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May 05th 2015 print

Chris Berg

The Undone Tasks of Deregulation

The law will always be a static instrument, but the economy it seeks to govern is dynamic: as rock beats scissors, so does law trump business needs. If the Abbott government wants to be remembered for advancing national prosperity it must dismember our regulatory behemoth

red tapeBack in 2007, Kevin Rudd thought he could make a big political statement by outflanking John Howard as a free marketeer. He claimed to be the true “economic conservative”, and attacked the Howard government’s “reckless spending”. But that was just half of Rudd’s pitch. A headline in the Australian Financial Review in October that year screamed, “Labor blasts PM over red tape burden”. Readers learned that Rudd had “savaged” the Coalition for the regulation that was “strangling” business. “Stand by for the Regulation Revolution,” said the Sydney Morning Herald; “cutting back the maze of business regulation and red tape” would be one of Rudd’s “top policy priorities”.

They say the past is another country. Campaigns are another planet. Once handed power by the Australian voters, the practice of the Rudd government was light years away from its soaring campaign rhetoric. Yes, true to Rudd’s promise, Lindsay Tanner was appointed Australia’s Minister for Finance and Deregulation. Yet one of Tanner’s first acts as minister was to preside over a vast increase in regulatory control over the finance sector, adopting new federal anti-money-laundering and counter-terrorism-financing laws that had been prepared by the Howard government.

This was just a taste of things to come. Tanner was our first deregulation minister and the experiment was a failure. Just as he was unable, as Minister for Finance, to prevent the massive splurge of government spending instigated by Rudd, Wayne Swan and Treasury Secretary Ken Henry, he was unable to hold back the tidal wave of new regulation that came with an interventionist government. By the twilight of the Labor government, this wave of regulatory interventionism had become a flood. Rudd’s professed disdain for the red tape burden strangling business was forgotten. Vast new regulatory frameworks were being imposed on labour markets, financial markets, employment conditions, child care, hospitals and health, aged care, competition law, health and safety laws, higher education, charities, coastal shipping, and of course the environment.

These increased the regulatory burden on individual sectors, but also the economy in general. For instance, the cost of regulation imposed on the mining and energy sectors flow through to raise the costs of downstream products. Just as taxes—like the carbon and mining taxes—reduce economic growth and living standards, so can regulation imposed on these vital sectors.

This essay was published in the May, 2015, edition of Quadrant.
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Some of the most egregious new regulations were not successfully implemented. Communications Minister Stephen Conroy was unable to pass his large-scale attempt to regulate fairness in the press. Attorney-General Nicola Roxon was unable to pass her attempt to create a right not to be offended on everything from race to politics in the workplace. Roxon did however manage to pass that manifestly absurd and deeply symbolic instance of regulatory over-reach—plain packaging on tobacco products.

These new regulations became a source of pride for the Labor government. Trying to combat the sense that parliament under Julia Gillard’s minority government was chaotic, Anthony Albanese used to brag about just how many pages of legislation Gillard had ushered through parliament. As the months ticked by the number grew ever larger. In six years, Labor passed a whopping 975 acts, adding up to 38,874 pages of legislation.

It’s true that the volume of legislation is an imperfect measure of the growth in regulation, for a number of important reasons. It is indicative rather than demonstrative. It does not take into account the effect that each new piece of legislation will have, nor does it take into account the fact that some legislation might repeal existing law, thereby reducing the regulatory burden. On the other side of the ledger these figures do not include subordinate legislation nor any state laws and council bylaws. But it is extremely suggestive. And constant legislative change imposes its own costs, as we shall discuss below. In 2012 the Institute of Public Affairs calculated that there were 103,908 pages of Commonwealth legislation on the books.

Rudd’s deregulation push may have been brazen, but every government comes to power promising to cut red tape. The Howard government had its own promise to reduce the regulation which was “enveloping small business” but the fruits of that labour are hard to see. Australia was more regulated after the Howard years rather than less, as I pointed out in the 2009 book The Howard Era. For all the stability and good governance that the Coalition offered between 1996 and 2007 it did little to stem the growing tide of regulation. Rudd wasn’t wrong when he diagnosed the red tape problem in 2007. It’s just that he wasn’t the person—and his party wasn’t game—to fix it.

