The dangers of regulations are real. Regulations can force businesses to increase costs or completely abandon markets. In Canada, federal regulations have recently been imposed on natural health products (NHPs) and people are right to be concerned - primarily with future accessibility and affordability of these products.

Regulations and their effectiveness

Regulations are restrictions imposed on the economy by government. License requirements, prohibitions, quality or safety standards, price controls, quotas, and subsidies are all regulatory interventions meant to impose a change on an economy–if a regulation doesn’t exact some type of change, it is considered ineffective, if nothing else. In other words, regulations at their worst are responsible for prohibiting entire industries, and at their best are just another hidden tax. Compliance costs of regulations alone can shift entire business models, often with the consumers and employees taking the brunt of it. In 2021, the total cost of regulation was $31.9 billion to Canadian businesses, and $364.3 billion to U.S. businesses. It is more telling to examine the cost-per-employee of all regulation costs. As with hours spent on regulation, the smallest businesses pay significantly more per employee. In Canada, small businesses spend more than nine times as much per employee on regulatory compliance compared to the biggest firms. [1]

An imperative, yet sadly overlooked measure to go by when analyzing the effectiveness of a regulation, is to take into account its seen, unseen and the unrealized effects on the market its imposed on. Take an imposed increase in the minimum wage, from $10 per hour to $17 for example, where the wage floor can go no lower than $17 per hour for all workers within the market. To further examine this intervention, take three workers, their wages being $10, $14, and $20. The $10 worker is in training and will surely earn a higher wage once trained. The $14 worker possesses adequate experience that would grant him the regular market wage corresponding to his role in the production process. The $20 worker is a skilled worker with a special set of expertise that makes his contribution greater to the business. Due to the imposed wage increase, the employer is no longer allowed to pay anyone below $17 and must decide whether to almost double the worker in training’s wage, while also increasing the $14 worker to meet regulation. The employer is likely to let the worker in training go because his productivity is lower than a regular worker but his price is now the same. The employer will have to tamper and tweak production costs, for he cannot afford to simply raise the $14 worker to $17 because his value contribution is that of $14 and not $17. This could mean a cut in benefits, less breaks, and other miscellaneous loss of perks for the worker. The $20 worker is above the new imposed wage floor and therefore is not affected. 

What is now seen is that an employer paid an average of $14.60 per hour of labour before the regulation, and $18.50 after. The regulation worked and raised the wage of workers. 

The unseen however reveals a different story. If nothing happened in the economy to increase productivity or profitability of the business, there would have been three workers employed at a total of $44 per hour. Now with the imposed regulation, there are only two workers at a total of $37 per hour–and the lower paid worker is working harder to justify his higher pay.  

The unrealized are the opportunities lost to these workers. The worker in training now has no job to gain experience to further his career, and with a skewed pay floor, employers cannot justify paying him the $17 wage. The threshold to get a job is steeper than before. The $20 worker is frustrated with not getting a raise while other less-productive workers received a 20% increase in their wage for no good reason. The $14 worker is now suffering an irregular and unnatural work experience, feeling overworked, for now the two workers are being asked to produce the same as three were before. 

Whether the regulation was worth it is a question with many answers depending on who the question is targeted towards, but make no mistake that the immediate effect of a regulation is only the tip of the iceberg, and the unseen and unrealized must be taken into consideration when measuring its overall effectiveness. 

The regulation story usually plays out like this; certain reports have found that X industry is failing to provide adequate standards, therefore Y regulations must be implemented. Typically following these claims are assurances to increase safety and fairness in the economy and that the customer's best interest is in mind. Alas, it is the customer that gets the short end of the stick. To understand why, compare an insurance model in an unregulated market to a politically regulated one. The insurer is incentivized to maximize revenue by insuring more businesses and paying out as little as possible, taking critical measures to minimize risk claims. Regulatory agencies on the other hand, lack proper oversight or accountability to provide the same information correctly. The regulator has absolutely no reason to operate efficiently other than political stipulation, which can swiftly change or succumb to corruption as politics change. The insurance agency does not want to pay out in any circumstances, and so only insures to carefully picked businesses that meet its requirements. If a business fails to meet its requirements, the insurer loses money. The regulator on the other hand, deals with its issues in fines and suffers no punishment. If we add demand protection to the equation; the idea that consumers gain further purchasing insights through experience checks provided by businesses such as Google Maps, and CNET, it is evident that the regulatory model isn’t the best way to protect consumers.

The move to regulate

Health Canada has argued that new rules are needed to improve the safety of therapeutic products, including supplements and herbal remedies. Despite individuals, businesses, and MPs urging the Canadian government that current regulations are adequate and more would simply hurt the communities these businesses serve, the regulatory clock keeps turning and its stranglehold on the economy tightens. 

The reasoning behind this bill is made clear by Canada’s auditor general. The report, which focused its efforts on examining the NHP market in Canada, sported a litany of generic and unsubstantiated claims. One of which stated that even though natural products are made with natural ingredients, they can cause negative effects when combined with other medications or when not used as directed. This line of thinking would move to further regulate all beverages due the dangers that come with drinking while using a laptop; combined they could be a serious electrical hazard. Another claim made by the report is that there is limited monitoring of licensed products and manufacturers, with examples to corroborate this claim having solely to do with Health Canada’s failure to adequately perform its regulation practices. Out of 7 of 46 site inspections in the report that were up for license renewal, 5 of the sites had their licenses renewed by Health Canada without verifying that the companies met other good manufacturing practices. 1 out of 46 sites were selling products online without a license. This science of reasoning upholds the very heart of political intervention; when a few do not meet certain requirements, the rest must suffer for it. Such a premise goes against basic economic values, for instead of a business being rewarded for achieving adequate product quality to their customers, or for providing highly competitive wages to their employees, they are punished for it. 

The auditor general’s report concluded that Health Canada fell short of ensuring that natural health products were safe and effective, though not literally. The report states that the department sufficiently approves products on the basis of evidence that they were safe and effective, but rather gaps in manufacturing oversight is what requires further intervention and stricter regulation, viz:

…gaps in the oversight of manufacturing sites and in the monitoring of products once on the market left consumers exposed to potential health and safety risks because products were not always manufactured or marketed according to licence conditions. [2]

The government’s fix for the lack of surveillance is absolute surveillance. Nobody is arguing that missing targets can come with inevitable consequences, but when the regulator isn’t performing to its pre-set standard, why does it then call for a raise?

While these regulatory interventions may enforce good practices, they will undoubtedly twist the market in ways that would only end up harming the consumer. After looking at the seen, the unseen, and the unrealized effects of government regulations and comparing the insurance model in an unregulated market to a politically regulated one, it becomes clear that the regulator’s interjections and interventions are more despotic than they are altruistic. Conflated costs of compliance puts copious pressure on small businesses, while absurd penalty fines only work to enrich the government’s pockets; the idea that regulations are there to support the market and protect individuals is at best, a questionable one. 

References

1. CFIB. “Regulatory Costs in Canada and the United States: A Small Business Perspective.” Canadian Federation of Independent Business, 16 Feb. 2022, www.cfib-fcei.ca/en/research-economic-analysis/regulatory-costs-in-canada-and-the-united-states#:~:text=As%20of%202021%2C%20the%20total,billion%20USD%20for%20Canadian%20businesses. 

2. Government of Canada, Office of the Auditor General of Canada. “Report 2-Natural Health Products-Health Canada.” Report 2-Natural Health Products-Health Canada, Health Canada, 2021, www.oag-bvg.gc.ca/internet/English/parl_cesd_202104_02_e_43806.html. 

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