Interchange fees

A few years ago, MBIE ran an inquiry into credit card interchange fees.

Most of the analysis seemed predicated on an assumption that retailers could neither impose surcharges for card transactions nor avoid accepting cards.

So I started taking pictures of EFTPOS terminals with tape over the credit card button or with obvious signs noting credit card surcharges to accompany my submission on it. The MBIE paper seemed to take "Well, anything's possible in two-sided markets so we should regulate" approach. 

Now it's ComCom that's proposing to regulate credit card interchange fees. 

But they did commission a couple papers. 

And this seems a key bit:

Moreover, it is theoretically argued that if the no-surcharge rule is lifted, interchange fee regulation is harmful for total welfare. Regulatory attention should in this case shift to merchants, rather than focusing on card networks. If surcharging is to be allowed, the optimal cap is equal to the merchant fee minus the merchant’s convenience benefit from card payments. In other words, the merchant should not surcharge more than his own incurred “transaction” cost of a card payment. This result is perfectly in line with the proposed “merchant indifference test” or “tourist test” to optimally cap merchants fees keeping the merchant indifferent between a cash payment vis-à-vis a card payment. Yet, recent cost-based surcharge regulations seem too lenient, as they allow surcharges up to the merchant fee – or even higher (Gomes and Tirole, 2018).

And remember that NZ retailers can set surcharges if they want. All of us see them all the time. Maybe John Small doesn't. 

It then goes on to note evidence from other countries about smallish proportions of transactions attracting surcharges.

But think about it for a minute. 

High volume retailers have some power in those relationships. You might expect that surcharges imposed on transactions at the grocery stores would be lower than the surcharges in other places. And it wouldn't just be about the supermarkets being big enough to have some heft. It would also be about the cost of providing the ancillary services that credit cards provide. You're going to be a lot less likely to see chargebacks for undelivered or unsatisfactory goods on a weekly grocery shop than you might for a mail order shipment that's gone wrong or, say, payment for your kid's trip out to space camp. Credit cards provide insurance; EFTPOS doesn't. That insurance is valuable, but more valuable in some cases than others. Those differences matter and I'd expect affect the charging structure that the card companies set. Nobody's doing a credit card chargeback if there's a broken egg in the darned carton when you get home. 

Another key bit, if you remember that NZ retailers very regularly set surcharges for credit cards.

Moreover, many payment networks have frequently imposed restrictive – and potentially “regressive” rules – on the merchant side, such as no-surcharge rules or honor-all-cards rules.31 Effectively, this implies that payment cards that are more expensive for merchants to accept, such as credit cards, will be cross-subsidized by cheaper means of payments such as debit and cash. As high-income consumers are the ones most likely to hold and use cards with higher reward schemes that are more expensive for merchants to accept, the cross-subsidies between the payment methods are regressive transfers from low-income consumers to high-income consumers (Felt et al., 2021; Wang, 2023).

I remember MBIE relying on this kind of argument in making its case, seemingly unaware that NZ retailers can and do set those surcharges. Hence my photography while out grabbing lunch. 

If ComCom tightly restricts credit card fees, expect a whole pile of services currently bundled with card transactions to disappear.  

It's annoying when there's a world of real problems that need to be dealt with and agencies like ComCom go off on these kinds of tilts. 

Fun antitrust application

David Harvey reports that AI scraping could wind up being part of the revised NZ Fair Digital News Bargaining Bill. 

Having defined what an AI system and an AI service is the Bill goes on goes on to link an AI system to news content for the purpose of training the AI system.

The focus is upon the way in which news content may be used to train a digital platform or AI system.

The first element is that an AI system must be trained using news content. This links to the definition of news content in the Bill. The training must generate outputs which happens if the AI system enables or facilitates the generation of outputs.

He continues through with technical elements on whether the definitions work and whatnot.

The better underlying question seemed to be why anyone thinks there's a problem here to be solved.

It's simple for a website to restrict against scraping. It would similarly be simple for a news site to licence its content for AI training, if anyone wanted to pay them enough to allow it. There is no obvious reason government needs to be involved in any of this. 

But there's a fun potential antitrust angle, and then conflicting priorities. It looks like Google has licensed Reddit content for AI training, and that part of the deal might mean that Google is now the only search engine that works on Reddit.

Reddit wouldn't have set an exclusivity deal unless the exclusivity deal gave it more money than licensing its content to multiple agents. 

