Federal government’s 'industrial policy' creates all the wrong incentives

Canada’s recovery from the pandemic will require, in addition to vaccines, rapid economic growth. Unfortunately, just as the Trudeau government has faltered in delivering vaccines—the rate of vaccinations in Canada lags far behind many other developed countries including the United States and United Kingdom—it seems to have little understanding of the sort of economic policy needed to hasten recovery. It’s instead relying on false ideas that will only impede economic growth.

The government’s economic strategy comes squarely down on the side of increased government spending and “industrial policy,” which is a euphemism for central planning. In an interview last December, Navdeep Bains (who was at the time the minister of innovation, science and industry), spoke of the government making “big bets” with subsidies and program spending in certain industries, including clean technology and the digital economy, to spur innovation, productivity and employment growth.

The problem, however, is that the government does not—and cannot—know which industries are the right ones to fund, nor how much funding is appropriate, nor specifically what should be funded to improve economic productivity. Knowledge and information about how and where capital and labour can be used most productively is widely dispersed among private individuals, not centralized. So economic decision-making should also be dispersed among individuals, as in a free market, not centralized, as under an industrial policy regime.

Because the government cannot possibly collect and use all the economic knowledge available in the market, it acts with less information and more ignorance than the market does. Industrial policy therefore inevitably fails; as George Mason University economist Don Boudreaux put it, “To replace markets with industrial policy is to replace an information-generating process with ignorance. It is to toss aside access to information and to rely instead upon uninformed stupidity.”

The knowledge problem, or the ignorance problem as we might call it, is compounded by the incentives problem. Private individuals risking their own money will generally do so more carefully and thoughtfully than politicians and bureaucrats who, because they spend other people’s money, have no skin in the game. And while the profit motive incentivizes individuals to invest in what is most economically profitable and productive, politicians have other objectives in mind.

As Boudreaux writes, since politicians administering industrial policy “are paid mostly in public acclaim rather than in monetary profits” their tendency is to invest in things that are flashy and attention-grabbing instead of what will increase economic productivity and raise standards of living. In the case of the Trudeau government, its big attention-grabber is the climate change issue, hence its preoccupation with green subsidies and clean technology industry.

Yet another problem with industrial policy is cronyism. In a free market, businesses earn money by producing goods and services people demand, but when governments give handouts to politically favoured industries, businesses can instead get money by lobbying government for it. Therefore, industrial policy encourages businesses to produce less and lobby more.

If we want a robust economic recovery, we need higher economic productivity. Industrial policy invariably accomplishes the opposite by transferring economic decision-making from the market to politicians and bureaucrats who have less knowledge and weaker incentives to invest productively. The certain effect of the federal government’s economic strategy, therefore, will be to impede recovery rather than hasten it.