Constraining G O V E R N M E N T R E G U L a T I

CONSTRAINING GOVERNMENT REGULATION BRYCE WILKINSON A DISCUSSION PAPER PREPARED FOR: New Zealand Business Roundtable Federated Farmers of New Zealand (Inc) Auckland Regional Chamber of Commerce and Industry Wellington Regional Chamber of Commerce NEW ZEALAND BUSINESS ROUNDTABLE NOVEMBER 2001 First published by the New Zealand Business Roundtable, PO Box 10–147, The Terrace, Wellington, New Zealand http://www.nzbr.org.nz With Federated Farmers of New Zealand (Inc) Auckland Regional Chamber of Commerce and Industry Wellington Regional Chamber of Commerce ISBN 1–877148–74–1 © 2001 edition: New Zealand Business Roundtable Design and production by Daphne Brasell Associates Ltd Printed by Astra Print Ltd, Wellington Contents Acknowledgements v Summary and overview vii 1 Introduction 1 2 Evidence of the Need for Regulatory Reform 5 2.1 Introduction 5 2.2 Symptoms of regulatory excess in New Zealand 5 2.3 New Zealand in an international context 43 2.4 Summary observations 55 3 What is Regulatory Reform About? 57 3.1 Introduction 57 3.2 Defining regulation and regulatory reform 58 3.3 Rules, regulations and liberty 60 3.4 Positive or welfare rights and redistribution 67 3.5 Regulation, economic freedom and prosperity 73 3.6 Regulation and the common law 79 3.7 Regulatory reform and government spending 82 3.8 Concluding comments 85 4 Various Reform Initiatives and Experiences 89 4.1 Introduction 89 4.2 Privatisation and ad hoc deregulation 89 4.3 Reforms to regulatory processes 92 4.4 Agency reforms 104 4.5 Sunset provisions and ad hoc reviews 110 4.6 Opt out and self-regulation 112 4.7 Regulatory budget 113 4.8 Concluding observations 114 5 Why Reform is so Difficult – Public Choice Theory 117 5.1 Introduction 117 5.2 Economic theories of regulation 117 5.3 The importance of ideas 132 5.4 Solutions to public choice difficulties 134 6 Constitutional Aspects of Regulation 137 6.1 Introduction 137 6.2 Constitutionalism and its origins 137 6.3 Separation of powers and the judiciary 141 6.4 The rule of law 148 6.5 Concluding observations 168 7 Regulatory Reform Options 171 7.1 Introduction 171 7.2 Reform objectives 171 7.3 Democracy 172 7.4 Separation of powers 177 7.5 The takings issue 181 iv 8 Design Options for Possible Regulatory Constraints 205 8.1 Introduction 205 8.2 Constitutional principles for testing regulations 205 8.3 Tests for evaluating laws and regulations 209 8.4 One-off regulatory reform 213 8.5 Institutional reforms to regulatory processes 214 8.6 Concluding comments 225 Appendices A: Reform Experience in Australia, the United States, the United Kingdom and Canada 228 B: Current and Proposed Compliance and Monitoring Arrangements for New Legislation and Regulations 232 C: Regulatory Responsibility Act 236 Bibliography 242 List of Abbreviations ACC Accident Compensation Corporation CED Committee for Economic Development (United States) EDC Economic Development Commission ERMA Environmental Risk Management Authority GAAP Generally accepted accounting principles GDP Gross domestic product GST Goods and services tax HSNO Hazardous Substances and New Organisms Act 1996 IMF International Monetary Fund IRD Inland Revenue Department LAC Legislative Advisory Committee LEG Cabinet Legislation Committee MMP Mixed Member Proportional electoral system MP Member of Parliament OECD Organisation for Economic Cooperation and Development OIRA Office of Information and Regulatory Affairs (United States) OMB United States Office of Management and Budget OSH Occupational safety and health OSH Occupational Safety and Health Service of the Department of Labour RIA Regulatory Impact Analysis RIS Regulatory Impact Statement RMA Resource Management Act 1991 SNA System of national accounts Acknowledgements Bryce Wilkinson of Capital Economics is the primary author of this report. Susan Begg of Credit Suisse First Boston and Tyler Cowen of George Mason University wrote substantial background papers on aspects of the material in this report that were used extensively. They have also commented in depth on successive drafts. Richard Epstein of the University of Chicago made an invaluable contribution in the form of detailed comments on an earlier version of the report. Wolfgang Kasper kindly commented in detail on section 8, Design Options for Possible Regulatory Constraints. Roger Kerr has both made this report possible and contributed extensively to its production. None of those assisting the primary author are responsible for the views expressed. v Summary and overview If governments were perfect, all laws and regulations would enhance human welfare and there would be no need for this report. Unfortunately, governments are not perfect. As a result, some laws and regulations may reduce citizens’ welfare. Section 2, Evidence of the Need