Reaping the Past

This article by John McCrone, features writer of “The Christchurch Press”, was published on 20 August in the Mainlander Section of “The Press”. It was also published by “The Dominion Post” on the same day under the title ‘Legacy of Rogernomics: Less Red Tape But More Heartache and Financial Disasters’. It is republished here because McCrone made extensive use of an interview with me, based on some work I am, doing on ‘light handed regulation’. The feature does not necessarily reflect only my views.

New Zealand’s rush to untangle red tape and embrace the idea that the business and the market can be trusted to do the right thing may have cost us billions of dollars and even lives.

Keywords: Regulation & Taxation;

Blame Rogernomics, they say. Pike River, leaky homes, finance companies. A whole string of disasters, costly in both money and lives, are being seen as the belated price New Zealand is paying for chucking away its rulebooks in the late 1980s.

Remember Rogernomics? Long story short, New Zealand’s economy was over-protected, over-regulated, in the Muldoon era. And so we leapt to the other extreme.

In a revolution quietly fomented by a clever clique of Treasury officials, and led in blitzkrieg fashion by incoming Labour Minister of Finance (now Act MP) Roger Douglas, New Zealand took the neo-liberal economic textbook and swallowed it whole. We deregulated everything in sight, slashing government controls to allow markets to self-regulate, and now some 20 years later, are still picking up the pieces.

Twenty-nine dead in the Pike River mine explosion. A Royal Commission is hearing how reforms to the Health and Safety in Employment Act 1992 resulted in the disappearance of specialist Government mine inspectors and mining-specific safety laws as New Zealand switched almost overnight to generic performance-based standards.

Market theory said this was how to both save public money and encourage business innovation unleash the productivity tiger. The nanny state could be rolled back by allowing workplace safety to be controlled by a single simpler set of pan-industry rules. Just tick the boxes to ensure compliance. Instead of laying down prescriptive procedures, the new regulations would be judged on outcomes. Firms would be set general health and safety targets, but left considerable choice about how they went about meeting them. Bosses could make the cost/benefit decisions about how much they actually needed to do to meet their legal obligations.

The result was that in mining, New Zealand went from a seven-strong inspectorate of well-paid specialists to just a pair of Department of Labour (DoL) inspectors having to deal with the whole country, gold mines and quarries included. And where there were once buttoned-down requirements, like coal mines needing to have an underviewer and fireman deputy inspect every cavity and dead-end within 90 metres of any workings for gas at least once a day, these were replaced by vague clauses about mine companies needing to take practicable steps to test the mine air and prevent ignition.

At the Pike River inquiry, mine inspector Michael Firmin complained his DoL bosses did not appreciate the need for more than a few flying visits a year. ‘Peoples approach was that, well you know, it’s the employers responsibility, not yours, to identify their own hazards. You just go and audit them.’

The DoL’s head of health and safety policy, James Murphy, agreed the department had taken a hands-off attitude to the detail of mine safety – ‘And were now thinking that actually we were too hands-off.’

The same story with finance companies. Around $8.6 billion of life savings of 200,000 Kiwi investors frozen, and potential losses of perhaps $3b even with Government bail-outs and guarantees, following the domino collapse of some 60 weakly-regulated deposit-takers and investment trusts.

Again, they seemed a good idea at the time. Nimble and entrepreneurial because of their market freedom. While the High Street banks remained under the stern oversight of the Reserve Bank and international regulation, the finance companies could take investor cash and loan it out on such sure-fire deals as third mortgages on Auckland apartment block developments or boy-racer cars sold to beneficiaries. Or in many cases, even propping up the owners own private business ventures.

The industry was largely self-regulated, relying heavily on the oversight of trustees and auditors the finance companies chose and paid for themselves. Their investment products were sold by financial advisors who needed no qualifications and worked on commission. It was all a cosy arrangement that for a few years generated spectacular growth until, from Bridgecorp to South Canterbury, they fell with a loud bang.

When former chair of the Securities Commission Jane Diplock was asked why the agency had been so inactive, she replied: ‘The commission’s role is not and never has been to approve prospectuses or investment statements. The responsibility for the correctness of information contained in prospectuses lies with the promoters and directors themselves.’

