This text is a copy of the remarks given by Michael Trebilcock (Professor of Law and Economics, University of Toronto)
Check Against Delivery
I have spent much of my professional career researching, writing, and teaching about the policy reform process in a wide range of policy contexts. I have also, in many contexts, been an active participant in this process, in one capacity or another. I have repeatedly been struck in many, if not most of these contexts, by the realization that diagnosing the ills of the status quo, and imagining better policy alternatives, at least in their broad contours, are often not especially controversial. However, the real challenges, in many cases, relate to getting from “here” to “there.” Over time, existing policies develop their own encrustations of institutions, vested interests, adaptive preferences, and expectations that render the trajectory of getting from here to there a major part of the policy challenge.
The long fight to end slavery, led by WilliamWilberforce, 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 percent of the British budget at the time) in compensation to plantation owners in many British colonies -- about $21 billion US 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. This is the focus of my recent book, Dealing with Losers: The Political Economy of Policy Transitions (Oxford University Press, 2014; now available in paperback, 2015).
A few selective, but far from exhaustive, examples serve to illustrate this point. First, take the case of land use regulations or controls. Sometimes relevant levels of government see fit to change these regulations. They may increase building setbacks from property lines or road allowances. They may impose height restrictions on buildings in residential or mixed-use neighbourhoods. They may change zoning laws from mixed-use to residential. In most of these cases, existing property owners will be exempted from these requirements, and their existing uses treated as legal “non-conforming uses.” In a similar vein, in tight residential housing markets, sometimes rent controls are imposed on existing rental properties, but the construction of future rental buildings is often exempted from these controls in order to incentivize new rental construction and alleviate supply constraints.
Take another example, environmental regulations are often subject to change, reflecting new scientific knowledge of environmental risks, or at least public perceptions thereof. Energy efficiency requirements for motor vehicles are but one example where regulations have become more stringent over time. Typically, these do not apply to the existing fleet of motor vehicles but to motor vehicles manufactured in the future, and often with a lead time in order to allow manufacturers to adapt to more stringent requirements.
Another example, particularly apt in a contemporary US policy context, relates to proposals to reform gun control laws. Even strong proponents of stricter gun control laws in proposing comprehensive background checks on all purchasers of guns or proposing the prohibition of assault rifles or magazines in excess of a certain capacity recognize that such restrictions can only feasibly apply to prospective purchases of weapons, and not existing owners of weapons, who would be effectively grandfathered under these reform proposals.
A yet further example relates to professional qualifications. In many professions, including law, medicine, and dentistry, entry requirements have become increasingly stringent over the past century. Yet, in applying these more stringent requirements, existing professionals are, in effect, grandfathered, subject perhaps to continuing professional education requirements.
Another, and quite different, international example is found in post-conflict nation-building exercises, where a major challenge is addressing what should be done with respect to atrocities committed in the past by various antagonists in the conflicts that have afflicted a nation. Here, more or less judicious combinations of truth and reconciliation commissions, lustration policies designed to disqualify certain officials from previous repressive regimes from future public office, and residual classes of cases where the most egregious past atrocities are remitted to either domestic or international criminal tribunals for prosecution, are often adopted. Such combinations of policies are obviously designed to draw a qualified line in the sand between what has happened in the past and new rules of civic engagement and collective governance going forward.
The need to take transition cost mitigation strategies seriously, and incorporate them systematically in policy development, as a matter of political economy, stands in relatively sharp contrast to two long-standing traditions in economics which tend to marginalize this issue. Economists, from a normative welfare economics perspective, often publish academic studies that document the gross inefficiencies associated with various existing public policies, accompanied by calls for radical reforms, apparently on the assumption that once these inefficiencies are revealed well-intentioned but unenlightened political representatives will immediately espouse the proposed reforms, or that alternatively an aroused citizenry will appropriately discipline venal political leaders that have been captured by rent-seeking special interest groups. Neither of these assumptions seem very realistic in many contexts – often exacerbated by claims of the virtues of “cold showers” or “shock therapy” (for others), despite our natural aversion to the risk of major disruptions in our lives.
An alternative positive tradition in economics -- Public Choice theory -- does take politics seriously but tends to view the existing policy outcomes of the political process as the best we can achieve in a world not populated by angels. An austere version of this theory offers few prospects that existing political equilibria can be disrupted and assumes that the iron triangle of incestuous relationships between politicians, regulators/bureaucrats, and rent-seeking interest groups is largely impermeable to change - a view that is hard to square with the privatization of many state-owned enterprises and the deregulation of many industries in many countries from the 1980s onwards, and the dramatic growth in environmental, health and safety, and other forms of social regulation over this period, often over the opposition of concentrated interests.
In contrast to economists or political economists, legal scholars, at least in the US, have been excessively preoccupied with the US Constitution’s Takings Clause (the Fifth Amendment) and the role of the courts as the ultimate arbiter of the legitimacy of government actions that negatively affect the value of citizens’ existing property rights, and the determination of compensation for such effects (as opposed to other transition cost mitigation strategies), drawing attention away from the role of political institutions in managing policy change.
