Transitional gains trap: Canadian supply management

I'd previously guessed that Canadian dairy quota has aggregate paper value of about $25 billion; I'd suggested that the Canadian government get out of the mess by giving each quota holder a bond equal in present value to the quota and impose a tax on dairy products sufficient to pay off the bond and set to expire with the last bond payment. Moves to an efficient system? Check. Winners compensate the losers? Check. I'm growing more convinced that transitional gains traps are sticky because voters kinda like being stuck in them: they like the idea of small dairy farms supplying their milk and don't much worry about the inefficiencies. The "tax the winners, buy out the losers" solution just seems so easy that it's hard to see what would be stopping it if folks really wanted it. Indeed, when folks are ready for change, compensating the losers barely seems to matter anyway.

William Robson and Colin Busby of the CD Howe Institute in Canada have a new study (National Post story here) out on the costs of supply management and potential for reform. They argue for a regular auction of new quota for the next twenty years until the cap becomes non-binding.

They peg the aggregate value of dairy quota at $21 billion and of all quota over $28 billion. Where I'd just multiplied the number of permits by the cost of a permit, they used a Stats Can Financial Farm Database.

The Robson/Busby plan, combined with tariff-rate quota liberalization, gives a decent path to market liberalization with costs primarily borne by existing quota holders who'd see their quota value reduce to nothing over time. If this were politically feasible, I would support it over my proposed tax and bond solution. Given the number of dairy farmers whose retirement plans hinge on selling off the quota when they hit 65, it might be a brave government that tries it.

I like Robson and Busby's listing of the nonsense that comes with a supply managed system:

Innovations that would otherwise be welcomed for expanding consumer choice – new milk products or substitutes for making ice cream, yogurt and cheese, for example – threaten the cartel system. When domestic milk prices are much higher than their international counterparts, food producers have incentives to import processed goods and substances that are not classified as dairy at the border – such as ice cream with enough sugar content to qualify as a sugar product, not a dairy product. In response, federal authorities have been expanding the list of prohibited products and tightening border controls to keep them out. The adverse impact of supply-management on the competitiveness of Canadian food manufacturers prompted a “Special Class Permit System” in 1995, which allows purchasers of industrial milk for use in dairy products, or purchasers of processed dairy products, to access different prices depending on end use. Food processors, for example, are sometimes allowed to buy cheaper Canadian cheese for use in exported frozen meals. This has created a whole new arena for lobbying and conflict over limited access to cheaper imports.

A nice piece on the whole, but they forgot to cite He Who Must Be Cited on transitional gains traps. Sigh.

In other Canadian supply management news, the battles over Manitoba potatoes continue...