Fri, 24 February 2017
What follows is an edited partial transcript of my conversation with Stephen M. Jones. He is an economist for the US Coast Guard. However, we are discussing his own research, so nothing in this conversation should be taken to represent the official views of the US Coast Guard.
Petersen: So Stephen, let's start just by defining regulatory discretion. What does that mean in this context?
Jones: Sure. So, I think first off, we should probably define regulation because when Congress writes a law, they pass the law on to regulatory agencies and it will say something to the effect of "agencies: issue a regulation." So, when we talk about regulations this point isn't always clear because people just aren't familiar with this process. The regulation is a statement that kind of clarifies existing congressional law or is written in direct response to congressional law. And this could be as specific as, say, Congress can direct an agency to set an exact amount of pollution that is permitted for an industry to as broad as saying something like "protect consumers from unreasonable risks." And then the agency has room to interpret that statement as wide as it wants to.
So, when I talk about agency discretion what I'm really talking about is Congress wrote a rule that gave the agency power to issue legally binding rules that may or may not trace directly back to Congress.
Petersen: Yes. So, in the example you use with the pollution, Congress has something fairly specific in mind---a specific type of pollution---but the agency might have to clarify and to say what counts as pollution and how much they're measuring it and maybe they might establish a quota system, they might have specific rules for specific firms. And in the other example you gave, which is just protecting consumers from unnecessary risk, in that case they can basically write rules as if they were their own legislator, they're essentially doing what Congress is ostensibly meant to do. Is that correct?
Jones: I'm not sure I would go that far. So, there are various theories of the purpose of the regulatory apparatus in the bureaucracy. Some people---I cite them in the paper---Baumgartner and Jones and Workman have one that is called 'The Politics of Information' and I forget what the other is called, it was written in 2015. And their theory instead is that Congress gives the agencies discretion because Congress doesn't know the problems it needs to solve and so the agency is kind of like the specialists that you subcontracted to figure out what Congress wants them to solve without actually knowing, say the relevant information to determine that.
That's one theory. You've got other people like Philip Hamburger notably, who has written a whole book on how administrative law, which is another word for regulation, is unlawful and so he goes through sort of the common-law tradition and cites numerous pieces of evidence to say, exactly in the way that you put it, that it's a deep legislative function and only Congress should be performing that.
And so, whether that's true I think depends on a number of different assumptions that aren't always discussed directly in the literature. That would be my interpretation if that makes sense.
Petersen: Right. And of course, we're approaching this from an economic standpoint so there are important public choice issues involved with this. The same rule whether it's written by a legislator or a bureaucracy---a regulatory agency--- it's the same rule and so in principle, there should be no difference. But the important thing is that the agency and the Congress may have different incentives and may write different rules. That's what I interpret as an important underlying theme in your paper.
Jones: That's most certainly true. So, that's actually one of the things that frustrate me greatly about reading a lot of these other, I think, great researchers who don't in my opinion sufficiently consider the role of incentives. To couch it in Baumgartner's or in Jones' and Workman's terms, okay, let's assume that the purpose of the bureaucracy is to create the information that's necessary to solve the national problems, whatever these supposed national problems are. Why would you assume that bureaucrats would supply the right amount of information in the right ways consistently throughout time?
And it's not clear to me that those incentive systems are ever worked out; or if you do work them out, I don't think it actually shows that bureaucrats are beholden directly to Congress. So the big terminal literature, which comes from McNollgast, which is McCubbins, Noll, and Weingast, in the 80s is called Congressional dominance. They basically say that because Congress writes the rules they structure all the incentives and have all the tools at their disposal to monitor and police agencies. And I'm just deeply skeptical that that works as well as they describe.
Petersen: Right. Your paper mentions the Administrative Procedure Act which is sort of an attempt by Congress to keep these agencies in check. Could you describe that act and what exactly it does?
Jones: Sure. So, the Administrative Procedure Act is the main document that governs how agencies regulate. It defines the process by which regulation is made. And the chief component is that it really says before an agency issues a regulation it has to go through notice-and-comment. And what that means is when it sends out a rule it issues it in the Federal Register, which is the government's journal of record, and then it allows everybody to comment on this rule, and literally anybody will comment on these rules, and the agency is legally required to respond to all comments.
