisory capacity in the Reserve Bank falls well short of the standards of supervision in Australia and other comparable countries.

These are just a few of the many issues that require more attention, transparency and accountability than they are receiving. We have a governor who has failed to adequately address these matters, a Reserve Bank Board that has been compliant, overly passive and non-challenging, and a Minister of Finance who appears to be asleep at the wheel when it comes to scrutinising the performance of the Reserve Bank. We also have a Treasury that has been inadequately resourced to monitor and scrutinise the performance of the Reserve Bank or to undertake meaningful assessments of cost/benefit analyses drafted by the Reserve Bank and other government agencies.

It is high time that these fundamental deficiencies in the quality of the governance and management of the Reserve Bank were addressed.  The Board needs to step up and perform the role expected of it in exercising close scrutiny of the Reserve Bank's performance across all its functions. It needs directors with the intellectual substance, independence and courage to do the job. There needs to be a robust set of performance metrics for the Reserve Bank monitored closely by Treasury. There should be periodic independent performance audits of the Reserve Bank conducted by persons appointed by the Minister of Finance on the recommendation of Treasury. And the Minister of Finance needs to sharpen his attention to all of these matters so as to ensure that New Zealand has a first rate, professional and credible central bank, rather than the C grade one we currently have. I would also urge Opposition parties to increase their scrutiny of the Minister, Reserve Bank Board, and Reserve Bank management in all of these areas. We need to see a much sharper performance by the FEC on all of these matters.

I hope this email helps to draw attention to these important issues. The views expressed in this email are shared by many, many New Zealanders.  They are shared by staff in the central bank, former central bank staff, foreign central bankers (with whom I interact on a regular basis), the financial sector, and financial analysts and commentators.

I urge you, Mr Quigley and Mr Robertson, to take note of the points raised in this email and to act on them.

Regards

Geof Mortlock

International Financial Sector Consultant

Former central banker (New Zealand) and financial sector regulator (Australia)

Consultant to the IMF and World Bank

These are Mortlock's views; he notes that his views are shared by others. 

I note that I have heard similar views around the Bank's deterioration of research capabilities, and around its loss of focus, from rather a few former RBNZ people unable to put their names to it - and even unable to be quoted anonymously in some cases. 

Supermarkets and inflation - denouement

In April, Minister David Clark put out a statement, as Minister, blaming supermarkets for inflation. 

He claimed that rising food prices "confirm the need to rein in the super profits of the supermarket duopoly" and "highlights the role the grocery sector is playing in driving up prices."

It was populist rubbish. Standard-drill models expect less pass-through of input price costs in less competitive sectors (though you can get different results if you make the models more complicated). 

I went through the standard econ drill on it in a column for the Dom Post.

But I also put through a couple of OIA requests just checking that he hadn't sought any advice from MBIE on this stuff. I really doubted that MBIE would have given him such shonky advice, but I was curious whether he'd bothered asking them about it.

So I asked, on Twitter. And MBIE, unlike MoH, is very good at catching OIA requests made on Twitter. 

I'd first asked for any correspondence on it and any advice provided. There was none. 

So I followed up, asking whether MBIE had provided any advice at all around supermarket pricing and inflation. They haven't. 

I can understand politicians mouthing off in their capacity as partisan MPs. 

I wish that that kind of rubbish wouldn't come out in their capacity as Ministers, and that they'd have at least sought some advice about whether they're talking utter nonsense. 

Thou shalt not suffer a conservative on your Board

Stuff reports on how Wellington works, and how the consensus is enforced. Former NZIER CE Laurence Kubiak has long been a patron of the arts. He's been Chair of the NZ Symphony Orchestra Board since 2019.

But he joined the Board of the New Zealand Taxpayers' Union in January. 

And Labour will not suffer a witch to live.

In December last year Kubiak advised the NZSO and the Ministry for Culture and Heritage that he accepted an appointment to the Taxpayers’ Union board, starting in January this year.

The ministry then informed Arts Minister Carmel Sepuloni by way of verbal update in a regular officials’ meeting shortly thereafter, according to ministry spokeswoman Emily Fabling.

Kubiak said he was then contacted by officials prior to his term as the NZSO chairperson ending on May 31 this year, saying the minister wanted to make some changes to the NZSO board, among other boards.

