How much freedom do we really have?

5 December 2015

An address to the Liberty Fest conference in Wellington

When the Human Freedom Index was published earlier this year, New Zealand was ranked fifth out of the 152 countries included in the survey, behind only Hong Kong, Switzerland, Finland and Denmark – ahead of Australia in seventh place, the UK in ninth place, and well ahead of the US in 20th place.

That looks pretty good, and particularly so given that the index was jointly compiled by the Cato Institute in the US and the Fraser Institute in Canada, both highly regarded think tanks.  The index was based on no fewer than 76 distinct indicators of personal and economic freedom, including freedom of religion, access to sound money, freedom of speech, size of government, freedom to trade internationally, and the extent of regulation of credit, labour and business.

And in many ways, the ranking is not a surprise – we do have a high degree of freedom to speak our minds; we are free to meet with whomever we choose; we are free to trade internationally; we are free to worship God in any way we choose, or not to worship God at all; and at least since the Reserve Bank legislation passed by the Fourth Labour Government in 1989, we have had access to reasonably sound money – and if we don’t like the soundness of our own money, we are free to convert our wealth into any currency of our choosing, or into tangible  forms of wealth such as gold or property.

So in some ways, and certainly compared with many other countries, we enjoy a high degree of freedom.

But how does the freedom we enjoy compare with what a true libertarian would like?

A true libertarian presumably wants absolutely no constraints on his (or her) freedom except for those which are necessary to protect the freedom of others.  And that probably also implies a level of taxation sufficient only to fund those activities of the state which can’t readily be provided privately, such as defence of the state, the prevention of crime, and the provision of some basic infrastructure.

In this world, there would be no huge transfer programmes, such as absorb some three-quarters of the New Zealand budget today – including spending on health, education, social welfare, and New Zealand Super.  People would pay for their own education and healthcare, and would provide for their own retirement.

There would be no laws preventing people from using recreational drugs, the primary effect of which is to affect the body or mind of the user.

There would be no laws obliging people to wear seat-belts, though there would still be laws banning, say, texting while driving because of the risk this poses to other road users.

There would be no compulsory earthquake insurance.

There would be no labour market laws, with people free to hire out their labour at any price they judge appropriate for them.

There would be no laws affecting the provision of financial advice, or the way banks must behave, with people free to make their own judgements about the ethics of financial advisers and the prudence of banks.

There would be no urban planning rules, with property owners free to build whatever they choose on their own property, subject only to being sued by neighbours for negatively affecting their property.

Instead of that world, we have a society absolutely stuffed with rules and regulations.  (And that’s probably true in both senses of the word “stuffed”!)  The Productivity Commission noted in a recent report that somewhere between 10,000 and 14,000 bureaucrats are employed full-time administering more than 200 regulatory regimes.  Each year since the mid-1990s, between 100 and 150 acts and some 350 legislative instruments have been added to the rulebook.  In total, we are now dealing with nearly 3,000 acts of Parliament and nearly 5,000 legislative instruments.

Why on earth is that, particularly when the political party which has been in power for most of the period since the end of the Second World War ostensibly believes in personal responsibility and limited government?

I think the answer to that question is essentially that there is an almost universal assumption that if things go wrong, the “government” – for which read “taxpayers” – will pick up the tab.

Thus for example, those riding in cars are legally obliged to “buckle up”.  A libertarian might say – “Why should anybody be obliged to buckle up?  After all, the person who gets killed or injured when NOT buckled up is the person who chose not to buckle up.”  True of course, but what happens in every modern society when somebody gets injured in a car accident?  An ambulance funded by others, and a hospital funded by others, picks up the tab.  And if the injuries are serious, or indeed if they are fatal, the dependents of the person injured or killed receive at least basic support from other taxpayers.

Similarly, if somebody’s house is totally wrecked in an earthquake, there is a very strong presumption that others – usually other taxpayers – will provide at least some form of basic rescue, probably in the form of highly subsidised housing.

Surely therefore, society is justified in requiring those riding in cars to buckle up, and those owning houses to take out at least a basic level of earthquake insurance?

