June 2000 Fraser Forum: Corporate Subsidies Worrying
On April 12th, David Collenette, the federal Transportation Minister, announced a new package of subsidies for ViaRail amounting to $401.9 million over five years. In the process, the Minister signalled that government activism is here to stay. Until the Via announcement, there was some uncertainty about the federal government position's regarding interventionist industrial policy. There can be little doubt now.
There are, essentially, two schools of thought regarding how best to develop industry. The activist school suggests that industry is developed with, among other policies, direct government ownership, subsidies, protection, and financial support. Most agree that the experiment with such policies was and is an almost complete disaster. Remember Canadian National Railway (CNR) and Air Canada? They were generally characterized by poor service, higher than competitive prices, and consistent losses that had to be subsidized by taxpayers.
Many market optimists hoped that governments had moved away from interventionist industrial policy towards the acceptance of a narrower role: to establish the proper framework for economic development. Such a framework encourages economic activity with competitive tax rates, prioritized spending, appropriate regulation, and the provision of basic services, such as a functioning legal system.
There were signals indicating that optimism was indeed warranted. The federal government has privatized the CNR, most of Petro-Canada and Air Canada, and just recently, has decided finally to close DEVCO. Unfortunately, these actions appear to be aberrations based on the need to eliminate deficits rather than an acceptance of the futility of direct government intervention.
Apparently, the era of surpluses has ushered in another period of increased government intervention and corporate subsidies. For instance, the federal government spent a total of $7.9 billion in 1999/2000 on regional development programs and subsidies for crown corporations. The latter alone are expected to increase by some $300 million to $4.1 billion in the next year.
The decision to throw $400 million at a railway that essentially runs between Quebec City and Windsor - 85 percent of Via's passengers and 70 percent of its income come from this corridor - is at least partially motivated by politics. However, what is more worrying is the underlying activist government policy.
It is relevant to understand why corporate subsidies exist in the first place. Private enterprise will not undertake certain activities because they lose money. But government sometimes chooses to usurp individual and voluntary decisions and undertake these activities on our behalf. They do so by using subsidies and tax breaks.
In the absence of such subsidies and the corresponding tax breaks, individuals and businesses would undertake other profitable activities. "Ah, but we're worse off in the absence of such activities," goes the standard retort. But history tells us a different story. CNR, Petro-Canada and Air Canada weren't eliminated. In fact, they were made profitable because competition and the absence of a safety net forced them to respond to consumer needs and provide better products at competitive prices. Consumers and the companies themselves are better off. The only group adversely affected is government, because it no longer has these pet projects to show off.
Corporate subsidies also create a situation where employees of non-subsid- ized firms support their competitors, and where certain regions that do not receive subsidized services support those areas that do. Returning to the Via example, the commuters who use planes, buses, and automobiles rather than trains will continue to pay part of the cost for those commuters who choose Via. Employees of rival companies like Greyhound bus, Air Canada, and rental car agencies actually subsidize their competitors. These types of transfers are not only economically inefficient, but also highly discriminatory in that they favour a small minority at the expense of the majority of taxpayers.
Even if we ignore the egregious nature of the transfers present in subsidies and the vast taxpayer resources poured into corporate hands, the basic economics of corporate subsidies still remain poor. The market - —that is, individuals, families, and businesses voluntarily supporting companies through the purchase of their goods and services - is the best way to pick economic winners and losers. If the federal government truly wants to develop industry and promote greater economic growth, then it should eliminate all corporate subsidies and use the proceeds to finance tax cuts for all individuals and businesses.
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