Kubiak said he asked whether there was any specific reason why his contract was not being renewed, and asked whether there was any issue with his governance of the NZSO, to which he said he was told: “absolutely not”. “[They] wanted to make changes. [It was] nothing more than that,” he said. “We serve at the minister’s pleasure.”

He told officials he was prepared to stay on until a replacement had been appointed, however that had not happened as of Monday.

Kubiak said it was “often hard to judge the timeline on these things” and there was a “large bureaucratic process” behind board appointments of agencies like the NZSO.

I don't know whether National should be pushing Sepuloni on this, or taking inspiration from her. 

National could, now, start drawing up an enemies list. 

All of the affiliations that would render someone no longer be suitable on various Boards, come a change in government, for Boards that serve at the Minister's pleasure. 

I'd really prefer that governments not play this game, but only one side playing it may be worse than both playing it. 

Afternoon Roundup

This afternoon's worthies, as I try to free up system resources so the Zoom session I'm listening in on might work a little better:

• The Canterbury Crusaders want what is effectively hundreds of millions of dollars of subsidies for their sports franchise. It would be nice if support for their sports team could be demonstrated through a PledgeMe fundraising drive for a stadium, rather than by forcing everyone in Christchurch to pay for it. Mayor Lianne Dalziel notes that the thing didn't pass cost-benefit even before the big run-up in costs. 


• The Reserve Bank is not Tane Mahuta. But if it is, then its Governor is a Northern Rata slowly strangling a once beautiful tree. DoC wouldn't let it happen. 


• Marc Daalder keeps providing the best NZ coverage on the current Covid state of play.


• Economists (rightly) don't like laws against price gouging.


• Pfizer's Covid vax is safe and effective for under-5s. Well, duh. So when will it be available in NZ?


• I'd not caught the BBC Radio version of Flight of the Conchords, from 2005. It's very good. HT: Andrew Farrant. 


• Anti-Money Laundering laws have made money transfers to the Pacific unsafe. This whole regime is so bad. 


• ESR geneticist Mike Bunce and Siouxsie Wiles sing the praises of wastewater testing. Bit of a shame that, as of 16 June, the most recent wastewater testing results were released 2 June, for the week ended 29 May. 

Cassandra's curse

I'd thought this was dead-obvious mid-January. I was surprised nobody had written on it, so I included it in a column published 24 January. I'd promised myself I wasn't going to write any more on Covid - that there was no point because nobody was listening. But I wrote it anyway. 

24 January, from an economics generalist who is spread thinly across more policy areas than I care to count. 

The country’s Covid testing system is likely to fall apart, quickly, when case numbers rise.

Testing labs can bundle five to ten samples together for testing. If none are positive, all is fine.

If the pooled sample is positive, individual samples need separate re-testing. When positivity rates are low, the system works well. But when positivity rates are high, pooled sampling stops working. Testing capacity drops to a small fraction of what it had been, just when it is most needed.

Headline figures on testing capacity may be more than a little optimistic. Contracting now for greater capacity, focusing on the saliva-based PCR testing (which identifies genetic material from the virus) that catches Omicron cases earlier, matters.

Nobody listened. I earned a couple minor insults on twitter for having right-wing reckons and undermining the government.  

Here's one genius who claims to be a physics teacher. 

And another.

Right.

Here's one conclusion of a fairly limp consultancy report into the predictable and predicted testing shambles:

A number of the reports included useful information however, the reports were not always delivered with significant contextual information, critical analysis or a call for action. The reporting style of the COVID-19 Testing and Supply Group appears to assume its audience had the requisite background knowledge and understanding to interpret the reports and recognise the significance of what was being reported. 

It also doesn’t recognise the significant non-COVID workload of some of the audience, such as the Director-General or Ministers who have significant other portfolios to attend to. This is perhaps reflective of the capacity limitations of the group in such a demanding environment. As a result, or in addition to this, the COVID-19 Testing and Supply Group relied heavily on verbal communication to provide context or convey information. 

This approach also assumed that the audience had the requisite background to the issues communicated and that they passed on that information effectively. For example, for the updates provided at the Daily IMT it was assumed that information passed on was being interpreted correctly, being noted, and actioned appropriately. 

The Ministry's modelling didn't pick up the problem. Reports through to the DG and Minister were not understood by DG Health or the Minister; the poor dears had too much on their plate to possibly be able to understand anything unless it were spoon-fed to them. 