Paralleling these unhelpful strands of academic literature, transition cost mitigation strategies that are actually adopted or proposed in policy arenas are often haphazard, inconsistent or ineffective and deserve a more central and systematic focus in the policy analysis. I illustrate the salience of this issue in my book with seven case-studies reflecting contemporary public policy debates, along with potential compromises on transition costs, which I attempt to capture in vignettes in the following comments.
- TRADE POLICY
An under-celebrated but dramatic success story in international policy-making in the post-war period has been progressive trade liberalization. Over this period, tariffs on industrial products have fallen, on average, from something close to 50 percent in 1947 to little more than 3 percent today. This process of trade liberalization, at the multilateral level, has evolved over the course of nine negotiating rounds, with tariff reductions gradually phased in within and across rounds. This strategy of gradualism has been complemented by according a central role to reciprocity, so that one country’s tariff concessions are balanced by tariff concessions made by its trading partners, with the effect that the contraction of import-sensitive industries is typically offset, over time, with the expansion of export-oriented industries. Finally, the international trading regime has always authorized a qualified principle of reversibility, where a country can reinstate previous levels of protection on a temporary basis in the event of unexpected import surges. These strategies of gradualism, reciprocity, and reversibility, while often decried by economists, have been central to mitigating the transition costs associated with trade liberalization and advancing the trade liberalization agenda. However, agricultural protectionism represents a major exception to general trade liberalization trends.
- AGRICULTURAL PROTECTIONISM
Reducing agricultural protectionism presents major policy challenges in many developed counties, even though current policies are typically inefficient and regressive and in the case of Canada are increasingly under pressure from our trading partners in current negotiations pertaining to the Trans-Pacific Partnership Agreement. For example, Canada’s dairy supply management regime has deliberately induced individual dairy farmers to invest in acquiring dairy quotas worth on average $2 million per farmer in current market value (almost $28 billion in total). 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 to substantially reduce tariffs over time complemented by partial compensation, e.g., for diminution in the book or acquisition value – not market value – of quotas, 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.
- IMMIGRATION POLICY
Another set of challenges is posed by policies designed to adopt more liberal policies governing the movement of people across borders (as opposed to goods, services, and capital), where many countries have found it much more difficult to implement a consistent and coherent set of policies that maximize both the gains to them and to prospective immigrants of more liberal immigration policies. The debate has run into severe tensions within the European Community over permitting free movement of people from recently acceded member countries – concerns partly reflecting fears of cultural incompatibility, adverse labour market effects, and fiscally-induced immigration driven by the desire to access receiving countries’ social programs. Likewise, sharply divergent perspectives on immigration policy in the US seem to have produced policy paralysis in reforming what most informed observers regard as a grossly inefficient and inequitable system of arcane and arbitrary rules reflected in inordinate delays and costs to immigrants, their families, and prospective employers in processing admission applications. Canada stands out as something of an exception to these trends, with relatively liberal immigration policies (at least in recent decades) and public opinion polls suggesting that a majority of Canadians support such policies, although the constant churning in these policies seems less impressive.
To mitigate transition costs associated with more liberal immigration policies, an emphasis on gradualism seems key: A slow but substantial expansion of temporary visas for highly skilled workers and their spouses and families would, according to most serious studies, benefit recipient countries enormously in terms of enriching their body of specialized human capital and the innovative potential associated with it, as well as (obviously) benefitting immigrants and their families themselves. A more cautious form of liberalization is called for with respect to the admission of less skilled or unskilled workers where there is the potential for an adverse impact on domestic unskilled workers in depressing employment and wage conditions, in the absence of ready alternative career opportunities, and perhaps without the offsetting positive spillovers associated with innovative or highly skilled workers. At least with respect to the latter, temporary work visas should recognize a clear path to permanent residence status and then naturalization. With respect to illegal immigrants, the policy choices are perhaps less obvious, but at least for those with clear medical records and with clean criminal records (other than offenses associated directly with their illegal entry), some significant period of temporary employment after satisfying these two criteria should entail a clear path to permanent residence and ultimately naturalization.
- MORTGAGE INTEREST DEDUCTIBILITY
Termination of mortgage interest tax deductibility in the United States, which is both inefficient in over-stimulating demand for housing and inequitable in that it confers disproportionate benefits on wealthier taxpayers, in higher marginal tax brackets, like dismantling agricultural supply management regimes, also entails undermining investments (partially impounded in all house prices) deliberately induced by public policies. A gradual back-end loaded phase-out perhaps accompanied with more finely targeted time-limited assistance to first-time homebuyers with below-average household incomes (to signify continuing public support for the “American Dream”) may be a politically feasible reform strategy. While this is a US example, most countries’ tax codes are riddled with similar inefficiencies and inequities and raise similar issues.
