Loose Regulations Sink Economies – and Buildings

Listener: 14 October, 2011.

Keywords: Macroeconomics & Money; Regulation & Taxation;

I have been preoccupied by leaky building syndrome, which may have damaged up to 110,000 dwellings as well as costing considerable domestic stress and even lives. Commercial and public buildings have suffered, too. There were many causes of the disaster but it illustrates the failure of regulation, which should have overridden them. Light-handed regulation – the fad of the past two decades – assumed that private actors would govern themselves to a high standard and not take short cuts or exploit others; that where they were not naturally inclined to behave this way, the threat of litigation would give the right result.

Of course there would be the odd failure; and although a few might be understandable, 110,000-odd suggests sheer carelessness. It is not the only regulatory failure. There are many others, including Cave Creek, and possibly the Pike River coal mine and Tamahere coolstore, which cost lives.

You don’t see expressions like “light-handed regulation” much nowadays, and measures are being introduced to impose public supervision. Even as the Royal Commission on Pike River continues deliberating, the Department of Labour has all but accepted responsibility for one aspect of mine safety by establishing a High Hazards Unit, with considerably more resources than the fig-leaf of mine inspection that characterised recent years.

However, the general impression is that the Government does not really know what to do, and those who benefit from the slack oversight have resisted any attempts to impose adequate public regulation. The Minister of Building and Construction announced the Government could not afford to fund all the leaky building remediation, implicitly accepting its responsibility for the failure resulting from the light-handed regulation it introduced. Do we have a disaster so big the taxpayer cannot afford to fix it?

It’s not just a matter of remedying past failure – although those who have lost dear ones can hardly be expected to be consoled, and many will be badly out of pocket through no fault of their own. Apparently there are still troubles in the building industry that may lead to more badly built buildings.

I have also been preoccupied by the long recession the world is in, with its unemployment and lower incomes costing considerable domestic stress and even lives. There were many causes of the global financial crisis, but it, too, illustrates the failure of light-handed regulation. It was assumed the financial sector would govern itself to a high standard and not take short cuts or exploit others. There would be the odd financial failure (of course), but not the near collapse of the world’s entire financial and economic system.

You don’t see expressions like “light-handed regulation” much today, since (even) Alan Greenspan, the chairman of the US Federal Reserve who presided over the regulatory failure, admitted his reservations. And although a variety of measures have been proposed to increase public supervision, nobody is quite sure what to do.

Meanwhile, the international finance sector, the main beneficiary of the slack oversight, resists significant change. Individuals made fortunes out of the light-handed regulation (paid for by others’ losses) and they are not willing to give up future opportunities to extend them, let alone admit their wealth was obtained in not entirely honourable ways.

The governments involved with these troubles are saying they cannot afford to fund all the required bailouts. So we have an international disaster so big the world’s taxpayers cannot afford to fix it. Because there is no international authority, there is no one to say this is how we are going to fix it, allocating the costs – fairly or unfairly (as we had with our leaky building syndrome). Instead we have a stand-off, and the world economy continues to leak. There is even the possibility we will have a second global financial crisis.

The fallout from leaky building syndrome is minuscule compared with that of the global economic crisis, but the parallels suggest something more fundamental is going on: that the world has entered into political arrangements that are neither preventing some appalling failures, nor able to address them when they occur, instead grimly marching on to repeat its mistakes.