SUPPLY MANAGEMENT AND THE INTEREST OF CONSUMERS AND FARMERS

This article has been published in the Fraser Institute Blog found at SUPPLY MANAGEMENT AND THE INTEREST OF CONSUMERS AND FARMERS

A leading politician recently explained to me why the last Conservative government in Ottawa did not abolish supply management: “It was not in the party’s interest”, implying that in fact it would have been in the public interest to have done so.

   

Why all governments since the inception of the system in the 1970s allowed the party over the public interest to dominate is easy to explain. The beneficiaries of the system spend large amounts of money lobbying politicians to retain it and punish those who do not. On the other hand, for the vast majority of voters the existence of supply management and the costs it brings are of relatively little importance and politicians would expect few electoral gains from ending the system. In fact, the results of a recent Angus Reid poll revealed that 58 percent of Canadians had “no idea” and 38% “knew little” on how the system works and therefore how much it costs them.[1]

However, the status quo is now threatened by President Donald Trump’s demand for an end to Canada’s supply management system during the renegotiation of the NAFTA treaty.[2] As a result, Prime Minister Justin Trudeau’s Liberal government faces a problem. If it insists on maintaining the system, US negotiators will demand reciprocal concessions that decrease Canadian exports, the exchange rate, employment and economic growth. 

If, on the other hand, the Liberal government agrees to abolish supply management, consumer prices will fall and the present level of US restrictions on Canadian exports will be maintained or even lowered and bring other benefits to the middle class the Liberals have promised to help.

The loss of the current electoral and financial support from the beneficiaries of the system can be made up by a government program explaining to voters why this policy is in their interest. The focus of such a campaign should be the simple explanation of how this system operates and how it affects their cost of living.

The explanation[3] should start by pointing to a very important and simple fact: Anyone in Canada who wants to produce or import dairy products, poultry and eggs and sell them must buy a quota from other farmers or face persecution resulting in fines or jail. With the ownership of the quota comes the right to sell a specified amount these products at prices fixed by a government-sanctioned association of producers.

By controlling the quantity of quotas in the market, this association determines the total amount produced and thus the prices at which demand equals supply in Canada. These prices are supposed to allow farmers to pay their capital and running costs and earn a normal profit. In fact, however, they are higher by amounts farmers need to pay the interest on the loan they had to take out to purchase the quota. Recently, according to a non-profit organization that represents Alberta’s dairy producers, the cost of a quota in Alberta came to $36,000 per cow or $3.9 million for an average-sized dairy herd of 108 cows.[4]  

The very existence of the quota price, which is found on the internet,[5] is incontrovertible evidence that consumers in Canada pay more for dairy products, poultry and eggs than it costs farmers to produce them and that without supply management consumer prices for these products would be lower. How much lower would these prices be? According to one recent peer-reviewed publication[6] the average family in Canada would save $444 annually. This burden is greater for the poor and families with children smaller for the rich and childless.

One reason why politicians may have been reluctant to end supply management in the past is that it will conflict with Canadians’ sense of fairness and will bring financial hardships or even bankruptcy to farmers whose income is curtailed but whose debt obligations remain, all caused by governments and for reasons beyond their control.

The government can deal with this problem by creating a financial adjustment program, the basic features of which are found in Australia’s recent experience.[7] That country in 2000 had ended supply management and assisted farmers through quarterly payments over eight years. Farmers leaving the industry were paid a lump sum.

An important feature of the program was that its cost was covered not by funds drawn from general government revenue but by the imposition of a surcharge of 11 cents per litre on the buyers of milk scheduled to last eight years. These costs in effect are an investment lasting eight years, which will bring a return of lower milk prices into the indefinite future.

It was not easy to design a compensating package that was fair to all Australian farmers and it would not be easy to do so in Canada, especially since the termination of supply management will impact farmers differently, depending on the time and price at which they had obtained their quotas. Some had received them free of charge when the system was created in the 1970s while the rest have enjoyed gains in the ever increasing value of their quotas depending on the time of their purchase. Most seriously hurt would be farmers who had bought their quotas recently.

However, these issues of compensation can and will be overcome simply because ending supply management will bring large and lasting benefits to Canadian consumers and in addition, will remove one of the greatest irritants in Canada’s relations with its global trading partners, increase economic and personal freedoms and allow free market forces to improve through time the quality, variety and costs of all agricultural products.

