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Stephen Staley: Canada’s economy is trapped in a tangled web of over-regulation. Growth and prosperity demands we cut ourselves free

Commentary

Workers place pipe during construction of the Trans Mountain pipeline expansion on farmland, in Abbotsford, B.C., on Wednesday, May 3, 2023. Darryl Dyck/The Canadian Press

A majority of Canadians think that Canada is broken after years of stagnant incomes, affordability challenges, rising crime, government failures on basic functions like healthcare and immigration, and a deepening cultural malaise. But decline is a choice, and better public policies are needed to overcome Canada’s many challenges. Kickstart Canada brings together leading voices in academia, think tanks, and business to lay out an optimistic vision for Canada’s future, providing the policy ideas that governments need to ensure a bright future for all Canadians.

Part One

Canada has an over-regulation problem. After a decade of lost growth, our country’s thicket of heavy regulations casts a dark shadow on the otherwise fertile soil of our economy. Both the quenching rain of new capital and the invigorating sunshine of innovation are prevented from doing their inevitable and natural work.

Kickstarting Canada demands we solve this problem. In this two-part essay, I will first lay out the argument for a future de-regulation agenda, and then provide some practical principles and examples that can allow capital and innovation to drive long-overdue growth.

I ask generous Hub readers to indulge me, as I begin this essay with a story from a different continent.

I recently stumbled across this post from Thierry Breton, the EU Commissioner responsible for the European Union’s internal market.

I know, everyone loathes and mocks, Elon Musk, one of the world’s richest men for overspending on X, the social media platform everyone loves to hate…but come on. European bureaucrats are now going to spend thousands of hours and millions of Euros waging a years-long legal campaign against a software feature tweak that amended the blue check mark? It’s not just that it’s stupid (which it obviously is), it’s that these people should have better things to do.

(I feel similarly about the efforts to rename streets and squares in Toronto: It’s annoying, but mostly it’s just outrageous that anyone is tackling name changes before they attempt to address the deteriorating traffic apocalypse of gridlock and taillights on those same streets. Shouldn’t we demand policymakers tackle problems from biggest to smallest, in that order? I digress…)

Even before the passage of the Digital Services Act (DSA) that Breton references in his post, the EU was hostile to technology companies, which is why, with very few exceptions (actually just one, Spotify) Occasionally some Europeans claim Stripe as their own, but of course the Irish-born Collison brothers, being ambitious and entrepreneurial, moved to Palo Alto to form their financial payment giant., basically no successful tech startup has emerged from the EU. Hilariously, Wirecard, the shining example of European fintech success for much of the 2010s, imploded in a massive (and in hindsight, obvious) fraud in 2020. One of the two guys who ran the place turned out to have most likely been a Russian FSB asset.

Beyond the impressive Swedish music streaming service (I’m a fan), Europe’s most significant contributions to the technology universe are those irritating pop-ups asking you to accept cookies on nearly every webpage you visit—a gift of the EU’s General Data Protection Regulation (GDPR).

There has been lots written about the EU’s regulatory overreach, including most recently by the peerless Ben Thompson, author of Stratechery, and one of the most interesting and innovative writers on technology strategy, which I recommend to Hub readers.

This very long introductory aside makes a stark point. While some regulation is necessary to protect consumers and proscribe reasonable limits on certain business practices, overregulation regularly results in sclerosis, and occasionally, insanity. When you build a regulatory regime as thick and incomprehensible as the EU has, where vague rules allow career bureaucrats to dictate nuanced software feature changes, the only innovation you allow for is creating innovative new regulations themselves. (This isn’t hyperbole, they’re very proud of this.)

Before diving into practical Canadian examples, there’s a polar opposite example worth touching on from the United States.

While this reference steers a bit too close for comfort to “He who shall not be named” I do think this op-ed from Mick Mulvaney, the former director of the Office of Management and Budget in the U.S., makes an illuminating point (and also gains access to my imagination by using the Shibboleth lines from “A Man For All Seasons”). Penned when Mulvaney briefly took over as acting director of the Consumer Financial Protection Bureau, he noted that previous leadership had been determined to demonstrate its fervour by “pushing the envelope” on regulatory enforcement, and instead argues that “the people we regulate should have the right to know what the rules are before being charged with breaking them. This means more formal rule making, and less regulation by enforcement.”