Government-types have claimed to be deeply worried about news sites not being able to adequately monetise content, with consequences then for the public good aspects of journalism. And they've tried to punt the bill over to tech platforms rather than just fund a public good out of public funds.

Here we have a news content site that has made a voluntary deal with a platform for content access for AI scraping - the very thing that NZ's Parliament seems to want to legislate to force - and folks are worried that the exclusivity arrangements that mean more money for the news sites also give the platform too much power. 

Today in Antitrust: when we force (or even allow!) AI companies to sign deals w/ content producers for old content or API access, there is obvious way to "raise rivals' costs" and lock in market power, dynamically making things worse for content producers. https://t.co/5wvRIoE0mU

— Kevin A. Bryan (@Afinetheorem) July 24, 2024

I'm not saying there aren't potential competition issues here. But there are trade-offs. Ban exclusivity arrangements and you'll reduce the amount of money going to news content providers, and then you'll have other parts of government looking for convoluted ways to force additional payments. 

Afternoon roundup

The closing of the browser tabs:

• The Commerce Commission blocks NZ DJ software company Serato from selling out to Japanese DJ product company AlphaTheta. One lesson: don't do tech startups in NZ if your exist strategy is selling out to a larger company.


• New Zealand's bureaucrats have apparently been considering a harmonised set of plain packaging rules on infant formula with Australia, which would force an important part of dairy processing overseas. Hopefully the government stops this one while issuing a pretty hard "please explain" to the officials involved. 


• Aaron Smale's reporting on the Inquiry into Abuse in Care has been superb throughout, and is great again this morning at Newsroom. He asks the right questions about state accountability. I expect that those who helped cover up the state's abuses are more likely to earn knighthoods than to face charges. 


• Gas shortages have Huntly importing more coal. 


• The Department of Conservation has more opportunity than any other part of govt I can think of to realistically improve its own finances through user charges and concession auction. Newsroom reports this morning that they're facing "huge financial pressure". There is an obvious solution here.

Right to Repair

The Green Party has a Member's Bill up arguing for a consumer right of repair; Auckland University's Alex Sims has written a few columns in support of such a thing. 

I'd had an email asking about that legislation; figured I'd share my response here - tidied up a bit.

If it’s more expensive to produce a product that can be easily disassembled for repair, there will be trade-offs. Consumers could choose an offering with lower up-front costs, but hard to repair, or one with higher up-front costs, but easier to repair. There’s no reason for legislation to privilege one choice over another. 

If one car company makes vehicles that can only really be repaired by dealers, and another uses a more open standard, the latter could easily advertise that ease of repairability. I remember back on our farm we had a very strong preference for tractors made by Versatile, because field-repair was dead simple and you didn’t have to wait for a couple days for some tech to come out with a diagnostic kit in the middle of harvest. Folks who could afford fleets of John Deere tractors to cover twenty square miles of fields could have a couple in reserve; we couldn’t on 1000 acres. Trade-offs and consumer choice. The John Deere machines were great for folks in situations different from ours.

But even leaving that aside, New Zealand has to be a regulation-taker in this space. We import all this stuff. A bespoke rule could require separate production lines for products destined for the NZ market. That has to increase costs while sharply limiting the range of products here available. And if Europe or some other crazy kind of place sets rules requiring more repairable versions, nothing stops anyone from bringing the Euro-standard products into New Zealand. 

Also important to remember that avoiding putting things in landfill can itself be wasteful. Landfills charge people for dumping things. Important to make sure that user charges there are set to fully cover the cost of disposing of stuff in landfill. If the landfill charges are set properly, and it's cheaper to buy something new and dispose of the old one than it is to repair the old one, repairing the thing would be wasteful. It would take more real resources to effect the repair. 

And if there are competition issues around vertical integration in repair, that’s for ComCom right?

I hope the legislation does not progress. It could easily see a sharp reduction in the range of products offered onto the NZ market.

The current Consumer Guarantees Act amounts to an information requirement on this stuff. 

If a manufacturer does not undertake to provide parts or repair services, they inform the consumer. That's the exception provided at Section 42 and signaled in Section 12. It arguably increases consumer information and enables better-informed choices. I'd still argue that manufacturers of easily-repaired goods already have plenty of incentive to advertise that fact to customers, but it's harder to see that the Act does harm where that exception is provided.

Deleting that exception while extending the requirements placed on manufacturers willing to sell into the NZ market really wouldn't be good. 

