National Post (National Edition)
Subsidies never work, so stop doling them out
Vital lesson to be learned from Oshawa closure
Last week’s announcement by General Motors that it would close its vehicle assembly plant in Oshawa brought the usual flood of instant lessons and easy remedies.
From the right, Conservative Leader Andrew Scheer blamed the federal carbon tax, on the basis of precisely zero evidence. From the left, there were demands for governments to “get tough” with GM, whatever that means: the closest thing to a definition offered was Unifor president Jerry Dias’s demand for a 40 per cent tariff on imports of GM cars from Mexico.
But of course the plant is going to close, and the jobs in the plant are going to be lost, and there isn’t a thing anyone can do about it.
Think of it this way. Governments have proven more than ready in the past to pay whatever the auto companies demanded to hold onto threatened jobs. If there were any chance whatsoever of buying the plant’s reprieve, no matter how foolishly or expensively, can there be any doubt they would have? That they did not — apparently GM waved them off — tells you how hopeless the plant’s prospects really are.
Many have recalled that the closure of the Oshawa plant comes less than a decade after the Canadian operations of GM and Chrysler were bailed out with $14 billion in federal and provincial money, $4 billion of which was never recovered. The lesson some have drawn from this is that GM is a devious ingrate, which may be fair comment but is not especially helpful. The real lesson is this: when you try to buy jobs with public money, the jobs last only as long as the money does. In the end, all you will have done is to lure people into taking or staying in jobs that were long since doomed.
Like most of economics, this is wholly alien to popular wisdom. There is a rich vein of commentary to the effect that the laws of economics are effectively optional, something we can resist by force of will: we can either bend to “market forces,” or we can “stand up” to them in some fashion. But in fact the latter option is entirely imaginary, at least in the long run. You can perhaps lure plants and jobs your way at the outset with subsidies and other goodies. But the only assurance they will stay is if it makes economic sense to the company to keep them there.
If not, then all you have won with your subsidy is the right to go on providing more subsidy, which is a fairly accurate description of Canadian automobile policy in recent decades. The workers whose jobs successive governments boasted of creating or saving were effectively hostages; as in all hostage-takings, the payment of ransom only stimulates further demands for ransom. Until one day when the money runs out, and the workers whose jobs were supposedly saved find themselves abandoned. This may be many things, but one thing it is not is compassionate.
This is a different case against subsidy than the one you might be accustomed to hearing. The more usual tack is to point to the opportunity cost of such “investments.” However many jobs might be saved in the favoured industry, that is, they are offset by the jobs destroyed (or never created) in other sectors. The investment diverted into the favoured sector is simply investment diverted out of others.
But in fact the case against subsidy is stronger than that. It doesn’t save jobs even in the subsidized sector. They are simply bottled up, eventually to be lost, not in tens or twenties over time but by the hundreds or thousands all at once. But by then the political leaders who provided the subsidy may hope to be out of office.
Indeed, subsidy arguably makes the eventual demise of those jobs more rather than less likely, so far as it blinds business to the reality of its situation or encourages it to avoid the sorts of hard decisions needed to put it right: a pattern I fear my own industry is about to repeat. Certainly the willingness of jurisdictions around the world to subsidize the auto sector has been materially responsible for the chronic overbuilding to which it is prone. But the industry might have been better off had it never gotten into the subsidy game in the first place.
Not that the Oshawa plant closing signals the end of it. Whatever combination of factors may have been responsible, it would be hard to call them “market forces.” Consumer demand may have shifted from sedans of the kind made in Oshawa to SUVS and light trucks, as in the longer term it is likely to shift from gasoline to electric, and self-driven to driverless. But the decisions of both industry and consumers are so distorted by multiple layers of subsidy — for different types of fuel, different sizes and makes of vehicle, to say nothing of the subsidies provided to competing modes of transport — that it is impossible to draw any firm conclusions about the underlying economics.
Except, perhaps, one. It isn’t only Oshawa that GM is shuttering: four other plant closings were announced, all in northeastern states. That suggests GM sees its future in the South and other lower-wage jurisdictions and, if that is true of GM, it is likely also true of the other American auto companies.
It would not be worth trying to save the Canadian industry if we could — Australia watched the industry depart rather than go on subsidizing it, and is thriving for it — but as we cannot, it seems a better use of our time to plan for a future without one.