Why Ontario’s business support program is a harmful, distortionary waste of money

Posted on in Debates

NationalPost.com – Full Comment
April 13, 2016.   Andrew Coyne

There are any number of criticisms to be made of Ontario’s vast, labyrinthine, largely opaque and unbelievably expensive system of business support, as described in a devastating and hitherto suppressed government report unearthed last week by the National Post. But only one of them really matters.

It isn’t the cost of the program, which the report, by the Expert Panel Examining Ontario’s Business Support Programs, values at a staggering $5-billion annually, including direct grants, tax credits and other subsidies.

It isn’t that so much of this amount — nearly a third — goes to the 200 largest and most profitable corporations in the province: the companies, as the report found, “least likely to be in need of support.”

It isn’t the lack of transparency surrounding the whole system: the absence of any defined criteria for how grants are to be distributed, or even a complete list of what grants have been awarded.

It isn’t that many of the recipient companies are also hefty donors to the Ontario Liberal party, or that the distribution of grants, as the Post’s analysis shows, tends to skew toward the most hotly contested ridings.

It isn’t the bizarre complexity of the scheme, comprising, as the expert panel’s report found, about 65 separate funds delivered through nine departments, as well as an archipelago of quasi-autonomous “innovation hubs” and institutes.

And it isn’t the secrecy surrounding the report itself, though the panel chair, business professor Margaret Dalziel, had been assured it would be made public when she took the job. Completed in 2014, it was only finally released when the Post’s Ashley Csanady started asking questions.

None of these really gets at the policy’s fundamental weakness. The program could be run at a fraction of the cost — it could be a model of transparency, untainted by patronage or corruption, with streamlined administration and clear objectives and published metrics — and it would still be a silly waste of money. No, worse than that, a harmful, distortionary waste of money.

The program would be no less harmful if, instead of giving most of the money to large, profitable corporations, it gave it all to small, failing ones. At best — if, say, it were buried in the ground — it has no effect. But if it has any effect, it is to steer capital and labour away from their most efficient uses, to those that are by definition less efficient; away from those dictated by costs and returns, and the willingness of consumers to buy the product in question, and toward those dictated by the availability of subsidy.

Yes, yes, yes: but what about the jobs created? There is a tendency in these discussions to see the waste and distortion involved as the cost, acceptable or otherwise, of the jobs created. The same sort of analysis often attends discussions of free trade vs protectionism, as if the issue were simply cheaper prices for consumers vs jobs for workers.

But in reality there is no such tradeoff. The jobs created in one sector by subsidy and protectionism are simply the jobs destroyed in another — by the diversion of productive resources, or of consumer purchasing power. Whatever phony-baloney estimates of “economic impact” or “spinoff benefits” the consultants may churn out, they are inevitably gross rather than net: they measure the jobs created (or “retained,” a lovely bit of sleight of hand) in the favoured sector, but not the jobs destroyed, or that never were, in the rest.

And this is the point that its advocates miss. When Ontario Economic Development Minister Brad Duguid declares that “we live in a global economy that’s so fiercely competitive … that we can’t afford to take the old approach” — by which he presumably means not throwing billions of dollars at a handful of large corporations — he may think he is saying something deeply meaningful, as no doubt he does by the following: “You need to pick winners, you need to support your growth firms that help build our economy in the new economy.”

Leave aside the faith in government’s ability to pick winners. Leave aside, as I hope I’ve shown, that picking winners isn’t the issue. Leave aside the minister’s apparent belief that the willingness of other countries to subsidize a given industry is somehow an argument for us to do likewise, as if Canada’s comparative advantage lay in zero-sum games.

The real competition, the one that subsidy distorts, is not between one country’s industry and another’s, but between industries and firms within the same jurisdiction

The really fundamental mistake, rather, consists in where the minister imagines the axis of competition lies. The real competition, the one that subsidy distorts, is not between one country’s industry and another’s, but between industries and firms within the same jurisdiction. Whatever advantage subsidy may give “our” firms over “theirs” can be obliterated in a single day’s movement of the exchange rate. But the damage it does to the internal allocation of resources is long-lasting.

Some years ago, the economist David Friedman wrote a brilliant piece called “The Iowa Car Crop.” He made the case that the cars Iowans bought from Japan were just as much a product of Iowa labour as the wheat they grew on their farms, since it was the wheat they traded to Japan that enabled them to purchase the cars. “A tax or a ban on “imported” automobiles,” he wrote, “is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.”

Who does Ontario’s $5-billion industrial subsidy scheme really harm? Ontario industry.

See Chart “Average Support by Revenue”:  < http://wpmedia.news.nationalpost.com/2016/04/report-on-ontario-business-support.jpg?w=620&quality=65&strip=all&h=373 >

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