So, the basic theory is this, it's kind of got a two-part mechanism here. On the one side, it's a sort of direct structural constraint and doesn't really affect agency decision making because all it's really saying is you have to send out all rules---if the fire alarm is triggered it acts like a fire alarm. So, if you get a whole bunch of comments it's a really easy way for Congress to tell, "oh there's a problem with this policy" or it's a contentious policy because all of these people commented it and it's really loud, it's like a fire alarm. But it doesn't necessarily mean that an agency, that an individual bureaucrat in that agency really feels that alarm. It's more like it'll just be triggered, make sure just do something that doesn't trigger that alarm and you should be okay.
The other way in which it might change agency behavior is that by forcing agencies to publish rules they reveal a lot of information and in the rule itself you have to describe, say, the cost of the benefits. You have to describe whether or not it has impacts on Native American tribes, or on the Federal structure, or various other executive orders that have been issued. So, one of the main ways in fact that notice-and-comment system has changed is executive orders that define how in a very practical sense these final rules will be constructed. And so, they're all today reviewed in an office inside of the OMB---the Organization for Management and Budget---and the office is called a wire at the Office of Information and Regulatory Affairs. And so, they're responsible for reviewing all regulation and they are an Office of the president. So, some people then conclude that the President has all this power, in effect, of rulemaking in general.
Petersen: I guess the idea of the President is that it's the executive branch and so it executes and it sort of makes sense that these agencies that are executing laws would ultimately be beholden to the President. It sort of fits. So, do you know quantitatively how many comments? Are these regulatory agencies writing regulations and getting hundreds of comments every time, or is it rare to get even one comment?
Jones: It depends on the agency and it depends on the rules. So EPA because many of its rules will have national effects, and then there are national environmental organizations that you can say are key stakeholders in the outcome of all these rules could very easily generate hundreds of thousands of comments. And so, they'll actually have computer programs that scrape the comments and kind of try to sort them in the boxes. You have other organizations, like FRA for instance, they might have a rule that only gets 30 comments.
Petersen: Sorry what does FRA stand for?
Jones: Sorry, that's the Federal Railroad Administration and that's one of the two main regulators of railroads in the United States. The other regulator, the Service and Transportation Board, is primarily focused on business practices, antitrust type issues, and FRA is focused primarily on health safety and welfare of anything railroad related. So that's everything from, say, the occupational safety of railroad workers to the safety of passengers on trains. And so, the Federal Railroad Administration might only get 30 to 40 comments on a normal rule, they might even get less than that. It really depends on the rule itself.
Petersen: And typically, this would be if a rule affects my business and I might pay attention to the new rules coming out in my industry and if one I thought was going to be detrimental to my bottom line if I work for or run a private business, then I would comment. Is that the typical thing that happens?
Jones: Probably. I really think the diversity of interaction is so high it's really hard to characterize exactly what normal public commenting looks like. Because it could be everything from "I'm a regulated businessman who wants this," there might be somebody on the other side who benefits directly because the new rule sets a standard and the standards organization writes in and says your standard isn't strict enough. It could be something like there's a proposed rule that the Federal Aviation Administration, which regulates commercial flying, or anything air related at all pretty much, and they have a rule on the use of cell phones on planes. They've got about 5,000 comments, 6,000 comments. It's quite a number. Once you get above 100 that's usually quite significant. And a lot of those could be something as simple as "we just think phones shouldn't be on planes" and just average citizens writing in upset at the very concept of a phone being on a plane. So, there's quite a diversity of interactions between the agency and public on that.
Petersen: So, getting into the main topic of your paper you discuss what you call channels of influence. So, what are those and why are they important?
Jones: Yes. The way I think about it is this. I think the chief question of the bureaucracy literature is who does this regulatory bureaucracy exist for? Does it exist for interest groups? Does it exist for Congress to ultimately provide information that Congress needs? Does it exist for the President to carry out the President's wishes and his policy? Or does it exist for the bureaucrats themselves which is the one I also like to emphasize because the literature on that one is not very common today. It was more common I think about 30 years ago but the framing of it is a little different.
