Basics of property rights

Roger Kerr's latest piece in the Otago Daily Times, Back to Basics on Property Rights (pdf), relates to my posting yesterday on Regime uncertainty.

Kerr writes

Business New Zealand, Federated Farmers, the New Zealand Business Roundtable, and the New Zealand Chambers of Commerce joined forces in commissioning the report because of their growing concerns about continuing ill-justified confiscations of private property rights, be they foresters’ cutting rights, landowners’ and developers’ rights, investors’ rights to the infrastructure they own and even their right to freely buy and
sell shares.

It is concerns like this that lie at the base of regime uncertainty. Higgs in his paper lists some of the Acts of Congress in the US that weakened property rights between 1933-40. See below for Table 1, from page 571 of Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War.

Yesterday I mentioned the Bill of Rights Act and the Resource Management Act as two examples of acts of parliament that undermine property rights in New Zealand. But Roger Kerr makes the point that New Zealand's bad history of property rights abuses goes back much further, and continues today,

New Zealand has a poor record in this area. The country is still divided because of Maori land confiscations almost 150 years ago. But such actions continue today, with the foreshore and seabed issue, the forced unbundling of Telecom and consequent massive loss of shareholder value, and the blocking of the sale of shares in Auckland International Airport Limited (AIAL).

Kerr goes on to point out at least as far as the AIAL case is concerned the government's action breached rule of law principles and in doing so pushed up the cost of capital and therefore we would assume had a negative effect on investment.

The report adds weight to last week’s ruling by the Regulations Review Committee of parliament regarding the way the government intervened in the Canadian bid for shares in AIAL. The Committee upheld the complaint of the Business Roundtable and the Wellington Regional Chamber of Commerce that the government’s action breached rule of law principles and risked deterring investment and pushing up the cost of capital to the detriment of all New Zealanders.

Later Kerr notes the unfortunate role of Treasury in the AIAL affair,

An extraordinary aspect of the exercise – and an alarming one for shareholders in any potentially ‘strategic’ asset – was the Treasury’s role in it. Although the Treasury had initially advised the government against intervention, it subsequently advised the Committee that “no taking of property arises from the regulations” and led it to agree that “share value fluctuation due to authorised regulatory intervention is something that shareholders simply have to accept”.

Kerr goes on to say

Based on the arguments presented by the Treasury, parliament might as well take the compensation provisions out of the Public Works Act and simply declare that when land is taken under it, the loss in value “is something landowners simply have to accept”.

Tell that to farmers and other landowners who report a steady flow of new proposals to ‘protect’ some piece of private land in the guise of the national good, generally without any reference to the rights of the landowner or consideration of compensation.

Such actions by a leading government department do nothing to assure investors that the returns to their investments are safe and this can have a chilling effect on the amount of investment undertaken.

Another point noted by Kerr is the incoherent nature of legislation impacting on private property rights in New Zealand. He writes

One of the issues highlighted in the report and reflected in the AIAL case is that legislation impacting on private property rights is fundamentally incoherent. On the one hand we have the Public Works Act 1981 which sets out to ensure that citizens are secure in their property rights. It embodies the longstanding common-law position that the Crown should only take private land for an essential public work, and only if voluntary negotiations fail, in which case compensation should be paid.

On the other hand we have the New Zealand Bill of Rights Act 1990, which does not even acknowledge any right to the quiet enjoyment of one’s possessions, let alone to private property in general. Then there is the Resource Management Act 1991, which allows political majorities on councils to dictate the use to which private land can be put without landowners’ consent and without compensation.

The same issues arise in the case of regulatory takings such as proposals to ‘protect’ a piece of private land or heritage building, where a government may allow the owner to retain possession of the property but regulate it in such a way as to diminish its value or use, again without compensation.

Kerr ends his article by saying

A Primer on Property Rights (which can be found at www.nzbr.org.nz) argues that clearly defined and respected property rights are the foundation of a peaceful, cohesive and prosperous society and, ultimately, the democratic system. Achieving recognition of this view and agreement on the proper role of the state in this area should be a high priority of any government. It is to be hoped the report will promote constructive debate on how this goal can be achieved.

I would phrase the issue as one where "regime uncertainty" and its impact on private investment, and thus productivity, is important and needs to be addressed. If New Zealand's investors are not convinced that their investments are secure then they will reduce investment and we will continue to see our standard of living fall.