Health is the whole job for DG Health. 

The problem was so freaking obvious that even I could see it. 

But apparently Bloomfield needed to have had his nose rubbed in it to be able to notice, and nobody rubbed his nose in it.  

I think we have to be blunt here. It takes only very basic numeracy, combined with very very basic understanding of how pooled sampling works, to be able to understand that pooled sampling cannot possibly continue working when positivity rates are high. You have to unpool and retest too often. Pooled sampling makes a ton of sense when you're looking for needles in haystacks. It cannot possibly work when every pooled sample has a very high chance of having at least one positive result. 

You literally need to know nothing other than this to know that there's going to be a problem. Figuring out the positivity rate at which it falls apart requires knowing the number of samples on a pooled tray in the systems currently in use. Knowing that there will be a problem at some positivity rate that is almost certain to obtain in an Omicron outbreak doesn't take that. 

I don't get how this wasn't completely obvious to anybody with passing familiarity with math and pooled sampling methods. 

This place...

Revenue bonds

Fun fact. According to Charles Schwab, only about a third of US investment-grade municipal debt is of the general obligation type that's common here. 

General obligation debt is debt that falls to ratepayers at large to cover, either directly or in the limit if something else fails. 

The other two-thirds are revenue bonds.

NZ doesn't have those but it should. 

A revenue bond gets paid off only by the revenues that arise from the project it funds - user fees, targeted rates and the like. If the revenues from the project fall short, the bond can fall over - so project viability gets a harder look.

The government's 'Three Water' reforms are largely about trying to unlock better funding and financing for water infrastructure. All the convoluted governance structures are mainly about trying to achieve balance sheet separation, so that there's no risk that the underlying councils will bail out any debt issued by the amalgamated entities, so they won't hit council debt limits.

A better approach would just allow councils and council-controlled entities to issue revenue bonds to fund this stuff, with payments financed by levies on the users.

It unlocks a pile of potential infrastructure investment. It provides fewer reasons for unaffected ratepayers to say no to stuff - the pipe serving the new set of apartments, or the new subdivision, gets paid for by the users and beneficiaries of the infrastructure, not by others. And it could bring bondholder oversight that necessary maintenance is being undertaken - to protect their stream of payments. 

It's this week's column over at the Stuff papers. But it builds on a theme from a column last year, where I reminded people about the special purpose districts that used to be able to issue this kind of debt. 

Anyway, I can't see what real problem gets solved by the proposed forced amalgamations that doesn't get solved, better, by revenue bonds for funding and financing infrastructure. 

And just think about the dynamics for other projects. Want a new highway? Set a revenue bond that has to be paid off by tolls on the users. That road will not get built unless its revenues exceed its costs. And same for a new tunnel at Mt Vic. Or a rail line. No more 0.2 BCR stuff. 

Afternoon roundup

I've got tabs, they're multiplying. And I'm losing all control - why can't Chrome be as good as it was a decade ago?

So time to clear them. The worthies:

• The ag sector's plan for dealing with ag emission pricing was released yesterday. I'm still thinking through this one. It is definitely not a first-best. Trying to figure out whether it's a second-best or a fifth-best. Executive Summary here, full report here. Stuff covers it here and here, and here with very minor comment from me. And here's BusinessDesk.
• Prohibitionists get mad that Emerson's Brewery donated to a breast cancer research fund. I'm pleasantly surprised that there's a cancer charity that cares more about cancer than about anti-alcohol activism. 
• Labour's proposals around supermarkets are populist nonsense. I worry that they're a foreshadowing of what's coming down the track for more sectors. Labour's falling in the polls, the next year will bring some horrible combination of high inflation and higher unemployment, and an election's due for 2023. Populist stuff like this will be tempting. 
• If water takes were under a cap-and-trade regime, this sort of thing would be better policed.
• A Grand Inquisitor has been appointed who seems likely to be very diligent. 
• America's welfare system has some worse EMTR cliffs than New Zealand's.
• The Ministry of Health continues to be a dangerous clown-show. 
• Winnipeg has a new slogan: 'It's made from what's real.' Bartley Kives ahs a thread of alternatives...
• Set density restrictions on bars and outlets, create rents for incumbents. Tullock's Trap. 
• The Commerce Commission has published submissions on regulatory barriers to entry in key building supplies. The Affordable Building Coalition's submission is very good.
• Maybe it would be a good idea to make it easier for foreign-trained GPs to practice in New Zealand? Maybe?
• There's maybe one degree of separation between everyone in New Zealand but come on.

