Title: Can’t say no Canadians

Sub-title: Recent auto sector bailouts show how hard it is for Canadians to say no to business demands for loans, subsidies or other forms of protection.

 

This week, Fiat announced that it had concluded a deal that would see the Italian automaker take a major stake in Chrysler. Canada’s 9,400 Chrysler employees greeted with glee the news, which would see the company pulled out of bankruptcy protection. However taxpayers, who will be on the hook for the $3.78 billion that the Canadian and Ontario governments lent the new company, have a right to be a little more sceptical. 

 

Ask almost any economist about the bailouts of GM and Chrysler, -- whose combined costs are estimated at $14 billion, -- and the answer is likely to boil down to “yes…but.”  Yes government bailouts are economically inefficient, they agree …but the Harper administration had no choice.

 

The reason relates to an interesting paradox: keeping incompetent, greedy and inefficient businesses alive costs Canadians a fortune (both in the increased taxes that they pay to fund bailouts, and in the higher prices that they have to pay for the products that they buy from these inefficient companies). Yet at the same time, Canadians have a hard time turning down bailout requests.

 

A short history of bailouts

In fact the recent Canadian auto sector bailouts are part of a global trend. After decades of increased business privatizations, which in Canada has seen companies such as CN, Air Canada and Petro-Canada sold to the public, after years of state ownership, the pendulum is swinging back. Governments are taking increasingly larger roles in their nations’ private sectors.

 

Here in Canada, despite those large privatizations, businesses have long benefited from a slew of government buyouts, subsidies and protective legislation. The automotive sector bailout (which will cost taxpayers an incredible $2 million per job saved) is just the tip of the iceberg.

 

For example in recent months alone, the government announced billions of dollars in transfers to banks, through its purchases of various mortgage assets. And companies across the country, including most recently in British Columbia’s forestry sector, have been screaming to get their share too.

 

“Canada has a long history of involvement in major businesses,” says Peter Hadekel, the Montreal-based author of Silent Partners: Taxpayers and the bankrolling of Bombardier. “But they are not alone. Governments all over the world, including Japan, Europe and even lately the United States, are doing the same thing.”

 

According to Hadekel, Bombardier, which is one of the world’s largest mass transit and aerospace sector players, has received billions of dollars from the federal government over the years. However the question remains as to how well those dollars were spent. “Government is traditionally a poor picker of winners and losers,” says Hadekel. “It is by no means certain that Bombardier would have been as successful as it has, without all of the tax breaks, loans and subsidies that it got.”

 

Are the investments worth it?

So is state involvement in the private sector worth it? The answer is almost inevitably no.  The Canadian government’s record in running the businesses that it buys has not been good. For example after Air Canada, the Canadian National Railway and Petro-Canada privatizations, all found to have been vastly overstaffed. That means during the many years that these companies were government run, it was taxpayers who were financing those extra salaries.

 

The reason that governments can get away with running businesses badly is no big secret. Politicians (who themselves almost never have direct business management experience) can almost never resist the temptation to staff public companies with their cronies. With no incentive to raise profits, even the most motivated managers eventually begin to slack off. And once the rot sets in at the top, it does not take long to flow down throughout the organization.

 

Nor is easy for ordinary folk to track what is going on. Canadian taxpayers, like those around the world, have a hard time making a connection between bailout costs (the auto sector adventure for example will hit the average Canadian family of four for $2,800) and the tax bills they pay at year end.

 

Economists like Joseph Schumpeter have long shown that “creative destruction:” letting businesses with incompetent, greedy and lazy workforces and management go under, is good for the economy, because it makes more room for efficient players. For example allowing GM and Chrysler to fail, would make room for Ford, Honda and Toyota, (which produce better products at a lower cost) to grab market share.

 

However by keeping the losers alive and subsidizing them, Canada (like many other countries around the world) has set the stage for years of auto sector stagnation, relative to its potential.

 

Peter Diekmeyer is Bankrate.ca economics columnist.

 

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