Friday, 13 July 2018

Slippery Slopes

In these days of ideological warfare, the slippery slope argument can be particularly treacherous.

Slippery slopes can easily be ridiculed as a logical fallacy. Just because I'll happily flip you a few bucks for a coffee does not mean I'll invest all my savings in your mad scheme.

To avoid the fallacy, you need more than just the mere assertion of a slippery slope: some combo of facts & reasoning that makes a plausible case for the existence of a slippery slope.

For example, I personally find it hard to believe that the bigoted cake-baker who sent the lesbian couple elsewhere is at the top of a slippery slope, so I'm with Rachel Stewart on this one. I just don't see this country accepting a roll-back of hard-won gay rights, or why a single bigoted Christian baker might trigger that landslide. If there's a coherent explanation of why this is a risk, then let's hear it. And if I turn out to be wrong, I promise to do my best to staunch the flow of bigotry, as I've been doing on this particular topic since the early 80s.

Similarly, I struggle with the idea that any limits on free speech put us on a slippery slope to authoritarian dictatorship. My evidence is that we don't live in such a dictatorship and yet my own efforts at promoting weird notions have often been suppressed: advocating for economic regulation during the mania of the 90s was not a career-advancing move, and don't get me started on agriculture.

I'm sure many other people have examples of progressive views that just can't get coverage and/or are actively suppressed. This feels like a restriction of our right to freeze peaches, and sometimes/often it really is exactly that. But I can still write blogs and inflict my views on others via twitter, so I feel like we in NZ are a long way short of Orwell's 1984.

But the world does seem to be on a slippery slope towards fascism. We have a sordid history to remind us of how this process works. It reminds us that fascism creeps, but has clear signposts. These days, in many parts of the world, it is out of its kennel and barking. This is pretty obviously a slippery slope to fight against. Not just for fear it might be us next, but because everyone it comes for is an innocent victim of a violent ideology.

So it is particularly galling that influential New Zealanders are misusing slippery slope arguments in such a despicable way to agitate in favour of two foreign fascists. Maybe they're just really thick, or perhaps what Nassim Taleb describes as IYIs (intellectual yet idiot). Maybe their judgement is clouded by tribal resentment of their team losing power. Or maybe they are actually fascists.

Whatever, their motivation, they definitely are hypocrites, so I feel totally justified in calling them whining hypocritical toadies.

Friday, 22 June 2018

Beware of Economists - Dairy Edition

Andrea Fox's excellent report on Fonterra has flushed out some bold opinions, none more so than those of "independent economists" Cameron Bagrie and Peter Fraser.
Bagrie manages to miss the vertically integrated wood for the functionally distinct trees:
"There's a major issue between the economic incentives of the two parts of the business. One part is trying to maximise milk payments and the other is trying to maximise value-added. When one does well, the other tends to suffer."
Shared-up Fonterra suppliers really don't care about this "major issue" Cameron, because we have a natural hedge against the price risk you are highlighting. It's the main strength of the co-op model. You might want to talk to some of our large electricity generator/retailers about this - they understand the concept pretty well.
Fraser is more like a shotgun on full choke, spraying thoughtlets wildly around the place. Bagrie is wrong but at least he put up an argument. There's no trace of one in Fraser's comments, despite the boldness of a break-up proposal. 
I'm not dismissing the idea, by the way. Fonterra has been a serious disappointment, as my fellow shareholders well know. I just think the idea deserves some serious analysis before people start promulgating it.

Sunday, 29 April 2018

Incel Libertarians

Robin Hanson argues that if you're in favour of government's redistributing income you're pretty similar to incels = linked to the Toronto terrorist.

Hanson opens by dwelling on people who care about income inequality: what twats they are, and how they're always threatening violence. He then cites Toronto and speculates that
those with much less access to sex suffer to a similar degree as those with low income, and might similarly hope to gain from organizing around this identity, 
Its all about envy you see. Redistributists stoke up resentment and envy using implicit threats of violence, such as citing previous revolutions. Incels are similar in some ways: they also get aggrieved about who gets what and have incentives to organise to get a better deal. And now they've demanded government redistribution of girlfriends and turned violent.

The subtext seems to be that it's the same thinking - envious losers agitating for government redistribution. Yet they don't seem to be the same people: hmm.

