The Harper government’s propensity for crony capitalism

January 20, 2013

CALGARY, AB, Jan. 20, 2013/ Troy Media/ – You might think the federal Conservatives, who added $125-billion to the federal debt since 2008 and will add another $21-billion by the end of March, might be shy about unnecessary expenditures. Alas, that’s not the case, as it appears Prime Minister Stephen Harper and his colleagues would rather hand out cash to corporate Canada instead.

In just the first two weeks of January, the prime minister announced another $250-million for the Automotive Innovation Fund – a federal subsidy program that provides the auto sector with taxpayer cash for research and development.

Then the prime minister announced $400-million for venture capital, mystifying those of us who thought it was fine to let private-sector angel investors risk their own cash, not that of taxpayers, on high-risk start-ups.

The recent taxpayer gifts are but the tip of the corporate welfare iceberg. Between 1994 and 2007, $202 billion was disbursed by all governments across Canada through subsidies to business.

Whenever politicians wish to shower taxpayer money around, predictable excuses are offered up in defence of crony capitalism.

One is that corporate welfare creates new economic activity, and thus extra jobs and new tax revenues. The prime minister trotted out a variant of this claim when he asserted that the previous $250 million dollop of taxpayer cash into the automotive fund ‘returned six times what the government has invested (into) the Canadian economy.’

But if the prime minister actually believes that, then why stop at $250 million? Why not drop another $1-billion or more into that fund, given such supposed multiplier effects?

The claim of magical multiplication effects is akin to dropping $250 million in taxpayer cash from the top of the CN Tower onto pedestrians below.

Of course that cash might create temporary one-time increases in economic activity and spinoff benefits. And no doubt, some politician somewhere would point to the ensuing spending as evidence such economic development strategies work.

But the relevant question is where the money originated in the first place and whether such a ‘helicopter’ approach to economic development is the best use of tax dollars.

Scattering tax dollars to the wind ignores the substitution effect. That is where tax dollars must be taken from others (i.e. through personal and business taxes) to finance the new round of crony capitalism.

The economic literature on subsidies and the substitution effect is clear: had the money been left with individuals and businesses (or un-borrowed) it would have been spent elsewhere or saved and invested anyway.

That would also have created economic activity, jobs, and eventually tax revenues for governments but without the inefficient recycling of tax dollars through the political picking of corporate welfare winners – and losers.

As one American expert on corporate welfare, Terry Buss, described it, the hidden victims of crony capitalism are businesses not on the take and taxpayers in general. As Buss wrote: ‘Potential losers are always in other cities or states, and few people concern themselves with the national interest.’

Sometimes politicians will admit that crony capitalism is an economic shell game, although they and others will still defend it on the grounds that other governments subsidize business, so Canadian politicians must play the same subsidy game.

Except that not everyone does it.

In 1996, after $2.2 billion in government loan guarantees to various businesses went sour, the Alberta government – under Premier Ralph Klein – passed the Business Financial Assistance Limitation Act to stop most loans, loan guarantees and outright subsidies to business (the exception being small businesses).

And the New Zealand government long ago stopped subsidizing farmers.

More recently, the Saskatchewan government ended the lucrative film tax credit (which cost the province $100-million over the years), over the wrongheaded objections of some business organizations, such as the Saskatchewan Chamber of Commerce.

One antidote to withstanding the pressure to subsidize companies or to engage in unproductive tax credit schemes is to toughen up existing free-trade agreements to end such abuses of taxpayers and their money. The very point of free-trade agreements is the pursuit of a level playing field and more economic growth for all.

After all, why should taxpayers (and their money) from any city, province or country be dragged into the competition between corporations? Let companies duke it out without taxpayers being forced into the ring.

Mark Milke a Senior Fellow with the Fraser Institute and author of several reports on business subsidies, including Corporate Welfare Bargains at Industry Canada.

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