the analysis of industrial policy needs to focus less on the policy outcomes — which Rodrik argues are inherently unknowable ex ante — and more on getting the policy process right. In Rodrik’s words:

We need to worry about how we design a setting in which private and public actors come together to solve problems in the productive sphere, each side learning about the opportunities and constraints faced by the other, and not about whether the right tool for industrial policy is, say, directed credit or R&D subsidies or whether it is the steel industry that ought to be promoted or the software industry.

Rodrik’s central thesis is that industrial policy is a discovery process—one where firms and the government learn about underlying costs and opportunities and engage in strategic coordination. He is not ignorant of the risks of industry capture. On the contrary, he acknowledges that industrial policy is open to  corruption and rent-seeking. The natural response of (non-corrupt) bureaucrats is to insulate policymaking and implementation from private interests and to shield public officials from close interaction with business people. Rodrik’s argument is that this instinct to keep the private sector at arms-length is diametrically opposed to the need for bureaucrats to engage with business people in order to properly understand impediments to growth.

[From an MED paper released this week as part of the work of the financial markets taskforce. The Rodrik paper is supposed to be here (but it didn't work for me).]

I have long subscribed to the view that a solid grounding in the structure/practices/costs etc of an industry is essential for good policy decisions, so this rings very true. The difficult is that industry policy (whether inter- or intra-) generally has winners and losers. So the “come together” prescription is actually an invitation to a debate between opposing interests.

If policy makers could chair those debates effectively, which would include a clear separation between fact-finding and analysis, this could work very well. Thats a big if. But its worth a shot. And if you are an public official with the requisite bravery, I’d be happy to help.

Moral hazard might be an reason: some people go nuts if they’re not controlled properly. But wouldn’t  most of those people also be testing the boundaries of a competitive fault-based system? I don’t see that we lose much from the no-fault system.

Incidentally, no-fault does also seem to work in competitive insurance markets – much as bill-and-keep works between telcos.

From this starting point, the merits of opening some or all of ACC’s domain to competition depend (in part) on a value tradeoff between

• Economies of scale because of risk pooling effects (which is a pro-monopoly effect); and
• Quiet life effects on productive efficiency (pro-competition).

God (or ACC or Treasury) might know how large these effects are but as ignorant owners, what kind of goals should we set for a reform process?

I’d want to see if we could bank the scale benefits and then use market-like mechanisms (i.e. incentive contracts) to encourage productive efficiency. Done well, a layer of competing service providers might be able to deliver good value, as it does for rubbish collection and for credit card services.

I look forward to the details.

The state constrains our freedom in all sorts of ways (taxation, road rules, enforcement of property rights) for all sorts of reasons (redistribution, public safety, economic efficiency). These all look pretty paternalist to me: they are all rules designed to mould society in ways that some people want.

Are they really much different to the things that get called nanny state paternalism (eg tougher alcohol & smoking laws)? The motivations are roughly the same: trying to align behaviour with some peoples’ view of what is good for society. The mechanisms are similar: compulsion. I’m thinking that the big difference might be novelty: new rule proposals are nanny state paternalism because that brand might help to defeat them; old rules might also be nanny state paternalism but they’re in place now so its harder for opposition to be effective so lets not devalue the nanny state paternalist brand through over-use?

The nanny state paternalist brand gets slapped on proposals people don’t like, but it doesn’t mean much more than “I don’t like this”. That is fine as a generally rallying cry for anyone who opposes a constraining policy, but it doesn’t do anything to promote competition-on-the-merits between policy options.

And to the extent that the brand is useful in rallying opposition, it is potentially devalued by over-use. For example, while usage is normally restricted to proposals that constrain, that needn’t remain so. I could imagine Kyle Chapman describing our immigration laws as nanny state paternalism on the grounds that they permit refugees to enter NZ.

So much for branding, what about the democracy angle? This I find particularly interesting. Many legal constraints enjoy widespread support even though they are actually nanny state paternalism (ie they constrain us because some people at some time thought that was a good idea). So how do anti-paternalists regard democracy? For example, would it be OK to have tighter alcohol laws if most people wanted them?

This question is addressed in Eric Crampton’s quotes from the great James Buchanan (here), but Buchanan’s argument is at best partial. He points to the fact that normal voting processes don’t reflect the intensity of preferences: we just mark the Bill and Ben Party candidate on the ballot paper; there is no way to say that we like this party, say, 10 times more than any other. In theory, this means that a referendum question could get more than 50% of ‘yes’ votes even though total wellbeing would be reduced by ‘yes’ because those voting ‘no’ feel more strongly about ‘no’ than those voting ‘yes’ feel about ‘yes’.