Maybe the incels actually have as much in common with libertarians? I don't know, just an idea like Hanson's. There is a clear link though: property rights. In theory, property rights are sancrosanct. In practice, liberatarians are pretty keen on expanding their own property rights. As are the incels.

The targets of Thiel & the incels are different (taxpayers/women) as are the methods. But it's all about expanding property rights. 

Wednesday, 25 April 2018

Banking Conduct & Competition

In the same week that the NZ Initiative hopped into the Reserve Bank's regulatory governance model, news about dodgy conduct by banks in Australia prompted Adrian Orr, the new Governor of the RBNZ to assure New Zealanders that our banks are "infinitely" better behaved than their Australian parent companies. Pretty strong word, infinitely. Especially for someone whose phrasing nuances can move markets.

It certainly raised my antennae and I'm not the only one. Bloomberg used another quite strong word in reporting the Governor's view: hubris. Meanwhile, Shamubeel argued that the burden of proof should now lie with the banks to prove they're not dodgy. In the same article, all our Aussie-owned banks said they're very different animals to their parents, barely even the same species. Significantly, all but one cited our different regulatory regime.

Which raises a pretty interesting question: is our regulatory regime (combined with other relevant features of our market) a contributor to much better conduct or a cover that obscures much the same conduct? On the basis of this recent reporting, we simply can tell.

I'd have thought the Governor would have research to back up his claim, but neither he nor the banks have cited any such research, so at this point its fair to assume that there is none.

The importance of this issue hardly needs pointing out. Banks made $5.2bn in profits from New Zealand last year and the vast majority of that took a one-way trip across the Tasman. Meanwhile, research by MBIE(pdf) suggests that over the period 2000-2010 finance and insurance was the least competitive of 10 sectors, and within that sector banking was the only industry to become less competitive.

I think we need more transparency here. Maybe the song being sung in harmony by the regulator and the regulatees is the real truth, but we need assurance that it's not just a doctrinal hymn of praise to the market.

Wednesday, 18 April 2018

Guess who doesn't like the Commerce Commission

The NZ Initiative has a new report out on regulatory governance that argues for restructuring the Commerce Commission into a Board + CEO model. There is plenty to read and some nice infographics but when you really get down to it, there is one main justification: the businesses being constrained by the Commission don't like it.

Regulatory governance is an important issue, for sure. And the NZI report is certainly an improvement over the situation 10 years ago, when Telecom was denying that it wanted the Commission abolished after one of its lawyers raised this as a prospect. But I didn't find the report convincing for the following reasons.

First, there is an inherent contradiction in the idea that you should rely on the views of those constrained by a regulator when assessing its performance. For example, I doubt that a survey of prisoners would deliver glowing appraisals of the police, courts and corrections. Similarly, in an era when environmental regulation is increasing, I'd be wary of taking the word of farmers on the quality of local council regulation.

Second, I'd expect that regulators with a narrow focus on particular sectors and repeated interactions in those sectors to score better than those required to make decisions across many industries, many of which will have only infrequent contact with the regulator. So I'm not surprised to see (in Appendix 3) that the regulatory branches inside the Commerce Commission are rated a fair bit higher than its competition branch.

Third, the competition branch has recently knocked back some big mergers (Sky-Vodafone, and Fairfax-NZME), against the expectations of advisors to those firms who were also surveyed. These respondents would have struggled to separate their opinion on those particular decisions from their overall views on the competition branch.

Fourth, despite the NZI's clear advocacy of a board + CEO governance model, the survey data don't support this view. Of the 29 regulators ranked, only 5 of those in the best 15 have this model, whereas there are 6 with this model in the worst 14. Three of the worst 4 regulators have a board + CEO model. 

If this is the best case that can be made for the governance changes NZI wants then you can put me down as a defender of the status quo.

Tuesday, 17 April 2018

Regaining Trust

Surveys indicate that we are becoming generally less trusting of business, governments, NGOs and media. Meanwhile, several empirical studies show correlations between economic growth and the levels of generalised trust in a country.

This macro connection has many micro (sector-level) contributors, where it is indicated by the costs of zero-trust in a trading relationship. Take labour markets: if the boss doesn't trust the worker to be diligent, she incurs extra monitoring & measuring costs. The resulting systems signal to workers that they are not trusted, which tends to erode employee motivation: a vicious cycle.

