In Ontario, the bootlegger has become the robber baron / by Michael Motala

Source: LCBO. 

Source: LCBO. 

President Donald J. Trump’s substantive criticisms of Canadian economic policy, ranging from the accusations of softwood lumber dumping, to fresh allegations that the government unjustly subsidizes dairy farming, are in fact nothing but a dustup in the long and storied history of Canada-US economic relations.

It started in the roaring ‘20s, during the age of American prohibition, when Canada drew ire from its southern neighbour, as alcohol manufacturing north of the 49th parallel took off. “Rum-running” bootleggers criss-crossed the world’s largest undefended border, from British Columbia to Ontario, fueling a network of underground speakeasies and crime while unabashedly thwarting US policy.

According to Canadian historian Daniel Francis, at the time “there wasn’t a job in Canada that paid that much for so little work.”

These days, north of the US border, what was once a bootlegger economy has become the domain of robber barons.

The Liquor Control Board of Ontario (LCBO), together with the Beer Store and a small retail chain owned by Ontario’s wine growers, have an exclusive fiat over the distribution of alcohol. Influenced by the homegrown temperance movement, a reaction to developments in the USA, Ontario’s liquor monopoly was an attempt to limit alcohol consumption in accordance with prevailing social mores. The approach to regulation and distribution is sui generis in the developed world.

The protections envisaged in Ontario’s liquor laws later became enshrined in the Canada-US trading relationship, survived NAFTA negotiations in 1993. Still in force today, practices are justified in terms of the social benefits accruing to Ontario’s public health infrastructure through the annual government dividend.

Do these alleged benefits stand up to scrutiny?

In the 2015-16 annual year, the LCBO alone reported a revenue of $5.57 billion dollars ($CDN), with net earnings of $1.97 billion, and dividend of $1.935 billion to Ontario taxpayers. Brewers Retail Inc., which operates as The Beer Store, has a monopoly over the sale of beer, and it is estimated it generates another $2.5 billion in sales. The majority of its shares are owned by foreign interests Molson Coors Brewing Co., Anheuser-Busch InBev SA, and Sapporo Breweries.

Meanwhile, unlike the LCBO, the Beer Store does not provide a public dividend, and merely redirects taxes like an ordinary business. There is no evidence the arrangement is superior to a more competitive market, and in fact, comparative cases suggest otherwise.

Just what are the consequences for consumer welfare?

The economics of the situation are increasingly clear. On the demand side, the existence of the LCBO limits consumer choice sets because it eliminates any retail competition. On the other hand, on the supply side, with unparalleled purchasing power in global markets, importing products from 85 countries, the LCBO could theoretically yield better prices, and pass on savings to consumers.

However, in 2014, the Calgary-based CD Howe Institute cited numerous cases where Ontario product prices were only marginally superior when compared to other Canadian provinces, where alcohol sales are deregulated. That means the LCBO is not passing on savings to customers. In fact, the report found the LCBO’s margin was nearly double those of competitive retailers in other provinces and U.S. states.

For its part, the Beer Store charges consumers and restaurant chains excessive margins, while funneling profits abroad. To sell at the Beer Store, non-owners encounter a barrier to entry in the form of an annual licensing fee.  Craft brewers, and small Ontario wine growers, complain that the prevailing conditions make it impossible for them to compete, and grow their business.

Ontario’s beer and liquor economy has all the trappings of an anti-trust case, similar to America’s domestic airlines. Like the most egregious horizontal or vertical monopoly, Ontario’s planned liquor economy harms consumer welfare while enriching private corporations.

But there is one crucial caveat. As a species of government, the arrangement is justified equally in economic and implicitly moralistic terms, and the regime is protected by an unjust and relatively unassailable shield of public authority.

Ontario’s idiosyncratic model is a reminder that big government, operating under paternalistic auspices, can sometimes be the progenitor of anti-competitive markets.

It begs the question: might and ought the logic of anti-trust law one day be applied to regulatory excess?