How Ontario smothers businesses with bureaucratic love

Posted on April 14, 2016 in Policy Context – FP/FP Comment
April 14, 2016.   William Watson

If you can’t raise a lousy $15,000 … maybe you’re not really cut out for business.

That newly unearthed Ontario report on the province’s business subsidies — suppressed until the National Post recently got its hands on it — begins with a true story. It’s about Ed Mateo (not his real name), a new Ontario PhD who invented a chemical analysis instrument he wanted to patent and manufacture. Despite Ontario handing out $4.1 billion yearly in business support via 65 (!) different programs, he couldn’t raise the $15,000 he needed to buy equipment and supplies. So he licensed his idea to a big European firm and Ontario lost “a high-potential new venture”— although Ed did at least earn licence fees that allowed him to develop “business interests” (the protection of which is why he’s pseudonymous).

As a professor I’ve always been about as far from business as you can get. But I’ve got to think that if you can’t raise a lousy $15,000 — from family, friends, the Internet, Dragons’ Den, a bank, or some Canadian venture capitalist — maybe you’re not really cut out for business.

Reaction to the report has focused on the unhealthy ethics of governments handing out money to businesses that then recycle bits of it back in political donations. Call me naive but I think most politicians aren’t interested in crude corruption of that sort. What may actually be worse is that they truly believe in what they’re doing. The politicians I’ve met want to help others and what better means than with money? It only encourages them that recipients of money are seldom unappreciative.

It’s hard to understand why the report was suppressed. Yes, it explains that, before this data was gathered, the province had no idea how much it was spending, where or on what. Yes, it reports that the government declined to provide enough data to allow for evaluation rather than simply enumeration of its various programs. And, yes, it criticizes the current pattern of handouts: too much in tax credits rather than cash and too much for big, established firms rather than smaller firms, especially ones growing quickly (if they are growing quickly, do they really need support?).

Nevertheless, the report strongly endorses government support for business. It recites the arguments against such support and suggests the government address those whenever it does provide support. But it offers many other arguments favouring business assistance, going so far beyond classic economic concepts of “market failure” as to embrace “fairness” as a principle — though it beggars belief that grants for business can systematically promote fairness, given the widely varying backgrounds and circumstances of business owners and employees.

Unfortunately, like all such analyses, the report is better at describing the platonic ideal for business support than at explaining how exactly to achieve it. Thus, support for business should be timely, well-designed, highly knowledgeable of and integrated with (but presumably not co-opted by) the targeted community; it should continuously evaluate the impact aid is having; it should encourage interactions among different businesses; it should “be informed by and responsive to the needs of companies at different stages of development, and in different sectors, regions and clusters.”

This elaboration of desires, rather than explanation of how to achieve them, is perfectly understandable. Achieving them is not possible. That would require minutely detailed information about how the economy works. That information does exist, sprinkled in the minds of the people most intimately involved in the billions of activities that are the economy. But how does the government possibly get ahold of it?

If men were angels, James Madison wrote, no government would be necessary. If government innovation “angels” were all-seeing and all-knowing, they might guide our economy forward in the sensitive, contextual, transformative way subsidy champions favour. But they are not angels and, despite the report’s plea for more, better and bigger data, they never will be.

The practical effect of spending billions of dollars encouraging innovation is to employ several thousand officials to patrol the economy and, using other people’s money, sniff out interactions, externalities, synergies, transformative fairness opportunities, and so on.

Would it not be better that these thousands actually become innovators? Maybe if government increased the return to successful innovation — most effectively by limiting its confiscation of the fruits of that innovation to a fifth or a tenth rather than a half — many more would emulate Ed Mateo. Or at least get into the business of lending future Ed Mateos a little money.

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