On balance, I certainly support those particular limits on personal freedom because I’m not willing to see somebody injured in a car accident, or his dependents, starve because of the stupidity of the person who refuses to wear a seat belt.  Similarly, I’m happy to see some basic level of compulsory earthquake insurance.

But this is clearly a very slippery slope.  Why not also ban mountaineering, or flying in a helicopter over glaciers, or driving at more than 60 kilometres per hour, or sky-diving, or swimming in the open ocean?  Why not ban violent contact sports like boxing – indeed, why not ban rugby?  Any one of these activities could result in injury or death involving a cost to taxpayers.

Why don’t we try to avoid taxpayers picking up the tab for a succession of unwanted children, born to mothers devoid of any stable relationship?  Or punish mothers who drink heavily during pregnancy because of the likelihood that their children will suffer from foetal alcohol syndrome and become a semi-permanent burden on other taxpayers?  (Actually, I would have more sympathy with policies of this kind than for some of the other policies now in place.)

Indeed, I have views on all these issues, but this morning I want to discuss just three areas where, in my view, the intrusion of the state has gone well beyond what can be justified.

The first is policy towards foreign direct investment.  I claim to be a world authority on this subject, having written two books on the pros and cons of foreign direct investment – the first book deploring the costs of foreign investment and the second applauding its benefits! 

Actually, it’s not difficult to show that foreign direct investment almost always benefits the recipient country, and that the profits earned by the foreign investor are by definition less than the value added in the host country.  The only exception is where the foreign investor receives the benefit of some kind of host country subsidy.  Those subsidies were very common in New Zealand’s past – think the artificially high prices which foreign-owned car companies were able to charge New Zealand consumers because of high tariffs on imports.  But with quantitative import controls long gone and tariffs very substantially reduced such subsidies no longer exist, or have been hugely reduced.  So as a starting point, foreign direct investment benefits New Zealanders – through better quality products, reduced prices, more employment opportunities for New Zealanders, more tax paid to the Inland Revenue Department, more rates paid to local governments,  the spread of new technologies, and so on.  Local companies supplying a foreign-owned company are likely to benefit from increased demand, while those in direct competition with the foreign-owned company will probably lose.

When I was an ex officio member of the Overseas Investment Commission (when I was Governor of the Reserve Bank), policy recognised these benefits: there was still a need to secure OIC approval for large scale foreign investment in New Zealand, but approval was almost automatic and was swiftly given.

Today, by contrast, approval by the Overseas Investment Office takes many months, multiple conditions are imposed on the investor, and politicians are prone to override the judgement of the OIO.  The Shanghai Pengxin purchase of the Crafar farms was an appalling example.  The decision took many months, despite the fact that Shanghai Pengxin was offering a price for the bankrupt Crafar farms which was some $30 million higher than the best local buyer was willing to pay; Shanghai Pengxin was obliged to use a government agency (Landcorp) to manage the farms, and was obliged to spend some $16 million on upgrading the farms – as if some Wellington bureaucrat has any right to tell a buyer how much he should spend on improving his investment.

More recently, it took the OIO 14 months to reach a decision on the acquisition of the Lochinver station – only to have that decision overturned by two ministers who were undoubtedly driven by a concern about how the acquisition would play in the general media.

I was myself chairman of Oceania Dairy, a New Zealand-owned company set up to process milk into milk powder in South Canterbury at an estimated capital cost of some $90 million.  We eventually got all the consents required to build the plant and dispose of the water which was going to be a by-product of the process, but then couldn’t raise the money to build the plant from the farmers who had initially been enthusiastic.  We were approached by a Chinese company keen to establish operations in New Zealand, and they wanted to produce not milk powder at a capital cost of $90 million but infant formula at a capital cost of over $200 million.  The local dairy farmers were enthusiastic about having another buyer for their milk; the Waimate District Council were enthusiastic at the prospect of having another rate-payer and another major employer in the district; and the sale of the company to the Chinese buyer did not involve a huge block of land.  It still took the OIO over three months to approve the purchase.  It should have taken three minutes.

The law under which the OIO now operates is, as Jamie Whyte has argued recently, fundamentally flawed, and it is little wonder that the OECD ranks New Zealand as now having the second most hostile policy towards foreign direct investment of any OECD country in the world except Japan.

