Ontario government doles out corporate welfare

When Margaret Thatcher was prime minister of the United Kingdom, her press secretary Bernard Ingham was often reduced to groaning at the sorry state of the business community during meetings between businessmen and the prime minister. As Ingham later recounted, businessmen would tell Thatcher she was brilliant “but we need more incentives! And I cheered when she said, ‘You realize that ‘incentives’ means more taxation, do you?’”

Businessmen are businessmen, but regrettably, not all political leaders are Margaret Thatcher, so we have in Ontario a steady stream of “incentives” flowing from government coffers. Consider the recent announcement for $500 million in loans and grants to a steel manufacturer in Hamilton as part of the Ford government’s auto strategy. The money is meant to help the company reduce greenhouse gas emissions. The Ontario Chamber of Commerce called it a “great investment in the green economy.”

Supposedly the $500 million, according to the government, will give the company a “competitive advantage.” And the government’s auto strategy also “includes supporting the shift to low-carbon steel production that will give Ontario a competitive advantage in attracting game-changing investments.”

Notwithstanding claims of improving competitiveness, handouts and government industrial strategies invariably have the opposite effect. The Ontario government calls itself a “partner” to the auto industry—and like most business partners wants its share of control. The government’s plans include supply chain transformations, electric and hybrid vehicle production targets, the expansion of various automotive programs, and washing the industry in corporate welfare, of which the $500 million is but one example.

Is there any historical precedent of successful state economic planning of this sort? Government control caused the Soviet Union’s collapse, it was why the U.K. economy was in a downward spiral in the 1970s before Thatcher rescued it, and it’s responsible for a great deal of economic distress around the world today including perhaps most infamously the crisis in Venezuela. There’s no reason to think the Ontario government trying the same thing—albeit to a much lesser degree than Venezuela—will produce any beneficial results.

In a real competitive economy, companies compete for business. If a company wants to raise $500 million to invest, it must issue debt or equity offering competitive risk-adjusted returns to investors. Or, if it wants to increase revenues by $500 million, it must compete with other businesses for sales by offering more attractive deals to consumers.

On the other hand, if government is just handing out money, businesses no longer compete to satisfy investors and consumers, but instead simply hire the best lobbyists. Unfortunately, while competing to improve business operations and satisfy customers is economically productive and beneficial to all, competition for government subsidies is economically destructive.

In other words, if Smith improves his business operations, customer Jones and investor Brown both benefit. But if Smith gets a government subsidy, taxpayers Jones and Brown must pay for it, and the overall effect is a net economic loss as the government redistribution and reallocation of capital discourages productivity, and economic resources are devoted to rent-seeking instead of productive activity.

The incontrovertible reality is that government subsidies—or as they are otherwise known, government investments, incentives, corporate welfare or crony capitalism—mean, as Margaret Thatcher said, more taxation. Somebody should tell the Chamber of Commerce.