An impatient Regulation Ministry can’t fix under-performing markets

Opinion: At the risk of some thinking I have defected to the Act Party, I am writing about regulation and its importance to our wellbeing.

The Coalition Government is creating a Ministry of Regulation quite a lot bigger than the Productivity Commission which has been, ahem, “decommissioned” to accommodate it. I can’t say I am encouraged by the appointment of a bureaucrat to head the ministry.

If it is genuinely to review and restructure how we regulate economic activity it needs the skills of analysis, critical thought and activism. The risk is that it is simply being established to provide cover for deregulation and privatisation already decided by politicians.

About half a century ago I was a member of an Economic Development Commission. This was ostensibly fulfilling an election promise from Labour but was in practice repurposed into a review body on how regulations were holding back economic progress. This was consistent with the views of the chair, an ex-Treasury head who had overseen the work of a group within Treasury which had drafted the reform programme adopted by the Lange/Douglas Government in preference to their own election policy.

As it happened at that time there was a genuine need to review decades of regulatory policy and practice. This had largely been built off the programmes adopted for wartime and post war “economic stabilisation” as it was called, rather than any great socialist impulse. These had been further developed into a labyrinth of smothering and distorting regulation furthering a wide range of sectional private interests. These ran from trade, to investment, to licensing (including occupational) and further. This was what caused Lange to describe the economy as “being run like a Polish shipyard”.

What any serious economic analysis found was that the problem was not whether there should be regulation or no regulation. There were, as there are now, zealots who thought simply taking off regulations was enough and that an imaginary perfectly competitive market would solve it.

The problem was understanding properly what the actual markets that comprised the economy were, how those markets might best be designed and than what forms of regulation might best support such markets. To my mind that was, as it is now, essential but difficult and measured work. Unfortunately there was no real patience or resource support for that and zealotry and the interests of a new set of sectional interests pushed on their agenda with great haste and vigour.

This may be ringing some bells.

It is not helped now, as it was not then, by many who consider themselves on the left of politics who have become wedded to any regulation being better than no regulation and to anything public being better than anything private as an article of faith. Like many other faiths, this one seems to be able to survive actual experience for extended periods even while its practice fades.

In today’s world if one takes off blinkers it is clearly apparent that some regulations are promoting inefficiency and inequity, and protecting sectional vested interests at the expense of others. The practical actions of many state bodies do the same.

Markets are social constructs. In a modern society they are not “natural” but the product of what we design them to be. Sometimes by omission, sometimes by deliberate action.

It is often not so much what the state controls but who controls the state and in whose interests they do so.

So much of our economy, so many of our markets, rely on the actions and therefore on the incentives and directions for private actors, that this needs close attention by those aiming at a better society based on social equity. Government bureaucracies funding activity or even acting directly, are often supporting inequity and inefficiency without a sound understanding of the markets involved. That work is seldom thought about, let alone done.

I have not yet had the call from David Seymour. But when I do my advice to him will be to see his new ministry not as an attack force knocking over obstacles in the way of some private actors’ profitability. Its kaupapa should not be some simplistic “regulation bad – get rid of or minimise it”.

What it should do is:

• Start with a balanced macro view of the economy and its current economic, environmental and social outcomes;
• Identify the major markets which are underperforming because of regulatory actions;
• Address the matter of market design and structure which need to be addressed in those markets;
• Identify the potential design and regulatory actions that seem most likely to enhance the position;
• Subject those to widespread and open discussion and avoid being pressured by sectional interests.

Act accordingly.

I know this is hard, I know it takes time. It took us a long while to get here.

It is highly unlikely that impatience, arbitrary decisions and shallow analysis will deliver anything more than what the old beneficiaries or some new lot with the same limited visions are demanding.