Arguments for why Canadians should pay for industrial handouts hold no value

Published: January 16, 2013, 8:02 pm
Updated: 4 years ago

What gives a thing value? I mean in the economic sense. When we say this good or service is worth more than that one, what do we mean? How do we know?

There are a hundred ways to answer that in the non-economic sense: for the pleasure it affords, you might say, or the moral use to which it is put.

Or for the craftsmanship, or sheer effort that went into it. All of these have some validity, and it would be hard to say which was truer than the others.

But in an economic sense, the answer is clear: the economic value of a thing is measured by what people are willing to pay for it at the margin.

That’s not only its value to them: in most cases, that is also its value to society. There are exceptions, where a thing entails benefits or more usually costs for others besides the buyer and seller, but for the most part the maxim holds: a thing is worth making, in economic terms, if its value to society, measured by what people are willing to pay for it, exceeds its costs, that is the value of the goods and services purchased in its production.

That doesn’t invalidate those other, non-economic ways of measuring value. We may still wish to assign some value to a thing, collectively, beyond the value that people actually do assign it, given a choice — but if so, we should at least recognize that this comes at an economic cost. Which gets us into thornier questions, such as who should decide, and who should pay, and why there is typically so little overlap between the first group and the second.

I offer all this as a prelude to discussing the latest raft of government handouts to corporate Canada: $250-million to the auto sector in the form of a renewed federal contribution to the Automobile Innovation Fund, on the theory that automobile manufacturers should not be expected to innovate on their own; $400-million more in federal subsidies to the venture capital business — yes, you read that right, government-funded venture capital — to be dispersed through a handful of private equity funds. By this bit of sleight of hand the venture capitalists were persuaded they were still venture capitalists and not wards of the state, while the prime minister was persuaded that this did not involve the government in “picking winners.”

The economic arguments against this are well known, and have nothing to do with whether the recipients turn out to be winners or losers. The subsidies given to any one industry or sector come at the cost of  every other: costs measured not just by the taxes they must pay, but in the capital, labour and sales diverted into the subsidized sector. Fading industrial dinosaur or high-tech start-up, the fact that a particular sort of enterprise cannot raise as much capital as it would like on its own does not make the case for governments to supply it: most often there is good reason for investors’ reluctance, namely the anemic returns they are likely to collect.

What’s interesting is the response of the proponents of these industrial handouts, whose ranks now include at least one former economist: not only do they fail to present any economic arguments for them, but neither do they offer even non-economic arguments — or not openly. Rather, they rely on a number of what might be called pseudo-economic arguments for why Canadians should pay (and pay, and pay) through their governments for things they would not pay for willingly. These include:

Because we’ve been doing so until now. That is, the sector has grown so large, largely thanks to previous subsidies, and employs so many people, that any reduction in subsidies would come at an unacceptable loss of jobs and output in that sector. But subsidy destroys jobs just as surely as it creates them, in the sectors that were not so favoured. It follows the reverse also applies.

Because others do so. As in, “we can’t be the only boy scouts in the world.” The latest handout to the auto industry was greeted by a sorrowful Globe and Mail report on how Canadian auto subsidies were falling behind those of other countries, in an industry in which governments are obligated to “pay to play.” But the willingness of other governments to subsidize their industries makes the case against us doing likewise, rather than for. If there’s no possibility of gaining even sectoral advantage, what’s the point?

Because some industries are just special. The advocate of auto subsidies, though he may congratulate himself on his pragmatism, starts from one piece of divine dogma: that Canada must be in the automobile business. But this is just a special case of a more general insistence on the primacy of manufacturing, rooted in little more than a cultish preference for making things. (You can’t hold a service in your hand, now can you?)

This is, I repeat, not an economic argument. It has nothing to do with benefits or costs, or value in the economic sense. If it’s about anything, it’s about aesthetics, or a sort of sectoral snobbery, the kind that finds the prospect of being “hewers of wood and drawers of water” so unspeakably vulgar. And yet it is presented as if it were an economic argument.

The Macdonald Laurier Institute has just put out a study debunking the “Dutch Disease” thesis: the rise in the dollar had other causes than just rising resource prices; the decline in manufacturing had other causes than just the dollar, and so on, giving reason to doubt whether the resource boom came at the expense of manufacturing. But surely the real objection is: so what if it did? What’s so special about manufacturing?