Richard Harman's stupid conspiracy theories

Sometimes, Richard Harman's Politik newsletter gets things right.

Today, not so much.

Loyal readers may have noticed that opening New Zealand up to real supermarket competition has been something of a priority for us.

It isn't new.

Oliver was writing on the importance of land use planning as barrier to competition as early as 2014. 

I'd noted it in 2019, here, I think before the market study into groceries was even announced (but I'd have to check back on the timing). I was then urging ComCom to use its new market studies powers to go after the real darned cartel enforcement: land use planning rules, and other regulations that prevent entry. 

If private cartels had ever worked to comparable effect, there would be deserved public clamour for the jailing of those responsible under the recent amendments to the Commerce Act, consequent to investigation of the cartel under a Commerce Act Part 3A market study. 

But can you even imagine the Commerce Commission setting Part 3A investigation of the extent to which the state is responsible for any of the country’s anticompetitive ills? 

It is not hard to come up with a list of places to look.

For example, what are the combined effects of New Zealand’s building materials certification regime when combined with council incentives under joint-and-several liability? Is there any good reason that it would be rather difficult to import and use building materials from trustworthy, comparable places like Vancouver, Seattle or Tokyo? 

What are the effects of zoning on substantial competition in retailing? Is it even possible for any new larger-footprint retail players to emerge given existing zoning restrictions? Isn’t the simplest explanation for decades of minimum parking rules that those rules raised the cost of entry for potential competitors?

We regularly hear complaint about lack of competition in banking and insurance, but nobody seems particularly keen on looking seriously at the legislative and regulatory barriers that would face new entrants. If there are large excess profits to be had in serving the New Zealand market, why is no one picking up those twenty-dollar bills sitting on the sidewalk?

I want real antitrust enforcement going after the country's real villains: the bureaucrats in central and local government who protect insiders, and who deserve to be in jail for it, but are protected by Section 3A Part 43 of the Commerce Act. Statutory regimes are given a pass. Bureaucracy protects itself.  

Market Studies give the only real way of digging through to the villainy of those regimes. They can take a broad look at conditions affecting competition. And in some cases, it's damned hard to avoid seeing what's going on.

ComCom's draft report tried to ignore it. Chapter 6 of the draft report mentioned it, but punted, claiming that RM reform was in progress and was somebody else's problem.

So we went in hammer and tongs. Submissions, columns, media - wherever I could find a spot to yell about the need to open up land use planning and the overseas investment act to enable real entry, I took it. There aren't many times when there seems to be a real chance of changing an outcome, rather than just putting up the analysis for a future better government to pick up, or informing the public about the policy options. 

At the same time in 2021, our Chair, Roger Partridge, was putting together an updated version of the survey he'd run a few years previously on businesses' views of the regulators they deal with. In the first survey, RBNZ came out poorly. They made governance changes, including a Board structure. I've been not at all a fan of how they've been running monetary policy, or the emphasis on climate instead of inflation, but RBNZ also does a ton of regulatory oversight with banks and insurers. 

The survey asked each of a couple hundred businesses to assess the regulators that they deal with most often. [Update: we got about a hundred responses.] Each one answered a couple dozen questions about the regulator that they deal with most often, second-most often, and third-most often. A lot of regulators get covered; different industries deal with different regulators. 

The Commerce Commission drew the most ratings - in part because it's in three parts. There's the Competition and Consumer Branch, the Price Regulation Branch, and the Telecommunications Commissioner. 

I don't think anybody provided a rating for the Transport Accident Investigation Commission or Heritage New Zealand or the New Zealand Walking Access Commission. Remember that they get a rating if they're among the three regulators with whom a business interacts. A business would have to be pretty messed up if one of its top-three interactions were with the Transport Accident Investigation Commission.

Anyway, Roger made me do the spreadsheet work for the survey. I do not enjoy it. The data needs a lot of cleaning to be usable. And I do not like data cleaning. It is a terrible use of my time but we're a small shop and somebody has to do it. 

So I compiled things in the spreadsheet and gave the numbers back to Roger. The only times I even looked at the names of the regulators was to make sure I was matching things properly. 