- PUBLIC PENSION SUSTAINABILITY
Public pension reform, designed to ensure long-term fiscal sustainability, given increased life expectancies and lower fertility rates, raises similar challenges. Reducing benefits to current or imminent retirees who have very limited ability to adapt to diminished benefits will seem to many citizens (not only retirees) as reneging on the social contract, while burdening younger workers with the entire burden of sustainability through higher contributions will seem to many citizens (not only younger workers) to be grossly inequitable. Hence, the principal feasible policy reform option is to raise the minimum retirement age in gentle stages to avoid sudden and disruptive impacts on workers nearing retirement age with limited adaptation options.
- CLIMATE CHANGE POLICY
In addressing what is surely the major regulatory challenge of our age - climate change policy –major or even radical technological breakthroughs (presently, at best, only sketchily understood) seem required in order to render major CO2 emission reductions both technologically feasible and economically bearable, rather than governments attempting to pick technological winners at the risk of locking in early, costly and relatively ineffective technological options. Thus, substantial public investments in basic R and D and a lengthy graduated phase-in period for increasingly stringent carbon taxes or cap-and-trade regimes to incentivize long-term technological innovation may be the most politically feasible option, given the unknown scale of the costs entailed. However, it is crucial that equivalent burdens be placed on imports (i.e., taxing carbon consumption, whatever its source) to mitigate carbon, investment and job migration, with duty remissions for countries adopting similar policies (with a view to motivating the evolution of a harmonized global carbon tax) – a policy orientation broadly supported by most economists (from Paul Krugman, on the left, to Greg Mankiw, on the right).
However, politicians to date have proven woefully inadequate to the task of persuading a broad cross-section of the citizenry of the merits of a phased implementation of such a strategy. In the face of scientific uncertainties, environmental doomsayers, on the one hand, call for cataclysmic policy interventions that are likely to entail dramatic short-run economic costs, while climate change deniers oppose any action at all, until the evidence is clearer, by which time it may be too late to take any effective action or cataclysmic interventions will in fact be necessary, at enormous cost. Here, in addition to gradualism, effective strategies of transition cost mitigation suggest that an emphasis on a capacity for adaptation (in the event that scientific understandings evolve or economic effects are unexpectedly severe), and reciprocity (even if unilaterally induced) will be essential.
- INSTITUTIONAL REFORMS AND DEVELOPMENT
Over the past two decades or so, scholars, policymakers, and international aid agencies have tended to converge on a consensus that the quality of a country’s institutions – political, bureaucratic, and legal – are a crucial determinant of that country’s future development trajectory, a view captured in the mantra “institutions matter,” or “governance matters.” However, despite the investment of vast resources by the international community in institutional reforms in developing countries, experience to date has been mixed to poor, as exemplified by the faltering efforts to institute democracy and the rule of law in countries such as Iraq and Afghanistan and similar efforts in various Middle Eastern countries (such as Egypt and Libya) following the so-called “Arab Spring.” It is now increasingly recognized that the contingencies of a country’s history and culture – captured by the concept of “path dependence” – delineate both the feasible scope of institutional reform and its advisable contours. More specifically, various kinds of switching costs from the status quo are likely to impede reforms. In terms of political economy, switching costs may be high for those within and outside existing institutions (however socially dysfunctional) who benefit from the institutional status quo and hence will resist reforms. Switching costs may also reflect individual learning costs in adapting to a new regime and the loss of network effects and institutional complementarities that may have evolved around existing regimes. Switching costs may also reflect the scarcity of financial and specialized human resources required to implement new institutional regimes. Finally, switching costs may reflect deeply embedded cultural beliefs or practices – norms of appropriateness – that are highly resistant to change. Regardless of the salience of any particular factor in a specific context, strategies for mitigating switching costs are likely to be a precondition to major progress on institutional reform in developing countries.
As Amy Gutmann and Dennis Thompson argue in a recent book, The Spirit of Compromise: “If politics is the art of the possible, compromise is the artistry of democracy. Democracy calls on politicians to resist compromise and to accept it. They may resist it more when they campaign, but they need to accept it more when they govern… The compromising mindset focuses on the critical question for governing: is the proposed law better than the status quo?”
Lloyd George, Prime Minister of Britain from 1916 to 1922, once advised: “Don’t be afraid to take a big step if one is indicated. You can’t cross a chasm in two small jumps. The most dangerous thing in the world is to try to leap a chasm in two jumps.” In many, perhaps most, policy contexts, this is not helpful advice. Attempting to cross a chasm in two small steps is likely to be suicidal but the same is often true of attempts to cross a large chasm in one leap. Feasible public policy options may often entail building a bridge across the chasm in stages, or working one’s way around its edges.
In my view, significant policy reforms are politically feasible in many contexts only with political leadership committed to judicious combinations of transition cost mitigation policies and astute framing of issues so as to engage not only the interests but also the values (including widely-held notions of fairness in benefit and burden-sharing) of a broad cross-section of a country’s citizens.
One hopes that before his death after chronic illness, 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.