References:

Alberta Milk (2017), “How much does quota cost for a 108 cow dairy?”, found at https://albertamilk.com/ask-dairy.../how-much-does-quota-cost-for-a-108-cow-dairy/

Canadian Dairy Information Center (2017), Monthly Milk Quota Exchange, found at http://www.dairyinfo.gc.ca/index_e.php?s1=dff-fcil&s2=quota&s3=qe-tq

Cardwell, Ryan, Chad Lawley and Di Xiang. 2015. “Milked and Feathered: The Regressive Welfare Effects of Canada’s Supply Management Regime.” Canadian Public Policy 41(1): 1-14.

Edwards, Geoff (2003), “The story of deregulation in the dairy industry”,  The Australian Journal of Agricultural and Resource Economics, 47:1, pp. 75–98 *

Globerman, Steven and Christopher Sands (2017), The Fate of NAFTA: Possible Scenarios and their Implications for Canada, The Fraser Institute, found at https://www.fraserinstitute.org/sites/default/files/fate-of-NAFTA-possible-scenarios-and-their-implications-for-canada-execsum.pdf

Grubel, Herbert and Richard Schwindt (1977), The Real Cost of the BC Milk Board, The Fraser Institute, found at https://www.fraserinstitute.org/sites/default/files/real-cost-of-the-bc-milk-board.pdf

Reid, Angus (2017), “Supply Management: Most Canadians say scrapping system should be on the table during NAFTA talks”, found at http://angusreid.org/supply-management-nafta-renegotiation/

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[1] See Reid (2017)

[2] For a discussion of the demand and broader issues surrounding it see Globerman and Sand (2017).

[3] For an early study of supply management and its cost see Grubel and Schwindt (1977)

[4] See Alberta Milk (2017)

[5] See Canadian Dairy Information Center (2017)

[6] See Cardwell et al (2017)

[7] See Edwards (2003)

LOWER IMMIGRATION TO CATCH UP

This article has been published in the Vancouver Sun on October 2nd, 2017. It is found at http://vancouversun.com/opinion/op-ed/opinion-curb-immigration-to-let-housing-catch-up-to-demand

Joffre Lakes Provincial Park is one of the most scenic recreation areas in Canada, if not the world. A 500 meter walk from the road reaches a small turquoise lake, an exhilarating five kilometer hike after two hours and an altitude gain of 400 meters reaches a second, a further 30 minutes a third lake. The path goes through an ancient forest, across avalanche chutes covered with slide alders and is bathed in the sound of rushing waters from a nearby creek and waterfalls.

The views from the lakes are spectacular. Evergreens line the shores and the waters reflect the sight of the large glacier descending from the 2,700 meters high Joffre Mountain. The highest lake is so close to this glacier that one can see serrated columns of ice and occasionally thundering falls of ice and rocks.

On this year’s Labour Day Sunday my wife’s and I drove to the park, where we encountered a traffic jam near the entrance and a long search for the last spot in one of three parking lots. The wait for the use of the single toilet at the start of the trail was 20 minutes. An RCMP officer at the scene told me that these conditions prevailed also during weekdays in the summer.

On the hiking path, we stopped every few minutes to let lines of younger and more vigorous hikers pass us. As we found out later, these hikers had parked on the side of the road, obviously willing to pay the tickets that a large sign had announced. It simply made more sense for them to pay this fine than to drive 3-hours back to Vancouver without stopping at the Park. Most unpleasant were the large crowds at the prominent viewpoints at the lakes, which offered standing room only and were bathed in loud chatter spoiling the normal silence of the environment.

Such unpleasant overcrowding of the Joffre Lakes Park is typical of all recreational facilities in the Lower Mainland. It also afflicts the region’s roads, bridges, public transit, hospitals, schools, universities and water supply and most importantly, Vancouver’s housing market.
  

What causes these problems? The simple answer is that for these facilities demand exceeds supply, but for the design of remedial policies, the fundamental but also more difficult question is why is there this excess demand?

Currently, the most popular answer is a shortage of investment in housing and infrastructure. Governments for some time have adopted policies to remedy this situation. The very existence and growth of the excess demand is clear evidence that these policies are inadequate and are likely to remain so. The relief from recently announced increases in publicly subsidized housing will quickly be overwhelmed by the torrent of additional demand for it.

