Economic Growth and Employment Effects Of Public Policy Reforms in Ontario
Benjamin Zycher
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March 2014 Summary Geographic entities and regions must compete for individual and business location choices and favorable investment decisions. Public policies affect this geographic competition in important ways that can be summarized as the creation of an environment---that is, an overall set of economic incentives---either strengthening or weakening local competitiveness relative to the environments characterizing other geographic entities. This study examines the underlying economics and policy analytics of four policy reforms that have been proposed for Ontario, and develops empirical estimates of their prospective effects upon Ontario GDP and employment. The four proposed reforms are as follows:
A reduction in the Ontario corporation income tax rate from 11.5 percent to 8 percent, with a budget-neutrality constraint assumed to be imposed through a reduction in government transfers to corporations.
An elimination of provincial “feed
-
in” (and perhaps other) subsidies for wind and
solar electricity.
A reduction in the regulatory burden, two manifestations of which are the commercial recycling taxes and fees administered by Waste Diversion Ontario and the development constraints imposed by the Far North Act.
Ontario participation in the New West Partnership Trade Agreement. The findings of the empirical analysis reported below can be summarized as follows. The proposed reduction in the corporation income tax would increase annual Ontario GDP by about $8.4 billion, and full-time equivalent employment by about 14,000. A reduction in feed-in tariffs and other subsidies for uneconomic power that would reduce the Ontario power cost index to the average for Canada as a whole would increase provincial GDP by $20 billion annually, and employment by about 5,000. The analysis does not find important GDP or aggregate employment effects from participation in the NWPTA; this may be the case because relatively free trade with the U.S. constrains the degree to which provinces are able to engage in overt and hidden protectionism.
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Economist, Washington D.C. This work is sponsored by the Ontario Progressive Conservative Caucus, but does not purport to represent its views or those of any of its officers or sponsors. Sincere thanks are due William R. Allen, Richard J. Buddin, and Laurence A. Dougharty for insightful suggestions, but the author retains sole responsibility for any remaining errors.
2 There can be little doubt, however, that participation in the NWPTA would improve labor mobility and reduce economic rigidities. Finally, it is clear that the regulatory burden is a very large somewhat-hidden tax on the Ontario economy; a regulatory reform that were to reduce the Ontario regulatory burden by adopting the best practices of leading provinces in Canada would increase GDP by $27 billion and total employment by about 10,600. This analysis is based upon the 2013 Fraser Institute ranking of economic freedom, which separates out three component dimensions of regulation, with provincial and municipal governments combined. These economic benefits of the proposed reforms are substantial, and the rationales offered in defense of the status quo are dubious. Policymakers should address these reforms in a serious fashion. I. Introduction Just as firms and industries must compete for consumer purchase choices, for employees, and for capital investments, so must geographic entities and regions compete for individual and business location choices and favorable investment decisions. Public policies affect this geographic competition in important ways that can be summarized as the creation of an environment---that is, an overall set of economic incentives---either strengthening or weakening local competitiveness relative to the environments characterizing other geographic entities.
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To some degree, this competitive dynamic is likely to strengthen as geographic proximity increases, but there can be little doubt that geographic competition is created by the ability of individuals and businesses to move among regions generally and policy jurisdictions in particular. The ease with which investment capital can be shifted on a worldwide basis strengthens this competitive process. A large number of public policies affect such overall competitiveness.
“Competitiveness” in this contex
t is the ability to attract labor and capital and to produce absolute and relative economic conditions characterized by higher individual incomes, greater aggregate productivity, stronger employment growth, and the like. Tax policies are an obvious example. Taxes (or effective tax rates) lower rather than higher---other factors held constant---would improve relative competitiveness by increasing private returns to work and investment. Tax burdens aligned more rather than less closely with the benefits of public spending programs are likely to do the same.
