Brian Easton finds the evidence is thin & shallow that regulation hurts productivity, and is a claim he wants to hear David Seymour justify

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

The invitation to comment on the proposed Regulatory Standards Bill opens with Minister David Seymour stating ‘[m]ost of New Zealand's problems can be traced to poor productivity, and poor productivity can be traced to poor regulations’.

I shall have little to say about the first proposition except I can think of a lot of New Zealand problems – actual and fantasised – which don’t seem to have much to do with productivity. I wait for the minister to explain the connection his Treaty Principles Bill has to poor productivity when it is returned to Parliament. (And indeed for his productivity insights on many of the other troubles which beset us.)

As for the second proposition, New Zealand may have a productivity problem – I cannot think of any country where such a claim is not made. But to attribute the problem entirely to ‘poor regulations’ is disingenuous and extravagant.

When a junior minister, Casey Costello, was challenged for empirical evidence to justify policies which rolled back the campaign to reduce tobacco consumption she could only cite flimsy industry-driven opinion from a thin Google search. There was a widespread demand she should resign. No similar demand has been made of Seymour to show his evidence. A Google search will prove just as thin.

To be clear, poor regulation can impact on economic performance. However, it is extremely difficult to measure by how much. For instance, in the late 1970s I was warning of the dangers of the heavy interventionism we associate with Muldoon. In the mid-1980s it was wound back. I spent a lot of effort trying to find out how much this impacted on economic growth. The evidence was that once the economy had come out of the great (seven- or eight-year) stagnation which Rogernomics had induced, it grew at much the same rate as it had been growing before the Rogernomic policies.

There was some evidence of a better quality of output (which is difficult to incorporate in the GDP measure) and more economic resilience and flexibility. But there was no faster economic growth, no measurable productivity gain. That is why it took twenty years for those at the bottom of the income distribution to regain their pre-Rogernomics standard of living. I was surprised by this no-productivity-gain research finding. But I am a scientist, not an ideologue; I learn from the failure of an experiment.

We can ask how damaging is today’s regulatory framework? Is it that much worse than other countries with higher productivity which is the assumption implicit in the minister’s claim? Perhaps a thin Google search will support the minister but on many dimensions elements of our framework are judged world class. For instance, it is not unusual for New Zealand to be judged very highly in the rankings of the ease of doing business. But our aggregate productivity levels are certainly not up there with it.

The government (MED) used to publish a checklist of how we performed. The one area where New Zealand seemed to do very badly was the quality of its management. There was not a lot of evidence one way or the other though. My suspicion is that the culture of New Zealand management, while good for dealing with small organisations, does not cope well with large complex (private and public) organisations. Cynics might add politicians to the management failure list. However, while poor management may explain, in part, New Zealand’s relatively low productivity, it is not a regulatory issue.

Other particularities of the New Zealand situation are that our size and isolation from the rest of the world economies means that we cannot reap productivity enhancing economies of agglomeration. There is not much that a regulatory framework can do about relocating us.

Paul Krugman, famous for his ‘productivity isn’t everything, but in the long run it is almost everything’, has recently modified his generalisation. He conceded that health and safety and environmental regulations could improve living standards, but that they slowed productivity increases. ‘So part of the productivity slowdown during the 1970s probably represented not so much a loss of dynamism as a shift in priorities — deliberate choices to make workplaces safer and skies cleaner, even at the expense of production. ... We could have a bigger economy if we were willing to have filthy air and a lot more injured workers, but that’s not a trade-off we want to make.’

They are instances of improving the quality of life at the expense of productivity. Another instance is that nowadays we can measure productivity in terms of output per hour worked. That does not include travel time to work. (It seems likely that were we to include that, New Zealand would do better in the productivity stakes because we spend less time commuting.) So if we ‘waste’ investment resources on reducing congestion and travel times, the cost is lower measured productivity.

In other words, we should not get too obsessed with the notion that economic output as measured by the GDP conventions translates directly into economic and social welfare. It may not especially as a society gets more affluent (and complex), something that the economists who developed the GDP measure almost a century ago pointed out; the measure was developed for much more limited purposes.

I would welcome better administration of the government’s interventions. I have described past failures of leaky buildings and earthquake standards, both of which have been costly in human and economic (productivity) terms. But that is not what the Regulatory Standards Bill is about. I write about its real – subversive – purpose next week.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.