And so, my point is to say each one of these separate groups should have an effect on the outcome itself of the final rule which changes say the regulatory set. Some rules may be demanded by bureaucrats, some rules are demanded by interest groups in Congress. If I were to put it in the econ speak---because I'm writing this paper probably more for a political science literature---but if I had to put it in an econ speak my I'm kind of saying you have four different demanders for this product and so who is the regulatory agency really supplying this for? It's I think really how I'm thinking about it.
For the full conversation, listen to the episode.
Fri, 17 February 2017
What follows is an edited transcript of my conversation with Maxime Bernier. If you like his ideas, I encourage you to go to his website to learn more about them.
Petersen: You're listening to Economics Detective Radio. Before we start let me give a quick disclaimer that although today's guest is a politician this show is nonpartisan and doesn't endorse any particular candidate for office. My guest and I are also Canadian so we'll be talking about some Canada-specific issues. I know I have an international audience but sometimes it's fun to learn about what's going on in other countries. So I hope you'll listen nonetheless. And now on to the episode.
My guest today is Maxime Bernier, he is the Member of Parliament for Beauce, Quebec and a contender for the Conservative Party leadership race. Maxime, welcome to Economics Detective Radio.
Bernier: Thank you very much for having me.
Petersen: So, our topic today will be Canada's economy and its economic policy. There's a lot to get to on this topic but let's start with the positive. The Fraser Institute's Economic Freedom of the World Index ranks Canada as the fifth freest country in the world, actually tied for fifth. We're well ahead of our neighbors, the Americans, who come in at number 16. So, to start our discussion, Maxime, what is Canada doing right with respect to its economic policy?
Bernier: First of all, I think that this was the ranking that the Fraser Institute did a year ago, if I remember very well, and at that time we had a balanced budget when we were in government and also we were successful in lowering taxes for every Canadian. And I think that's a key when you speak about more freedom you must also have less government and a limited government in Ottawa. And I think that was the goal of the Conservative government when we were in government.
And also we have a lot of free trade. That's very important. We signed free-trade agreements with I think, if my memory is good, 45 countries. So, when you have more free trade like that, Canadians are able to buy goods from every country and they are able to also export products. So, that's helping also.
More free trade, less government, lower taxes and I think that's a big reason why we are there now.
Petersen: Yeah, there's a pretty general economic freedom, and you mentioned that that ranking came out last year and we have had a change of government recently so let's see if we can keep our high position.
But let's move on to some specific areas where we're not so free. Let's start with telecommunications. Canadians have some of the most expensive cell phone bills in the world. You personally did some work in deregulating the telecommunications sector when you were Industry Minister in 2006-2007. Can you talk a little bit about the changes that happened then and where we are now?
Bernier: Yeah, at that time we wanted to deregulate the telecom industry, mostly the regulation that was imposed by the CRTC. We were successful in doing that, and afterwards I think we had a little bit more competition in Canada in telecom.
But we didn't have time to also abolish the restriction on foreign investment in telecommunication. And so I think that would be the next step to take to have a bit more competition. And so that's why in my program I have a very strong platform about deregulating and also abolishing the prohibition on foreign investment in telecom and also in the aviation sector. So like that, corporations from outside Canada will be able to invest here in telecom and that will help Canadian consumers, who will have more choices and lower prices. But it was the deregulation that we did---that I did when I was Industry Minister---that was the first part of the deregulation. So now we must go ahead with abolishing the prohibition on foreign investment in telecom.
Petersen: Right. The vast majority of Canadians live right on the border with the United States and if you just step across the border suddenly you can buy a data plan for much less. One thing I was struck by when visiting the United States was that people just watch YouTube videos when they're on their mobile data. And you don't see that in Canada because it's so incredibly expensive. So, I wouldn't be surprised if we allow the American companies to sell to us if we wouldn't get exactly the same plan they're getting which would be great.
Bernier: Yes, I just want to add that Verizon, I think they wanted to come to Canada but they were not able to. They had created a Canadian corporation and all that and at the end, they decided not to come to Canada like their operations in the US. So, I think that will be a big step if we are successful in abolishing the restriction on foreign investments. That would make a difference for Canadian consumers.