The second area I want to touch on is the whole area of urban planning, covered by the Resource Management Act and by the Local Government Act.  At the moment, house prices in our major cities are, relative to incomes, among the very highest in the developed world.  In Auckland in particular house prices have reached outrageous levels – with the median house price now some nine times the median household income.  (Housing is regarded as affordable when the median house price is some three times median household income.)

When the Productivity Commission looked at the causes of this situation they found four factors which contributed to it.  One of those causes – the fact that the price of building materials in New Zealand is a bit higher than in, say, Australia – has nothing to do with urban planning rules.  The other three factors are all related to urban planning – the lengthy time and considerable expense involved in getting consents to develop land and build houses; the small scale nature of the building industry in New Zealand (related to the difficulty of accessing decent blocks of land on which to build multiple houses); and the effect of local body planning on the availability of land.

In Auckland and in several other major cities, the local government has ring-fenced the city and refused to allow houses to be built outside that ring-fence.  The Productivity Commission found that the price of land just inside the Auckland Metropolitan Urban Limit, for example, was between eight and ten times the price of land just outside that limit. 

In addition, developers are obliged to build into the price of the sections they sell all of the cost of the infrastructure required by the development of those sections, so that instead of spreading the cost of that infrastructure over its useful life by funding it through borrowing, the cost has to be paid upfront.  The combination of these policies means that high quality rural land selling at $50,000 per hectare suddenly becomes priced at some $5 million per hectare, with the effect of that huge escalation in price reflected through the entire housing stock.

This is having an absolutely devastating economic and social effect, with people on average incomes quite unable to afford to buy a house, with high rents putting a terrible squeeze on a great many families, and with the high level of borrowing required to fund those who can afford to buy at these prices necessitating a very high level of dependence on overseas borrowing by the banking system.

And all of this is a direct result of urban planning rules.  As Dr Arthur Grimes has pointed out, “You can have big cheap cities, or small expensive ones, but just don’t say you can have small and cheap”, which of course is what the Auckland Council is trying to achieve.

And the delays in getting consents are legendary and ridiculous.  The Auckland Council recently boasted that under its fast-track process for resource consents 15% of all resource consents are being approved within 10 working days – which means of course that 85% of consents are taking longer than 10 working days, and this not for large scale developments but for houses!  Why in heaven’s name should it take more than 10 working days – indeed, why should it take even one working day – to approve an application to build a house in an area already zoned for residential development?

Finally, I want to touch briefly on the role which the Reserve Bank plays in banking supervision.  Banking is a tricky policy area because, much as governments and bank regulators like to argue that no bank is too big to fail, the reality is that the closure of any one of the big four or five banks would have such calamitous effects on the economy as a whole that no government is going to be happy about closing it.

When I was Governor between 1988 and 2002, the Reserve Bank tried to put very strong incentives on bank directors to run their bank prudently by requiring each bank director to sign off a statement about the way their bank was being operated on a quarterly basis, while also requiring banks to advise the Reserve Bank how an administrator could operate the bank without closing it should the bank get into serious financial difficulty.

The major banks are still required to operate in such a way that, were they to get into difficulty, the Reserve Bank could step in and manage them, albeit at potentially total loss to shareholders and some loss even to other creditors.  That’s as it should be.

But the Reserve Bank no longer requires each bank director to sign off quarterly disclosure statements, is contemplating the discontinuation of quarterly statements to the public, requires banks to provide a large volume of financial information to the Reserve Bank which is not available to the public, and reserves the right to veto the appointment of all bank directors, all bank CEOs, and all those reporting directly to the CEO.  This is true not just for major systemically important banks but for all banks, even the smallest and, astonishingly, for all non-bank deposit takers and insurance companies.  This is a level of intrusion which seems entirely unwarranted, and can only increase the political pressure on the government to bail out any bank, or indeed any other deposit-taker, which might get into trouble.

Yes, we might be ranked fifth in the world in terms of our overall level of freedom, but that still leaves a huge range of areas where we could be much freer than we currently are.

2015-12-05 00:00:00.Long.
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