The late Ronald Reagan mastered the art of condensing complex issues into witty statements: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”

When Sir Roderick Deane spoke on the state of regulation to The New Zealand Initiative last week, he began with this famous quote by the former US president.

Yet at the end of Sir Roderick’s lecture, Reagan’s dictum appeared almost too optimistic in the New Zealand context. We even regulate those things that are not moving. Worse, in New Zealand too many things are not moving precisely because they are overregulated.

With his experience as an economist, regulator, chief executive and chair of large companies, Sir Roderick is uniquely qualified to comment on New Zealand’s regulatory maze. His long career in both the public and the private sector spans decades. He has thus witnessed the growth of the regulatory state first-hand – and he has watched numerous attempts of curbing excessive red tape.

There has been no shortage of initiatives that typically go under the label of “better regulation” (as if anyone would ever call for “worse regulation”). Last year, the Productivity Commission published a 540-page report on regulatory institutions and practices. This year, we have already seen the release of the “loopy rules” report of the Rules Reduction Taskforce, Sapere’s Regulatory Impact Analysisevaluation for the Treasury and the government’s Statutes Repeal Bill.

It is fair to say that not just complying with regulations has become an onerous business but regulating and re-regulating regulations are in themselves a veritable sector of government activity.

Quoting the Productivity Commission’s research, Sir Roderick pointed out the remarkable size of the regulatory state. An estimated 10,000 to 14,000 bureaucrats are administering more than 200 regulatory regimes. Each year since the mid-1990s, 100-150 acts and 350 legislative instruments are added to the rulebook. In total, we are now dealing with 2871 acts and 4950 legislative instruments in force. Virtually no-one in either government or business would even be aware of all of them.

Not fit for purpose

Unsurprisingly, surveys of New Zealand firms show that large majorities of them regard legislation as not fit for purpose. They complain not only about the costs that regulations impose on them. That would only be too understandable. However, the most frustrating aspect about regulations is that regulations are perceived to be contradictory or incompatible.

Such regulatory risks, according to Sir Roderick, are not just a matter of economic inefficiency. If it were only about resources wasted in establishing and maintaining the regulatory apparatus, then that would be deplorable from a taxpayers’ perspective but, beyond the fiscal implications, it would not matter much.

The reality, however, is far worse. The sheer complexity of New Zealand’s regulations, and the uncertainty that comes with their application, has an impact on companies’ behaviour. Regulatory uncertainty means that their directors always have to be on the lookout for compliance risks.

One of the areas of regulation singled out by Sir Roderick was the Financial Markets Conduct Act. It is a piece of legislation that comes with only the best stated intentions. The act itself defines as its purposes to avoid unnecessary compliance costs, reduce governance risks, promote innovation and flexibility, provide understandable information, facilitate transparent markets and promote informed participation in markets. But having enumerated those laudable objectives, it requires almost 600 clauses to spell out what this means in practice.

For Sir Roderick, the complexity of this regulation is the main reason for the sluggish development of New Zealand’s financial markets. It has made stock market launches difficult by introducing strict requirements for prospectuses. It has also discouraged market takeovers. In this way, major corporate adjustment mechanisms have been “lobotomised,” as Sir Roderick put it.

What it means for our capital markets is clearly visible when looking at the development of the New Zealand sharemarket over time. World Bank data show that between 1988 and 2012, the market capitalisation of listed companies in New Zealand increased from 29% to 47% of GDP. Though an improvement, stock markets in the rest of the OECD are much larger: They went from 60% to 85% of GDP on average.

The development of stocks traded is even more worrying. The figure for New Zealand is only about 14% of GDP, whereas it is 81% for the whole OECD. Clearly, the complicated regulatory framework has to take some of the blame for this discrepancy. If companies are afraid to go public or to merge with and acquire other listed companies, it is little wonder this is reflected in a smaller stock market.

As a former chief executive (1992-99) and chairman (1999-2006) of Telecom, Sir Roderick keeps a close eye on the development of the communications sector. It is another part of the economy where the effects of regulation are apparent.

Although the telecommunications industry recorded the highest labour productivity growth between 1978 and 2012 (and the third-highest multifactor productivity growth over the same period), its profitability does not show for it. The combined profits of Spark, Chorus, Vodafone, 2degrees and CallPlus are now not even half the profit of the smallest of the top four banks.

Sir Roderick is not surprised about this. In his lecture, he explained how the communications sector has been subjected to constant regulatory interventions. As 80% of Chorus’ revenue is regulated by the Commerce Commission, its share price is dominated by regulatory decisions and processes – not by its strong connections growth, its powerful broadband expansion or its cost declines.

How do you escape this regulatory maze? Unfortunately, not even a regulatory veteran like Sir Roderick has a magic wand to cut out an escape path. And there probably are no silver bullets in any case.

However, there are a few basic principles for genuine regulatory reform. For a start, regulations should routinely be subjected to cost benefit analyses before they are introduced – and they should be reviewed once they have been in operation. Property rights should be strengthened while judicial activism should be scaled back. A smaller government and, with it, a smaller public service bureaucracy would also help.

None of this will have a chance of succeeding if not promoted through strong political leadership. Deregulation needs a champion in government. There’s a minister for regulatory reform, Steven Joyce, and a parliamentary under-secretary for regulatory reform, David Seymour (who attended Sir Roderick’s lecture), and their activities such as the Statutes Repeal Bill are to be commended.

But beyond Messrs Joyce and Seymour, it will take a personal commitment from Prime Minister John Key to make regulatory change one of his priorities – and thus one of his government’s.

To begin with, he might take some more inspiration, if not from Sir Roderick then perhaps from Ronald Reagan: “Government’s first duty is to protect the people, not run their lives.”