Report on biz subsidies only part of the story

Hey there, time traveller!
This article was published 23/7/2013 (1490 days ago), so information in it may no longer be current.

Winnipeg's Buhler Industries -- Canada's last farm-equipment manufacturer -- got a dose of good news Tuesday when Export Development Canada approved a $20-million line of credit.

The announcement, at first blush, seems to be positive. Buhler is a prominent Winnipeg employer, with about 800 employees locally. The money helps Buhler expand overseas sales and keep Canada a player in the international farm-equipment market.

Not everyone sees it that way. The Vancouver-based Fraser Institute -- a conservative think-tank -- released a report the same day condemning government support to business.

The report revealed Ottawa has contributed $22 billion in loans and grants to Canadian businesses since 1961. No matter how you look at that number, it's pretty astounding. But what does it actually mean?

'The companies with the highest employee counts -- most of which do not take subsidies -- are real-world examples of companies that have not needed taxpayer assistance to create jobs'

The Fraser Institute argues accepting grants or loans from government is a worst practice for Canadian business. In fact, it points out the gross majority of Canada's largest employers have never taken government largesse to get to where they are today.

"Peer-reviewed research does not support many claims advanced by federal politicians and other proponents... that corporate welfare is responsible for economic growth or job creation," the report concludes. "In fact, the companies with the highest employee counts -- most of which do not take subsidies -- are real-world examples of companies that have not needed taxpayer assistance to create jobs."

To give credit where credit is due, this is a good subject to study and at its most basic level, there is some good stuff in the report. We cannot escape the fact there have been some bad investments by government in the private sector. However, as is so often the case with Fraser Institute research, this study fails in two profound ways.

First, it does not dig deeply enough into the subject matter to differentiate between good and bad investments; and second, it draws conclusions the findings don't support.

For example, the institute argues because most of Canada's largest employers do not accept corporate welfare, it is unnecessary. However, Canada has more than 18 million people in its workforce. At most, the largest employers who have shunned corporate welfare represent about 1.3 million jobs. It does not list the number of employees employed in companies that have accepted government loans and grants, nor does it attempt to assess the value of the companies, or the wages paid.

The study also fails to acknowledge many of our most profitable, high-value industries -- aerospace, oil and gas, automotive -- were established with government subsidies. The fact is economies do not care where a dollar of investment comes from. Economies are a blend of public- and private-sector investment. Canada is split fairly evenly, with about half of GDP generated by each of the public and private sectors. Nordic countries generate as much as 80 per cent of their GDP from public-sector activity; others such as the United States rely more heavily on the private sector for growth.

In empirical terms, however, a dollar invested, regardless of its source, produces growth. This is particularly true of employment; a dollar spent hiring a worker has the same impact regardless of whether it's public or private.

David Macdonald, chief economist for the Canadian Centre for Policy Alternatives, admits he is not a fan of government subsidies to business. That having been said, he also noted his dislike of this type of investment does not change the fact each dollar invested -- whether by government or a private company -- can produce about $1.50 in economic growth, Macdonald said. There are factors that limit the impact of the investment, he added.

Money spent on direct employment has the biggest economic return, Macdonald said. However, if the money is being used to buy building materials or machinery from outside the jurisdiction in which the investment is being made, the spinoffs are considerably less. This is what economists call "leakage."

The impact could also be eroded depending on whether the company is publicly traded, or privately owned. Or, whether the company is Canadian-owned and located, or multinational.

The Fraser Institute specifically fails to draw any of these lines in its analysis. Just as it fails to deal with the real elephant in this debate: tax cuts.

Remarkably, the institute admits it excluded "tax reductions, deductions, credits or exemptions" for businesses even while conceding "preferential tax treatment... mimics subsidies." That is, for the institute, an assertion too far.

If you created a list of potential government investments, with the ones that created the biggest economic bang at the top, tax cuts would go at the bottom. Tax cuts provide the biggest benefit to high-income earners, who tend to save money rather than spend it, which limits economic impact. The same is true for corporations. Cutting taxes for an already-profitable corporation may boost earnings, share prices and dividends, and that will benefit those lucky enough to own stocks in that company. But it leads to less growth.

Running through the narrative of the Fraser Institute's research is an assumption lower taxes and smaller government make for a better economy. In fact, lower taxes and smaller government mean better conditions for one segment of the population; it is much harder to make the argument this model makes for a better economy.

We are better off for knowing how much money Canada has spent providing grants and loans to businesses. We are still waiting for a more definitive verdict on what it really means.

dan.lett@freepress.mb.ca