This is how cannabis bureaucracy destroys wealth.
Last week, the government of Canada released a review of Health Canada’s cost-effectiveness for issuing cannabis licences.
Of course, a “licence” from a government body is asking permission for a freedom you already have. When you have to ask permission to produce from people who produce nothing, your society is ass-backward.
Case in point: You’d think bringing in $160 million in screening fees, import/export fees, and other regulatory cash grabs would yield a profit.
No, Health Canada spent $430 million managing licence applications. Imagine a private accreditation agency reporting a $270 million loss and making up the difference via a taxpayer bailout.
That’s how cannabis bureaucracy destroys wealth.
How Cannabis Bureaucracy Destroys Wealth
According to the review, Health Canada expected to recover 100% of their regulatory costs. “Based on estimates of market size and the number of licensed producers at the time,” they write, believing the hype that LPs were promoting.
Of course, to anyone paying attention, there was a supply glut. The numbers LPs were throwing around in 2018 were extravagant and in no way based on fundamentals. We reported on this. It wasn’t a secret.
As Ringo Starr said, “everything government touches turns to crap.” And it wouldn’t be a true bureaucratic boondoggle without rubbing salt in the wounds.
Not only has Health Canada failed to recover the costs of their regulatory program, but this regulatory program is suffocating the legal cannabis industry.
From compliance fees to arbitrary banana-republic-style decisions, the cannabis bureaucracy is destroying wealth and is out of control.
And they know this. As part of the review, Health Canada sent questionaries to licence holders. The response?
Given the economies of scale, fees, excise taxes, and other compliance costs have a greater impact on micro-producers.
From the review,
Despite the relatively lower fees, a higher proportion of micro licence holders (37.5%) compared to standard licence holders (20.5%) reported that fees accounted for over 10% of operating costs.
Micros spend over 10 percent of their costs on security requirements compared to standard licensed producers. This is despite having fewer requirements than the bigger guys.
Micros also pay more for record-keeping (nearly 30%) than standard LPs (13.5%).
But remember to add salt to the wounds.
The government’s monopoly cannabis boards favour low-cost cannabis products. They want to buy bulk flower on the cheap. It is not ideal for craft growers specializing in premium goods.
This is how cannabis bureaucracy destroys wealth.
How Cannabis Bureaucracy Destroys Wealth
This is how cannabis bureaucracy destroys wealth.
They charge $1,781 for a security clearance fee. They charge $658 for import/export permits.
Health Canada charges standard cultivation and processing licences 2.3 percent of their revenue for an annual regulatory fee, or $23,000 (whichever is higher).
For micro-cultivation and processing and nursery licence holders, the rate is 1 percent of cannabis revenue up to $1 million. (And then 2.3 percent over $1 million).
Excise taxes are outside the scope of Health Canada’s regulatory program. Although, they don’t help. All these fees and the bureaucracy can’t even recover its operational costs.
A business operates on the margins. They can’t afford this kind of petty tyranny.
Small businesses must carefully assess the marginal revenue they create. They must weigh regulatory costs against additional revenue from expanding operations.
The more a business produces, the incremental benefits decrease. Regulatory costs add another layer of expense that diminishing returns cannot justify. This, in effect, makes small marginal businesses unable to expand.
Something is seriously wrong when you have to ask permission to produce from people who produce nothing.
The Inferiority of Government Accreditation Agencies
To sum up, cannabis bureaucracy destroys wealth. They do this through:
Coercion: Government regulatory agencies use coercive force to enforce compliance. This is morally repulsive.
One-Size-Fits-All: Government regulations are simple tools in a complex, capital-intensive economy. Ultimately, they stifle innovation and adaptability.
Bureaucratic Inefficiency: Health Canada believed the hype of LPs that the Canadian cannabis market would be huge. It wasn’t. It was a bubble that they based their calculations on.
Political Influence and Capture: Political pressures and lobbying influence regulatory agencies. This leads to regulations that benefit specific interest groups rather than the consumer.
Lack of Accountability: Government agencies lack the same level of accountability as private entities. There is no rational economic calculation and no consequence to being disastrously wrong.
In contrast, a system of private accreditation works better. Imagine buying cannabis with the following:
- a seal from a reputable company
- a seal from a less reputable company
- a seal from a company with a lousy reputation
- no seal, and thus, no guarantee the grower hasn’t sprayed their product with pesticides.
Contrast this to the one-size-fits-all approach, and you can see how cannabis bureaucracy destroys wealth.
The Superiority of Private Accreditation Agencies
Private accreditation agencies are voluntary. Everyone determines the value of the accreditation through market demand. A competitive market means multiple agencies can exist, catering to diverse needs and keeping each other in check by directly competing for customers.
Private enterprise adapts and produces technological advancements. They respond better to new developments and aren’t burdened by bureaucratic inertia.
Private agencies can focus on specific industries, allowing them to tailor accreditation criteria to what helps inform and protect consumers. Consumers can choose which agencies’ standards they value and trust.
There’s greater cost efficiency in the private sector. No private accreditation agency would survive long posting an annual loss. Private enterprise is also decentralized, giving stakeholders more control over regulatory standards and reducing political lobbying and undue influence.
Overall, however, the main benefit of private accreditation is that it’s a system based on contracts. Courts could resolve disputes (over edibles, for example) when the terms and conditions of the agreement are clear.
In other words, there is greater freedom and efficiency when we don’t base our producer-regulatory relationships on metaphysical theories about the “social contract,” no one has ever seen or signed.
Markets Win
Health Canada’s cost-effectiveness is abysmal. No one is surprised. All bureaucracy, cannabis or not, destroys wealth. It is the nature of the institution.
On the other hand, markets create wealth. Markets are also self-regulating since, in effect, markets are just people like you and me trading goods and services with each other.
Only control freaks try to control and limit peaceful acts between consenting adults.