He goes on to say:

“We are government employees. We don’t just work for the government, we work for the people. And that means everyone: those who use credit cards, and those who provide those cards; those who take loans, and those who make them; those who buy cars, and those who sell them. All of those people are part of what makes this country great. And all of them deserve to be treated fairly by their government. There is a reason Lady Justice wears a blindfold and carries a balance scale along with her sword.”

These two examples are illuminating polemics for thinking about any regulatory regime. On one side, an expansive, expanding, and inscrutable forest of regulations that stifles innovation and permits the government to sue you for altering the criteria of getting a blue checkmark on a universally reviled social media platform. On the other side, clear laws, enforced fairly, allowing everyone to understand the rules and make clear, informed decisions on that basis.

Canada’s regulatory environment is preventing economic growth

In Canada, today’s regulatory landscape is far too close to the former. This isn’t a cost-free choice. The regulatory environment directly impacts the economy’s investment climate and in turn, its ability to innovate and ultimately drive economic growth that materially impacts the lives of every Canadian.

The results speak for themselves. Canada’s economy is struggling. Our real GDP per capita has not grown meaningfully in a decade. The OECD projects that Canada will have the worst GDP per capita growth over the next decade…and the three after that! How can this be possible in an advanced industrial economy that is blessed with abundant resources, an educated workforce, and desirable neighbours?

The full answer isn’t the regulatory environment. But a big part of it is.

A recent C.D. Howe Institute study showed, for instance, that Canada has among the slowest building permitting processes in the OECD. The authors set out that there is “widespread consensus that Canada’s system for regulating and improving major infrastructure projects is too slow and burdensome.” Their paper notes, one assumes for the sake of comedy, that the federal government’s 2023 budget “laments that mines should not take 12 years to open. In fact, the real average is 17.9 years.” Just to play that back, the current government, in the current year, complained about how long it took to build things under their own regime…and undershot it by 50 percent.

One might see those stats and think them esoteric or inconsequential. Perhaps readers don’t have much interaction with the resource sector, or hand-wave away the numbers on the belief that some slowness in the process ensures projects are safe and don’t cause long-term environmental damage.

That certainly seems to be the perspective of the Trudeau government, which has placed a regulatory straightjacket around our resource sector since taking office. The impact of suffocating this sector, however, has far wider effects on our economy.

Recent research from the Macdonald-Laurier Institute (profiled in a DeepDive here at The Hub) demonstrates that a significant portion of the Canadian economy—14 percent of GDP, 58 percent of merchandise exports, half of all business investment, one in 10 jobs—flow from Canada’s resource sector. Not only is the resource sector among the most productive in the Canadian economy, but it’s also one of the only sectors that has been growing; can you imagine what it could do if those in charge weren’t trying to destroy it?

That’s not an overstatement. The current environment minister, Steven Guilbeault, is a radical activist whose entire adult life has been spent trying to destroy the resource sector. If you observed merely their actions and ignored everything they say (good advice broadly, to be honest), you’d conclude that Trudeau and Guillbeault’s zealotry is the primary objective of the federal government. It is reflected in stifling anti-resource regulations, ideologically-driven foreign aid, unconstitutional and extra-jurisdictional meddling in infrastructure building, and even curtailing the rights of First Nations to fish as they see fit.

The Trudeau government has passed the controversial Bill C-69, (dubbed the “No More Pipelines Act” by its opponents) that included a sweeping new power to assess any new project on climate change grounds. The practical outcome of these legislative and regulatory changes  have made it impossible for anyone, anywhere in Canada, to build anything meaningful in any reasonable period of time.

These regulations were so radical and sweeping that the Supreme Court of Canada declared large swaths of them to be unconstitutional. If you were an investor with something to build in Canada, briefly relieved by the Supreme Court decision, you would have been quickly dissuaded, as Guillbeault marched out to say that he was going to preserve the majority of the legislation, and do as little as possible to make it minimally compliant with the Constitution.