While that is possible in theory, in practice we have no way of telling whether it happened in any particular case. But anyway, accepting it as a theoretical possibility, what are the implications? Buchanan argues that the domain of democracy needs to be restricted, to

prevent ordinary democratic majorities, in the electorates or in legislative assemblies, from entering too readily into the sumptuary areas of activities.

Presumably, hopefully, a constitutional move like this would require broad popular support, but even then we’d be in the slightly incongrous position of advocating that a popular vote be used to prohibit the use of popular votes. Isn’t it just more nanny state paternalism to ban the making of certain rules?

There are also boundary issues. One is the nanny state paternalist brand is readily attached to non-sumptuary stuff, like the anti-smacking law. But even in respect of food, something like the  proposal for mandatory country of origin labelling could fall on either side of a constitutional line.

In summary, I don’t like the nanny state paternalist brand because it looks like just an ad hominem argument in disguise and it seems to almost deny the legitimacy of democratic decision making.

My conclusion is that it could, if designed well.

My starting point is the idea that we all collectively invest in (i.e. pay) our government(s) and therefore we own/control our governments. TABOR is legislation would regulate the terms of this bargain between we kiwis as investor/owners of government, and our position as beneficiaries/victims of the system of government that results.

Viewed this way, the TABOR idea is similar to price-cap (CPI-X) regulation of natural monopolies, which also involves a bargain between investors and the general public, so lets start there. We can then use the logic of regulated private investment to get an idea of what we should and should not accept from regulated government.

Price (or sometimes revenue) caps are calculated so that the regulated firm has just enough cash to (a) cover essential operating costs and (b) earn a reasonable but not excessive return on capital. Prices are allowed to trend at the rate of CPI inflation minus some efficiency factor X to account for reasonble differences in (unavoidable) cost changes between the regulated firm and the broader economy.

If the regulated firm can be more efficient (i.e. cut costs), it may continue to charge at the price cap and retain the benefit of any cost reductions. So it has an incentive to keep costs down. Then, every five years or so, the model is reset based on current information. The regulator considers and may mandate a one-time price adjustment (which could be down) and a new X factor, and the whole thing kicks off again for another 5 years.

Its an imperfect system for sure, but it has the great benefit of getting efficiency and discipline into what could otherwise be a recipe for rampant profiteering (which has happened) or outrageous waste (which can also happen).

In this utility regulation context we can think of the regulator as procuring services on behalf of the population. It is obviously in our interests for it to be done efficiently. And since the same applies to local government, maybe similar ideas could work.

After all, government is a natural monopoly. Democracy is the process of competition for the right to  govern, but 2 governments at once is a recipe for civil war, which is not an efficient way to compete for power!

Although they are both natural monopolies, there are big differences between a government and a powerlines company. And those differences are very relevant to how you regulate them.

The most obvious ones that matter are service definition and service quality. Unless you can define what is to be provided, and in what quality, it makes no sense at all to regulate prices or revenues. Firms will just redefine/degrade the service to maintain profits without charging high prices.

So if you cap local government rates, you might just get really crappy service. Some would say we already have that, but it could be worse and we need to make sure it isn’t.

Also, investors expect to get their money back. One aspect of the Colorado experiment that would not be tolerated by private investors is the ratchet effect referred to in Wikipedia, whereby if revenues fall due to recession they stay down. I can’t see any reason to have a ratchet.

Another issue relevant to local govt in NZ is that central govt keeps passing it obligations that are costly to manage. There would need to be an allowance built into any TABOR to allow (efficient) costs of this type to be passed on to ratepayers.

Still, if these issues were managed well, the concept could work. It will be interesting to see what (if anything) emerges.

The Commerce Commission has settled everything in its prosecution of Visa and MasterCard and all the banks in their capacity as members of those networks. It (the Commission) incurred costs of $6.6m over the three years it spent preparing for the trial which has now been aborted. Multiply that by about 8 to take account of all the defendants and you have a bill of about $50m.

And on the benefit side? Well there are 3 main points. First, interchange is still set centrally (which was the basic competition complaint – the thing that made this look like a cartel) but now by offshore profit-seeking networks (Visa and MC have both demutualised in recent years), rather than by local committees with good information on competition and market conditions in NZ. These cental interchange fees are unlikely to fall and may well rise over time IMHO. So no gain there.

