Category Archives: Regulatory Affairs

Supply management: a costly endeavor

SM.pngSource: Trevor Tombe, Twitter @TrevorTombe

By Alex Whalen, AIMS Operations Manager

The viability of supply management has come into discussion lately due to the new Trump Presidency. Dalhousie University’s Dean of Management, Sylvain Charlebois, a food expert, recently issued a press release examining the potential effects of Trump policy on the Canadian Dairy Industry.

Following Dr. Charlebois’ announcement, AIMS President Marco Navarro-Génie appeared on the Sheldon MacLeod Show. Dr. Navarro discussed the economics of supply management and why they are prejudicial against consumers. The simple explanation is that in Canada some industries, dairy being most prominent, have a restriction on production. The result is more profit for the producers at the cost of a higher price for everyday consumers.

This leads one to wonder: how do producers get away with such a scam? The answer lies in the distribution of costs and benefits. The costs of supply management are large in the aggregate, but relatively small on any individual purchase. A few extra pennies per transaction is not enough to outrage the public, even if the total costs are enormous. On the other side, the benefits of supply management are large and distributed among a small number of vocal, organized, and politically strong producers.

This phenomenon is analogous to the issue of inter-provincial trade, which has made it into the public lexicon only sporadically. The costs of not allowing Quebec beer into New Brunswick, for example, are small on a per-transaction basis, but large in the aggregate. The benefits accrue to a single entity, NB liquor, and in other cases, to Quebec’s SAQ, the LCBO, etc.

Recent trade deals reveal just how bad things have gotten. While we see occasional lip service paid to abolishing supply management, the provisions included in actual deals are paltry. For example, the recently negotiated CETA allowed for just 2% of the Canadian cheese market being opened up to foreign producers. Such reforms are merely symbolic and do not match the intensity of the problem.

For economists, demolishing inter-provincial trade barriers and phasing out supply management are as close to consensus items as you may find. However, the problem is not economic, it is political. The answer to these issues lies in the broader consumer base realizing it is being conned to the benefit of a select few. Such anti-market interference is unjust and consumers should demand better.

NL Should Lift Beer Restrictions

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Editors note: what follows is an opinion piece written by recent AIMS Intern Leo Plumer. This piece was originally written for NALCEF, and is reprinted here with permission. Leo is a founding director of the organization, which can be found at http://www.nalcef.com

 

By Leo Plumer, AIMS Intern

I like my local beer, and it’s hard to avoid discussing the ubiquitous Labatt- and Molson-owned brands like India, Blue Star and Dominion. Why do these two macrobreweries dominate our corner stores to begin with? Do people simply prefer making the trek to the Liquor Store to get imported brands? Unlikely.

In fact, regulation stipulates that only locally-brewed beer may be sold in corner stores. This is at the chopping block in interprovincial trade talks, and it’s got its beneficiaries justifiably worried. More than 100 people work at Labatt and Molson breweries in St. John’s, and their representatives have voiced opposition to lifting the provision. Their livelihoods depend on the big brewers keeping production in the province, and they fear that retail liberalization may lead to painful job cuts.

Let’s deconstruct why this may happen. This legislation exists to incentivize out-of-province brewers to produce locally – ostensibly creating local jobs – by securing them an inflated share of the local market. The fear is that, without this special protection, it would no longer be worth it for the macros to keep production in-province on efficiency grounds.

From an economic perspective, regulations that allow private firms to be shielded from competition are a classic example of “rent-seeking.” There’s a strong incentive to lobby for this kind of legislation: rather than competing in the rough and tumble of the marketplace, it is often easier to get the government to intervene for you. It should be clear that this, in theory, is a bad thing. Instead of helping new entrepreneurs, it concentrates power in the most influential companies. Instead of innovating or bringing in new products at lower prices, it increases prices and promotes stagnation. Firms can, instead of creating wealth, extract wealth from their artificial market share. It benefits them at the expense of everyone else.

Public policy should be made in the long-run public interest, and unfortunately these provisions run counter to that notion. With recent economic mismanagement in mind, NL must change course in its thinking. While it may seem prudent to do anything to protect existing local jobs, this reasoning can quickly get out of hand. Should we restrict, say, the sale of Coca-Cola to protect locally-bottled Pepsi products? NL needs to be working on integrating with the national – moreover global – economy. We should be gearing policy towards improving competitiveness and finding our niche in a constantly growing marketplace, and restricting consumers’ access to goods and businesses’ ability to provide them works against this. Another way to think about it: if you need special protections to stay in business here, perhaps those resources could have been put into ventures that can stand on their own two feet.

Less abstractly, liberalizing the beer trade will result in lower prices for consumers – NL has some of the highest in Canada. This may mean more demand for retailers, or induce some to open business selling specialty beer. Importantly, it also allows consumers much more variety and convenience.

On the producer’s side, it’s not entirely obvious that the Big Two will close down simply because they’ll have more competition. After all, a large portion of their production consists of brands unique to the local market. More plausibly, there may be some downsizing. On the other hand, craft beer is poised to boom in NL, and opening up consumer selection would only further cultivate demand. If macros contract, while homegrown brewers expand, we may yet see net job gains. Many other jurisdictions across North America lack our retail restrictions, yet thousands of independent breweries blossom.

Repealing these regulations would be a small step, but in the right direction. If we allow bad ideas to aggregate, over time we will feel their effects as a drag on badly needed dynamism and growth. For the record, I won’t say no to a cold Black Horse, no matter where it’s brewed.

 

Hurting the poor with wage policies

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By Marco Navarro-Génie, President & CEO

Advocates of higher minimum wages often believe that higher wages alone will help lift people out of poverty. While on an individual basis there is a common but simplistic sense that this is true, the aggregated economic reality is different. Forcing wages up artificially hurts those who are employed in low-wage jobs.

Economies are vast collections of transactions and relationships that echo in various directions, often unforeseen.

A new study into Seattle’s minimum wage hike to $11 per hour shows results that were contemplated by market theory. Such results should give Atlantic Canadian (and Alberta) governments pause when suggesting $15 CDN per hour or more.

The study found that workers end up with less money in their pockets:

  1. While some workers made more per hour than before, fewer workers were employed in the same jobs.
  2. Many of those still employed before the increase were subsequently working fewer hours.
  3. There is an increase in automation of low end jobs.  McDonald’s restaurants, as an example, are now experimenting with the automation of food orders.

There is no magic involved in having predicted that this would be so.  When the cost of labour goes up, businesses with limited resources can purchase less of it.  One can afford less labour hours, so one cuts employee positions or the number of work hours if one keeps all employees.

In a robust economy like Seattle’s the net result is that forcing wages upward hurts those the policy claims to help, the poor.  In a region like Atlantic Canada where we already struggle with unemployment, the consequences of pushing minimum wages upward so dramatically could have dire consequences.