Tuesday, 27 August 2013

Look out - the termites are coming

David Lange famously once remarked about Roger Douglas, "He's like rust, he never sleeps".

I'm beginning to feel the same way about the folks, in academia and in the commentariat, who are insistently trying to undermine the market-friendly and consumer-friendly reforms the Labour government of 1984-90 brought in, and which the National government of 1990-99 extended.
We're not alone in this, by the way: the termites are on the march in Australia and the UK as well.

The line of argument here and overseas generally runs like this (it comes with variations, but this is the general gist). It's a three-step.

Step 1. The GFC was a disaster brought about by deregulation of the finance sector.
Step 2. Therefore deregulation is a bad thing everywhere.
Step 3. Therefore it must be rolled back.

Even if you subscribe to Step  1 - and even though deregulation may have played its part in it, you'd have to observe that financial booms and busts have been happening for centuries under every sort of regulatory regime - the real sleight of hand comes at Step 2.

That's a big step, and it's not supported either by any great body of principled reasoning. Quite the opposite - at the level of theory, economists would generally say that workably competitive markets tend to work better for consumers and suppliers than anything else. As one of my favourite quotes puts it (from Oxford's Prof George Yarrow), "Market processes are often messy:  outcomes can be both inefficient and unfair.  The soundest argument for markets ... is simply that, very frequently, they are the least bad of the alternatives.  To paraphrase Churchill's remark on democracy, markets are the worst method of resource allocation, except for all the others that have been tried".

As economists or intelligent folks interested in economic issues, you probably know that, so why am I banging on about it?

What's got me sounding off  was a new opinion piece on a Stuff blog, 'Espiner: Deregulation's unfortunate experiment'. Espiner acknowledges, fairly, that New Zealand, pre-reforms, was in a bad way - "Back in the early 80s, New Zealand had one of the most regulated economies in the western world. You had to order a new car in advance... You couldn't take money out of the country without permission, employ anyone who wasn't in a union or put a cafĂ© table on a footpath" - but argues that the proposed solutions made things worse, and were responsible for everything from Pike River (no, really, that's what he argues) to the Fonterra product contamination.

In his words: "We've had to endure the meltdown of our finance companies, the fleecing of thousands of investors of their retirement savings, a $6 billion leaky homes fiasco, the worst and least competitive telephone service in the western world, some of the highest electricity prices, the deaths of 29 miners at Pike River and most recently, the severe shock to our dairy industry.
Light-handed regulation has, in short, been an unmitigated disaster".

I'm not going to say that New Zealand's various regulatory regimes were all up to the mark. It doesn't look as if they were. But as for the rest of Mr Espiner's arguments, they're codswollop*.

I've written before, in Deregulation - how quickly we forget, about how people's memories are very short when it comes to the benefits of the liberalisation and deregulation we introduced, so let me remind people of just some of the things that have changed for the better.

Ordinary folk can get a mortgage. When I came out to New Zealand, to work for the Bank of New Zealand, it had virtually no housing mortgages on its books. You had to have an 'in' with a firm of solicitors to get them to lend you money from their trust accounts. How do you reckon that worked for many people?

People can buy cars and clothes and household appliances and electronic gizmos at a sensible price, instead of the limited quantities of highly expensive products the Men from the Ministry condescended to allow them to have. Espiner is, for some reason not obvious to me, particularly scathing of our lowered barriers to imports, saying we were "performing a down-trou on the world stage that was again vigorously applauded by an audience that then went home wrapped up in its nice warm tariffs". You know what? It actually doesn't matter a damn whether those other countries kept their tariffs or not (and he's factually wrong anyway, many other countries have liberalised their trade over the past couple of decades): we won even by moving on our own.

And who do you think most benefitted from cheaper imports? The politically connected businesspeople with the valuable rip-off import licences awarded to them by their mates in Wellington? Or ordinary families who can now buy clothes and shoes and televisions in The Warehouse at affordable prices?

And how'd you like to be back in the days when Prime-Minister-and-Finance-Minister Muldoon could simply announce that you wouldn't get getting any pay rise this year. Or next year. And that interest rates have just gone down 4% because I said so in the Budget last night (a true example). But they might go up 4% tomorrow if I feel like it. And the Kiwi dollar is worth whatever I say it is. And sorry about the 11% inflation rate.

Like to go back to that, from today's world of low and steady inflation? An outcome we have got, by the way, by adopting one of those newfangled experiments in economic theory (inflation targetting in this case) that Espiner so dislikes?

66% top rate of income tax do anything for you? No, I didn't think so. Like to go back to having the pubs shut at 6.00pm? When you couldn't buy wine in the supermarket? When the shops were closed on the weekend? How about giving Air New Zealand back its monopoly on domestic air travel?

Yeah, right.

And why not give Telecom its monopoly back, too (on mobiles as well as landlines, of course - the Ministry can't have you making choices for yourself, can it)? Yes, I can see that bright idea fixing "the worst and least competitive telephone service in the western world" that Espiner is so worked up about.

As regular readers of this blog will be aware, I'm no booster for the telcos, and there's still a way to go before we have the sort of choice I'd like to see, but Espiner is barking mad if he thinks (a) telco services have got worse since deregulation or (b) they'd improve if we went back to the old state monolith. And don't take my word for it - go and read the Commerce Commission's annual monitoring reports on the telco market and see for yourself how (for example) mobile prices have been falling now that we've got greater competition (I reproduced one of the Commission's graphs showing it happening here).

I could go on, but I doubt if any amount of compelling evidence would make much difference to the white anters steadily gnawing away at markets, flexibility and choice.

*Original text amended in light of feedback

2 comments:

  1. I agree that this was a pretty sweeping criticism, and silly in places. But I also thought he had enough 'hits' in his claims to make for an interesting article. Which ever way you look at it the amount of money lost to dodgy financial houses and the loss of life at Pike River resulted from deregulation gone crazy, and a slack government. So I think he had some good points among his silliness.

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  2. Thanks for the comment, and I can see your point. I've amended the text a little to better reflect his argument about weak supervision. Thanks again for the feedback

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