Shakedown finances

There are a lot of problems with the Paul Goldsmith / Willie Jackson media bargaining bill. 

I hit on some of those over in the Stuff papers this week.

A snippet:

If the bill goes ahead with only that change, some things are predictable.

Meta will exit news in New Zealand, as it is set to do in Australia. Australia’s government has been mulling over whether it ought to compel Meta to continue providing news in Australia – which is a bit odd. This all started from a notion that Meta was stealing news. One normally doesn’t encourage thieves to keep at it because of the benefits of the fines assessed against them.

When Meta leaves, outlets where Meta provides a lot of free distribution and links will take a substantial hit. They will appear at the minister’s door asking why he has done this to them. They will be right to do so. He will have to come up with an answer despite the fiscal situation and explain to his Cabinet colleagues why he needs to boost media subsidies.

Moreover, New Zealand’s reputation among tech investors will decline. What should they think about places that shake down the tech sector to subsidise other industries?

There is a completely defensible case for public support for journalism. This bill fails to help and causes substantial additional problems.

I wish Minister Goldsmith luck.

The more I think about it though, the more the tax policy aspect of it really bothers me.

NZ has had a decent tax policy process overall. Some bits are incoherent - depreciation settings on commercial buildings and interest deductibility for rental property businesses seem to flip on political whims rather than on any sound basis. But overall, the generic tax policy process is good.

What Minister Goldsmith and National are setting up here is an end-run both around the generic tax policy process and the vote allocation process. 

The legislation that Minister Goldsmith wishes to progress would set the Minister as decider on whether to designate a platform for compulsory bargaining. A Minister could tell Meta/Google/Twitter/Microsoft that if they give some specified amounts to whichever media companies, that would be enough to avoid designation. 

Whatever the resulting de facto tax is, it will not have gone through any kind of IRD tax policy process. Nobody will have checked whether it makes sense, how it interacts with other taxes, what it does to BBLR norms. It won't have to be voted on by Parliament, except in the legislation enabling the Minister to act as extortionist. 

Normal drill in spending measures is that different Ministries put budget bids up to cabinet. Those bids fight against each other for scarce public funding. There's an implicit evaluation of all of them against each other - ideally via cost-benefit assessment, but often also against political considerations. 

None of the money handed over to media companies through Goldsmith's extortion bill will go through that process. Nothing will adjudicate whether the money is appropriately allocated across media outlets/objectives, or whether spending in that area is more important than in other areas that normal vote bids have to compete with.

It is an end-run against both IRD and against the normal vote allocation process. We wind up with tin pot funds for different things, contributed to 'voluntarily' by sectors heavied to make the contributions. 

It is terrible precedent. 

If Government learns that it can avoid all manner of fiscal and procedural constraints by heavying a disfavoured industry to fund a favoured sector through regulatory impost or through promise of regulatory forbearance if the heavied sector does 'enough' to pay off the favoured sector, do not expect it to stop with tech platforms and news media.

Other applications are obvious.

The Grocery Regulator could be instructed to go hard against supermarkets in areas that are of little public benefit but massive cost to the sector, unless the grocers 'voluntarily' agree to do enough to supply food banks free of charge. Who could object? Anyone who does would be painted as either being in the pockets of Big Supermarkets, or as hating the poor, or both - good policy be damned. 

It isn't hard to come up with more of these. 

It's a terrible path. 

I hope Paul Goldsmith comes to his senses. 

Food waste

There are some areas where it's hard to get a solution without government intervention. Carbon prices, for example. Not saying it's impossible, it's just hard.

There are also plenty of areas where policy is probably wrong and could use advice from a Chief Science Advisor. For example, setting an air quality standard for schools that balances cost of cleaner air against benefits from fewer teachers and kids out sick. Seems important. Naomi Wu's put up interesting stuff on far-UV light. Does the science stack up? What would it cost to put those in schools, if government ordered at scale for every school in the country? Would doing so bend the cost curve and set an example for others to follow?

Little things like that. Might matter. There have been a lot of illness-related school absences, and the government has claimed to be keen on reducing school absences.

The Prime Minister's Chief Science Advisor just put out a report on the critical issue of... food waste.

Normally you want to start with whether there's a potential policy problem. 

But every part of the system has strong incentive to avoid food waste.

