On Feb. 7, the federal government announced that it was launching a broad review of Canada’s competition laws for the first time in more than a decade amid concerns that the country’s Competition Bureau lacks sufficient enforcement power to effectively block monopolistic, anti-consumer practices.
François-Philippe Champagne, Minister of Innovation, Science and Industry, announced that the government will assess ways to improve the Competition Act. Ottawa’s priorities include closing loopholes that allow for harmful corporate conduct and adjusting the penalty structure to serve as a more effective deterrent against anti-competitive behaviour.
According to the government, the review will ensure that Canadians are protected from anti-consumer practices in critical sectors, including the oil and gas, digital services such as Facebook and Google, telecommunications and financial services sectors.
Reforming Canadian competition policy so that it better deals with anti-consumer corporate concentration is a long-term project. However, one short-term action that can be taken immediately is a ban on noncompete agreements in federally regulated sectors. While Ontario recently passed such a law, the Ontario ban does not apply to federally regulated industries with major competition problems, like telecommunications. Ever wonder why Canadians pay among the highest cellphone bills in the world? Hint: it has something to do with the fact that three telecommunications companies in Canada have a 91 per cent share of cellphone market revenue.
Companies in federally regulated sectors have continued to use noncompete agreements left, right, and centre to stifle competition in ways that the Competition Bureau cannot touch. These agreements permit employers to dictate what employees can and cannot do after leaving a job, even when they are no longer employees. Resorting to tools like noncompete agreements presents a simple way of stopping in-house talent from becoming a competitor. Noncompete agreements should be banned at both the federal and provincial levels.
Temporary income tax cut financed by a corporate excess-profits tax: Because creating efficient markets through competition policy is such a long-term project, a temporary excess-profits tax on large corporations that had excessive profits directly related to the pandemic, would be useful. If the revenues raised through these taxes are used to pay for a one-year income tax cut for low to moderate income earners (i.e. the first two tax brackets covering individuals making $98,000 or less), such a tax would be especially useful. This would help average Canadians deal with the temporary increase in prices due to Covid related supply chain issues.
How would an excess profits tax work? Simple. By taxing companies that made windfall profits directly because of Covid.
For example, while thousands of brick-and-mortar stores were closed by government to reduce Covid transmission, Amazon’s Canadian sales sky-rocketed. Cloud computing, which is also an area where Amazon dominates through its AWS subsidiary, also exploded.
Moreover, stores like Walmart and Costco, which compete directly with thousands of brick and mortar stores that were closed to reduce Covid transmission, also saw dramatic sales gains because in most provinces (including Ontario), they were allowed to keep their non-food operations open while their bricks and mortar competitors selling the exact same non-food items were forced to close.
Remarkably, the federal government appears to be taking the first (baby) steps towards implementing an excess profits tax. Ottawa will soon be increasing the corporate tax rate on bank and insurer profits over $1 billion by 3 percentage points to 18 per cent. The government has also announced a vaguely defined, temporary Canada Recovery Dividend to be levied on large banks and insurers because they’ve bounced back quicker than other industries. The measures would raise a combined $10.8 billion over the next five years, according to the Liberal Party platform.
Price controls: With the advent of World War Two, Prime Minister Mackenzie King was determined to avoid the problems of greed and inflation which had plagued Canada during the First World War. In 1939, he established the Wartime Prices and Trade Board, with the aim of stopping prices and wages from spiralling out of control.
Initially, the Board did relatively little, putting on partial limits on rents, coal, sugar, timber, steel, milk and a few other goods. But in 1941 the cost of living began to rise sharply. In a radio broadcast, King announced a freeze on prices and the setting of levels for wages and salaries.
The Board built up a huge structure of 13 regional offices and 100 local offices, whose staffs were not always popular. Controls resulted in the shortage of certain goods and some poorly-made products reaching Canadians. But the cost of living, which had risen 17.8% from 1939 to 1941, increased only 2.8% from 1941 to 1945, the most successful record among all the major nations in the war.
Canada’s only experience in peacetime with broad-based price controls occurred 1975-78 in response to the exceptionally high inflation rates of 1974-75. The federal Anti-Inflation Act established a 3-year controls system. Wage guidelines were binding on all firms with 500 or more employees, on all federal employees, and (with the agreement of the majority of provincial governments) on most other public-sector employees. Profit-margin controls restricted the price and cost markups of large firms. Although the magnitude of the effect of the legislation is debatable, empirical analysis has generally supported the claim that the controls program did reduce inflation below the level that otherwise would have prevailed.
That said, across-the-board price controls are not the answer to today’s inflation. The federal government simply doesn’t have the expertise to impose such controls effectively. However, Canadian governments do have a track record of successful price controls in selected sectors that carry on to this day and government should not be shy in using them. Moreover, in a few sectors, these controls should even be strengthened and broadened.
For example, prices at the gas pumps are a major contributor to today’s inflation. The Canadian government has the constitutional authority to regulate gasoline prices only in an emergency. However, provinces and territories can regulate gas prices, and Quebec and the Atlantic provinces do so. Provinces without gas price regulation regimes should look closely at gas price regulation in the eastern provinces and implement gas price regulation regimes tailored to their provinces.
The federal government does have the authority to regulate drug prices and has done so for many decades.
The Patent Act establishes the Patented Medicine Prices Review Board (PMPRB) with a mandate to regulate the prices of patented medicines sold in Canada to ensure that they are not excessive and to report to Parliament annually through the Minister of Health.
On Dec. 23, Health Minister Jean-Yves Duclos delayed the implementation of new rules to lower the price of drugs. The new rules, meant to reduce patented drug prices that are among the highest in the world, will now come into effect on July 1, 2022 rather than on Jan. 1, 2022 as previously scheduled. The name brand pharmaceutical industry has long fought this new drug price regime and they always will. The government should ignore the industry lobby and implement the new rules as soon as possible.
Whether through a temporary income tax cut paid for by a windfall profits tax, competition policy reform and enforcement, or price controls (or all three), it’s important for the federal government to do what it can to prevent hugely-profitable monopolistic corporations from raising their prices. Otherwise, responsibility for controlling inflation falls entirely to the Bank of Canada.
Contrary to what many people seem to believe, the U.S. Federal Reserve and the Bank of Canada don’t have a magic wand to bring down inflation quickly and painlessly. They can’t unclog the ports, increase oil production, build more affordable housing, or procure more semiconductors for cars. Their limited tools—interest-rate changes plus purchases and sales of government bonds—can directly affect credit conditions in the economy. But these changes affect prices and wages only indirectly, and do so gradually over a considerable time period. What the Federal Reserve and the Bank of Canada do have the capacity to do fairly quickly, if they get things wrong, is crash the housing market, the stock market, and the economy.