Petersen: So, we have a similar issue with the airlines. It's very, very expensive to make a domestic flight within Canada, for instance, flying Vancouver to Toronto is about twice as much as flying L.A. to New York even though they are similar distances. So, do you want to comment on that situation? We only have the two airlines West-Jet and Air Canada. Could that be similarly fixed?
Bernier: Yes, you're absolutely right. If you want to fly from Canada to another country it is still competitive, but if you want to fly in Canada, inside the country, from example Montreal to Toronto, or other cities like that, it is very expensive. Because, like you said, we have only two main carriers in Canada: West-Jet and Air Canada. And we don't have like other countries a low-cost carrier.
So, we need to have one and I know that some business entrepreneurs want to create one low-cost carrier but their funding, their capital it's coming from the U.S. and from U.K. And you still have the same things in aviation, we have a restriction on foreign investment coming from other countries. So, that's why we must abolish that and like that we'll have a low-cost carrier and that will compete against Air Canada and West-Jet. That adds more competition, more choice and at the end lower prices.
So, I know that the Federal Government and the Minister of Transport, they're looking at it right now because these entrepreneurs want to create that corporation, a low-cost carrier. And they're ready for that. They're looking at it right now so, I hope they will abolish that but I'm not so sure. This is why for me, I have a platform that is based on more freedom and less government and it will be always good for Canadians. That is why I'm pushing that very hard, I wrote to the Minister about that to be sure that they will abolish foreign restriction in the investment in the aviation sector.
I don't know if they will do it but if not I will do it when I will be the leader of the party and Prime Minister.
Petersen: Yes, I hope you succeed in that. This one is a particularly important one because if airfare is expensive then more people drive and driving is statistically much more dangerous. So, you have more highway fatalities. I personally drove over 1,200 kilometers to visit family over Christmas. So, I'd really love to have an option to fly cheaply but it's just out of reach at our current airfare prices.
We also have a problem here in Canada, a similar related problem with cartels. We tend to create cartels in a lot of industries and we have one set of policies called Supply Management that applies to poultry, dairy products, even maple syrup (which is very quintessentially Canadian) keeping these prices artificially high. So, could you talk a bit about Supply Management for those who maybe haven't heard of it?
Bernier: Yes, Supply Management it is a legal cartel for dairy, poultry and eggs and the like. The producers on the Supply Management are able to fix high prices for these products and they are fixing the production also. That's why it's a cartel, they're fixing the production for the Canadian market and they are fixing the price, every year they increase the price of these products.
So, I am the only candidate for the leadership of the Conservative Party of Canada and also the only member of Parliament who's speaking for Canadian consumers and that wants them to save $2.6 billion every year. Because that's the cost of keeping that cartel and for a family the cost is $500 every year. I want them to be able to buy poultry, eggs, and milk from other countries---they want to export that---but because we have tariffs at the border of 300% on products coming from other countries to be sure that the dairy producer in Canada will be able to fix high prices for their products.
So, for me, if you believe in a free market you must abolish that and I don't want to do work for 19,000 farmers that are on Supply Management, I want to work with 35 million Canadians. And I think that's the most important for me and actually, the farmers just represent 10% of the farmers and all the other farmers in Canada, like the beef producers and all the other farmers are not on the Supply Management, they are operating in a free market. So, it is not fair and to be fair we need to abolish that but because as a special interest group they are very powerful and they're very well connected with the politicians, they were able to keep that privilege for a very long time and I think now it's time to speak for Canadian consumers and that's what I'm doing so I hope to be successful with that.
Petersen: Ironically Facebook has been serving me advertisements from the Canadian milk producers and their tagline or slogan is Canadian milk is worth crying over, or spilt Canadian milk is worth crying over, or something like that. And the irony is that if they supply too much milk, because of Supply Management they actually have to dump it to keep the price high. So it is really just wasting perfectly good milk and poultry.
Bernier: Yes. If they produce too much they cannot export their surplus because it's a subsidized milk. So that's why it's bad for them. They are producing good products, good milk, good dairy, good poultry, and eggs and I want them to be able to export their products to other countries and right now on Supply Management they can't because they have the responsibility and the obligation to produce only for the Canadian market.