A cabbage that doesn't make it onto the truck to get to market is money that the farmer doesn't get. Farmers like having money. They will invest in getting food to market up to the point at which getting the next cabbage onto the truck costs more than it's worth. Reducing spoilage isn't free. Farmers have to balance things. They are best placed to do so on their end. Who could know better than they do?

Transport companies that can't get their act together to deliver food in good condition wind up losing customers to those who can. That also means money. Transport companies prefer having money to not having money. They will invest in reducing spoilage up to the point at which the expected costs of doing so are greater than the benefits. Reducing spoilage isn't free. Shipping companies have to balance things. They are best placed to do so for their part of the production chain. Who could know better than they do?

Grocers that throw out a lot of spoiled food are throwing away money. They paid for the goods, and get no revenue from the ones they throw out. Grocers like having money. Didn't we just have an inquiry into whether grocers like having money too much? Spoiled food is wasted money. Grocers will invest in reducing spoilage up to the point at which the next dollar invested in it saves less than a dollar's worth of food. Reducing spoilage isn't free. Grocers have to balance things. They are best placed to do so for their part of the production chain. Who could know better than they do?

Households that throw away spoiled food are throwing away money. They paid for the food, and don't get to eat it. Households like having edible food and like having money. Don't we regularly hear news stories about people not being able to afford enough food? Spoiled food is wasted money. Households will invest in reducing spoilage and avoiding waste up to the point at which the next dollar's worth of effort in doing so saves less than a dollar's worth of food, as the household values things. Reducing spoilage and waste isn't free. Households have to balance things. They are best placed to do so for their part of the production chain. Who could know better than they do?

Spoiled food winds up in a few places. If it's in a household's compost bin, it can result in GHG emissions that aren't priced. But government seems to like composting. If it goes down the waste disposal, it winds up in the city's sludge plant along with human waste. I'm pretty sure those plants are in the ETS. If it goes into the trash can, it winds up at landfill. Landfills pay for their emissions, and have every incentive to reduce those emissions. Some capture and use the captured methane. If it winds up being fed to pets or to livestock, it displaces other feed and needn't be worried about.

And then we get the press release on the PMCSA's report from NZ Food Waste Champions. Where do you even start? 

They want a national food waste strategy with Targets! and Structures! and Systems! and Mechanisms!. 

The recommendations delivered to the Government include the need for a national food loss and waste strategic action plan, a reduction target, and structures and systems to empower stakeholders to act on them; mechanisms for ensuring more New Zealand-specific reliable and comprehensive food waste data; better strategies aimed at preventing food loss at  source; and enabling conditions that promote food rescue and upcycling to ensure edible food is never treated as waste.

The report gives a bullet-point list of first steps in preventing food losses in production. One of them was "exploring the potential of cooperative business models to improve farmers' market power." 

It is ...not obvious... why a coop would be preferable or how market power enters into any of this. The report seems to worry that buyers with market power can insist on high standards for delivered food, resulting in diversion of 'nutritious food' (ie potentially unpalatable to their customers, but still edible, and could be on-sold to Wonky Box) away from tables. There seems little consideration of that high standards by grocers might encourage producer practices that avoid bruised fruit that has a shorter shelf-life. 

There was one sensible bit in the press release.  

Dawson cites food packaging decisions as an example. “Moving to more sustainable packaging solutions is important, but what if that packaging means the food inside has a shorter shelf-life, which leads to higher levels of waste with greater levels of emissions?”

If grocers have chosen those options because consumers want them, they've made the balancing. If consumers want dumb-forms of packaging because they falsely believe those versions are somehow better for the environment, then maybe government could decide to run fewer anti-plastics campaigns. If grocers have chosen those options either because compelled by regulation or under threat of regulation if they do not, or because of misguided government-sponsored messaging around sustainability, then government has skewed the balance and done harm. Regulation doesn't do the comprehensive balancing that grocers would otherwise do. 

Similarly, the report recommends evaluating the Grocery Supply Code on "trade term driven food loss and waste." If the regulator sets supply terms that aren't what willing parties would contract to on their own, there's again the risk that government has skewed the balance and done harm. Regulation doesn't do the comprehensive balancing that grocers and suppliers discover through negotiation. 

Highlighting how regulatory mandates can inadvertently create waste is great. It's the kind of thing a new Ministry for Regulation could be doing. 

