POLITICIANS CAN’T RESIST A LOSER.
To my mind the most interesting comment in Kevin Carmichael’s lead article in the Post’s “Innovation Nation” initiative that launched on Saturday was from Wayne Wachell, chief executive of Vancouver-based Genus Capital Management, which handles assets worth $1.5 billion. “We have to move beyond energy as the driver of our economy,” Wachell told Carmichael. “Toronto has a bunch of banks. What do the rest of us do? Sell insurance and wealth management.”
That’s a bit harsh. As charts accompanying the article showed, Canada does lots of other things, too, many of them growing rapidly. But if you’re sitting on $1.5 billion in capital like Wachell’s company is, you are wonderfully placed to influence your economy’s development. If you do think future energy growth will be slow and profits low, you can put your money into these other activities, including the numberless future startups that were the nameless, because they are not yet born, heroes of Innovation Nation.
Though $1.5 billion is way more money than I’ll ever have to manage (thank goodness!) it’s only a tiny percentage of Canada’s total net worth of over $11 trillion. But if much of the economy really is wealth management, then all these wealth managers can easily get us out of the dead and dying industries of the past and pour their/our money into all the new-economy startups that supposedly are the obvious route to wealth in the 21st century.
Despite every other business book these days telling the story of some 20-years-ago teenager whose name is now a household word and whose net worth is in the gazillions, it seems the Canadian capital market for some reason is insufficiently nurturing to startups, or has trouble managing the transition from startup to medium-sized player, or can’t prevent the sale of Canadian success stories to foreign giants who then live off the intellectual property rents Canadian brains have generated. (Question: In selling their companies, don’t Canadian brains capitalize the value of these rents, thus keeping them in Canada, at least so long as the brains themselves and their bank accounts stay here? And if we do want them to stay, should we really tax high marginal income as much as we do?)
Whatever the reason, our richly funded capital markets supposedly don’t give us the right kinds of enterprises. Hence the argument that government needs to be more involved in “targeted industrial policy,” “focused investment,” “strategic planning,” “national champions,” “picking winners” — choose the terminology most consistent with your opinion of the recommended intervention.
The objection many of us in economics have to this idea is not essentially ideological. It’s practical: Is democratic government well suited to the kind of ruthless capital allocation that helps explain the success of places like Silicon Valley? No, it generally isn’t. And for very good reason.
Democratic governments are, quite properly, obsessed with fairness. Because of this, as a quote in a companion Saturday Financial Post article by Jesse Snyder puts it, they spread available moneys thin, like peanut butter. Democratic governments spread thin for obvious reasons: They need to please as many — and tick off as few — voters as possible. That’s their nature. It would be better to make bigger bets on fewer companies, but can anyone really imagine Canadian governments putting big bucks only where economics dictates?
For equally understandable reasons, democratic governments are not ruthless with losers. They do sometimes pick winners. Snyder cites the example of early oil sands research. In the 1970s, a favourite example was government-supported research that led to Nortel’s success. (Yes, Nortel was once a success and, yes, we’ve been having this debate since the 1970s, longer even.) Such successes do happen. Throw enough money at research and they’re almost bound to happen. But what about the other side of effective capital allocation: Ditching losers? Can democratic governments easily do that? If losers weren’t voters or didn’t employ voters, maybe they could. But that’s not democratic reality.
Another person quoted Saturday says a big problem is that government procurement is slow, rules-intensive, and (northern Trumpism alert) not sufficiently biased toward Canadian suppliers. But all of that is for good reason. Unlike capital market funds, which spend money that savers offer up voluntarily, government spends tax dollars. Taxpayers want value for money. If a $16 orange juice gets a cabinet minister fired and $100,000 in yearly expenses gets a former governor general pilloried, then of course governments will be careful how they spend. Do we really want it any other way?
Non-democratic governments may — emphasize may — be better at picking winners and euthanizing losers, though I’m guessing dictators have other deficiencies that make them lousy capital allocators. But our government isn’t non-democratic and we don’t want it to be. We’ve got a big, modern capital market. Let it allocate capital and let government focus on the important things only government can do.
CAN ANYONE REALLY IMAGINE THEM PUTTING BIG BUCKS ONLY WHERE ECONOMICS DICTATE?