Brian Easton: Do We Want A Regulatory Standards Act?

The ACT party election manifesto will propose to introduce a Regulatory Standards Act to set a higher bar for new regulation, and test regulations against the key principles of the Regulatory Standards Act.

To make my position clear I have had doubts, going back to Muldoon’s time in the 1970s, about the casual way we introduce regulations. Since then we have made a number of improvements to how they are introduced. But I am uneasy about the proposed legislation; at the very least, I think it requires a wide public debate before it is enacted.

We know roughly the content of what legislation ACT has in mind because in 2021 it introduced a Regulatory Standards Bill to Parliament – it did not get past the first reading. It said its purpose was to improve the quality of Acts of Parliament and other kinds of legislation by

‘(a) specifying principles of responsible regulation that apply to new legislation and, over time, to all legislation; and

‘(b) requiring those proposing new legislation to state whether the legislation is compatible with those principles and, if not, the reasons for the incompatibility; and

‘(c) granting courts the power to declare legislation to be incompatible with those principles.’

The heart of the proposal is the ‘principles of responsible regulation’. Perhaps the most troubling is principle (c) which reads that legislation (or regulation)

should not take or impair, or authorise the taking or impairment of, property without the consent of the owner unless

(i) the taking or impairment is necessary in the public interest; and

(ii) full compensation for the taking or impairment is provided to the owner; and

(iii) that compensation is provided, to the extent practicable, by or on behalf of the persons who obtain the benefit of the taking or impairment:

Let me explain by example. When in 2006, the Government announced it would force Telecom to unbundle its operations separating the copper network from the ‘value-added’ services it delivered over the network, the market capitalisation of Telecom fell by about $3 billion; Telecom shareholders had their property (the shares) ‘impaired’ by that amount.

It is not difficult to favour principle c(i). Telecom was a monopoly, as a consequence of the botched privatisation in 1989 which did not go through a select committee while the cabinet committee did not even have a paper reviewing the regulatory (i.e. monopoly) issues the privatisation raised. The purchasers of the business made big monopoly profits. However, Telecom was unable to work out how to do a commercial broadband roll-out, and New Zealand was internationally way behind in electronic connectivity.

A main purpose of the separation was to improve that connectivity. Chorus – which evolved from the Telecom network – together with a lot of government funding and some competition has got our network up to speed. So much so, you think of what is provided today as normal. But reflect how much more difficult the Covid lockdowns would have been had we still had the Telecom network. Working from home would be a joke. So we may take it that the separation of Telecom was in the public interest if it was necessary for the broadband roll out.

The downside for the holders of Telecom shares was that having lost its monopoly, their company would not be as profitable. That is why the share price fell so dramatically. Here is where principle c(ii) applies. Under the Regulatory Standards Bill the government would have had to compensate the shareholder for their $3b loss.

It didn’t. Should it have compensated? At which point the argument gets tortuous.

You could say that the shareholders did not deserve their monopoly profits. That may be true for the first purchasers of the privatised company, as they used its market power to extract higher prices (often with poor services) from consumers. But most sold their shares at favourable prices, so many of the 2006 shareholders paid a higher price for their holdings because the monopoly returns were built into the price of the shares they bought.

n the other hand, you could argue that they should have bought into the company knowing there was regulatory risk – that at any time the government could change the regulatory framework which might be detrimental to their share value. Certainly, the Labour Government had signalled that in 1999 it established a review of the industry.

You might argue that regulatory risk is an integral part of a market economy. Higher profit rates partly reflect this. However, there are economies in which that risk is so high, that investment and innovation are distorted and those economies function poorly, often with low formal employment and negligible economic growth.

The Regulatory Standards Bill cuts through this complex argument by setting a standard that any change in the regulatory framework should result in anyone who suffers being compensated. I am not sure how pervasive the principle is intended to be. For instance, would those who suffer from the introduction of a capital gains tax or a higher income tax rates have to be compensated?

As I understand it, the bill does not require the compensation in regard to parliamentary statutes. Rather, the courts could declare that principle c(ii) was infringed but the government could still go ahead with the policy. The Bill of Rights Act works like this. The effect of the principle is to give property rights a similar status to human rights.

Much of the literature goes back to a provision in the US Bill of Rights which is an integral part of their constitution. The Fifth Amendment includes that no person ‘shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.’

At first, the last part was concerned about the government taking land without paying for it, but over the years economists and lawyers realised that the notion of ‘property’ could apply to many other things. There has been an ongoing discussion about the application of the notion. Some US states have passed related legislation. A particular pressure has been from neoliberals for it would reduce the range of interventions available to a government.

You can get a sense of this by imagining the principle applying in the past. I leave others to describe what might have happened when the government was interfering with Maori land rights. But suppose it had applied in 1984 when Muldoon left office. Virtually every regulatory change made since then infringed principle c(ii) in regard to someone or some institution. For instance, unions would have a grievance from the Employment Contracts Act, as would have had many workers. Perhaps it would not matter so much if Parliament set out the change in statute but most such statutes require supplementary regulations. Social security benefits are set under regulation.

An irony is that some of the advocates of a regulatory standards act were closely involved in those regulatory changes. They were acting in good faith then, if breaching the principles they now want to enact.

My view of the post-1984 regulatory changes is mixed. Some I supported, some I opposed, some I was uncomfortable with. (I think a degree of regulatory risk is inevitable in a thriving modern economy, but that it should not be excessive.)

I was, and am, particularly concerned with the massive change to the income distribution. (We don’t have data to tell us what happened to the wealth distribution.) In particular child poverty about doubled, while the rich had marked increases in their income (those on middle incomes were worse off too).

The effect of implementing a regulatory standards act would be to consolidate the existing income distribution, stalling the government from changing it. Do we want to do that? What is special about the current income distribution? Why not the 1984 distribution, or any other year you might choose?

There may be two caveats to the proposal. First, the courts would only be able to declare a legislated change was against the principles of the act; they could only strike down changes under regulation. Do I trust lawyers and judges to have a sophisticated understanding of how such economic regulation works? Do I trust economists?

But second, the 2021 Regulatory Standards Bill had a provision that it would not come into force unless it was endorsed by a majority in a referendum. I don’t know whether ACT still has that provision in mind. It might argue that ACT’s election to government (when that occurs) is such a referendum, but it is likely to have only 10 percent or so of the vote, which hardly constitutes a majority.

I regret that Parliament did not send the 2021 Regulatory Standards Bill to a select committee where these issues could have been properly debated. Many of the brief contributions during its first reading were hardly coherent. We really need a proper discussion on ACT’s proposal before it gets into office and tries to implement it.

PS. I have not covered principle c(iii) here because of space. It seems to imply that the beneficiaries from the detriment may have to be taxed to compensate those who suffer detriment.

Brian Easton is an economist and historian from New Zealand. He was the economics columnist for the New Zealand Listener magazine for 37 years. This article was first published HERE