Source: New Zealand Government
Introduction
Normally I’d start these things off by thanking you all for having me, thanking the conference organisers, and saying how nice it is to be in Australia, with our ANZAC Partners.
I am pleased you invited me, and I always enjoy meeting Australians, one way or another. However, when I saw the conference title “Regulation 2025 to 2050: Disruption, Change, and Continuity,” my heart sank.
It’s one of those phrases that could be used to describe almost any point in time. To show you what I mean, I thought of some other uses:
The Steam Age 1770-1914: Disruption, Change and Continuity
Europe: 1939-1945: Disruption, Change and Continuity
Or, a more local example. Australian Cricket 2018: Sandpaper, Spin, and Turn
Just checking you’re listening.
Besides being far too versatile, the title screams that the status quo carries on, whatever it is. There’s no sense of urgency . No question of whether our underlying assumptions are correct. Whatever happens, we end up back at continuity.
I’d like to challenge that, because dare I say, I bring a different perspective. I am not a professional regulator, I’m not an unelected public official.
I’m a representative of my neighbours, who trust me with their vote, and ask me to speak on their behalf. They conduct rigorous and public performance reviews every three years, and there’s no tribunal hearing if I don’t like the outcome.
My basic thesis is this. The past three decades have seen an explosion of regulatory activity, both on the compliance side and the administrative side.
This growth in activity has had three effects, each one more pernicious than the last.
Number one, it consumes significant real resources, both in direct costs and in delays.
Number two, it leads to a deadweight loss when otherwise viable projects are forgone due to regulatory costs.
Number three, over time it changes our culture, because children grow up with fewer heroes who took initiative and succeeded.
These costs have not been justified by any improvement in people’s outcomes. Not even close. Instead, the explanation for the regulatory explosion lies in public choice economics.
Let me lay this out.
The regulatory explosion
I was talking to one of the people I represent this morning. This person has a land development company. They’ve been building Kiwi suburbs for three generations. I spoke to them this morning to get a story straight they told me a few years ago.
Unfortunately, I’d remembered it correctly. Their developments are often coastal. They take land and create beautiful subdivisions where people are extremely happy to live.
One of their first coastal developments, 35 years ago, took a matter of months to consent. It involved eight different resource consents, perhaps understandable considering all the modification of a coastal environment to create canals and so on. There were less than a handful of expert consultants involved. Perhaps a civil engineer, a surveyor, and one or two others.
That development stands today as one of the more desirable addresses in New Zealand. Nobody, so far as I’m aware, believes that it is an environmental problem. In fact, some of New Zealand’s wealthiest people pay a fortune to live in this modified environment.
The Business has carried on replicating the success, but the regulatory costs have exploded. They tell me they now need 37 different resource consents to do exactly the same thing. Physically, it is identical to the development of the early 1990s. At last count, they needed 26 different paid experts to interface with the regulator.
These are the direct costs and delays. The fees are astronomical. Consenting is now measured in years instead of months. Altogether massive costs have been added. And yet, nobody can point to a better outcome for all these resources being diverted.
The second effect is that people stop doing things. My constituent tells me that they now turn down projects that would have proceeded in happier and simpler regulatory environments.
The third effect is that a three generation business may not a have a fourth, if we don’t get our act together. It would be such a shame to lose that accumulated knowledge because regulatory costs make development more expensive than homebuyers can afford to pay.
I’m proud to say our Government is doing serious, first-principles reform of resource management. New underlying legislation will be in place before the 2026 election. I think there will be a fourth generation and Kiwis will see a return to housing affordability over the medium term.
We are also reforming building regulations, starting from the premise of equivalency with overseas materials and techniques. It’s absurd that 67 territorial authorities have each been gatekeeping their own bespoke building product market. These changes I’m sure will go a long way to helping the next generation own a part of their country, and believe that country is worth their support.
Housing is perhaps the most important regulatory failure in New Zealand. Home ownership rates have plummeted and a generation that sees no future in a property owning democracy will militate against a democracy that hasn’t worked for them.
