American critique of red tape misses the point on win elections

US President Donald Trump walks on the south lawn of the White House on July 6. Picture: Getty Images

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It’s something of a worry that a book written by two partisan American journalists should be having a biblical-level impact in Canberra.

Written by Ezra Klein and Derek Thompson, Abundance: How We Build a Better Future was published in March. Most of the text was written when it wasn’t clear Donald Trump would be elected as US president for a second time.

The principal aim of the book is to provide guidance to left-leaning politicians about achieving their aims more efficiently. The authors don’t query these aims or ask whether government intervention is really a good idea.

Focusing on three areas – housing, climate measures and infrastructure – the argument is that over-regulation is holding back progress and red tape reduction is the key to better outcomes. The authors make the point that while individual regulations may make some sense and serve legitimate ends, the cumulative effect is often stifling: “Each individual decision is rational. The collective consequences are maddening.”

Abundance by Ezra Klein and Derek Thompson.

The authors present plenty of evidence to back up their case. They cite the example of California, where every political level, as well as the judiciary, is dominated by Democratic Party nominees.

“California has spent decades trying and failing to build high-speed rail. It has the worst homelessness problem in the country. It has the worst housing affordability problem in the country. It trails only Hawaii and Massachusetts in its cost of living. As a result, it is losing hundreds of thousands to Texas and Arizona.”

Communist-run China is given as an example of what can be done, although it’s not entirely clear whether the authors support this repressive regime: “China can build hundreds of thousands of miles of high-speed rail in the time it takes California to fail to build hundreds of miles of high-speed rail. China does not spend years debating with judges whether to move a storage facility.”

The objective of providing more affordable housing is an example where government policies generally have the opposite effect. A recent RAND report compared the costs of producing affordable, family-suitable housing in California and Texas. Per square foot, it costs more than four times to build in California than it does in Texas. The plethora of requirements in California, including the mandated use of unionised labour, explain the difference. It also takes almost two years longer for projects to be completed in California.

Another example is Chicago, a Democrat city. Recently, $US11bn was invested by the city to build 10,000 affordable housing units. That means each unit costs more than $US1m – that’s more than $1.5m in Aussie dollars.

There was a 100-point process for selecting the projects, with 10 points for “advanced level” green certification; 11 points for a women-led development teams; and seven points for certain accessibility standards.

Cost containment scored only three points.

The conclusion is obvious: seeking to impose numerous conditions when the objective is to provide more affordable housing leads to perverse outcomes.

Economists, of course, won’t be in the least surprised; the famous Tinbergen rule deems the requirement of one policy instrument for one objective. Any violation of the rule leads to sub-optimal results.

When it comes to renewable energy, Klein and Thompson observe the far faster rollout in red states – controlled by Republicans – than in the blue states. The legislation that was designed to block what were thought of as undesirable developments such as new coalmines has been used by those opposed to wind and solar installations as well as new transmission lines.

The authors are not great believers in the power of markets or the scope for private businesses to solve most of society’s problems. They still see government as the solution. In their view, the federal government should somehow supercharge science and what is required is “a new kind of entrepreneurial state (with) the government as a bottleneck detective”. Given their observations about the dead hand of regulation, this sounds hopelessly naive.

(It is also reminiscent of that other unconvincing advocate for government intervention, Mariana Mazzucato. One of her books is entitled The Entrepreneurial State: Debunking Public vs Private Sector Myths. Her ideas have captured the imagination of our Treasurer, Jim Chalmers.)

The Klein-Thompson book does contain some useful lessons for Australia. It focuses on the supply side of the economy, which is routinely ignored by policymakers when deciding on large-scale policy interventions – childcare and aged care being obvious examples.

It also strongly makes the case for focusing on productivity.

In the authors’ words, “an economy can grow because it adds more people. It can grow because it adds more land or natural resources. But once those avenues are exhausted, it needs to do more with what it has.”

The authors strongly favour an expansion of nuclear power in the US, arguing that the massive over-regulation of the industry has thwarted the industry for decades. Our Energy Minister, Chris Bowen, may like to pay attention.

Where the authors err is their take on the role of government and how political parties can win office. It’s a technocratic view of how governments should function. The leaders should develop worthy policy aims, hopefully with political appeal, and then go about achieving these aims in the most efficient and cost-effective way possible.

Whether voters are really swayed by the supposed technocratic prowess of political parties is unclear, although blatant incompetence tends to be punished.

It was not something Trump campaigned on. Rather, it was the message of making America great again – a values-based statement that means different things to different people. The Coalition may want to take note: claiming to be a more efficient government manager is probably unlikely to win elections.

The likeliest message the Albanese government will take from the book is the need to reduce red tape, but only in preferred areas.

This will include housing and renewable energy where infringing on the rights of those adversely affected by investments, often subsidised, will be justified in the “national interest”.

The states will be called on to make much of this happen. It is already happening, with state planning ministers overriding the role of local governments in a growing number of instances. The rights of landowners and affected communities that object to renewable energy projects and transmission lines are being significantly curtailed.

When it comes to other areas, however, there will likely be a step up in regulatory intrusion. The new merger laws involve a thicket of red tape, to use Klein and Thompson’s noun.

The regulatory burden on childcare sector is also about to be massively ramped up.

In net terms, very little is likely to be achieved, but for the Albanese government’s pet projects life suddenly may become easier for investors and operators.

There will be a negligible impact on productivity.