Compare that to a more trusting give-and-take employment relationship, where clear directions are set and people are trusted to get on with the job. The psychological effect on workers is far more positive and most will respond with more effort, diligence and initiative.

This isn't the normal competitive market story though. The benefits of markets arise from people switching for price/quality related reasons, whereas trust relationships are built over time through mutual give-and-take. Here's how Nobel laureate Kenneth Arrow framed the resulting dilemma back in 1999:
...labour or supplier turnover in response to prices may destroy the willingness to offer trust or, more generally, to invest in the future of the relation. This leads to an important and long-standing question: does the market ... destroy social links that have positive implications for efficiency?
It is not proven that "the market" has caused the measured decline in trust but Arrow was certainly right to worry that lower trust is bad for the economy.

So how do we regain trust? There is no app, that's for sure. Maybe there are some latent exponential technologies, not yet conceived? I hope so.

More probably, we're going to need to fall back on the known methods for (re)building trust. In market settings those with the whip hand will need to take the initiative, for obvious reasons. These are relationship-specific problems, so the methods and results will vary across markets.

A few examples...

  • Fonterra just abandoned a practice of delaying payment to its minor suppliers introduced just two years ago. Though heading in the right direction, this is error correction. At the very best, it repays the trust overdraft, getting them all back to where they were 2 years ago.
  • Mass-market online trading platforms such as TradeMe know that having good systems for monitoring the reputation of their customers increases the number of trades, which is good for business.
  • Media fragmentation allows small groups to form, building inter-group trust. Which is great unless it's achieved at the expense of generalised trust in the wider community, as with anti-social media channels.
  • How's the trust relationship between EQC and the victims of the ChCh earthquakes? Or between environmentally-conscious vehicle buyers Volkswagen three years after the scam was uncovered?
Much of this is for firms to sort out by themselves, and effective competition will help do that, supported by sound anti-trust law, market design and regulation. But maybe we also need pro-trust policies? I'm going to wonder about this for a while and would appreciate any thoughts you might have.

Wednesday, 11 April 2018

Regional Dairy Regulation

The original 2001 version of the Dairy Industry Restructuring Act (DIRA) allowed Fonterra to form, subject to regulatory constraints including free entry & exit provisions. Anticipating that independent processors (IPs) would enter and attack the mega-co-op's share of farm-gate milk supply, DIRA included sunset provisions that would effectively dissolve the regulatory constraints once IPs captured 20% of milk supply in each island.

Last year, two reports cited Fonterra's market share of farm-gate milk at 84% nation-wide and it seems the 80% trigger has actually been breached in Te Wai Pounamu. In response, Minister Damien O'Connor has bought time by getting Parliament to repeal the sunset provisions, and launched an inquiry with potentially quite broad terms.

Regionally different rules should be an important consideration for the inquiry. In regions with plenty of competition the case for regulation is much weaker than in regions where Fonterra remains a monoposonist. This is true for farmers and processors.

  • Farmers in competitive regions have alternative supply options so it is fair to question whether they need still regulatory protection.
  • There may also be a case for using regulation to lean against the further addition of capacity in regions where excessive capacity is a looming threat, in favour of monopsony regions.

The two-island structure of the existing rules seems inadequate for today's market structures. For example, farm-gate milk collection remains a Fonterra monopsony in the top-of-the-south (Nelson-Marlborough) where we are located, even though Fonterra has lost more than 20% share in Te Wai Pounamu as a whole. I'm not sure how a proper geographic market definition analysis would pan out, but I am sure that one is needed. 

If there are regional markets, dairy regulation might need to change quite a bit in response. Here are some obvious questions to get us started.
  • Is there any need for the milk price manual in competitive regions? It was needed when Fonterra was so dominant that "market" pricing would have exposed farmers to hold-up risk, but competition pushes the milk price up so once Fonterra loses enough market share, maybe there should be no constraints on the farm-gate price.
  • How should the farm-gate milk price be set in other regions? Suppose Fonterra starts paying above the manual price to retain market share in competitive regions. Do we still need a milk price manual for other locations, or could those prices be pegged to the market-determined prices in competitive regions?
Obviously there are lots of other interesting questions facing the review, but since one of the objectives is to promote competition/contestability the geographic boundaries of markets are probably about to become important.