Petersen: You mentioned the 300% border tariff on U.S. dairy. I think in the U.S. they have a different policy where they actually subsidize it and keep the price artificially low. But we had this strange situation a few years back where Canadian pizzerias were smuggling in black market mozzarella over the border and got caught. You shouldn't have to smuggle mozzarella cheese. If we had a free market, there would just be one price for mozzarella cheese and you wouldn't get a benefit by smuggling it.
You mentioned that you're really the only one calling for an end to this Supply Management policy and yet our Prime Minister for almost a decade, Stephen Harper, has a Master's degree in economics. He must have known that this policy was not good for Canadians. And most of the MPs are smart people, they must realize it, but is it as simple as the cartels themselves just making big donations and buying protection for this policy?
Bernier: First of all, you're right, when we were in government that was the policy of our government to keep that cartel, that Supply Management system. All the members of the Conservative Party of Canada voted in 2004 in a convention to protect these farmers and after that when we were in government in 2006-2007, that was the policy of the government, and that was the policy of the government until the end, until 2015.
And I think that at that time we didn't want to displease the cartel and that special interest group. And I tried to fight for that on the cabinet table but I wasn't successful. Most importantly, I think now I'm able to do it and I will ask---if I'm the leader of the Conservative Party---I will ask the members to decide on that and to review their policy statement that they did more than 12 years ago, and I hope the members will abolish that and they will believe in a free market also for producers on Supply Management.
Petersen: Have the supply managed industries been pushing back against you? Have they been taking out ads or funding your opponents? How are they trying to protect their cartel status?
Bernier: For sure. It's an important cartel in Quebec and in Ontario, they want to do everything for Maxime Bernier to not be elected. And so I think they are buying memberships to vote for the leadership of our party to be able to vote because, as you know, you need to be a member.
If you want to be a member and support my candidacy you can go on my website www.maximebernier.com and you'll be able to become a member for only $15. But, yes, the dairy producers are working to be sure that I won't be elected.
But there's more Canadians than dairy producers. So, I'm working hard to be sure to be successful because they want to keep their privilege and we'll see what will happen. And it's easy for them because I'm the only candidate who wants to abolish that and speaking for Canadian consumers, so they can vote for all the other candidates and they will have somebody who will support their special interest.
Petersen: I hope you succeed. And you're right there are more Canadians than supply managed firms or farmers that benefit from this particular policy. But you have this issue of the cost being dispersed and so although there are fewer farmers who benefit from the cartel and from Supply Management there may be a lot more motivated per capita. So, I hope you can succeed in getting over that, sort of, public choice hurdle. But my cynicism kind of says that it's an uphill battle.
Bernier: Absolutely. But also, I must say that the other farmers that are not on Supply Management, they have a huge interest also for that cartel to be abolished because it's not fair for them. Each time Canada is negotiating a free trade agreement with another country they have access, for example, Canadian beef will have access to the other country's market, but they won't have the full access because we're not giving full access to their milk, poultry, and eggs. So at the end, they are paying a little bit for that and they don't have the access that they would have otherwise. And they understand that. So the other farmers that are not on Supply Management have the interest to be sure that we have all these steps that can counterbalance the special interest group.
Petersen: I wonder about that because if beef and poultry are substitutes then you would think that the beef producers would want their competitor to have higher prices than they do so people would maybe buy more beef. But there is the issue of the international agreements.
You've called for the privatization of Canada Post and the removal of its monopoly on letter mail. That's another area where Canadians pay more, not just for letters but also parcels shipping to and from and within Canada is much more expensive than it is in the United States and other places. So could you talk about what the legal status of Canada Post is and what both parcel shipping and regular mail are, what the legal status of both of those is?
Bernier: Yes, you're absolutely right. Canada Post is a state-owned enterprise and I think in 2017 we must do like other countries and privatized that. They are charging at a huge cost because they are not competitive, they have huge expenses and they're not so efficient.
