Liberals go for big dose of ‘rent’

The Liberals have worked hard to make the link between the welfare of middle-income Canadians and economic growth, and rightly so. Economic growth is a necessary if not always sufficient condition for sustained, broad-based improvements in living standards. The Minister of Finance’s Advisory Council of Economic Growth set itself an ambitious target in its reports: to increase the growth rate of real median incomes from the current baseline of 1.2 per cent a year to 2.2 per cent in 2030.

In growth empirics, a sustained increase of one percentage point a year would be an extraordinary achievement, the equivalent of an extra $15,000 a year for median earners.

But the chances of that actually happening are vanishingly small. And just as the so-called “middle-class tax cut” mainly benefits people in the top third of the income distribution, the proceeds of the “innovation agenda” will likely be absorbed by the usual class of well-connected rent-seekers.

The word “rent” has a particular meaning for economists, usually negative.

In a properly functioning market, payments should reflect the minimum compensation necessary to bring about the most efficient outcomes. The price of a good should be enough for a producer to supply it, a salary should be enough for a worker to accept a job, and a rate of profit should be enough to attract an investor. Payments above those levels — rents — are a waste, benefiting the recipient at the expense of the rest of society. For an economist, “rent-seeking” is an activity to be denounced, and “rentseeker” is a harsh epithet.

Rents are difficult to sustain without government support: state-granted monopolies, permits, licences and the like. And the beneficiaries are invariably those with influence and connections. The people at the margin of society are hardly in a position to extract these favours. Neither are the people in the middle class.

So, the traditional agenda when it comes to rents has been to work to eliminate them, dismantling first the old feudal system of monopolies and guilds, and later working to restrain the market power of large corporations.

This hasn’t been as easy as it sounds — people who are in a position to extract rents are typically wellplaced to preserve their positions.

Not all governmentcreated rents are harmful. Sustained economic growth depends on the creation of new ideas, new technology, innovation or whatever you want to call it. The economist Paul Romer prefers the term “recipes.” But the economics of recipes are nonstandard. Since recipes are non-rival — one person can benefit without affecting the ability of another person to do so — it’s hard to recover the costs of R&D. If no one can afford to finance the costs of R&D, fewer ideas are created and economic growth suffers.

The standard solution is for governments to enforce intellectual property (IP) rights so that the owner of a recipe can act as a monopolist. These monopoly rents can then be used to cover the costs of R&D. Governments have to strike a delicate balance here. If IP is too weak, researchers can’t cover their costs. But if IP is too strong, other researchers will be unable to build on existing work.

There may well be elements of Canada’s IP rules that could be modified in order to promote faster growth, but we’re going to have to wait to see what they might be. The 2017 budget promises only to “develop a new intellectual property strategy over the coming year.” In the meantime, the Liberals are adopting the strategy of picking winners: distributing public money to private entrepreneurs.

This is a dog-eared script so well-known that it seems hardly worth taking the time to explain how it goes. Since governments are no better than anyone else, and probably worse, at recognizing the economic potential of new ideas, these funding programs become games in which the goal is to extract rents from the government. To the extent that they promote innovation, it comes from finding new and profitable ways to pitch a proposal so that it fits whatever criteria the governments are using when they fund projects. If anyone in the middle class benefits, it’s largely a matter of happenstance, not design.

It’s not written in stone that this will happen again, but there’s nothing written in this year’s budget to suggest that it won’t. Money is to be dispersed through myriad programs, including six “Economic Strategy Tables.” The strategy is not so much picking winners as it is setting up a buffet for well-connected rent-seekers.

The middle class should prepare to be disappointed by the Liberals’ growth agenda. Again.