Another Productivity Commission inquiry

A day after posting my sceptical comments on the Productivity Commission’s land supply report comes news that the government has asked the Commission to undertake more of a blue-skies exercise.  In the words of Bill English’s press release

The Government has asked the Productivity Commission to review urban planning rules and processes, and identify the most appropriate system for land use allocation, Finance Minister Bill English says.

“Urban planning in New Zealand not only underpins housing affordability but also the productivity of the wider economy,” Mr English says.

“Many parts of the regime are out-dated and unwieldy, having been developed over the years in a piecemeal fashion. International best practice has moved on and so must New Zealand.”

The Productivity Commission will undertake a first principles review of the urban planning rules that fall under Acts such as the Local Government Act, the Resource Management Act and the Land Transport Management Act, to ensure they support a responsive housing market.

“The Commission will also consider ways to ensure the future regime is flexible and able to respond to changing demands.”

There have not been many occasions in its seven years in office when the current government has pleasantly surprised me, but this was one of them.

And in the words of Murray Sherwin’s press release

“Most New Zealanders live in cities, and cities are places where most of the country’s economic activity occurs. It’s important that our planning system effectively controls harms to people and the environment, makes enough room and infrastructure available for homes, businesses and industry, and responds quickly to change,” said Commission Chair, Murray Sherwin.

“Cities across New Zealand face a range of challenges. Fast growing cities like Auckland are finding it difficult to provide enough capacity to house their rising populations, while others face the problem of maintaining essential services and infrastructure with flat or declining populations. Urban areas need a planning system that can respond effectively and efficiently to these pressures.”

“Our inquiry will explore the development of the current planning system in New Zealand, assess its performance compared to other countries, and identify where change is needed. The aim is not to draft new laws ourselves, but set out what a high-performing planning system would look like.”

The government’s terms of reference for this inquiry have not yet been released, so we’ll have to wait and see what, if any, constraints have been put on this particular inquiry.

I’m cautiously optimistic that the Commission will come up with something useful as it pulls together its report over the next year –  although ideas of private choice, preferences, markets, and knowledge limitations need to weigh at least as heavily as smarter government and better plans.

But it is worth bearing in mind that the current government has already been in office for seven years, and has achieved very little in respect of liberalising the rather dead-hand of the regulatory state in this area.  By the time the inquiry report emerges, the government will be eight years old and just about to head into an election year.  Major reforming legislation seems unlikely in 2017, and who knows what lies beyond that year’s election.  Have fourth term governments been known for their bold reforms (late Seddon, late Massey, 1946-49, 1969-72)?    Is a government in which the Greens are full members, or are  relied on for confidence and supply, likely to be one that introduces far-reaching reforms to make the land and housing markets work more flexibly and effectively?    And the Productivity Commission seems to have a hankering for more powers for central government –  more so, at least judging by their most recent report, than they favour more powers for individuals and more reliance on the market.  But more powers for central government might seem appealing if a particular central government shares one’s vision, but rather less so in other cases.

Perhaps the best we can really hope for is an authoritative document that will be mined for workable nuggets in the following decade or two?   But that, in itself, would be no small achievement.

I’ve noted previously that I’m not aware of examples where far-reaching planning regimes once in place have been materially unwound, enabling housing to become consistently more affordable and responsive to the needs and interests of potential purchasers.   Impressively, the Productivity Commission says its issues paper for this inquiry will be out only six weeks from now.  I hope they use that opportunity to draw our attention to any liberalising experiences abroad they are aware of.   And as the Commission has come across as rather sympathetic to the desire of councils to promote “compact urban forms”, I hope they consider the historical data suggesting that as cities have become richer they have tended to become less dense, not more dense.

It would be interesting to know what prompted this belated request from the government.  I wonder if the Hsieh and Moretti paper has played a part?  Certainly the Minister now talks of “urban planning in New Zealand…underpins…the productivity of the wider economy”, and the Commission was slightly breathless in its enthusiasm for the results

Quantifying the size of the prize is difficult, but it could be significant. One US study (Hsieh & Moretti, 2015) estimates that lowering regulatory constraints on land supply in three high-productivity US cities – New York, San Francisco and San Jose – to that of the median level of restrictiveness in the United States would increase GDP by 9.5%. A productivity bonus anywhere near this level would be of major significance to the New Zealand economy. Indeed, it is difficult to think of many other policies that would yield such an improvement in the nation’s economy.

I’m all in favour of much less heavily regulated land use, but I remain pretty sceptical about size of any aggregate productivity gains that such reforms might offer.  Well-functioning markets in affordable housing would be a great gain in their own right.  But papers like that of Hsieh and Moretti need a great deal more scrutiny before putting much weight on the idea that urban planning reform offers very large gains in productivity or GDP per capita.   It would be interesting, for example, to see some detailed scrutiny of comparisons between San Francisco and New York on the one hand, and Atlanta and Houston on the other.  And cross-country comparative analysis would also be interesting, including taking account of the economic fortunes of such cities (with tight land use and building restrictions) such as Sydney and London.

And I was curious about the timing of the announcement.  When an announcement is slipped out on the day of World Cup final, it doesn’t suggest any great desire on the 9th floor to draw much attention to the new work.  And consistent with that, perhaps, the capital’s daily newspaper, awash in black, does not even report the announcement (UPDATE: nor, as far as I can see, does the Herald).

The recent Productivity Commission report has a nice summary of the evolution of the planning regime in New Zealand.  Some time ago, browsing on the Ministry of Justice website [1] I stumbled on this snippet, from the speech of a Cabinet minister introducing to Parliament New Zealand’s first piece of town planning legislation in 1926:

Cities and towns in the Dominion at the present time have no schemes of town planning and the sooner the controlling authorities have the power and set to work and draft such schemes the better for themselves and the people generally.

Perhaps the councils benefited, but it less clear how “the people generally” – and especially those wanting reasonable housing for themselves and their children – have come to benefit.  Perhaps the new Commission report will help answer that question.

UPDATE: The Terms of Reference for the new inquiry are here.  As a quick reaction:

a.  They seem to take too much for granted the need for an “urban planning system”

b.   There are no references to individuals, markets, private preferences, choice, property rights etc

c.   The list of those the Commission is enjoined to consult is lengthy, and almost exclusively parties with vested interests in the process.  Many will have useful specialised knowledge, but there is no emphasis on property owners, potential house purchasers and the like.

d.    The Commission is enjoined not to undertake what might “constitute a critique of previous or ongoing reforms to the systems of legislation that make the urban planning system”.