So, my thinking about that is, these are not services that Canadians need to be delivered by a government entity. We have a private sector for delivery and I think that it is not an essential service for Canadians any more. And they are using Canada Post less and less with emails and all that, and so we must do like in Belgium, like in U.K., like in France and privatized it.
Also, they're charging very high prices for their products. So, if we have more competition, that will help and at the end that's the solution. But they want to keep that and for me if you want to speak for Canadian consumers you must go ahead and do that reform, that's my proposal.
Petersen: Yes, it's such a big issue because in other countries that have much cheaper shipping, people are opened up to the whole global marketplace, you don't have to go to your local store to buy any particular good, you can buy it online and have it shipped to you. But for Canadians, you're adding $10-$15 to the price and so Canadians aren't really online buying things nearly as much as, for instance, our neighbors the Americans.
And when Canadians want to run online businesses and maybe ship things to other people to stay competitive they often have to drive across the border and ship from the United States because it is just so much cheaper.
And Canada Post has a legal monopoly on letter mail which is a little bit odd. Why should one particular government entity have the legal right to ship our mail? It's kind of an odd historical anomaly that we could be rid of.
Bernier: And you have to think the price also. It's not a free market. It is them who are fixing the price because, like you said, they have a legal monopoly. That's what I want to do, I want to be sure that we can have competition there.
Petersen: You've also called for reducing trade restrictions within Canada. This is one of those things that is so odd, is that we're one country, ten provinces, but we restrict many goods from being shipped within our own country across borders. So for instance alcohol. If you have a craft brewery or a winery in British Columbia it's very hard to ship it to even Alberta right next door. Can you talk about some of the internal trade restrictions that we have in Canada?
Bernier: Yes. We have a lot of them in these kinds of industries, but for me it is a bit of a shame that after 150 years we don't have an economy of exchange in Canada, because that was the goal of the Fathers of our Constitution. The fathers of our country, they wanted to have an economic union and we don't have that because of some restrictions, legislation, and regulation by provinces.
So, my goal is to be sure that we'll have an economic union. And to do that, it's against the Constitution and so I want to be sure to have a team in Ottawa of civil servants that will look at all the regulations and the legislations that are imposed by provinces and to bring provinces in front of the court when they don't respect the Constitution. Nobody has had the courage to do that and I think it's time to do it. And that will be the only solution because I cannot change the legislation or regulation at the provincial level and at the federal level we must respect the Constitution.
But I can assure Canadians that we'll do everything for the provinces to respect the Constitution. That's why we're going to bring the province in front of the court and the court will decide if it's constitutional or not. And I think it won't be because it's clear in the Constitution that we must be able to sell and buy goods from any province in Canada. That would be the solution. Because if you ask the provinces to do that, they have the problem and they cannot find the solution. So, that's why every year you have a meeting with the premier at the provincial level and they're saying, you know, we will abolish trade barriers and all that and it is not happening.
And they're the problem and they're not able to do that. They want to protect their own little market it is not good for Canadians, so we must do something at the federal level and that's what I want to do. I want to do a strong analysis of every regulation, legislation that provinces are imposing, legislations that are against free trade and after that bring them in court and the court will decide. And in the end I'm sure it will be unconstitutional and maybe when you do that, in five years after that, you have a real economic union in Canada like the fathers of our Constitution wanted.
Petersen: Yes. One wonders what is even the point of having a country if you're not going to have at least free trade within your borders? That seems to be the main benefit of all confederating and joining into one country instead of being 10 smaller countries.
Do you have any concluding thoughts, anything we didn't cover that you'd like to say?
Bernier: First of all I want to thank you for giving me that opportunity to speak with your people and if they want to know a little a bit more about our economic policy, they can go on my website www.maximebernier.com. Everything is there and I'm very proud of our platform. It's a platform that is based on individual freedom, personal responsibility, respect, and fairness and it is a platform that is based on real conservative values and the values of Western Civilization. So, if people like that they can become a member and they can vote for the leadership. I appreciate that you gave me this opportunity and maybe another time we can go on and speak about other economic issues.
Petersen: My guest today has been Maxime Bernier. Maxime, thanks for being part of Economics Detective Radio.
Bernier: Thank you very much and have a nice day.