Regulations and consequences

The story we are all being told about productivity and growth in Canada is that we have

1. too many regulations on companies
2. too much bureaucracy and "red tape"
3. too many trade barriers
4. limited "freedom" for companies

I will say that there is no doubt that these things limit productivity and (short term) economic growth. By definition, output is reduced and investment is limited when rules are in place about how things need to operate.

The elimination of rules (labour rights, environmental regulations, minimum wage laws, duty to consult, health and safety standards) would increase the rate of investment (and then output) in some areas of the economy.

However, the saying this as if no one understood that this was the case is bizarre.

The call for more subsidies for profits and the constant moaning about how hard it is to be a small business owner is music to neoliberal ears. The belief that small businesses are important to The Economy is baked deep in their ideology. (The fact that it isn't even kind of true and that small businesses destroy as many jobs than they create even with massive profit subsidies is never talked about. Nor is it ever acknowledged that regular people support micro businesses, not small businesses, not for economic reasons.)

The wealth redistribution of neoclassical economics is based on the idea that there are free things in the economy that can be exploited for profit. Those "free" things are public goods that, through the process of commodification, become private goods free for exploitation. Things like public land, air, minerals under the ground, public companies, government services, wages from value added production, and taxes taken from working people are all only looked at from the perspective of the transfer of wealth. A transfer from labour to capital.

The regulatory regime is similar. Regulations are established in response to problems seen. They have intended consequences—dealing with the problem identified—and unintended consequences. The unintended consequences related to the impact on the economy more broadly.

In the government, they only ever really look at the negative unintended consequences, but there are usually positive ones as well.

Let's take a look at two recent examples from the energy and chemical sector for an example.

Biodiesel production and the use of Benzene extracted from fossil fuels during refining to make styrene plastics.

Both have down on their luck companies in Canada (most classified as smallish businesses). And, both on the outs because of lack of smart (not less) regulation.

Benzene is a rather nasty compound found in oil and gas. It is removed through several (mid-stream) refining processes. Part of the way that it is "disposed of" is to turn it into plastic.

The Canadian government established a facility in the early 1900s as the Canadian Polymer Corporation (a Crown) in Sarnia to deal with Benzene. It was privatized and the last owner of the infrastructure was INEOS.

The Ontario government delayed the establishing of regulations around Benzene release based on the most recent science and below regulations found elsewhere in the world. One assumes the idea was that lower regulations (and the subsequent release of Benzene at high levels) was to allow profitable production to continue.

The lack of regulations allows the company to establish essentially a run to fail program.

I call Run to Fail a strategy where minimal operational investment is made in a piece of infrastructure and you squeeze production out until it fails (or until the government is forced to increase regulations to match basic standards). Then you abandon the infrastructure.

Why abandon it? Because at that point the company has extracted (and spent) all the profits from the infrastructure and the money is no longer there for renewal.

This is a type of transfer of wealth that we do not really talk about. And, it is a direct consequence of lack of regulation.

The alternative would have been to slowly increase regulations along with the science about the dangers of benzene, forcing private capital owners to invest in upgrades while the facility was profitable. This would have forced reduced profits through investment in infrastructure. The infrastructure assets would not have lost capacity to produce and the company's investors would have seen an assets not precipitously declining in value over that time.

Instead of creating an incentive to run to fail, the company would have had an incentive to maintain the facility over a longer time frame.

Now, it isn't guaranteed that the company would have continued to be profitable in competition with lower-regulatory regimes, but the assets would have sustained a higher value making resale or continued operation an option.

As of right now, there is no entity that wants to take over the facility as it would be too high of an upfront cost to fix. So, the benzene must be shipped somewhere else (the USA) and Canada has lost its domestic supply of a useful plastic product and has to import it at a higher cost (money and environment wise).

The alternative process can be seen around biodiesel production. Many new plants were built on Canadian public funded research, such as the Biox plant in Hamilton.

This refinery was one of the few commercialization of university research success stories. That is, until it was purchased for its IP, and then essentially shuttered because USA subsidies for biodiesel production meant it could no longer export green fuel to the USA.

In Canada, the response from the government to save biodiesel production has been increased regulations. In BC, the government saved a biodiesel refinery by establishing a domestic production minimum and a standard for transport diesel to have a higher percentage of biodiesel.

Biodiesel is more expensive that regular diesel, but it is part of a circular economy and attempting to capture green waste product, bypass the release of methane from it rotting in landfills, and doing something with it that is less destructive. I.e., burn it in the place o a fossil fuel or make bio plastics out of it.

In Ontario, the government has been convinced that this is a good regulation, one that might save production.

The regulation is a barrier to trade (it includes a domestic production element), a barrier to free exploitation of fossil fuel product at the expense of the environment and people, and will have unintended consequences of reducing the need to transport unrefined biowaste to the USA.

But, it may have the consequence of stopping the complete destruction of biofuel production in Ontario and reducing our dependency on American fuels.

The point here is that every conversation we are having about regulations and "barriers to trade" or productivity are complex. That complexity means that following the rhetoric on deregulation has unintended consequences as much as "regulations" have.

The only solution to this is to demand more wholistic analysis than what is provided by neoclassical ideologues. That is, we have to collect data from all the sources, look at all the data, and then ask the question are we willing to allow the transfer of wealth to capital in the short term and deal with the medium and long term costs?

Usually, if there was a regulation established, the answer is going to be no.

If that is true, then we need another way to continue to build the Canadian economy than simply hoping that capital and the Americans will give us all a break. The answer is going to be found in left-wing industrial strategies, ones that take account of all of the consequences of policy changes.