Then leaky homes. Wellington economist Brian Easton says the cost to the country is staggering a national disaster equal to that of Canterbury’s earthquakes. Spread out over more years of course, and no deaths if you dont count the suicides of affected home-owners. But the eventual price tag for rebuilding soggy houses and rotten apartment complexes is going to be anywhere between $11b and $23b.

Once more, Easton says, the blame has to be laid at the door of Rogernomics, even if technically the changes were enacted in the era of Ruthanasia – National Government Finance Minister Ruth Richardson picking up in 1990 from where Roger Douglas reforms had left off.

Easton says the 1991 Building Act was another case of an industry’s accumulated wisdom in the form of experienced inspectors and regulatory safeguards being stripped away so as supposedly to fast-track the economy.

There was a shift to performance-based regulation where producer statements – paper promises that new building methods would work were allowed to replace detailed requirements on fixings and flashings. Even compliance became out-sourced to the market with private building inspectors starting to do the work certifications normally done by council housing departments.

This new light-handed approach relied on legal come-backs to do the ultimate policing. If a building failed because the design was faulty, the construction negligent, or the materials over-sold and the leaky homes saga was usually about all three then owners were expected to be able to take someone to court for non-performance.

However Easton says with the whole flimsy system letting them down, this was never possible. At the first hint of a law suit, builders, developers, architects and private inspectors disappeared into the woodwork.

Even the Governments Building Industry Authority, the supposed regulator that oversaw the use of untreated timber framing and plaster cladding without an internal ventilation gap, was hastily closed down and folded into the Department of Building and Housing as the writs began to fly.

Easton says, looking back, what actually happened was deregulation became a massive excuse for New Zealand to take on speculative risk.

As investors know, there are two strategies when it comes to making money. You can opt to play safe and conservative for a steady market return, or buy a slice of risk in the hope of bigger wins.

With deregulation, this is what New Zealand did at the national level – seek faster growth by letting its businesses define their own levels of risk tolerance. The theory was that individuals would make smarter decisions than a slow-moving state.

But instead, once the controls were relaxed, the risks were wildly mispriced. The commercial gambles people were prepared to take quickly got out of hand.

Either this was because there was not much real fear of any market mechanism come-back. Getting found out could take many years. Time enough to lock up the earnings in family trusts, change jobs or shoot through to the Gold Coast. Or simply because there was a general lack of competence.

Easton says regulations represent a collective wisdom accumulated over time, and in suddenly deregulated markets, both buyers and sellers proved to be poor judges about the long-term consequences of the choices they made.

It was a big experiment. New Zealand tried to show the world by taking a purist textbook approach to running a modern high growth economy and got burnt. Add up all the failures and there is now a bill that will have to be borne for quite some time. So surely we have learned our lesson and moved on?

Maybe it is our settler heritage, agrees Victoria University economist Geoff Bertram, but there is not much appetite for governments telling us what to do.

Certainly the standard quip about the business community is that it enjoys moaning about red tape as much as farmers enjoy moaning about the weather.

The prevailing ideology is that regulation is inherently a bad thing. Politicians can never be trusted, so whenever politicians interfere, you assume its for malignant purposes, says Bertram.

Which may explain why there is major bit of regulatory policy work being pushed in Parliament at the moment. Yet it is in fact a naked attempt, even 20 years later, to keep the Rogernomics bandwagon rolling. (Douglas didn’t repond to requests for an interview for this story.)

On Thursday, submissions closed for the Commerce Select Committee hearings on the Act Party sponsored Regulatory Standards Bill. First surfacing as a Business Roundtable proposal in 2001, then bounced about as a private members bill for some years, the bill is now back on the table as part of Acts confidence and supply agreement with National.

Regulatory Reform Minister Rodney Hide – his job title another part of these negotiations – makes no secret of the fact that Act sees this as unfinished business, a further effort to cement neo-liberal principles in place as part of New Zealands economic constitution.

Hide says there are already two legs to this constitution in the lynchpin reforms of the 1989 Reserve Bank Act and 1993 Fiscal Responsibility Act. The first enshrined a hard-line monetary policy by handing over to the Reserve Bank the task of controlling inflation with interest rates. The second forced governments to open their books and stick to their spending promises.

Now, says Hide, there needs to be a third leg that similarly hardwires responsible regulation-making into the running of the country.

Act’s bill proposes that governments publicly certify every new regulation against a collection of benchmarks, including ones guaranteeing the protection of individual liberties and property rights. There would be automatic compensation for any impairment of these rights. And the courts would also have new powers to over-turn legislation which fell foul of its private ownership principles.

