We’ve heard a lot lately about regulation, regulators and how they are either not working or we need more of them because the market isn’t working.

It’s good to have these discussions. While a bit esoteric for most, pretty much everyone in Australia has some ideas about the banking royal commission. The two regulators involved (ASIC and APRA) have come in for plenty of commentary by the royal commission and others.

In Victoria, the EPA has drawn comments about the premises where chemical waste has been stored following a spate of toxic fires.

The Fair Work Ombudsman has been criticised for failing to take a harder line on enterprises which routinely under pay their workers, particularly overseas students.

Questions arise about the competence of the regulators and the scope of their remit and powers and the level of resources available. Indeed, we have just heard the Prime Minister talking about reducing red tape and commenting that approvals for big projects are taking unacceptably long time to conclude. He’s asking the business community to come forward to nominate regulations that are holding back investments. PM’s Speech to WA Chamber of Commerce June 2019

The Institute for Public Affairs (IPA) has also raised the question of what it calls “dark regulation”. A slightly emotive term for guidance and processes that regulators provide to regulated entities. I’m sure they also include the specifics of the regulations. (See note at the end for more info).

But there is a different view being discussed as well that has been leveled at the “ neoliberal” stance of many governments for emphasising the market over regulation. Links have been drawn between this “neoliberal” approach and growing economic inequality. I haven’t investigated whether this has been looked at but it would be interesting to see what people conclude. Folks espousing this idea don’t give any references.

The idea that markets work better than regulation has been a predominant theme in Australian policy circles since at least the 1980s. The big picture debate has been pretty much silent for some time and as things have changed a lot since then, it’s probably high time to revisit this and check to see if the balance is right. One thing I am certainly concerned with though is that pendulums have a tendency to swing back too far. So let’s keep some moderation in all this.

While lots of my ex colleagues will attest, I am not a fan of “just in case” regulations, I also am acutely aware that sometimes there is definitely a net benefit to regulation.

I see three areas for discussion here – what do we regulate, what are the regulations and who is the regulator (and how is the regulator configured).

I was going to start at the end of that list because that’s really what started my thinking on these topics. But after the PM’s speech I’m inclined to think more about why we regulate and save the rest of these questions for another day. If you just look for ways to reduce regulation without considering why the regulation is there, you risk throwing out the baby with the bath water. The PM made no mention of this.

Regulation, put simply, is one policy measure that can work to ensure that the community’s expectations about outcomes are given effect when the market will not lead to this outcome and where there is a net benefit from putting the regulation in place. Economists like to talk about “market failure” as the reason for government intervention. Typical of economists, this jargon doesn’t mean what the plain English translation would suggest. For my non-economist readers who are so inclined, there are any number of sites to refer to eg, market failure and government responses. It is important to note though, that intervention does not have to be regulation. And even if regulation may solve the issue, or at least address the worse of it, there is generally consideration of the costs of regulation, including the chance that the regulation makes things worse not better, aka, regulatory failure.

By way of example, I wrote a while ago (In the long run some of us may still be alive to report on it , 27 October 2018) about the challenges for regulators – and by implication, regulations – to deal with issues in the nonsumer market. These are markets where the consumer pretty much doesn’t have a choice about whether to participate or not. Left to their own devices these markets generally do not work all that well. This may be a reason for government intervene, and regulation may be one policy tool to address this.

All I am suggesting is that before we go right off slashing regulations or regulating everything that moves, maybe, just maybe, we should go back to basics and ask what is the issue? Is there a case for government intervention? What would be the most appropriate intervention? Do we fully understand the costs and benefits of that intervention (or failure to intervene)? And yes, go back to the economists’ lists of why and what in this space and carefully evaluate the options. (See for example the reference to market failure I noted above.)

I’ve got to say that there seems to be some benefit in regulations around environmental protections for say large mining or infrastructure projects. I’m less inclined to think there’d be much benefit in registering hairdressers (yes I saw this proposed recently).

And just one final thing, there may well have been less regulation of privatised entities than there could have/should have, because governments, when faced with the trade off between regulation and asset price, failed to stop and take a deep breath when their financial advisors gave them their estimates of the dollar differences.

NOTE

Regulation can be thought of as having three levels. First is the legislation that, hopefully, sets out the objectives of the regulation and its general form. This is an act of parliament. Then there are the regulations made by the Minister responsible for that act. These provide further details about the how regulation will be undertaken, including possibly instructions to the regulator. This is not an act of parliament and is generally reviewable in the first instance through a regulatory impact assessment or similar, then at regular intervals, as these provisions should contain a sunset clause. Finally, the regulator may issue notes, guidance and the very specific details of how it will undertake its regulatory role, including compliance, monitoring, reporting and the processes it will follow. I think it was this last set of documents to which the IPA was referring.