Preparing for the big one

Dr Eric Crampton
The National Business Review
1 June, 2018

Having a change in government is a bit like moving house.

When you pack up the house for a move, you get to take a hard look at a lot of stuff that’s accumulated over the years – things that might have been a mistake to buy in the first place and almost certainly should have been gotten rid of ages ago.

It’s an opportunity for clearing out the junk where you don’t really need to admit that you had made a mistake in the first place.

Over three terms in office, it’s easy for policy junk to accumulate, too. Clearing it out is easier when somebody else was the one who bought it in the first place.

Earlier this week, I gave a short talk for the Society of Local Government Managers on the lessons of the Christchurch earthquakes. Earthquake Commission Minister Megan Woods has started preparation for disasters yet to come. But the remaining work is considerable, for both central and local government.

In March, Ms Woods made welcome changes to the board of the Earthquake Commission (EQC) and announced policy changes to come, including increasing the coverage cap and leaving contents coverage to private insurers.

But the more important changes remain on hold pending further study.

Hurdle for claimants
During the Christchurch recovery, the EQC cap was a hurdle that claimants needed to leap to reach their private insurer. After the Seddon earthquake, the government tried a different process. Instead of lodging claims with EQC, households would instead talk only with their private insurer. The insurer would then make a claim on EQC for under-cap damages.

The trial looked promising. It has not yet undergone full assessment, but it seemed promising enough to warrant a change in the default pending further study.

If Wellington’s earthquake arrived tomorrow, we might hope that the government would apply the method trialled in Kaikoura. But we could have no certainty of it. These things are best sorted out between insurers and EQC before an event rather than afterward.

And while this year’s budget announced and funded a new insurance tribunal to find speedier resolutions for the remaining Christchurch insurance claims, it did not seem to provide any contingency funding for greater payments to claimants.

Insurance problems were an important part of the regime uncertainty that enveloped Christchurch after the earthquakes. Nobody really knew the rules of the game. Many households sat in insurance limbo, unsure whether and when their house might be repaired or rebuilt.

Regime uncertainty is pernicious.

Imagine you’re playing a board game like Monopoly. You don’t know how any toss of the dice will fall, but you do have certainty that pieces move around the board clockwise, that landing on Chance gets you a Chance card that could have any of several known effects, and that landing on Free Parking, well, it depends on the house rules.

Changing the rules
But imagine playing the game where, after every roll of the dice, the rules might change. Maybe all the houses disappear. Maybe half the houses move one space to the left. Maybe everybody has to trade properties to make it easier for one of the players to get that string of red properties on one side of the board for a retail precinct.

It’s a lot harder to play that game. Do you build houses on Baltic Ave, or restore the Bains Building on Madras St, if the property might be taken for a stadium if somebody decides that they do in fact want one there?

Economist Robert Higgs finds that regime uncertainty makes investment riskier. When regimes are uncertain, yield curves become steeper because investors need higher returns to compensate for the policy risk that grows over longer periods. And related empirical work by Stanford and Chicago economists suggests that policy uncertainty hurts private investment, employment, and real GDP.

In Christchurch, it wasn’t just the ground moving under our feet. It was also the rules. And if the rules of the game are too uncertain, people can always choose not to play at all and find better games elsewhere.

Our report on the policy lessons of the Christchurch earthquakes argued that both central and local government could do a lot to prepare now to reduce that kind of uncertainty in disasters to come.

Central government needs to develop a better model for a recovery agency ready to be pulled off the shelf and implemented in the next disaster.

Local government should check through city plans, as elements defensible during normal times may be incredibly costly during disaster recovery. Determining in advance which rules might be suspended or superseded after an event would both enable stronger recovery and provide more certainty. And if parts of downtown never worked well, why not set out alternative plan well before any event instead of trying to design it during a crisis?

A lot of policy junk remains in the earthquake response arena. The time to clean it up is now, while we are still moving political house. This isn’t that ugly vase that somebody gave you as a wedding present and is cheap to keep in moving boxes as you shift from house to house. It’s potentially far more expensive to keep. I hope we never find out how much more expensive.

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