So how does the Abbott government shape up? There are positive early signs. On the headline figure of legislative activity, 2014 was a good year. There were just 135 acts constituting 4607 pages of legislation passed through the Commonwealth parliament last year. This is a drop from the more than 5000 pages passed in 2013, and happily well below the 8150 passed in 2012. No doubt this is in part due to the trouble that the government has had passing its bills through a hostile, unpredictable Senate. But it is also due to the efforts of the Coalition’s own deregulation minister, Josh Frydenberg, and the emphasis that the Abbott government has placed on its deregulation agenda. Abbott and Frydenberg made deregulation one of the central features of its economic message in the Gillard years, leaning heavily on reducing the regulatory burden as part of its plan to revive the economy after years of sluggishness.

And yet. While the Abbott government repealed 57,000 pages of legislation in 2014—and claims to have saved the economy a whopping $2.1 billion a year—much of that which was repealed was already defunct. The real work of deregulation, if it is to occur, hasn’t started.

Indeed, the Abbott government’s deregulation experience shows why this agenda is so hard to pursue. In 2013, the much-publicised “Repeal Days”—a single parliamentary day every six months dedicated solely to repealing law rather than introducing it—were important but, as they came around, their agenda items kept disappearing. For instance, the proposal to eliminate the entirely unnecessary gender-equality reporting requirements imposed on businesses with more than 100 employees had to be dropped, apparently for political reasons. The reforms to the Labor government’s Future of Financial Advice program, which would have taken the edge off some of the most extreme regulatory controls but nevertheless left the previous government’s regulatory framework largely in place, were implemented by regulation. In a surprise upset the Future of Financial Advice reforms were reversed by the Senate at the end of the year. Other deregulatory proposals—such as the deregulation of higher education—have floundered as well.

Every regulation, even the most absurd, has a unique justification, and its own constituency. Gender-equality reporting is “not an issue of red tape”, according to Claire Braund, the head of an organisation called Women on Boards Australia. But it is the epitome of red tape—it imposes no other compliance requirements on firms except paperwork, and paperwork that has no other purpose except informing government. It should be the low-hanging fruit of regulatory reduction. There is not a single person in the country, except perhaps the bureaucrats that administer the program, who would be materially worse off if this requirement was abandoned. Yet gender reporting could not be repealed.

In some areas the government seems intent on going backwards. The Abbott government started 2015 with a stalled budget and by talking up a range of regulatory increases. It’s clamping down on foreign ownership in property. It’s introducing new country-of-origin labels to food products. It’s talking about lowering the GST threshold on imports and digital products, which would require enormous new regulatory infrastructure for retailers and importers alike. It has passed legislation to impose new controls on social media websites to clamp down on cyberbullying and to require internet service providers to keep vast amounts of information on every Australian’s online activities just in case they are in the future suspected of a crime or regulatory violation.

We can bat the pros and cons of these proposals around. They ought to be debated earnestly. But they illustrate that even a government as apparently dedicated to deregulation as the Coalition under Tony Abbott is nevertheless unable to resist the steady creep of new economic controls. There’s something much deeper going on here than traditional party ideology. While it is clear that Labor’s approach to regulation was worse than what we saw under the Howard government and what we have seen so far under Abbott, we’re talking about differences in degree, not kind. There is a deep and seemingly inexorable logic of modern democratic government that pushes it towards regulatory excess. Recognising we have a problem is the first step to solving it.

And it is a problem. Each year the World Econ­omic Forum publishes a Global Competitiveness Report which rates world economies according to a large range of indicators that would help facilitate business. Australia does relatively well overall. We rate well on things like education, the soundness of our banks, the health of our population, the depth of our financial markets, the professionalism of management and so on. But we are catastrophically bad when it comes to “burden of government regulation”—a terrible 124th in the world, sharing a spot with such economic powerhouses as Iran, Spain and Zimbabwe. Our competitors rate much higher. The United States is at eighty-second, while Canada is twenty-ninth.

