Reasoned rescue – editorial – Reasoned rescue
November 10, 2008 at 11:21 PM EST

The first ministers’ meeting yesterday in Ottawa is a striking example of the pressures on government at a time of economic anxiety. Help was sought by various premiers for automobile manufacturers, private pension plans, exporters and more.

The federal government could easily be swamped with such demands. It needs to establish clear principles on when and how business should, or should not, be assisted.

One source for such criteria is A New Framework for Economic Policy, nicknamed The Purple Paper, a document published in 1994 by the Department of Finance, under the auspices of Paul Martin, at a turning-point like the one we are now going through.

The Purple Paper sensibly said that a balance had to be struck between providing shock absorption and preserving incentives to seek new opportunities. Singling out individual firms, it said, was “largely sterile.” Government’s main role in supporting the private sector consisted of its contributions to infrastructure, health-care and education – at the time, the sustenance of overall credit conditions was not highlighted.

Many of the paper’s ideas on government’s more “pro-active” economic role stand up well to the test of time. Notably, subsidies and other such programs should be temporary. They should help shape comparative advantages for Canada, ones that arise from skills rather than natural resources.

Public policy should not retard adjustment to economic change, but rather encourage innovation, helping prepare industry for the future. It should sustain only activities that are competitive. On-the-job training is to be supported when firms cannot see their way to providing it alone.

Government has a well-founded role in assisting basic research, because firms cannot expect to capture eventual returns from discoveries that are not directly translatable into privately owned intellectual property. The early stages of research cannot do without the free exchange of ideas and information, before the profitable quasi-monopolistic benefits of patents and copyrights on detailed techniques click in, and clamp down on openness.

In spite of all this, no national economy can be treated as a closed system, and especially not Canada’s. Sometimes, government needs to counteract the policies of other nation-states.

Above all, as the 1994 Purple Paper said, government policies should favour the growth of total factor productivity, which does not separate labour from capital, but is a measure of technological progress.

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