Carney has recently announced a 'red tape review' to eliminate 'outdated and overcomplicated regulations.'Sean Kilpatrick/The Canadian Press
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Nobody likes red tape. In the recent federal election campaign, Conservative Leader Pierre Poilievre pledged to eliminate 25 per cent of Canada’s red tape, just as his predecessor Stephen Harper did in both the 2011 and 2015 campaigns. Once in office, Mr. Harper launched a Red Tape Reduction Action Plan, and the new government of Prime Minister Mark Carney has followed suit by recently announcing a “red tape review” to eliminate “outdated and overcomplicated regulations.”
It’s not hard to see why they all hate it. One recent study estimated that it knocked nearly 1 per cent off the potential economic growth of developed economies, and Canadians know all too well how regulations have hobbled the economy by inhibiting interprovincial trade and deepening the housing crisis. You’d have to go back a long way to find someone who campaigned on a platform of adding red tape.
But if everyone hates it, why do we keep getting more of it? A report released earlier this year by Statistics Canada found that between 2006 and 2021, the number of regulations increased by nearly 100,000 – and that the annual growth rate in regulations surpassed the growth of the economy, resisting all government efforts to curtail it.
Ottawa launches red tape review, looking to scrap outdated regulations
In fact, by slowing the rate of new business formation and the productivity growth that would have resulted from it, red tape may have knocked as much as 1.7 per cent off the economy’s output. A country whose per capita income growth has been slowing sharply, and recently turned negative, can ill afford such setbacks.
Nor is the problem confined to Canada. A 2020 OECD report found that despite repeated efforts by Western governments to slash red tape, the stock of regulations kept rising everywhere.
It’s obviously one thing to say you’ll cut red tape, but an entirely different thing to do it. Part of the apparently irresistible impulse toward further regulation stems from the increasing complexity of advanced economies. Each time a new invention comes along, it calls forth new regulation.
With the potentially toxic effects of social media and now AI having become topics of discussion, the call for more regulation is natural. And while deregulation can unleash growth, it can also have deleterious effects: Financial deregulation in the United States in the 1990s triggered a late-decade boom, but it also gave us the mother of all crashes in 2008.
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But there’s more behind the push to increase regulation than mere necessity. A basic error behind the assumption that everyone hates red tape is to assume that capitalists love capitalism. In fact, as soon as a business succeeds, the temptation to protect its position by freezing out new entrants grows stronger. A large recent study in the U.S. found a strong tendency among incumbent firms to lobby for regulations that raise fixed costs, thereby making it hard for new firms to enter the market.
The same protectionist tendency exists among workers as well, since one of the most common barriers to entry has become occupational licensing, something Canadian professionals and tradespeople who have ever contemplated changing provinces know all too well. Similar drawbridge-raising is ubiquitous in the housing sector, with property owners using planning meetings to block new developments that would effectively increase supply and lower prices.
But if we can all agree that additional red tape nonetheless stifles growth, why is it so intractable? It would appear to come down to the economic calculus behind political decision-making. Research has shown that while deregulation yields economic benefits, they are diffuse and emerge over time, whereas the costs are immediate and concentrated, since the beneficiary of the regulation loses immediately. So if a government is to successfully pull off deregulation, it needs a strong mandate and must act early in its term, allowing time for the benefits to turn up and the losers to accept their losses.
Even then, the impetus to reform is hard, because it runs up against a political rule Machiavelli uncovered 500 years ago in The Prince: Today’s losers are always a more formidable constituency than tomorrow’s winners.
American economist Mancur Olson hit upon something similar in his seminal research on what he called the logic of collective action: Policies with concentrated benefits but dispersed costs will draw more support than opposition. For instance, that 1.7-per-cent output loss identified in the Statscan study amounts to about 0.1 per cent per year. Few will go to the trenches for that sort of increase in annual national output, but those who stand to lose from a regulation that has enriched them will fight like lions.
This would seem to explain why Canada’s interprovincial trade barriers are proving so resistant to removal and why the housing crisis is so stubborn. Both may be the inevitable outcome of a society that has grown so rich, the desire to preserve wealth overpowers the drive to create new income.