The Australian Industry Group surveyed 241 CEOs in Australian businesses. The number of executives who nominated government regulation as one of their top three impediments to growth has grown from 9 per cent in 2011 to 11 per cent in 2014. This figure may seem relatively small in isolation, but given that it competes against other factors like the global economic and investment climate, it is strikingly high. Fully 83 per cent of CEOs believe they face a medium to high level of regulatory burden—particularly in the areas of industrial relations and health and safety.

The Minerals Council of Australia commissioned a review of legislative controls on the mining industry. It found that the number of primary pieces of legislation overseeing project approvals nation-wide increased from ninety-four to 144 between 2006 and 2013. Subordinate legislation increased even more: from sixty-six in 2006 to 119 in 2013. As they told the Productivity Commission’s 2013 review into mineral and energy resource exploration, the largest mining states, Western Australia and Queensland, have some of the most onerous regulatory burdens. Hancock Prospecting’s Roy Hill iron ore project in the Pilbara has required a staggering 4000 licences, approvals and permits—much of them imposed by the state government.

The cost burden of regulation is well known. But more important—and harder to test—is how regulations shape and constrain the economy itself. A modern economy is subject to constant shocks. Technologies change. Preferences change. New business models supplant old business models. Political events in distant countries can have unpredictable ricochet effects for Australian firms. Foreign price changes suddenly render existing ways of work unprofitable, or open up new opportunities. Firms have to constantly shift their operations, their ways of doing things, even their entire business models sometimes just to stay afloat. Economic change does not just occur in boom-bust cycles, nor in the long-term technological revolutions that have characterised the last two centuries. Tiny changes to supply lines, seemingly minor legislative changes in distant countries, and modest but constant adjustments to consumer goods mean that the economic ground is constantly shifting under the feet of the business sector.

Contrast this unstable economic dynamism with the political system that proposes to regulate it. Statutes reflect the nature of the world only at the moment of their passage through parliament. Legislation is static—black words in leather books that can only be altered through fraught and complex political negotiation. Even minor, uncontroversial legislative amendments can take months. Serious change can take years, from green papers to white papers to exposure drafts to committee inquiries to law of the land. Each of those legislative changes that the Gillard government was so pleased to have overseen was a long time in the making—the fruit of months and years of bureaucratic busywork. As a consequence the economic environment depicted in statute is almost always long out of date. Embedded in each statute are assumptions—about the shape of industry, technological ability, the force of competition—which do not last.

In other words, no matter how active the government is, the law is a static instrument. The economy it governs is dynamic. This creates serious problems. As rock beats scissors, law trumps business needs. Firms facing economic headwinds find that their ability to adjust is limited by the legislative environment they operate in: legal constraints are constraints on business flexibility. In an Institute of Public Affairs paper published in December 2014, Dom Talimanidis demonstrated the perilous decline in entrepreneurism in Australia. Where new businesses constituted 17 per cent of total businesses in 2003-04, in 2012-13 new businesses were just 11 per cent of total businesses. Unsurprisingly, the relative decline in business entry is greatest in those states that are the least economically free.

The burden of regulation is most obvious when we look at individual firms—the time spent on paperwork, the business opportunities not pursued. But all these little disincentives and distractions add up. Regulatory excess can have serious macro-economic consequences. In an important paper published by the Swedish think-tank Research Institute of Industrial Economics in January 2015, the economist Christian Bjørnskov looked at the relationship between standard measures of economic freedom and economic crises. As Bjørnskov finds, a high degree of economic freedom does little to prevent countries from suffering an economic crisis. But the degree to which an economy is free is a very important factor in how quickly a country recovers from a crisis. The things that matter here are not whether taxes are low, government spending is modest, or whether the rule of law is strong, but how efficient the regulatory environment is.

