Wednesday 13 April 2011

Picking the high variance play

Yeah, I know that Bill Easterly has thrown a big monkey wrench (data quality) into the notion that dictatorships produce high variance outcomes relative to democracies. But it's not implausible that a good choice of dictator could yield better than average outcomes. And far worse outcomes too.

No Right Turn lists some of the features of the legislation [draft as at first reading linked] under which Christchurch folk will be living for the next few... months? years?
CERA has the power to demand any information about anything from anyone. No warrant, no oversight, no safeguards. This is more power than the Serious Fraud Office, and with fewer checks and balances.

CERA, which means the Minister, also has wide powers to "assist" the rebuilding of Christchurch. They can:And all of this without any effective rights of appeal and with only limited rights of compensation.

And to cap it all off, there's the same dictatorial power to amend laws by regulation originally seen in CERRA v1.0.
Dean Knight provides a few detailed objections.

Let's leave aside for now my usual weeping about the decline in rule of law and the lack of a constitutional spirit among voters that would restrain such things. Instead, let's look at the legislation as a high variance play.

A best case use of these powers could be really beneficial for Christchurch. If Ikea wanted to set up in Christchurch, they could probably start construction the day after buying some property out near the airport. We'd effectively be a special economic zone within New Zealand where competitors couldn't stop things through RMA objections. There will be at least some developments of this sort that come of the lifting of the regulatory lid; fast-tracking some of these kinds of projects through what would otherwise have been a multi-year regulatory approval process seems very beneficial.

But a plausible worst case use of the powers isn't particularly nice. I'm most worried about the potential for expropriation: consolidating some land titles downtown for urban renewal will be awfully tempting. I have a hard time imagining the worst case would be much worse than this; the government does face a re-election constraint. But I also would have had a hard time imagining a lot of what's already happened.

The case for expropriation is pretty weak. In normal times, government turns to expropriation with compensation as a solution to hold-out problems. In the US, this has often been used to steal people's homes and turn them over to developers (Go to Google, type Kelo v. City of New London); I've heard of nothing comparable here.

But imagine that government deemed it critical to reconstruction that some new private facility gets built downtown. If there were only one possible location for the facility, and if all the current owners knew that, each would try to extract maximally when setting selling prices; government might then try compulsory acquisition at post-quake prices, and hopefully they'd settle on something reasonable. But the earthquake has flattened enough of downtown that there ought to be multiple potential locations for any facility the government might want. Dominant assurance contracts should then have a good chance of working.

Here's a scenario. Suppose that sites A, B, and C are potential decent spots for some new project. Titles are spread over a dozen owners in each place. The developer approaches each of the three dozen owners and offers the following deal:
I'm looking to build and I'm eyeing up a few different sites. But I need a big enough space that I need to buy from a few folks to make things work. Here's the deal. I'll pay you $(some non-trivial amount) right now for an option to buy your property at the land assessment value from 2007. You get the cash in hand whether I exercise the option or not. If everybody else in the block of land where your property is signs on, I might exercise the option. Or I might go with one of the other sections if everybody signs on there. Point being - you get cash in hand right now if you sign on, and a great price for your land if I exercise the option. Can I get you a pen?
Holdout problem solved, and with it any need for expropriation is gone. I really hope that the government encourages this kind of thinking, or at least uses some of the properties Council already purchased over the last few years, before looking at compulsory acquisition.


  1. Except that expropiation is typically used here for roadworks where the location of the facility is limited. For example if the government were to widen Curlett's road (now three lanes wide!) to four lanes, then it would have to take some property (about a metre or so of the sections adjacent).

    This is not an easy process. By way of example, Fendalton road used to be an extremely narrow two lane road and chock-a-block congested at the best of times. It was then proposed to widen it to increase traffic flows. It took FORTY YEARS to overcome rich resident resistance and that's with the provisions of the Public Works Act being available to use all throughout this time.

    One possibility that I hope that CERA uses is that black protest fence down by the airport. The guy can't develop the section because of airport noise restrictions. CERA can override the restrictions and also insert a caveat that the tenants of the section can't be allowed to complain about noise from the airport.

  2. Do you think CERA is essentially an admission that our current development rules/regulations are grossly inefficient and suffocated by consulting all sorts of serial complainers, not to mention the checking for taniwha that goes on?
    I'm not saying this temporary legislation is perfect, but to think that as soon as some real development needs to go on in Chch, the RMA and other legislation is not up to the task either practically or politically.

    I wish it was available on youtube for the exact wording, but when CEO of Orion talked about installing the temporary overhead wire link after the earthquake, he said and I paraphrase: 'Ordinarily it would take 1-2 years to get the consent and take 6 to 7 weeks to build, I went to civil defence got approval in 20mins and it will be built in 5-6 days'

    Another case is this one:

    Crest put in their first applications in 2006.

  3. The suggestion you provide is of course the standard free market solution to such dilemmas, but unfortunately, to politicians and bureaucrats alike the idea of using raw power will always be much more attractive. Rather than being creative in finding negotiable solutions, they will the limited creativity they have to concoct arguments why there really is no other choice than trashing property rights. It has always been that way and it will always be that way, especially where there is a dire lack of strong fundamental principles surrounding property rights that are enforced in constitutional law. Lacking of that, the police state will invariably seek compulsion rather than collaboration.


  4. I had a conversation with one of my workmates this morning about the CERA legislation. He sees no problem in granting such dictatorial powers to an individual or small organisation because, and I loosely quote:, "I like to assume the best in people rather than that they will abuse this power." Clearly he hasn't been keeping up with the news lately.

    My personal feeling is that if Brownlee and co have no intention of dissolving local authorities or forcing information sharing then why is legislation allowing such activity necessary? If the intention is that all rebuilding measures will be managed with due consultation and respect for property rights the there is no need for legislation that allows for arbitrary siezure and demolition of private property. That these powers can be enacted with little or no right to appeal, protest, or even compensation in some cases, seems to me to be a step too far.