Budget shows Ottawa doesn’t understand innovation
The federal budget epitomizes the government’s complete lack of self-awareness about its failure to understand why innovation in Canada has lagged for years. The chapter on innovation and the economy begins by observing “Canada has everything we need to thrive,” with high levels of education, worldclass research, abundant energy, and free-trade access to the entire G7 and the EU. Yet it acknowledges sub-par productivity and innovation are the “Achilles heel of the Canadian economy.”
So why can’t Canada translate its ample supply of the supposed raw inputs of innovation into more output? Start with the fact that, according to the latest research from Nobel Laureate Edmund Phelps, the main determinant of innovation is societal attitudes and values, not some laundry list of government policies. After all, the Soviet Union also had high levels of human capital and abundant energy but failed miserably at innovation.
Instead of cultivating risk-taking and entrepreneurship, the budget continues the grape-shot approach of scattering money across a wide variety of programs and industries: $15 billion over five years for the Canada Growth Fund, $1 billion over five years for the Canadian Innovation and Investment Agency, $750 million over six years for Innovation Clusters (the discredited centrepiece of the government’s previous innovation policy), $1 billion for a new Strategic Innovation Fund, and $1.2 billion more for regional development slush funds.
These investments will have no measurable impact on innovation because they are only about one per cent of the $216 billion businesses currently invest annually and they don’t address the underlying problem of values and attitudes. Governments’ repeated attempts to incubate innovation in environments artificially created by government-controlled agencies actually subtract from Canada’s potential to innovate by encouraging a dependence on government support and direction that is the antithesis of entrepreneurial innovation in commercial markets.
The federal government’s inability to design an effective approach is hardly surprising given its lack of understanding of innovation. The budget laments Canada’s last-place global standing in business investment in research and development, but on the next page admits “invention is not enough.” The government persists in confusing Research and Development with innovation, an idea long discredited in the extensive literature on innovation but which governments both left and right somehow cannot grasp. Even as it acknowledges Canada’s insufficiency of R&D, the budget touts Canada’s superior growth of high-tech jobs — apparently without seeing the contradiction involved in doing so (never mind that the employment data is dubious). Innovation is not about invention and high-tech, but instead involves new ways of doing things that are commercially viable anywhere in the economy.
The $38.3-million increase in funding for Canada Research Chairs (CRC) exemplifies another flaw in government attempts to boost innovation. The budget claims the CRC program has created 2,200 lucrative positions at Canadian universities since its establishment in 2000. An “extensive evaluation” of whether this has fostered innovation will be completed in the fall of 2022 — although the program has obviously failed to achieve its original goal of kick-starting overall innovation through academic research. But instead of waiting for an evaluation of the CRC program, the government has bulled ahead and increased funding so it can check the box on its menu of alleged innovation inputs, a list drawn up by academic and business cronies who benefit from these government handouts. The lack of performance- and market-based benchmarks for success is one reason Canadian innovation policy perpetually wastes taxpayer dollars without materially impacting overall innovation.
The government is not even capable of innovation in the branding of its policies. The “Build Back Better” mantra has been an international policy cliché for at least a decade. Budget 2022 proposes the creation of a “Council of Economic Advisors,” a direct lift from the U.S., but does not explain how a new council would succeed where bodies like the Economic Council of Canada (1963-93) did not. It looks like an attempt to further marginalize the Department of Finance and its annoying insistence that chronic deficit spending ultimately is counter-productive. Lack of originality is also manifest in more funding for Canadarm3, as if Canada’s space program cannot innovate beyond the highly visible success of the 1980s Canadarm. The copycat branding of policy initiatives reflects a government devoid of new ideas and a civil service that understands it only has to offer programs with catchy names but without any follow through on details.
The government’s whole approach to innovation is based on what Mariana Mazzucato, who often defends government interventions, calls “myths about where entrepreneurship and innovation come from.” These myths include “assumptions that all the State has to do is to ‘nudge’ the private sector in the right direction” through a mixture of tax credits, subsidies and incentives, especially for firms in favoured industries or small businesses.
Nudges will not be enough to make up for Canada’s persistent innovation deficit, which is becoming entrenched in a growing hostility from many parts of society to entrepreneurship and wealth creation. The flaw is not just trying to pick winners. It is the refusal to accept that creative destruction inevitably results in winners and losers, and that winners must be rewarded and losers allowed to falter. This ethos is anathema to governments in Canada that see themselves as guardians of an established order that innovation by definition seeks to disrupt, a contradiction that has resulted in decades of failed government innovation policies.