Popular are also policies designed to reduce demand. They are focused on the housing market and involve taxes on foreign buyers, raising the cost of mortgages and reducing regulation. These policies at best have had only transitory effects on demand for housing. More investment in infrastructure has been promised by all parties at every election but obviously has failed to eliminate the problems.

However, there is one simple way to reduce demand. Lower immigration from the present rate, which sees about 250 new immigrant families settle EVERY WEEK of the year in Greater Vancouver. This rate of increase has brought the total population of British Columbia from 2.2 million in 1972 to 4.8 million in 2017. The projection that it will reach 6.0 million in 2037 strongly suggests future worsening of excess demand.

Parliament could easily reduce the number of immigrants temporarily from the present national 300,000 per year to 50,000. While in place for perhaps five years, the construction of housing and investment in infrastructure can catch up with demand. Thereafter, the number can be raised again but only to a level equal to the economy’s absorptive capacity marked by the sustainably matched demand and supply in housing and of infrastructure services.

Canadians really face no costs resulting from such a temporary reduction in the number of immigrants. Politicians proposing this policy run the risk of electoral losses from some powerful interest groups, but these could easily be exceeded by the gain in votes from suffering Canadians who benefit from it and let the politicians know about their preferences.

What Motivates Kim Jong-un and Why it Matters

In April I traveled to Seoul to deliver a paper at a conference of economists and public policy experts. On this occasion I learned much about life and politics in Korea by touring the Korean War Museum, an art museum, a university, a hospital, historic palaces, commercial centers and the Demilitarized Zone. Most informative were discussions with local leaders, academics, doctors and a general who recently had commanded the US forces stationed in Korea.

This visit to Korea has caused me to take more than the usual interest in the current political problems surrounding North Korea’s development of a nuclear arsenal and missile delivery system. I therefore eagerly attended a public lecture on the topic delivered by Paul Evans, a specialist on Asian Pacific international relations at the University of British Columbia who has served on a number of committees that regularly advise governments on the politics of the region.

To my surprise Evans argued that Kim Jong-un’s development of a nuclear arsenal is the result of his belief that the United States was planning to invade his country and destroy his regime. This long-standing belief explains North Korea’s maintenance of one million soldiers on active duties that are backed by several million reservists and paramilitary units. These troops are equipped with thousands of tanks and artillery pieces capable of using chemical and biological agents soon missiles equipped with nuclear warheads.

Evans’ interpretation of the reasons for North Korea’s nuclear policy leads him to the conclusion that the country’s fear of invasion and its aggressive rhetoric can be ended by the withdrawal of US troops from South Korea and regional military bases.

However, many experts disagree with this recommendation on the grounds that Kim Jong-un’s policies are not motivated by national security concerns but the ideologically driven desire to create one communist Korea on the Peninsula. This goal has motivated North Korea’s policies since 1945 when the cold-war foes United States and Russia agreed on the creation of the two countries north and south of the 38^th parallel.

This view of North Korea’s true motives is backed by strong evidence. The Korean War was started when in 1950 the North Korean army invaded the South Korea in a surprise attack and without any provocation or threat of an attack on its territory.  That war ended in 1953 with North Korea agreeing only to a cease fire not a peace treaty, signaling that it did not accept the permanent division between the two countries. The country’s recently created nuclear capacity is not needed to defend its territory from invasion but to support its grand scheme for a unified Korea.
 

This grand scheme includes North Korea’s use of its nuclear capability to blackmail the United States into withdrawing its troops from South Korea or face a nuclear missile attack on its territory. The experts believe that if this threat causes the United States to withdraw its troops and prevent it coming to the aid of the South Korean army in case of a military conflict, North Korea will invade South Korea, defeat its army and establish a communist government.

If this analysis is correct, the challenge is not to persuade the United States to withdraw from the region but to persuade Kim Jong-un that the United States will never be blackmailed into withdrawing its troops and abandoning its support for South Korea. If he accepts this proposition, he will end his provocative rhetoric about attacks on US territories and the United States in return will accept the fact the North Korea is a nuclear power, as it has in the case of other countries like China, India, Pakistan and Israel.

President Donald Trump’s policies are designed to signal America’s resolve to resist the nuclear blackmail by North Korea. It is an open question whether this will be enough to persuade Kim Jong-un to end his provocations with or without offers of financial assistance and the ending of existing sanctions. Past efforts made in this spirit have failed and the world can only hope that they will be successful in the future.