ComCom came out poorly this time. The numbers are what they are. I don't care what the numbers are. I just care that I don't screw things up in the spreadsheet. 

Roger's report came out a couple of weeks ago. 

And that led Richard Harman to spin an incoherent conspiracy theory. 

Here's what he wrote in his newsletter this morning. I haven't corrected his typos. I have put in a few comments along the way.

Discrediting the Commerce Commission’s supermarket competition report 

By Richard Harman -03/06/2022 

That the  Minister of Commerce and Consumer Affairs, David Clark, yesterday chose his words carefully when he commented on the attempts to bring more competition to the supermarket sector says a lot. 

Clark told POLITIK that the supermarkets were reacting “in public” positively to what the Government was proposing. 

But away from the spotlight, a critical ally of the  supermarket companies was mounting a full-on critique of the Commerce Commission and its Market Study into the retail grocery sector. 

The Commission identified  two main areas where it considered consider changes would be desirable “to help facilitate an increase in the number of grocery retailers that compete effectively with the major grocery retailers” 

One was to improve the availability of a wide range of wholesale groceries on reasonable terms. 

“We consider that retail competition would be enhanced by one or more of the major grocery retailers offering wholesale supply of groceries to other retailers on a voluntary basis,” the Commission said. 

The other proposal was to take measures to make more sites available for grocery retailing. “We recommend using a range of mechanisms under planning law to ensure sufficient land is available to enable choice in sites for new retail grocery stores,” the Commission said. 

“We also recommend prohibiting the use of restrictive covenants on land and exclusivity covenants in leases.” 

On Budget night Clark introduced the Commerce (Grocery Sector Covenants) Amendment Bill which ammended  to, ban restrictive covenants on land, and exclusive covenants on leases. 

It also made existing covenants unenforceable.  “This legislation stops supermarkets from engaging in the anti-competitive land wars we’ve seen, where they buy up land or dictate the terms of leases to block their competitors from getting a foothold in the area,” said Clark. 

Perhaps surprisingly, both supermarket chains, Foodstuffs and Countdown, have supported the legislation in submissions to the Economic Development, Science and Innovation Committee. 

Foodstuffs North Island CEO Chris Quin said the Bill was consistent with the company’s “Action Plan” which it had developed in response to the Commerce Commission. 

But a submission to the Committee from Food and Grocery Council CEO, Katherine Rich, suggested that the companies were able to support the Bill because they actually had much more draconian controls on who might set up shop near a supermarket inserted in the highly confidential lease agreements they entered into with landlords. 

Those controls are effectively secret and unlikely to be able to be touched by Clark’s Bill in the form it was introduced into Parliament. “What’s become apparent through our review of a generic retail lease is supermarkets aren’t using their market power to block not just fellow grocery retailers – they’re using it to block or constrain almost all retail that comes close to them,” Rich told the Committee  yesterday.

“This is done by using incredibly broad definitions of what a supermarket is in leases that describe their sphere of interest. 

“In summary, anything that can be sold. 

“It’s an exhaustive list. 

“The supermarket has defined its business as almost everything that can be sold by anybody. 

“The supermarket can add any other goods at any time to futureproof opportunities or threats — all rights are reserved. 

“Most New Zealanders would not think a supermarket is something that sells clothing, fashion, luggage, sports and fitness goods, appliances, shoes, computers, insurance and lending, hair dressing services, banking, arts and crafts or childcare services. 

“But according to this lease, they do.” 

Rich said supermarkets also gave themselves the rights to determine who the landlord leased to up to 3 years after the supermarket has vacated the property. 

“But the clause that surprised us the most was the requirement for landlords to campaign to block potential supermarket competition. 

“The lease we’ve quoted demands that the landlord make submissions to oppose all district plans, developments, new stores, applications for resource consent, or changes to a resource consent that affects the supermarket’s competitive position at the landlord’s own cost. 

“All these sorts of oppressive clauses add up to barriers for new entrants.” 

The supermarkets have an influential ally in the New Zealand Initiative, the right wing think tank which is a successor to the Business Round Table. 

Both supermarket companies help fund the Initiative. 