In New Zealand we now have sitting politicians openly questioning whether democracy is the best system. Ironically, they themselves are elected, but I didn’t say they were smart, just that they’re reflecting a sentiment too many young New Zealanders share.
I believe the broken pathway to home ownership is one of the biggest challenges that societies like Australia and New Zealand face, and at its heart it is a regulatory failure.
I could make similar arguments for everything from access to medicines, to financial services to operating a daycare. The consistent refrain is that people who went into a field to achieve a goal are frustrated with their regulatory environment.
“All I wanted to do is help children reach their potential,” they’ll say, “but all I actually do is fill out forms for the Ministry of Education.” “I went into this financial advice to protect the vulnerable from conmen, but it’s so hard to ask me for advice that they end up with the conmen anyway.” I could tell you stories from my neighbours who elected me all night.
My challenge is to ask yourself: For the pages of rules, the number of regulators, and the time spent in compliance activity, can you really say the outcomes you’re delivering are more cost effective than three decades ago?
The Productivity Paradox
I believe the regulatory explosion explains more than a generation disillusioned with the housing market. Housing production is not the only industry that’s been stifled.
In New Zealand we talk about the productivity paradox. New Zealand has done all the right things, and rarely rates outside the top five nations in a public policy league table. And yet we find ourselves on the wrong end of the productivity statistics. In the past decade we’ve had a moribund growth rate of 0.2 per cent.
How to explain this paradox? My theory comes from an Economics Professor I tutored under. I won’t name him because these academics exist in a suffocating left wing environment, and being quoted by me can leave them sitting all alone in the staffroom.
His basic point was that the era of neo-liberalism is known for deregulation, but shouldn’t be. Yes, you have more freedom to do things, but practically they are harder to do.
People are forced to spend more time on what he calls transactional activity; that is getting permission to do work, demonstrating work has been done, showing qualifications to do work, planning to do work, everything but actually doing work.
The converse is that people have less time to actually do work, less time for what he calls transformational activity. All of this is borne out well by the story from by subdivision building constituent, but it could be borne out in most industries just as easily.
Officially, New Zealand is one of the freest societies in history. You really can register a business in moments. We have thrown off the kind of 20th century petty bureaucracy and soft corruption that prevents people in developing countries even setting up shop. They have been replaced by new barriers to nearly everything you might seek to do after that, and we transform less because we’re too busy transacting.
The Public Choice Origins of the Explosion
Why has this happened? If you accept that the regulatory state grown faster than the value it delivers for the past three or four decades, what is the explanation?
I’ve pondered this and find the public choice explanation the most convincing. If you are not familiar with the public choice literature, it is worth it. Even if for no other reason that it will make politics less frustrating. Few people are truly evil or stupid, but politics creates weird incentives. Public choice is the application of micro-economics and game theory to political actors.
At its heart is a tragedy of the commons. If you vote badly, or don’t vote at all, you face no cost. I know you guys get fined for not voting, but that’s another story. You still wake up on Sunday morning with the same Government regardless of voting effort.
Being informed and rational about voting has an opportunity cost. You have to give up other opportunities to do it. If you’re familiar with Garet Hardin’s essay, The Tragedy of the Commons, you should be able to see the parallel.
Bad or poorly informed votes are a benefit to the person who casts them. The costs are spread across everyone else who needs to live under bad policy. It’s the same as a herdsman putting another cow on the commons to get a private benefit at public expense.
Nonetheless, there are a lot of people who do benefit from bad policies, such as excessive regulation. Sometimes, it’s regulated parties who calculate that regulation will cost them less than their competitors. Other times it’s interest groups who want some cause they believe in recognised. Other times its regulators who are eager to expand the scope and size of their practices. Still other times it’s the 26 ‘experts’ who get paid to interface with the regulators.
There is no shortage of organised interest groups wanting more regulation, and they have an unlikely advantage. As Mancur Olsen wrote in his Logic of Collective Action ‘there is a systematic tendency for ‘exploitation’ of the great by the small.’ Small groups find it easier to organise politically, and tend to do better at lobbying.
