Friday, May 1, 2015

In a commentary in The Globe and Mail, Prof. Michael Trebilcock looks at the issue of compensation for those who lose out because of changes in public policy ("How to take the sting out of policy transitions," April 30, 2015). The commentary is based on his book Dealing With Losers: The Political Economy of Policy Transitions, which has been awarded the Donner Prize for the best book on public policy written by a Canadian.

Read the commentary on The Globe and Mail website, or below.

How to take the sting out of policy transitions

By Michael Trebilcock

April 30, 2015

The long fight to end slavery, led by William Wilberforce, among many others, culminated in Britain with the enactment of the Slavery Abolition Act in 1833. This Act made provision for a payment of £20-million (almost 40 per cent of the British budget at the time) in compensation to plantation owners in many British colonies – about $21-billion U.S. in present day value.

Moreover, only slaves below the age of six were initially freed while others were re-designated as “apprentices”, who were to be freed in two stages in 1838 and 1840. Wilberforce and many other abolitionists accepted that compensation and phased implementation was required to ensure enactment of the legislation, particularly by the House of Lords, where plantation owners were strongly represented among the aristocracy.

Whenever governments change policies – whether tax, expenditure, or regulatory policies – even when the changes are on net socially beneficial, there will typically be losers who have made investments of one kind or another predicated on, or even deliberately induced, by the pre-reform set of policies. The issue of whether and when to mitigate the costs associated with policy changes, whether through explicit government compensation, grandfathering, or phased or postponed implementation, is ubiquitous across the policy landscape if political opposition to change is to be muted and a generally socially beneficial reform agenda advanced, on the assumption that often a broad cross-section of a country’s citizens are likely to find incremental reform entailing compromises among winners and losers superior to the policy status quo.

Transition cost mitigation strategies that are actually adopted or proposed in many policy arenas are often haphazard, inconsistent or ineffective and deserve a more central and systematic focus in policy analysis. I illustrate the salience of this issue with two examples from contemporary public policy debates, along with potential compromises on transition costs.

Reducing agricultural protectionism presents major policy challenges in many developed counties, even though current policies are typically inefficient and regressive. For example, Canada’s dairy supply management regime that sets minimum prices and maximum quantities for dairy products has deliberately induced individual dairy farmers to invest in acquiring dairy quotas worth on average almost $2-million per farmer in current market value (almost $28-billion in total) and entailing transfers from consumers to dairy farmers of $3.6-billion annually (60 per cent of gross dairy farm receipts). This massive wealth transfer is tantamount to a grocery tax on dairy products of 150 per cent (or about $420 per family of four each year). However, to simply cancel this scheme overnight is likely to strike many citizens (beyond dairy farmers) as akin to an expropriation of a major part of dairy farmers’ wealth. Hence, a gradual phase-out reflected in commitments in trade treaties (like the Trans-Pacific Partnership Agreement) to substantially reduce tariffs on dairy products (now set at 250 – 300 per cent) over time complemented by partial compensation (e.g., for diminution in the book or acquisition value – not market value – of quotas in order to negate the rapid run-up in the value of quotas in recent years), financed by a temporary consumer tax on dairy products and a temporary tax on exporters that gain from opening up foreign markets through concessions on imported dairy products, seem indispensable to any realistic prospects of reform.

Perhaps the most daunting regulatory challenge of our age is climate change policy, which has been beset for the past decades by an intractable global prisoner’s dilemma problem that has precluded international agreement on reduction of greenhouse gas emissions. In contrast to a top-down approach, there appears to be much merit to bottom-up action, for example by major developed emitters like the U.S., the EU, China, and India implementing a phased-in, revenue neutral, carbon tax, or cap-and-trade equivalent, with carbon tariffs at the border that impose similar burdens on imports, with remissions of these duties in the event that exporting countries choose to adopt similar policies, hopefully inducing over time a coalescence around a global carbon tax (or its equivalent). These policies, accompanied by substantial public investments in basic R and D, are likely to incentivize long-term technological innovation and experimentation that is required in order to render major CO2 emission reductions both technologically feasible and economically bearable. Such a policy orientation seems broadly supported by most economists, from Paul Krugman on the left to Greg Mankiw on the right, and seems vastly preferable to governments attempting to pick technological winners at the risk of locking-in early, costly, and relatively ineffective technological options.

One hopes that before his death, days before the enactment of the Slavery Abolition Act, William Wilberforce was able to take great pride and solace in the accomplishments wrought by himself and his fellow abolitionists, not because they achieved nirvana overnight, but because they marked important progress, despite the political compromises involved, in achieving full human equality (racial, religious, and sexual) – a quest that may never end.