Brian Easton offers an economic perspective on the Fast Track Approvals Bill

The Fast-Track Approvals Bill enables cabinet ministers to circumvent key environmental planning and protection processes for infrastructure projects. Its difficulties have been well canvassed. This column suggests a different way of thinking about the proposal.

I am going to explore the Bill from the perspective of its proponents with their focus on short-term material output (usually GDP or one of its variants). That means I am not going to canvass issues already covered in much on my writings of such things as the relationship between material consumption and wellbeing, the boundary between the market and outside the market including resource depletion, the distributional issues, the time horizon and so on. They are important, but if we try to deal with everything at the same time we get into the typical confusion which marks so much public discussion in New Zealand. Instead, I want to focus upon the narrow vision of the advocates of the Fast Track legislation of maximising material output.

One form of the theorem set out by Nobel Laureate Ronald Coase states that market decisions maximize material output if transaction costs are zero and property rights are fully allocated.* Some people use the theorem to argue that the market can rip away if there is private property, but it actually illustrates just how complicated market design is.

I once asked an economist who worked on the development of the Resource Management Act (RMA) how important the Coase theorem was in their thinking. You will recall this was a time when the penchant to let the market rip dominated much government policy. They looked at me in astonishment and said it had not occurred to them.

Had it done so, they would have been confronted with the fact that they were designing a system with very high transaction costs – as your lawyer will remind you when you are off to an environmental hearing. Moreover, underpinning every environmental hearing is the allocation of property rights. They are rarely unconstrained or simple. (You will find rules prohibit you from doing everything you may want to your house despite the slogan that a home is one’s castle.)

A reason that transactions costs are high and that the market cannot be left to itself is that the property rights involved with the RMA have not been fully allocated. I first began thinking about the relevance of the Coase Theorem to the RMA when I realised that its notion of sustainability, as the effect of giving property rights to the unborn. It says that they are entitled to an environment similar to today’s. (Whether that is practical is another matter.) But does it not also give some sort of rights to plants and animals which are near extinction?

But there are also rights to the living. What if a development proposal cuts out the sun from your property, or the view, or aesthetically offends you, or changes the nature of your neighbourhood, or ...? There is a very long list of such potential infringements of what you value.

A doomsday book survey of all such property rights would have been impossible. Instead each case involves the courts determining the detail of the entitlements. The transaction costs become substantial, in which case the Coase Theorem says it is unlikely there will be an optimal outcome.

This may be making heavy weather of the RMA but it sheds light on the Fast-Track Approvals Bill. Nominally, the Bill aims to reduce the transaction costs of the RMA process; that is usually a good thing, especially if you think increasing material output is a good thing. (If there are side payments – such as political donations – an optimal outcome is not so obvious. Market theory does not conclude that political corruption leads to good outcomes. That is also practical experience – corrupt regimes have a poor economic record.)

However, the focus on the transaction costs means that the property rights issues can get lost. Many of those opposed to the bill expect that the implicit property rights of the environment will be overridden. Certainly at least some of the supporters of the bill have publicly discounted the property rights some of the opponents think they have – or should have.

In effect, the proposed legislation charges cabinet ministers (Infrastructure, Transport and Regional Development) from the coalition government with deciding on which property rights triumph. No doubt, the three think they will do so wisely, but I would expect them to blanche at the thought of three cabinet ministers from, say, Labour, the Greens and Te Parti Maori making decisions in their place. It would lead to a quite different assignment of those property rights and often there would be different outcomes. (One genius suggested that the proposed act be repealed after three years, ignoring that once the principle had been established it could be reintroduced by a government hostile to this one.)

Implicit in the Coase Theorem is that if property rights are not fully articulated and secure – as they are not when they are subject to political interference – the market will not work properly and the economy will suffer.

There is an even deeper issue. Should politicians determine the allocation of property rights? This is what happens in today’s Russia where Putin arbitrarily seizes property, including forced sales and imprisonment of property owners. (Hence Russian oligarchs living and investing outside Russia.)

But it was a feature of English life, six and more centuries ago. Monarchs arbitrarily seized their subjects’ estates and often had considerable powers in determining what happened to inheritances. (Like Putin, they even incarcerated or executed foes in the process.) Part of the reason for the subsequent success of the English economy is that property owners steadily reduced their monarch’s powers to interfere with property rights.

Are we returning to that situation? Well, the Fast-track Approvals Bill is a step on the way – some would say it is but a small step. I’ve not seen the usual guardians of property rights – the classical liberals and neoliberals – making much of a fuss over this. Is it because the property rights that are being seized are from future generations, from the environment and from small property owners? I leave them to respond. I doubt that Ronald Coase was wrong.

* For the cognoscenti, the theorem is a lemma from general equilibrium theory. That theory, and therefore the Coase Theorem, breaks down if there are multiple equilibria.