You might ask why regulations has seemingly grown in the past three or four decades when public choice has been true for a lot longer than that. I have some thoughts about that, which I won’t go into in the interests of time. If you don’t all drum me out of here for the content of this speech I might tell you at the bar.
A problem defined
If you agree that there is a problem with regulation, that it is large and systematic, and it is driven by phenomena best explained by public choice theory, then I have one more proposition to sell you: A problem defined is a problem half solved.
If the public have been left worse off because it’s difficult for them to monitor the quality of regulatory initiatives, then our goal should be to lower to cost to citizens of tat monitoring. That is, in a nutshell, what New Zealand’s Ministry for Regulation was set up to do.
The Regulatory Standards Bill, currently wending its way through Parliament, is especially designed to do that.
The Regulatory Standards Bill
The Bill has three parts. A declaration regime, a set of principles, and an enforcement regime.
The first part is a declaration regime. We have had Regulatory Impact Statements for a long time, and they have been ineffective for a long time. There is little incentive for Ministers or departments to demand more rigorous scrutiny of their own regulatory initiatives. Something about turkeys and Christmas comes to mind.
These will be largely replaced by Consistency Assessment Statements, which will be different because they will have a statutory basis. They will reflect a set of principles, which make up the second part of the law.
Respect for property rights, liberties, the rule of law, problem definition and cost-benefit analysis, among other principles, will be set in law by Parliament as mandatory considerations this year. The aim is to make the impacts of collective action on individual rights clearer and simpler for the wider public to understand.
That leaves the third part, which addresses the turkey-Christmas problem. A statutory Board appointed by the Governor General on the advice of Cabinet will evaluate the quality of Consistency Assessment Statements. The Regulatory Standards Board will issue declarations if they a Consistency Assessment Statement is inadequate. This offers the public a further facility for evaluating the regulatory costs they’re proposed to carry.
The Ministry of Regulation hosts the Regulatory Standards Board. It will also support the preparation of Consistency Assessment Statements. However, it has some other purposes.
Sector Reviews
It is about to commence its fifth Sector Review, where it asks regulated Parties for their complaints and identifies rules to be modified or removed. We recently removed all regulation of hairdressers in New Zealand, after discovering people have been paying for follow rules with no benefit whatsoever for my entire lifetime.
We are changing the way that Early Childhood Education is regulated. In two years we will have changed most of the rules, legislated new graduated principles for regulating, and replaced the regulator with a different agency to achieve separation between policy and enforcement.
A similar overhaul is occurring in the field of Agricultural and Horticultural products regulation. New Zealand farmers have had to use outdated subset of the products their competitors can access. We are fixing that with greater use of foreign equivalency, and greater accountability for performance.
We never stop these sector reviews. We are in the middle of an overhaul of Telecommunications regulations. We have just begun consulting on harmonisation of New Zealand’s 36 different rules for product labelling that prevent Kiwis from accessing a wider choice of more affordable goods.
We also carry out frequent inquiries into tips the public send us through the Red Tape Tipline. We found that rules around Garden sheds and distance to boundary were stopping people make full use of their back yards. Urban intensification makes this regulation more costly every year. We got rid of the rule last month, and this month Pink Floyd guitarist was pinged for breaching a similar rule in England. He don’t need no regulation, and I bet he wishes he was here, where he could place his shed freely.
Conclusion
Our Government is confronting on the Regulatory Explosion head on. If we want our society to work, meaning we want the next generation to believe in it rather than militate against it, then we must succeed.
Our chosen method is sunlight, informed by Public Choice Theory. Our goal is to shift the political calculus away from regulating, unless it is rigorously demonstrated to be the only solution to a well-defined problem, with benefits exceeding its costs.
If we succeed in enabling greater public scrutiny of regulatory initiatives, this profession will need to ask itself whether the last four decades of regulatory growth has really delivered cost-effective benefits to the wider public, or simply rents for the regulatory state.
Thank you very much for listening, and I hope all 700 of you have a wonderful conference.
MIL OSI