Second, banks can negotiate bilaterally and the Commission has extracted “committments” from the banks that involve

significantly reducing the average interchange fees charged on New Zealand credit card transactions, ensuring that these fees in New Zealand are driven downwards from the rates that were centrally set by the Visa and MasterCard schemes

These sound very much like behavioural undertakings, so I wonder if this is a precedent to the use of such undertakings in other areas, such as merger clearance applications. In any case, logic suggests that if there is a maximum price that card issuers can charge for interchange, they will do that. Will be very interesting to see if there are deviations. Personally I’m sceptical of any real gains from this.

Third, merchants are allowed to “surcharge” meaning they increase the price when you present a credit card. Again, I don’t see much change. Those who can already do (eg taxis) and I’d expect retailers to be quite careful about where and when they surcharge, for fear of annoying their customers or driving into the arms of rivals who do not surcharge.

So overall, this case has been a disaster: huge expense for very modest gains at best.

The case pits the Commerce Commission, joined in this instance by a group of retailers, up against most of those involved in supplying credit card services in NZ (e.g. the banks), but with the notable exception of Visa and MasterCard (who have settled) and American Express (who was not sued in the first place, for interesting, and IMHO relevant reasons).

The charges are being brought under the competition provisions of the Commerce Act (s30 and s27 in particular). They allege cartel-like conduct, particularly in relation to “interchange”. Interchange is the source of the benefits delivered to credit cardholders, such as free credit for a month, frequent flyer points etc.

This litigation was started almost 3 years ago and has cost many tens of millions of dollars so far. I anticipate having plenty to say once the case is over, but until then, mum will probably be the word.

Since 1924, when a motorcyclist was unfairly tried in England, the principle of open justice has been recognised in the idea that justice should not only be done, but also be seen to be done. It implies avoiding even the perception of some kind of conflict or corruption.

Everyone makes mistakes, and a somewhat random sample end up in court as a result. That sample of course includes some of those who run the legal system. Even judges make mistakes. In fact Lord Hewart, the original 1924 source of the principle of open justice was a prime (and ironic) example:

Hewart … has been called the worst Chief Justice since Scroggs and Jeffries in the seventeenth century. I do not think that this is quite fair. When one considers the enormous improvement in judicial standards between the seventeenth and twentieth centuries, I should say that, comparatively speaking, he was the worst Chief Justice ever. (Lord Devlin, via Spigelman J)

ouch! Anyway, the point is that when someone from the justice industry screws up, as we all do at times, that is the very time we need open justice. And what do we get instead?

Name suppression for an ex-MP accused of fraud. Not a good look, but less stunning than…

A secret decision in the Tuhoe Terrorist Trial Why? There was wall-to-wall media coverage of the raids. Shouldn’t we at least know why a whole decision is secret?

And if you’re minded consider such questions, you might also like two more great quotes from Spigelman

Publicity is the authentic hallmark of judicial as distinct from administrative procedure (Privy Council)

Publicity is the very soul of justice. It is the keenest spur to exertion and the surest of all guards against improbity. It keeps the judge, while trying, under trial (Jeremy Bentham)

The details of the refinements will be interesting I’m sure, but in the meantime, it reminds me of a news item I gleaned during the mobile termination bunfight in Wellington this week.

As I understand it, the Germans have recently allowed for cartel victims to sue for damages. Fair enough you probably think, but one consequence is that it undermines the leniency programme. The state won’t prosecute the whistleblower, but the victims can.  It seems to me that they could easily have extended immunity for whistleblowers to the private action legislation. Must investigate further.

I don’t know whether the Russell McVeagh guys Stephen quotes are connected with other NZBORA arguments being advanced by Business NZ (which I discussed below). But it is worth noting that changes to the NZBORA are extremely far-reaching, so lets all pay attention.

On Stephen’s more specific topic of regulating financial advisors, my view is that the massive asymmetries of information/knowledge in this market mean that some regulation is likely to be warranted. Any regulation will inevitably constrain the rights of some people. No regulation would be a disaster for everyone including the supply side. And while legislation should not assume everyone is an idiot, recent NZ financial history suggests there is scope for improvement.

The trick is to find a balance, which is also why potential changes to the NZBORA should be of wider public interest.