Our first submission to ComCom highlighted the importance of barriers to entry. We noted that it may be practically impossible to open a new supermarket chain. Zoning sets very few sites that are allowed to be supermarkets; many sites that are allowed to be supermarkets by zoning are tied up in restrictive covenants; consenting can take years or a decade; and, you have to get through the Overseas Investment Office.

Our second submission, after the consultation rounds and hearings, made the point again. Look through the covenants, void any that are found to be anticompetitive in effect. Look too at lease arrangements but remember that there can be good efficiency reasons for exclusivity in leases. But first and foremost fix zoning. None of the rest can matter if people are allowed to set up supermarkets everywhere. It would be impossible to encumber the whole city against being a supermarket. It's only possible for encumbrances to matter if zoning is stupidly tight to begin with. 

Just over a week ago in a report written by its chair, Roger Partridge, it reported on a survey of the country’s 200 largest businesses by revenue, “together with those members of The New Zealand Initiative not otherwise included in the top 200. 

Just 36 companies responded when asked to rate the Commerce Commission which was ranked as the least effective of six regulatory agencies. 

Despite the very low response, the Initiative pumped out press releases and videos with titles like: “Time is up for the Commerce Commission”; “Reform needed as Commerce Commission suffers alarming slide in regulatory performance”; “Roger Partridge on new research that shows businesses are losing faith in the Commerce Commission.” 

I wonder whether Harman read the report, or whether Clark just fed him the line. Here's Table 2 of the report. ComCom was the most frequently rated agency.

 

If Harman read the report and came to this conclusion, he's past-due for retirement. If he was just fed the line by Clark and repeated it, same thing. 

Again: each of the 200+ were asked to provide ratings for the top three regulators they deal with. Not all of the 200 are going to primarily be dealing with ComCom. It would be stupid to expect that they would. Different companies deal with different regulators. We didn't want rankings of regulators that a company only deals with infrequently. We wanted rankings from companies who had those regulators front-of-mind.

Back to Harman:

In a podcast a week ago, the Initiative’s Executive Director, Oliver Hartwich, took up the issue of the Initiative’s report. 

“What came through in our survey was that many large companies actually believed that the Commerce Commission simply didn’t understand the market conditions in which they operate, that they lacked some commercial expertise,” he said. 

Also on the podcast was Foodstuffs director, Peter Schultz who agreed that the Commerce Commission lacked expertise. 

“From my perspective, the depth of knowledge that participants in an industry sector have relative to a group working in the commission; the difference is huge,” he said. 

“So there’s got to be a great learning curve that’s required through the process.” Hartwich repeated the message; that the Commerce Commission lacked the expertise to conduct the supermarket market survey. 

“What I just heard from you, it took you the better part of a year to get the Commerce Commission up to speed on how supermarkets work and how the industry works,” he said. 

I was in on that podcast chat. I noted that the draft report was incompetent, but that the final report was much improved. I was rather happy with the final report. The importance of regulatory barriers to entry seemed to finally have clicked for them. I said as much in the podcast.

I just don't get Harman. Given that the final report from ComCom actually got it right, and we'd put out supportive press releases about the damned thing, would we have been trying to undermine ComCom in the supermarkets inquiry by releasing the report? Like, how stupid would that be? ComCom finally got it right, Clark had gone off on a populist tear claiming that supermarkets cause inflation rather than monetary policy and saying he'd do a pile of crazy stuff that the Commission had recommended against. 

If we had been playing dodgy games, we would have delayed the release of the report until after the government had completed its response to the Market Study. The last thing we'd want to be doing would be undermining ComCom relative to Minister Clark's populist hunches and others' rent-seeking. 

But we don't play those games. The report was ready so we released it. I was annoyed that the numbers had come out poorly for ComCom given that their final report had gotten to the right spot, but the numbers are what they are.  

Clark told POLITIK that he was getting very positive support from the public for the moves he ahd already announced to strenghten competition. 

“I think New Zealanders understand that there’s a major issue that needs tackling and they’re really pleased to see strong, decisive action from the Government,” he said. 

But what about the supermarket companies? 

“I have to say at this stage that the public comments are very much in favour of increasing competition in the market. 

“They certainly don’t want to get offside with consumers, so they will continue to pitch their own offerings. 

“But at this stage they appear to be open to change.” 

Clark’s reference to “public comments” is a hint that behind the scenes the supermarkets are playing hardball. 

The role of the New Zealand Initiative as what appears to be a proxy critic of the Commerce Commission with presumably the intention that will discredit its report is obvious. 