Economic crises necessitate a large-scale reallocation of resources, away from troubled sectors and into more stable ones. At the individual level, a person who has lost a job in an economic crisis needs to move rapidly into new employment—perhaps even new employment in a new industry—before the harm of unemployment becomes too manifest. Regulations like occupational licensing and industrial relations laws that raise the cost of employment act as a handbrake on the necessary economic adjustment. All regulation in some way prevents resources from being used alternatively—even if it is just the opportunity cost of time spent filling out gender-reporting forms. Even when regulation is desirable, we have to recognise that all regulation makes for a less flexible economy, and one less able to adapt to change.

One possible answer to the problem of legislative immobility is for parliament to grant a certain amount of discretion to adjust and interpret regulations according to changing circumstances. This is what we do when we hand decision-making power over to regulatory agencies. Yet vesting unelected regulators with discretionary power does more harm than good. It exacerbates regulatory uncertainty, with serious consequences for the private plans of individuals and firms. It facilitates regulatory “capture”. And of course it has a democratic legitimacy problem—under whose authority do regulators make what are effectively public-policy decisions?

Nevertheless, policy-makers today lean heavily on delegation to regulatory agencies, handing them quasi-legislative power. In an important book, Is Administrative Law Unlawful? (2014), the Columbia Law School professor Philip Hamburger traces the origins of such delegated legislative power back past the creation of regulatory agencies at the beginning of the twentieth century—where most scholars’ history stops—all the way to the pronouncements of medieval kings. Hamburger draws a distinction between administrative pronouncements by executive governments that are intended to bind officers of the executive and those that are intended to bind society more generally. The former form of pronouncement is obviously necessary for government to function. Bosses need some way of instructing their employees. But pronouncements that affect the public more generally ought to be the purview of the legislature, not the executive. These are more akin to the exercise of the royal prerogative than democratic law.

We often imagine that our modern concerns are distinct from those of the past. But how much legislative power the executive could exercise without parliamentary approval was one of the great contests in the lead-up to the English Civil War. The seventeenth-century English historian Roger Twysden declared that “the basis or ground of all the liberty and franchise of the subject” was “this maxim, that the king cannot alone alter the law”. Yet through executive pronouncement and delegation governments have vested vast legislative power in what scholars call “non-majoritarian” regulatory and bureaucratic agencies.

We are yet to work out the long-term democratic significance of this approach to governance. But the economic consequences are dire. Friedrich Hayek argued that the rule of law had three requirements. Laws had to be general, that is, they applied not to specific circumstances and individuals but to society as a whole. They had to be equal—they had to apply to all people in society equally, without discrimination. And finally they had to be certain. Certainty is a strange word to be used in connection with economic life, of course: there is nothing certain about the future. But the challenge of economic uncertainty is exacerbated by political uncertainty. Hayek wrote:

I doubt whether the significance which the certainty of the law has for the smooth and efficient working of economic life can be exaggerated, and there is probably no single factor which has contributed more to the greater prosperity of the Western World, compared with the Orient, than the relative certainty of the law which in the West had early been achieved.

So laws ought to be clearly spelled out. They need to be “known”. Their consequences and significance ought to be discernible to all those who are expected to follow them. We ought to limit the discretion that administrators and bureaucrats have in applying the law.

But does this black-letter approach to law really create certainty? What is certain about black-letter law that is subject to constant revision? Or black-letter law that is constantly being supplemented, complemented and expanded? The volume of legislation currently being pushed through parliaments, state and Commonwealth, Labor or Coalition, and invented by regulatory agencies, is itself a challenge to the certainty of the law. As Bruno Leoni wrote in his classic study Freedom and the Law:

The more intense and accelerated is the process of law-making, the more uncertain will it be that present legislation will last for any length of time. Moreover, there is nothing to prevent a law, certain in the above-mentioned sense, from being unpredictably changed by another law no less “certain” than the previous one.

Thus, the certainty of the law, in this sense, could be called the short-run certainty of the law.