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Environmental
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For a useful comparison study of the U.S. states in terms of such competitiveness parameters, see Arthur B. Laffer, Stephen Moore, and Jonathan Williams,
Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index
. See also William P. Ruger and Jason Sorens, “
Freedom In the 50 States: An Index of Personal and Economic Freedom
, Mercatus Center, 2013, at http://mercatus.org/publication/freedom-50-states-2013-edition. See also Dean Stansel and Fred McMahon,
Economic Freedom of North America
, Fraser Institute, 2013, at http://www.freetheworld.com/efna.html; and The Fraser Institute,
Economic Freedom of the World: 2012 Annual Report
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Note that taxes can be too low as well as too high: A zero tax environment relative to a “low” tax one is
unlikely to yield strong competitiveness because public services provide value, and government may have a
3 policies clearly affect competitiveness, as individuals and businesses making location decisions are certain to value improved environmental quality while attempting to balance it against the perceived costs of the policies implemented to achieve it. The tradeoffs among the amounts, quality, and costs of public services are another broad example, however obvious. Trade policies affect the degree to which a given geographic entity can exploit its comparative advantages---the productive activities that it can undertake at a (marginal) cost lower than those of other regions---thus achieving greater specialization, productivity, and wealth.
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Various regulatory policies and the benefits and costs that they yield are yet another obvious example.
In short, “competitiveness” in this context can be viewed as the degree to which
resources are allowed to flow or are directed (by market prices) to their most productive uses, thus increasing aggregate wealth. Governments implement public policies in substantial part as a response to the demands of interest groups, which may be broad- based (or diffused) coalitions or narrow (concentrated) interests. A substantial literature has noted that concentrated interests enjoy an important advantage relative to diffused interests in terms of exerting pressures on government officials for favorable policies, in brief because lobbying and other activities intended to persuade public officials to adopt given policies are collective goods from the viewpoint of any given member of an interest group. The standard free-rider problem is likely to increase in importance with the size or diffusion of the group, although policy proposals that affect large majorities in ways easily measureable or easily perceived may overcome this condition.
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comparative advantage in the provision of certain services. In the context of provincial governance, policing may be a good example.
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Trade among geographic regions and nations increases competitive pressures and thus output also by constraining the ability of governments to impose inefficient costs. It does this also by facilitating the allocation of resources and productive activities in accordance with the reduced costs and increased productivity yielded by economic specialization. Since no one is forced to trade, trade itself and the
efficiencies that it promotes increase wellbeing for all, if we define “wellbeing” in a way that respects the
choices that individuals make for themselves on a voluntary basis. Accordingly, this productive specialization allows each region or nation---and, in principle, each individual---to attain greater wealth and thus a higher living standard than would be the case were trade to be constrained or largely prohibited. For
a nontechnical summary discussion, see Bob McTeer, “The Impact of Foreign Trade on the Economy,”
New York Times
, December 10, 2008, at http://economix.blogs.nytimes.com/2008/12/10/the-impact-of-foreign-trade-on-the-economy/. Obviously, those subjected by trade to stronger competitive pressures might be made worse off in their role as producers; an obvious example is low-wage workers subjected to implicit competition from workers overseas. But most are made better off in their roles as consumers when aggregate wealth---the total consumption pie---is increased, as reflected in the downward pressure on the aggregate price level that trade exerts by increasing the size (or value) of the aggregate basket of goods and services. In plainer language: Trade makes the economy bigger and thus almost everyone better off.
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One way to define “diffusion” is the magnitude of the effect of a given policy on the average (or median)
member of the interest group, either absolutely or as a proportion of the total effect. See Mancur Olson Jr.,
The Logic of Collective Action
, Cambridge: Harvard University Press, 1965; Douglass C. North and John J.
Wallis, “American Government Expenditures: A Historical Perspective,”
American Economic Review
, Vol. 72, No. 2 (May 1982), pp. 336-
340; and Gordon Tullock, “Problems of Majority Voting,”
Journal of Political Economy
, Vol. 67, No. 6 (December 1959), pp. 571-579. For a summary discussion, see Dennis C. Mueller,
Public Choice III
, Cambridge: Cambridge University Press, 2003, pp. 501-559.