Why on earth would we be trying to do that, when ComCom's final report got the big picture thing right?

But Rich believes that one of the keys to unlocking competition is to get rid of the secret lease clauses. 

“Our main message is that it’s not just a single exclusivity clause, it’s a suite of oppressive clauses that have the same effect,” she said. 

“And in particular, you should certainly prohibit the ability for a supermarket to tell a landlord or anybody to go out and campaign against new developments in district plans and that sort of thing.” 

“If this committee gets its definitions in this bill right then you will increase competition not just in grocery retail, but in all retail, due to these incredibly broad definitions being used to block others. 

“You might even see a return of more Mum and Dad retail.”

I do not believe that there is anyone in the entire country who has put more effort into making the case for ending the regulatory barriers to entry that prevent effective supermarket competition.

I also do not believe that the ComCom final report would have figured this out if I hadn't done the work. 

Richard Harman perhaps should consider retirement. 

Sequencing matters

Last year, I'd suggested that the government do a few things to help improve real competition in grocery retail.

In hindsight, the fault is mine. I should have made really really explicit that the ordering of these things matters. 

You have to do them in order. 

Well, maybe not all of them. 

Flip around the ordering on 1, 2, and 3 if you like. But 4 has to come last. 

1. Direct the Overseas Investment Office to approve any application that involves building a new supermarket. Be liberal about it. If it's a ground-floor grocer with a 40-story apartment building above it, that's still a-ok.
2. Make sure that existing covenants restricting properties against use in grocery retail are wiped if they're found to have anticompetitive effect.
3. Set very credible expectations that consenting will no longer block grocery retail. There are options for doing this. We'd liked the idea of an "and a supermarket" addendum to the Enabling Housing Supply legislation, so that building three houses of up to three stories, and / or a supermarket, on your property would be a by-right activity. Send the appropriate threats to Councils that Commissioners will be put in place if they block supermarkets, or that a UDA will be set on top of them whose specific purpose is consenting supermarkets - and that it will authorise every single last one, overriding any zoning constraints.
4. THEN phone up Aldi, Lidl, and a pile of others and announce that NZ is now actually open for business and would love their entry.

So what's happened since?

Best I'm aware, nobody's talked to the Overseas Investment Office.

The supermarkets are removing the covenants on their own, and there's legislation coming on top of that too.

Nothing's been done on consenting.

The Government has threatened that any large supermarket chain with a wholesaler may be forced to sell wholesale product at regulated prices to competitors. It has also threatened that it may yet force existing chains to divest stores.

And the government's asked Aldi if it wants to come in. 1 isn't done; 2's done, 3 hasn't been touched yet. 

If Aldi would still expect consenting to be uncertain and take years, there's no good reason for them to be interested. 

But it's worse than that. The Government has threatened that the wholesale side of integrated grocery chains could be forced to sell product to competitor chains at regulated prices. And that they're still considering forcing chains to sell off stores.

Kate MacNamara covers it.

Gary Mortimer, an expert in supermarket retailing and a professor at the Queensland University of Technology, said New Zealand is a "reasonable next port of call for Aldi" which likes to target markets which are underserved by competition.

Aldi is popular in Australia, where it has more than 570 stores and employs some 13,500 people. It claims to save families who switch to its supermarket $2400 a year.

However, Mortimer said the company is more likely to be put off than pleased by the changes the Government has announced for grocery wholesale.

"Aldi is likely to see complicated wholesaling rules as a barrier to entry," Mortimer said.

The company sources its apparel and general merchandising goods globally. And the majority of its products are purchased through contract manufacturing and sold under the company's own private labels.

"It won't be interested in purchasing wholesale from local New Zealand competitors," he said.

Moreover, Mortimer said Aldi may be wary of being ensnared by the requirement to wholesale to competitors, should it pursue a New Zealand expansion.

It's currently unclear which supermarkets will be subject to a regulated mandate to supply competitors, now or in the future.

It is far from crazy for Minister Clark to have a preliminary chat with the likes of Aldi along the lines of: "We think these are the big problems inhibiting entry, this is what we're doing about them, what do you think?"

Could find out about issues nobody here had considered.

But doing it while issuing threats around forced access into the wholesale side, and around long-term property rights, and while the consenting side hasn't really been touched?