This broad theme of strangling the resource sector in regulation has been a hallmark of the Trudeau government. It introduced onerous new regulations on everything from oil and gas, methane, coal, fuel mandates, and clean electricity standards.

Perhaps this regulatory extremism is best summarized in the federal government’s promise to phase out internal combustion vehicles by 2035 which is not only a radical intervention in the economy but is obviously impossible on its face.

While environmental extremism has driven the government to aggressively rule out building anything of value, solving for the dense regulatory burden in this country is a far more comprehensive problem than that.

Canada’s regulatory environment is stifling innovation

This essay began by making fun of the EU’s clownish regulatory overreach, which has demonstrably created a hostile jurisdiction for innovation and innovators.

But, while the EU is an easy target, Canada’s own house is far too brittle for us to throw rocks across the Atlantic, sadly. Sure, there are some solid examples that we like to put in the window today (Shopify) and others in the past who have spawned geographic ecosystems we still like to point to (RIM and Kitchener-Waterloo). But if those are our best examples, we should take note of the withering criticism that their founders have and continue to level against our uncompetitive regulatory and tax policy environments.

Canada is a big enough market that most significant innovative players have and will continue to have a provincial outpost here, but that is insufficient to make this a place where innovators are drawn, or innovative companies born, at scale.

Why? Well, taxes are too high, for starters. Objectively and relatively we’ve created financial limiters on the ability to build truly great companies in this country, a problem that is surely exacerbated by the Trudeau government’s recent tax increases on productive capital.

Beyond that, more than 25 years after the original internet boom, our regulatory environment and the current government which continues to layer on top of it have some fundamental misconceptions about how radically technology has changed business models in this age of abundance.

I briefly mentioned Ben Thompson earlier. One of his foundational arguments is about what he calls “Aggregation Theory.” He argues that the internet age has radically transformed how we need to think about the business models of tech giants and the sectors they impact. Historically, many dominant businesses, particularly content businesses (newspapers and traditional entertainment in particular) succeeded because creating and distributing content were both expensive and benefitted from geographic limitations. Because distribution channels were limited, only a small number of creators had access to them, which simultaneously made them more valuable as marketing vehicles.

The internet changed all that. In the internet age potential audiences no longer have geographic limitations, and the marginal costs of distribution has become zero which makes it easier than ever before to become a content creator and grow an audience. The new limiting factor is not availability of expensive content or cost to distribute, but the ability to aggregate demand. Thus the success of the big “aggregators” such as Google, Meta, etc.

This matters in a world where the regulations and grants for your media, telecommunications, and news sectors remain premised on an entirely different business model, in an entirely different era, with entirely different flows of value. In these areas, the regulations of every part of these industries deserve to be re-examined.

The CRTC as an entity is probably worthy of being tackled specifically and comprehensively in this series. Still, it’s worth noting that both the Online Streaming Act, a fairly recent piece of legislation which has been the subject of much debate—here and elsewhere—and the Online News Act, are premised on regulatory models designed for the old era. Have platforms cannibalized the revenue of geographically limited news and content providers? Absolutely.

But rather than establishing a regulatory regime that acknowledges the world has changed, the current government has chosen to fight gravity and subsidize business models that no longer exist while they ignore the enormous opportunities for the next generation of Canadian talent by clinging like grim death to a funding model that ignores the internet and the reality of aggregators. These new regulations are not merely throwing dollars at disrupted dinosaurs, they are picking notional winners (stale incumbents) and disadvantaging content creators, innovative technology players, and new media platforms who are trying to seize the opportunity provided by the most significant technological achievements of the last 50 years.

Overcoming our lost decade

Readers who have come this far have been generous with their time and attention, and one hopes they have been at least somewhat convinced that the reality of our lost decade of stagnation is the result of aggressive over-regulation.

Later this week The Hub will publish part two, which will outline some principles and practical ideas for how we can begin to shake ourselves free from the regulatory shackles that encumber us today.

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Stephen Staley

Stephen Staley is a Senior Advisor at the Oyster Group. He formerly served as a Bank Executive and as Executive Assistant to Prime Minister Stephen Harper. He lives and works in Toronto.

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