Hide says forcing governments to think twice about measures that affect the personal would stem a still continuing tidal wave of law-making. Between 2000 and 2009 over 68,000 pages of regulation was passed. That’s significantly up on the previous decade and the decade before that. The bill has caused widespread outcry, at least among those who pay  attention to regulatory matters.

Alex Penk of the conservative think tank, the Maxim Institute, says the automatic compensation provision takes away room for normal common-sense.

‘If Parliament wanted to ban dangerous weapons, it would end up having to compensate those weapon owners for a property right.’ Or to use a more current example, to get the synthetic cannabis drug Kronic off the shelves, the Government might have had to buy up all the warehouse stocks, he says.

Others, like Sir Geoffrey Palmer, former Prime Minister and president of the Law Commission, say giving courts the role of stopping legislation for reasons of political principle rather undermines the point of democracy. Such a move would play into the hands of those who can afford the lawyers rather than ordinary citizens. Even a Treasury review of the bill has been unusually head-shaking, saying it is simultaneously low on benefits and high on risk.

So Act’s Regulatory Standards Bill is being dismissed as a bit of political theatre something to make Act look like it is doing something rather than legislation with a realistic chance of getting passed. However critics like Easton say it shows that the anti-regulation bias still prevails in the public mind. Generally people accept deregulation as a necessary medicine.

Of course, out of the limelight, there have been attempts to respond to the lessons of recent regulatory failures. Official policy still backs a performance-based approach to rule-making setting targets and giving the market choices about how it delivers. But much more effort is now being made to anticipate how new rules might go wrong.

Ministry of Economic Development director of regulation Peter Mumford says government departments are now expected to carry out a regulatory impact analysis to identify the kinds of unintended behaviours that might result from law changes. When the changes are particularly novel or significant, this is backed up by a second fuller assessment by a specialist Treasury regulatory quality team ironically, the very team that gave the thumbs down to Acts Regulatory Standards Bill.

So officials claim that more effort is going into preventing future mistakes. And then each of the regulatory disasters has naturally been followed by some kind of re-regulatory response a predictable bolting of stable doors.

To deal with leaky homes, governments have brought in a succession of new building laws and accreditation schemes. Though no one is too happy with the compensation package, finally introduced last July after many years of delay, where owners still accept half the repair bill. And despite thick new manuals of building advice being printed by risk-adverse councils, those in the know say that with the same flawed materials, same design errors, the leakers are still being built.

The collapse of the finance company sector has prompted an extended tidy up too. Last year, non-bank deposit takers were forced to have credit ratings, minimum capital ratios and other safeguards. The financial advice industry was tightened up with professional registration required and disclosure of sales commissions. The Government has said it intends putting still tighter rules in place, By 2013, the Reserve Bank will licence finance companies, giving it considerable power over the appointment of their directors and rights to inspect their books.

Out of Pike River, again there will be a whole set of lessons to be learned: years to fix what was allowed to go wrong – though already this week the government announces it was setting up a High Hazards Unit and doubling the number of safety inspectors for the mining and petroleum industries.

However Easton says these are all piecemeal reactions, individual patches. Despite a series of major regulatory failures, the attitudes behind Rogernomics have not yet really changed. There is still a nave faith in the power of markets to police themselves.

Bertram agrees: ‘Around the edges, there are a few public relations tweaks going on. But there’s no political will and no political constituency to roll things back. The rhetoric is just remorselessly anti-regulation still.’

Bertram says other countries like Australia were facing the same economic challenges in the late 1980s and have made many of the same changes such as a move towards performance-based regulation. But they did it steadily and pragmatically.

They did not follow New Zealand’s hasty big bang approach which destroyed a generation of knowledge and protections. Or systematically under-funded any regulatory body that was then left so that, like the DoL mines inspectors, the Securities Commission or Building Industry Authority, officialdom was almost set up to fail.

‘Were a laughing stock in many overseas jurisdictions. They look at our regulatory arrangements and roll their eyes’, says Bertram.

So New Zealand has a problem with red tape, Bertram says. But it is all about quality rather than quantity. And even as another inquiry lifts the lid on just what a light-handed approach to running a country actually looks like, Kiwis are still not ready for that conversation about how things should be done, he believes.