for Regulatory Reform, documents the existence of actual, material and pervasive regulatory harms. It cites many cases of apparently law- respecting and productive citizens whose lives have been ruined emotionally and financially by existing legislation. There can be no doubt that the hopes and aspirations of much greater numbers are being thwarted. Other, less harrowing cases point to material adverse effects on investment in New Zealand. A preliminary examination of the legislation underlying these cases points to deep- seated flaws. Some regulations appear to create monopoly situations rather than alleviate them. Others can be exploited for anti-competitive purposes. Some allow the unscrupulous to extort money from businesses simply because it is cheaper to pay them off than to resist their demands. Some regulations transfer wealth from the less well off to the better off, contrary to normal notions of equity. Legislation commonly seeks to impose outcomes, essentially regardless of cost or the existence of diverse personal preferences. Such legislation stops individuals from achieving outcomes that balance marginal benefit and marginal cost. Denial of freedom of contract is a common feature. There is a pattern of resistance to compensation for regulations that take lawful rights, particularly in the environmental area. Section 2 also documents widespread concerns amongst legal experts about the poor quality of much legislation. Some concerns relate to deficient policy analysis – such as inadequate problem definition, failure to establish that legislation is needed and legislation that fails to give effect to the intended policy. Legislators sometimes appear to regulate in ignorance of the existence of the common law. It is asserted that they sometimes issue laws as symbolic public action, rather than as practical solutions to real problems. There are also concerns about inaccessibility and content. Legislation sometimes fails to comply with constitutional principles. Many of the experts’ concerns support the inference that legislators sometimes rush to legislate with a view to solving the problems later. Concerns about premature legislation and poorly drafted legislation point to this problem. The deluge of new and amending laws and regulations that emerges annually from parliament and the executive branch of government (as distinct from the legislature) is consistent with such concerns. No small business can be expected to be able to comply knowingly with the welter of laws and regulation to which it is subject. In general small businesses must fly blind. Larger businesses may have invested so heavily in reputation that ‘flying blind’ is not an option. These businesses are more likely to invest in ascertaining the implications of complex regulations and in attempting to comply with them, even if the costs are very high. Even so, compliance costs are, in general, proportionally larger for smaller firms. Governments commonly acknowledge that the costs of complying with regulations are excessive and undertake to reduce them. Their lack of success indicates in itself that vii viii the problems cannot be solved by minor adjustments. If it were easy it would have been done. Section 2 acknowledges that New Zealand does not appear to stand out from many wealthy industrialised countries; concerns about onerous regulatory burdens are an international phenomenon. In the United States, research indicates that most federal government regulations would fail a strict cost-benefit test. New Zealand’s ongoing economic decline relative to other nations suggests that New Zealanders can less afford to tolerate the situation. Section 3, What is Regulatory Reform About?, examines the relationship between regulation and two broad aspects of human welfare − liberty and prosperity. It defines regulatory reform and discusses the relationship between regulation, liberty, economic freedom and government spending. Regulations include laws, formal and informal orders and subordinate rules issued by all levels of government, and rules issued by non-governmental or self-regulatory bodies to which governments have delegated regulatory powers. This definition is economic. Under a legal definition, Acts of parliament are sometimes referred to as primary legislation and regulations and by-laws as subordinate legislation. As defined, regulations do not include the common law. The common law is by far the dominant source of the legal rules that govern the interactions between citizens. The three pillars of the common law are the laws of tort, property and contract. As comprehensive as it is, the common law is not in itself a complete legal system. Some problems governing interactions between citizens, such as non-point source pollution, may be

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