If ever there was a “negative externality”, as economists call it, this is it. The cost of regulatory delay has two aspects. It greatly reduces the productivity of the construction industry, affecting both housing, and commercial and infrastructure construction.
If ever there was a multifaceted problem it’s housing affordability; problems on both the demand and supply sides. But we’re indebted to Treasury for pointing out just how much of the problem is explained by the growing inefficiency of our home building industry.
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It’s a cottage industry that’s done too little to seek economies of scale. But the average time it takes to produce a new home has worsened greatly in recent decades. This must surely be explained mainly by the growing time it takes for building permits to be issued.
So, if we were to greatly reduce the average approval time – which shouldn’t be too hard – we could expect this to significantly increase the number of homes the industry could produce each year, without any increase in its size. Productivity improvement doesn’t come more clearly than this. And this relatively easy policy measure could also put a decent dent in our home affordability problem.
The other respect in which delays in approvals are costly comes from what economists call “the time value of money,” and normal people call interest rates. Construction companies have capital – borrowed or from shareholders – tied up and waiting for the off from approval bodies. So for every day that capital lies idle, the business has funding costs that aren’t matched by income-earning work.
One of the most useful things about the roundtable is the way it has produced evidence of the extent of something we rarely notice: overlapping and conflicting regulations, the surprising number of approvals businesses must get and the growing delays in getting them, as well as all the forms that regulators demand be filled, repeating known information.
If we were to greatly reduce the average approval times, we could expect this to significantly increase the number of homes the industry could produce each year.
As the Productivity Commission has confirmed, our businesses face a thicket of regulations. That thicket grows with each year of governments governing. It grows because governments take on more objectives.
They want economic growth and rising living standards, but they also want to transition to renewable energy, protect the natural environment, keep people safe at work, ensure diversity in the workforce, and various other completely legitimate concerns.
Trouble is, we’ve got all these outfits busily regulating this bit and that bit, without any outfit sitting over the top, regulating the regulators. Making sure the various bits fit together without overlap and contradictions, finding the best trade-off between the conflicting objectives, and forcing all the regulators to rationalise their form-filling, using uniform definitions and common databases.
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That would be hard enough at the federal level, but it has to be achieved by agreement between the feds and the states, with the states getting their local government into line.
When you think it through, it’s not hard to see how excessive, unco-ordinated and conflicting regulation of businesses, with all its approval processes and form-filling, is clogging up the capitalist machine. Unclog the pipes and the machine would produce more each year without any extra inputs.
But regulatory reform has been tried before and achieved little before being slipped quietly into the too-hard basket. And even if the roundtable decisions were to lead to an almighty clean-out of the Aegean stable and a one-off lift in the level of productivity, the capitalist pipes would start clogging up again as governments continued to govern and regulation expanded.
So what we need is another permanent government agency, whose only job is to regulate the nation’s regulators in the interests of the regulated and the continued success of the capitalist machine.
Ross Gittins is the economics editor.
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