Another potential area for investigation - not sure whether it's in the report, though - would be the darned restrictions against building things on Precious Agricultural Land. Where those things can include restrictions against putting processing facilities on that land, they wind up requiring that food be trucked farther away before processing, which increases damage and waste. It's one of the things that National promised to look into; the restrictions on use of agricultural land are entirely a government-caused problem.  

The rest seems madness.

They apparently wrote four reports on this stuff. In this government budget situation. And with rather more important areas where scientific advice could improve government policy where there is an actual policy problem. With 500 "experts and stakeholders across the motu" having had to spend time on it. 

It all does make one wonder about waste-reduction.

Sheltered workshops and wage top-ups

It's hard to tell what the actual state of play is, but pretty easy to tell what it should be.

People with severe disabilities will often have great difficulty obtaining employment. In cases of intellectual disability, the point of employment is far less about what gets produced and far more about social connection and a feeling of worth for those engaged in activities. 

If you apply the minimum wage rigidly in those cases, people will instead be unemployed unless philanthropists are willing to fund sheltered workshops or equivalent roles. 

If you allow sub-minimum wages, a lot of people who otherwise would be unemployable will have some chance of finding meaningful activities. 

If people are employed at sub-minimum wages, activists will decide that it's awful and unfair and insist that the minimum wage be applied rigidly, and damn companies as selfish if they do not pay $23.15/hr for work that might produce $2/hr of value. It's inevitable.  They cannot see the next step, or don't care because it gives them a chance to rail against the evils of capitalism when that employment ends. 

Labour had proposed a reasonable solution to that mess: top-up wages. Budget 2023 had had them coming into effect from mid-2025, but I do not know whether or for how long that had actually been funded.

Ending the Minimum Wage Exemption

The Government will end the discriminatory Minimum Wage Exemption (MWE), which allows disabled people to be paid less than the minimum wage, by mid-2025.

“This unfair exemption currently affects about 800 disabled people who are legally able to be paid less on the basis they’re perceived to be less productive,” Priyanca Radhakrishnan said.

“Some disabled people in New Zealand are paid under the minimum wage and that needs to end. We will start this work immediately.

“This Government made a manifesto commitment to replace MWE permits with a wage supplement, ensuring all disabled people receive at least minimum wage.

“Under the Wage Supplement, approximately 800 disabled people will have their wages increased to minimum wage. This will support some disabled people to shift off the benefit into paid employment and decrease their reliance on the welfare system,” Priyanca Radhakrishnan said.

The rhetoric here is a bit nuts; it's playing to their activists around fairness. But the underlying policy would recognise that people with severe disabilities would not find employment if the employer had to pay the minimum wage, and had government wage top-ups making up the difference. 

If the state were not topping up wages, it would be providing other benefits instead. So the government isn't out the full amount of the wage top-up. It's out the difference between the wage top-up and the cost of whatever other supported living payments would otherwise have been provided if there were no wage income. I would expect that the EMTR on the wage top up will be pretty high, given the other income-linked benefits that would claw back.  

If the state wants the wages of severely disabled people to be high enough to support their living costs, doing it through wage top-ups makes a lot of sense. It keeps people in work and puts the burden of support broadly on the tax base, rather than expecting the employer to bear the burden itself. 

The Herald reports that the government is not going to go ahead with the top-up payments, with cost savings to the government reported at around $11m per year - or just under $13,000 if there are 900 affected workers. I expect, but don't know, that that is net of any increase in supported living payments and the like. 

Most important is not abolishing the minimum wage exemptions for people would could never find meaningful employment from willing employers at the minimum wage, and it doesn't look like the government is abolishing that. They're also maintaining support to help employers accommodate disabled workers. 

Supplemental assistance through supported living payments would have these workers no worse off than disabled people who are unable to work. There aren't good choices here, only trade-offs. 

What Labour had proposed was good, but did mean that someone who is completely unable to work would wind up with less money than someone whose work is really more of a social activity than productive. And you might not like that. 

National's version has support instead through supported living payments, which means some so-supported workers don't get to enjoy that support through a paycheque, and total support will be at a lower level than what Labour had promised (but had not yet put in place). And you might not like that. 

What I worry more about is whether the proposed version will prove politically stable. Most important in a lot of these cases is going to be the fulfilment of being able to go to work, not the paycheque itself. I hope that the next turn of the electoral cycle would have a Labour-led government reinstate top-ups, rather than ban employers from paying sub-minimum wages. 

Previously: Karl du Fresne's excellent piece on sheltered workshops.