William Watson: When will our winning-cursed governments stop subsidizing free-agent firms?

As a lifelong sports fan I was very envious this week when Charles Lammam, director of fiscal studies at the Fraser Institute, was quoted prominently in a National Post story about why in recent years Canadian NHL teams have been having trouble making the Stanley Cup playoffs. And he was quoted in the sports section, where I’ve always wanted to appear. The insight Charles provided is that free-agent stars find our high marginal income tax rates off-putting. “Our higher taxes erect roadblocks,” he is quoted as saying.

If a Canadian team does manage a free-agent signing, you can be reasonably sure the team is picking up the tax differential, that is, the difference between the taxes the player would pay in the States and the taxes he faces here. Unless for some reason he has a strong preference for Canada—love of snow, potholes or unending fan and media pressure, say—the free agent will have to clear at least as much money as he could in the U.S., which means the team will have to compensate him for the extra taxes he pays here. The thing about free agents is that they can hold out for the very best offer. If they don’t get it, you don’t get them.

This principle came to mind a little later while reading an expert panel report on the Ontario government’s 65 programs supporting business. Yes, 65. The government had been sitting on the report until the National Post posted a leaked copy on its website.

The report is a very nice piece of work. To my mind, it is far too supportive of discretionary assistance to business, which I oppose on the Hayekian principle that we will never have the information we need in order to put effective discretionary assistance into effect. (If you’ll forgive yet another reference to the National Post, you can read my criticism of it here.)

Despite that, the report makes a number of great points along the way. One concerns the “winner’s curse” that arises when governments bid for investments from highly mobile international corporations—which you might think of as the economic equivalent of hockey’s star free agents. To quote from the report:

[On] occasion, there will be competitive pressures for Ontario to match [investment incentives offered by other jurisdictions]. Such incentives should be used sparingly and judiciously. The province needs to be sensitive to the “winner’s curse” phenomenon. When competitive bidding is characterized by incomplete information, winners tend to overpay. The province may be successful in attracting or retaining large enterprises, but it may pay so much in incentives that the effect on net welfare is negative (Report of the Expert Panel Examining Ontario’s Business Support Programs, p. 34).

In the real world, of course, bidding is always characterized by incomplete information. But apart from that the rest of the passage is bang-on. The political pressures surrounding attempts to attract or sustain investment from high-profile foreign businesses can quickly become overwhelming. Governments may come to feel they simply can’t tolerate risking the charge that they were responsible for losing firm so-and-so’s investment in the province.

Governments that get themselves into such a situation are in exactly the same fix as the general managers of NHL teams being hounded by dissatisfied fans—of whom there are millions in Canada this year—to make a big free-agent acquisition. With the pressure on, the risk of over-paying is extreme. And the player or firm, whichever is the case, is almost certain to appropriate all the benefit that his or its coming to his new team or province is likely to produce.

How much is it rational to pay at an auction? You obviously don’t want to pay all the way up to the entire benefit you would get out of whatever is on the block, but if a Cisco or GE or Honda has several jurisdictions bidding for its services, the chance the winning subsidy will equal or maybe even exceed the full social benefit to the winning bidder is very high. Getting yourself into such a situation, be you an NHL general manager or a provincial minister of industry, is just dumb.