National Post (National Edition)
Even before inflation Canada was expensive
`Why is Canada so expensive?” Even before this past year's outbreak of inflation Canada was expensive. Why inflation happened is a question for another day (though — spoiler alert — the same culprit is largely to blame). But why was even pre-inflationary Canada so expensive?
One answer, certainly, is that everybody wants things to be more expensive! The restaurant would like to increase its profits by making its meals more expensive; the hotel wants to charge you more for your stay; the gardener wants to invoice you more for mowing your lawn; the homeowner wants his house to sell for as much as possible; and McDonald's, Tim Hortons, Second Cup, and Starbucks would all like to make more money by having us pay more for coffee.
So maybe the real question is not “Why is Canada so expensive?” but instead “Why are most things actually quite cheap?” Who protects the consumer from high prices? Some people might say that government regulation protects consumers from business exploitation. But there is no law that stops McDonald's from charging $5 for coffee instead of $2. Nor would such a law do any good. Price ceilings are invariably harmful: by discouraging supply and preventing prices from restraining demand, they are the surest way to create a shortage.
If it's not the government that keeps coffee prices low, then is it the benevolence of McDonald's shareholders that leads them to accept lower profits by supplying us with cheap coffee? Certainly not. No less (though also no more) than other companies' shareholders, they want to do as well for themselves as possible. The real answer is that Tim Hortons and Second Cup protect us from McDonald's; just as Sobeys and Metro, not the government, protect us from Loblaws; Hilton protects us from Marriott; PepsiCo protects us from CocaCola; Amazon protects us from a great many retailers that sell books, electronics, clothes, and appliances; and they, in turn, protect us from Amazon.
In all these cases, it is a free and competitive market that keeps prices low. Our freedom to choose how to spend our money is what protects us from high prices. The corollary is that when we are not free to choose we are not similarly protected from high prices. When are we not free to choose? When governments stifle competition, drive up costs, spend our money, or “manage supply,” often under the guise of ensuring the quality of goods and services.
Let's take, for example, one of the federal government's favourite programs: child care. It is said by politicians everywhere and of all stripes that the government is making child care “more affordable” by spending more money on it. But something does not become more affordable by virtue of our being forced to pay for it with our taxes instead of voluntarily choosing to buy it. All it means is that we lose control over how — and how much of — our money is spent and turn control over to government.
The problem is that while government can obscure costs, and government can redistribute costs, government cannot reduce costs. If there is any evidence that government makes the provision of child care or anything else cheaper or more efficient, it has yet to be uncovered. Government-imposed efficiency, as economist John Cochrane puts it, is “a hope without historical precedent.”
Wait times for surgery, hallway health care, road congestion, military procurement, government-protected agricultural cartels, green energy disasters and, worst of all, our public school systems, which have become ever more expensive even as educational quality has declined, all demonstrate the failure of government control. Child care is no different. Thanks to the federal government, we will pay more for worse child care.
Let's turn now to the provinces. The Ontario government recently announced that to help people cope with high inflation it would raise the minimum wage to $15.50 per hour. In other words, it will try to mitigate the harm of rising prices by … raising prices. Of course, the effect of the minimum wage law is to remove from the employable labour force those workers whose productivity is below the stated minimum, by making it unprofitable for employers to hire them. It means less employment than would otherwise take place and, in consequence, fewer goods and services produced and therefore higher prices. What the Ontario government is doing involves economic illiteracy.
Here's another example of economic illiteracy: the embrace by the left, and now increasingly by many conservatives, of labour unions. What makes unions, including private-sector unions, so harmful is that they are monopolistic institutions that reduce the productivity of workers by tying employee compensation to seniority instead of economic output. This sort of arrangement is inefficient and — the key point — unsustainable in competitive environments, so unions rely for their survival on government favours in the form of anti-competitive policies.
The two best texts I know of on the economics of unionization are the chapter on unions in Hayek's The Constitution of Liberty, and the chapter in Milton and Rose Friedman's Free to Choose titled Who Protects the Worker? Both texts build their case against unions from the principles of supply and demand. Here is Hayek: “Workers can raise real wages above the level that would prevail on a free market only by limiting the supply.” As the Friedmans similarly put it: “A successful union reduces the number of jobs available of the kind it controls.”
Unions reduce the number of jobs by lobbying government for anti-competitive policies, including: minimum wage laws, mandatory labour standards, supply management and other forms of protectionism, occupational licensing, restricted bidding, and all sorts of government spending and regulatory initiatives, including the current
Liberal effort to bring child care under government control. The intention and effect of all these policies is to prevent the most disadvantaged members of the labour force from competing for jobs and, by preventing them from producing goods and services, to inflate prices.
There is another important point that cannot be overlooked: the argument that government control raises the price and worsens the quality of goods and services does not rely either on private-sector workers being more productive than government workers or on non-unionized workers being more productive than unionized ones. In fact, the argument that consumers are better off without government control relies only on the basic economic principles that competition is better than monopoly and choice is better than coercion.
Milton Friedman's adage that “nobody spends somebody else's money as carefully as he spends his own” always applies. When the government spends our money, it will not spend it as carefully as we would. Or when it restricts how we spend our money, such as through labour market or industry regulation that limits our choices as consumers, it removes the incentive for — and obligation of — producers to continually innovate, improve, and compete to offer the best possible goods and services at the lowest prices.
If we want a more affordable Canada, we should therefore favour large-scale liberalization of labour markets, widespread deregulation of industry, significant privatization, including in education and health care, and for all levels of government to take, not a scalpel, but a pickaxe, hatchet, or other heavy equipment to the huge amounts of spending that need to be pruned.
Free and competitive markets, not government, are what protect consumers. Think of all the cases in which prices are persistently too high: real estate, in many cities; dairy products at the grocery store; the high taxes we pay for underperforming schools and inadequate access to medical care, and so on. There is no case in which government is not the problem.
WHEN THE GOVERNMENT SPENDS OUR MONEY, IT WILL NOT SPEND IT AS CAREFULLY AS WE WOULD.