I was wrong about Canada’s state capacity

When the New York Times ran a feature encouraging its writers to admit things they got wrong, we were equally intrigued and annoyed. What a great idea — why didn’t we think of that?! That’s exactly the spirit we want to encourage at The Hub. We know we won’t be right about everything, but we want to admit it when we get something wrong and we want to figure out why we were off base. So, this week, we’ll be borrowing the Times’ idea and running essays from our writers and staff about the things we got wrong. Please, enjoy our blunders.

The idea of ​​“state capacity” has attracted considerable intellectual and political attention in recent years. It started with a blog post in early 2020 by leading public intellectual Tyler Cowen about what he called “state-capacity libertarianism” to describe a policy framework for a limited yet effective government to provide basic public goods and solve for market failures. His influential essay has since spawned dozens of articles, commentaries, and papers on the topic.

State capacity broadly refers to a government’s functional ability to carry out its market-supporting activities in an efficient and effective manner. The key insight here is that while debates about the proper size and scope of government are highly important, we ought to dedicate similar energy and attention to questions of state capacity and competency.

Cowen’s chief contribution was to catalyze a renewed intellectual movement focused on “better or worse government” rather than merely “bigger or smaller government.” The timing couldn’t have been more apposite. His essay was published mere months before the COVID-19 pandemic.

The pandemic experience brought the ensuing conceptual debate about state capacity into practical focus. It necessarily put governments in Canada and elsewhere around the world to the test. The results were mixed, to say the least.

Prior to the pandemic, it was something of an axiom that Canada is home to strong public institutions, a professional public service, and high-quality public administration. It has, in other words, high levels of state capacity.

I subscribed to this view. I’ve even authored and co-authored articles, papers, and newspaper columns in favor of a larger role for government in supporting science and technology and industrial development. It may be a reach to say that I was fully wrong. But in hindsight I now concede that my analysis probably overstated Canada’s state capacity.

The pandemic exposed that our governments are slower and more sclerotic than many of us fully understood. It turns out that Canada has a state capacity problem.

Start with the federal government. The pandemic revealed that Ottawa’s state capacity has been hollowed out in recent decades. It still proved capable of creating new cash transfer programs like the Canada Emergency Relief Benefit and distributing checks to households with minimal scrutiny or oversight, but otherwise the federal capacity for procurement, logistics, and service delivery was shockingly weak. The federal government has effectively been reduced to a revenue collection entity that exists to transfer dollars to seniors, families with children, First Nations, and other levels of government.

This state capacity weakness manifested itself in a long list of federal pandemic failures, including its confusing and often contradictory public health dictates, its initial vaccine procurement (including a bizarre contract with a Chinese state-owned enterprise), and the $25 million spent on the ArriveCan app.

The post-pandemic period has similarly been marked by high-profile cases of government failure. The most obvious example is the country’s passport backlog which has led to lengthy delays, long line-ups at Service Canada offices, and canceled summer vacations.

This case is particularly salient because it is so basic. How can a government that cannot issue passports on a timely basis reasonably expect to reduce poverty by 50 percent in 2030 or engineer an energy transition by 2050 or fulfill any other major policy ambition over the coming years?

The provinces aren’t much better. Their collective failure to reform their health-care systems prior to the pandemic in spite of mounting evidence of limited capacity and poor outcomes was a major factor behind the country’s lengthy and stringent lockdowns. The risk of hospitals collapsing essentially held us held hostage for more than two years.

This point cannot be overstated: we now know that children suffered long-term learning loss and others future diagnostic tests, surgeries, and treatments in large part because a generation of provincial bureaucrats, politicians, and special interests chose to protect the failed health-care status quo.

These recent examples raise legitimate questions about our governments’ ability to deliver on their core functions and responsibilities. Lines of people in front of their local Passport Canada offices with lawn chairs like they’re waiting for a concert or playoff tickets is a powerful rebuttal to the pre-pandemic narrative about Canada’s world-class state capacity.

It’s important to emphasize that these observations are neither partisan nor necessarily arguments in favor of a smaller government. Governmental failings have been broadly distributed on the Left and Right and, in any case, research tells us that the correlation between state capacity and size of government is imprecise. Denmark, Finland, and Israel have governments that are similarly sized or even bigger and yet seem able to deliver more effective and expeditious public services than we can.

The factors behind our state capacity weaknesses are complex and would doubtless be the subject of ideological and political debate. The Left would ostensibly argue that it’s a consequence of so-called “austerity” including previous rounds of privatization and spending cuts. The Right would instead point to Public Choice explanations including institutionalized risk aversion, perverse incentives, and union-protected mediocrity that undermine effective and efficient collective action.

The key point here though is that the pandemic exposed that Canadians shouldn’t be self-congratulatory about our country’s state capacity to deliver on whatever we collectively ask of it through our politics.

Which brings me to my mea culpa. My research in recent years on innovation policy has highlighted the rise of the intangible economy (which has been described as the shift from an “economy of things” to an “economy of thoughts”) and its unique characteristics and properties including its geopolitical and strategic consequences. This has led me to rethink the role of the state to support science and technology and cultivate sectors, sub-sectors, and technologies that may have high-value, strategic upside for the Canadian economy.

As part of this work, we’ve considered the creation of new public sector organizations to better support breakthrough technologies and even grappled with the potential for a modern industrial policy. I have tried to root my analysis in a clear-eyed understanding of the limits of state action and other political economy risks. In a late 2021 paper, for instance, we argued for a new science and technology agency with a specialized staff and a high degree of autonomy so as to minimize the risks of bureaucratic inertia and political capture.

But even with these political economy caveats (which were unfairly ignored by some critics), there’s probably an argument that my work has overestimated Canada’s state capacity. That is to say, I spent so much time worrying about the twin risks of bureaucratization and politicization that I failed to ask more basic questions like “can the government reasonably do this?”. The passport mess has provided a useful corrective.

I stand behind most or all of my work on these topics. We do need to recommend ourselves to a more ambitious science and technology strategy and the market uncertainty of breakthrough technologies will invariably involve a role for government. But I now better appreciate how improving (or at least accounting for) the country’s state capacity is a crucial first step to greater progress on these issues. I admit that I was wrong—or at least a bit incomplete in my analysis. One consequence is I’m now probably more of an economic libertarian than I was prior to the pandemic.

The key takeaway then is that our politics ought to dedicate more energy and attention to the question of state capacity. Our political debates need to go beyond bigger versus smaller government and address good versus bad government. Everyone should be able to ultimately agree that the former is better than the latter.

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