For anybody who had a time horizon longer than that short run, the law was anything but certain. Leoni’s book was published in 1961. His lifetime (Leoni was born in 1913) had seen enormous economic and technological change, but the scale of those changes pales in comparison to the shifts in technology and business that we are seeing today. In just a few years entire industries have shifted out of the terrestrial world into online. Ubiquitous communications have made older traditions of work obsolete. It is absurd that we have shop trading-hour regulations, as still exist in Western Australia, co-existing alongside always-on mobile internet shopping. While firms like Uber and Airbnb are revolutionising transport and accommodation respectively, they present a competitive threat to the taxi and hotel industries that have been lumbered with long-standing and costly regulation. Stretching our view slightly further into the future, today’s regulatory assumptions are going to be challenged by new technologies like 3D printers, consumer drones and digital cryptocurrencies like Bitcoin. No matter how manic is the legislative activity that characterises our political system, it is nevertheless unable to keep up with social and technological change.

Despite the small but important successes of the Abbott government in reducing some regulation and clearing the statute books of anachronisms, it is obvious that the deregulation movement has stalled. Deregulation is now more a political slogan than a serious public-policy project. Politicians have ceased trying to justify the purposes of deregulation and now treat deregulation as a good in-and-of-itself. This is a testament to the intellectual success of the deregulators of the past—who made the case for lower regulation a virtual self-evident proposition—but it has left the political class with little appetite to actually argue the case for needed reform. When each side has committed itself to deregulation, all that remains is a rule-in, rule-out game. Unfortunately, in the nature of politics, rule-outs are more common than rule-ins. The populist pressure for new law is far greater than the intellectual pressure for less.

Thus the deregulation stalemate, a stalemate more pernicious as we move towards an unpredictable economic future and hyper-innovations in technology. The issue is not how many “repeal days” are scheduled in a year. The issue is how the government sees its relationship with the economy. We do not lack alternatives to the over-regulation path we have taken. Leoni was an advocate of the common law—the system of private, particular and iterative law-making vastly superior to the statutory law which now dominates our legal systems. Rather than expecting politicians to play constant catch-up with economic and technological changes, the common law would allow legal issues to be solved when they arise. Law can be discovered, rather than imposed.

Hayek spoke of “generality” as an ideal of the rule of law. In modern regulatory parlance this is akin to “neutrality”. Four decades ago the Fraser government’s Campbell Committee into financial regulation spoke of “competitive neutrality”, just as the Rudd government’s Convergence Review into media and communications regulation spoke of “technological neutrality”. The idea is that products or services that compete with each other should face the same regulatory burden. Deposits in building societies should be regulated the same way as those in banks. Video broadcast over television channels should be regulated the same way as video served over the internet.

Neutrality has proven to be more of a catchphrase than a policy program. This is because genuine regulatory neutrality undermines some of the most fundamental assumptions of government economic management. To regulate is to control. Every advocate of new regulation has an idea of the world that their proposal would create. Regulation is always purposeful—it has a goal, a vision of a fixed future. For all the valuable discussion of technological neutrality, Labor’s Convergence Review collapsed into absurdity when it was unable to shed a fundamental belief in the ability of governments and regulators to shape the world around them. Rather than reducing the burden on highly regulated television services, it proposed to expand those regulations onto the ungovernable internet. Neutral, yes. But also absurd.

The Convergence Review offers a microcosm of the broader regulation problem. Regulatory excess is the result of governments trying to impose their values on the economy—using law to shape the economy according to their own preferences rather than allowing the economy to flow unpredictably according to consumer demand and entrepreneurial experimentation. In that sense, it is a reflection of the political system from which it emanates. If the Abbott government wants to go down in Australian history as a significant reform-driven government, then the “deregulation agenda” is not enough. It needs to start a serious rethink of the relationship between the dynamic, entrepreneurial economy and the static but over-energetic regulatory state.

Chris Berg is a Senior Fellow with the Institute of Public Affairs. His new book, Liberty, Democracy & Equality, was published by Connor Court last month.