The Productivity Commission and a legacy of unwelcome advice 🍋
Hefty tomes have their place
“The commission became known for rather hefty tomes on housing affordability, local government land use regulation and urban planning, more effective social services, and productivity within the state sector. Few would have read those reports all the way through. But their detailed work would have been important to Labour’s urban growth agenda, and to the prior National government’s investment approach in social services.”
But that didn’t mean the Commission wasn’t, at times, a thorn in the side of both. And there were numerous occasions where the Commission offered up challenging advice that could have helped avoid later problems, which was not taken. In this post, we discuss a few examples.
Considerable inertia
On education, the Commission irked Tertiary Education Minister (and later Minister of Finance & Minister for the Productivity Commission) Steven Joyce with its unflinching analysis of the tertiary education system. The terms of reference for that inquiry asked the Commission to investigate “considerable inertia” from tertiary providers to innovate and “shift away from traditional models” of delivery. The Commission found the inertia lay with the system itself — in regulatory settings that bestowed market power, granted local monopolies, and required cartel-like structures; and in a funding system that stymied innovation and punished risk takers.
The Commission went further, showing how the education system perpetuated disparities in opportunity. Because people from higher socioeconomic backgrounds participated in tertiary education for longer, and at higher levels, they received more government funding towards their education. In effect, carpenters pay for doctors’ education. And ethnic disparities in participation and retention in degree-level study largely reflected disparities that emerged earlier in the education system.
“The vast majority of the explained ethnic gaps were due to differences in school performance, at age 15-16, with socioeconomic status and parental education also playing important, but much smaller, roles.”
The Government responded to the draft inquiry report in 2016 with “On the whole, the New Zealand tertiary sector currently performs well, especially when compared with our international peers, so there is a high bar for major changes”.
and Bronwyn Howell argue that the reluctance to deal with the issues identified in the Commission’s final report contributed to the current funding crisis now facing New Zealand’s universities. In particular, the ability of universities to respond to falling domestic student demand by changing prices and innovating their offerings remains severely constrained. That leaves cost reductions, which, for institutions whose largest cost is academic staff, means layoffs.Prices and confidence in the ETS market collapsed
On climate policy, the Commission recommended in 2018 that the Government should “fix the weaknesses in the New Zealand Emissions Trading Scheme that compromise its ability to deliver effective emission pricing”, including setting up an independent agency to look after the market and provide greater “stability, transparency and forward guidance”.
Instead, the Government kept hold of decisions about ETS market settings, and saw New Zealand Unit prices and confidence in the market collapse after it ignored advice on from the Climate Change Commission on reserve prices and the volumes of units to be auctioned. Three auctions of New Zealand Units have failed this year, meaning that the Government has missed out on hundreds of millions of dollars in revenue.
Job-killing robots evaporated
In 2016, the Labour Party was busy laying out its labour market policies to ensure the security of jobs. According to Grant Robertson, technological change was moving at "warp speed" which posed a real risk of growing the inequality gap. "Ensuring we are prepared for the changing nature of work is one of the biggest tasks facing New Zealand”.
The new Labour-led government gave the Productivity Commission a terms of reference for an inquiry into Technological change and the future of work in 2019. Unhappy with the Commission’s hefty tomes, Finance Minister and Minister for the Productivity Commission, Grant Robertson sought to be more directive about what the Government wanted in terms of outputs.
“We encourage the Commission to break the inquiry down into a series of shorter, related reports, published throughout the term of the inquiry, with a final report summarising findings and providing recommendations”.
The Commission complied – publishing five reports before its final summary report delivered in March 2020. The Commission’s initial report challenged the central premise that technological change was disrupting the world of work:
“There is little, if anything, in the available data to suggest imminent disruption to work. In an environment of rapid technological change and diffusion, one would expect to see high rates of firm start-ups, high productivity growth and high levels of job churn. Yet across the developed world, the data indicates the opposite… New Zealand needs to embrace technology, not treat it as a threat. The problem is not that there is too much technological change and adoption; there is too little.”
Taking to heart the Government’s desire for the timing of outputs to align with its policy process, staff started a blog Futureworknz, aimed at generating and testing ideas for the inquiry and promoting debate on live issues. Posts published twice a week, debunked fallacies, argued that redundancy pay is outmoded, and challenged notions about “good jobs”.
No doubt Grant Robertson found the analysis, and the Commission, irksome. However, as it turned out, there was little space for the Government to consider the Commission’s advice. By March 2020 the world of work had changed. Far from being concerned about the impact of technology on work, many people harnessed technology so that they could work from home in the pandemic. And many firms accelerated their uptake of new technology to stay in business and keep their staff in work. All the rhetoric about job-killing robots evaporated.
An unfinished legacy
Of course, governments didn’t ignore everything the Productivity Commission recommended. For example, commentators have pointed to the Commission’s recommendations as providing the groundwork for reform of the Resource Management Act. But given the heated debate and controversy over recent RMA reforms, that may be a legacy that is still unfinished.
So, what’s been the legacy of all the unwelcome advice? Some of those hefty reports are still being used and read (all the way through) by officials, and we are still regularly asked about them. That’s because as Eric Crampton so sagely observed, the Commission’s reports were deeply technical, they were impartial, and they mattered. They still do.
By
&Judy Kavanagh worked for the NZPC from 2011 to 2022. She was the Director of the New models of tertiary education inquiry and the Technological change and future of work inquiry. She also worked on inquiries into housing affordability, regulatory institutions and practices, and state sector productivity.
Nik Green worked for the NZPC from 2013 to 2021. He was involved in inquiries into regulatory institutions and practices, urban planning, state sector productivity, low emissions economy, technological change and the future of work, and New Zealand’s immigration settings.
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No advice has been more "unwelcome" than housing affordability inquiries concluding that supply of greenfields land is the make-or-break factor. And it clearly is, it is a slam-dunk to show this from the evidence. We have a modern neo-pagan established religion that holds land itself as sacred as if we were Maoris to whom it is "Taonga". Labour even without the Greens, won't go against this belief. Even National, under John Key, lacked the spine to face the wrath of the clerisy on this - it is a tragedy for NZ that it didn't attend to this problem then, as it has only got so bad as to be of mind-boggling proportions. Michael Reddel said it precisely in 2016 (which was already terribly late)
https://croakingcassandra.com/2016/07/28/a-couple-of-cartoons/
"...There are no totally easy or fail-safe ways to unwind the disaster that the New Zealand – especially Auckland – housing market has become. But this is a clear example where the sooner it happens the better. If house prices rose sharply one day and were reversed the next, almost no one suffers. If prices rise sharply for six months and then fully reverse, a few people will have difficulty – but the losses will be isolated and limited, posing no sort of systemic threat. But if real house prices stay at current levels for the next 20 years, most of the housing stock will have been purchased (and borrowed against to finance) at today’s incredibly high prices..."
The arguments that urban sprawl has downside costs that exceed the benefit to the economy and society, from house prices being affordable by historic norms and remaining stable, are simply unreasonable. Simply pricing the externalities we are worried about, and leaving urban economies free of gouging economic rent in land, would be the rational way to go. Ironically, the cost of 'pricing" - taxes and fees - for infrastructure use and provision - might cause outrage. But costs of even greater magnitude for every new entrant to the market, buying or renting unaltered existing houses (and new vastly smaller and lower quality ones) does not seem to arouse the social conscience sufficiently to guarantee political action.