The staggering $10.6-billion from Ottawa and Ontario to help bail out General Motors - at least temporarily - will reverberate throughout Canadian public affairs for years.
The bailout will make it politically almost impossible for the federal government to say no to other industries in distress when they ask for assistance.
In a country with a malignant sense of regional envy, how does Ottawa say no to demands from other parts of Canada for help? Or how does Ottawa look with a flinty eye at reducing subsidies, protection and other forms of assistance that have either failed or outlived their usefulness?
You can hear it now from St. John's to Victoria to Nunavut: Ottawa spent all those billions on GM in Ontario, how about a few paltry tens or hundreds of millions for us? Alberta - Alberta! - is asking for a special payment under equalization for the dramatic drop in its revenues. How does Ottawa say no to Alberta, bedrock of the Conservative Party, having just said yes, yes and yes to one industry in Ontario? What does Ottawa (and Ontario) say to demands/requests from other car companies?
When this recession ends, and a genuine recovery begins, Ottawa will have to raise taxes and cut spending if it hopes to balance the budget. Cutting that spending has now become harder, in part because so much has been sent down the GM sinkhole, in part because any region or industry or group whose federal money might be threatened will cry: Remember GM!
It's possible, one supposes (but highly improbable), that the federal and Ontario governments will get their money back. In theory, once GM emerges from bankruptcy and rediscovers the pink of health, the company will be sold, and the governments will recoup their “investment.”
Ottawa and Ontario must divest 35 per cent of their stock within three years, and 65 per cent within six. If the past is any guide, that stock won't be worth very much.
GM had been losing market share for a very long time. Its once-mighty brand has been tarnished, perhaps beyond redemption. Now owned by governments, GM will be subject to political pressures to do non-economic things, unlike its competitors that did not seek bailout money.
Ontario's particular problem, partly of its own making, is that the province is stuck with dud models, such as the Camaro environmental dinosaur, the production of which the McGuinty government unwisely subsidized to retain jobs in Oshawa. Imagine, as the industry struggles to turn green, being saddled with a Camaro. Such was the rear-view mirror vision of GM; such was the lack of vision of the government.
Looking beyond the immediate news, the GM bailout is a small part of a deepening problem with national and international repercussions: the threat of inflation.
The United States faces a federal deficit equal to about 12.5 per cent of the total economy. (Add to that big state and local deficits.) The country's debt is exploding. As trustees reported last week, the public health-care plan for the poor will be insolvent by 2017 and Social Security by 2037.
The recapitalization of America will require trillions of dollars, to which this bailout of GM adds a small part. Since Congress is ill-disposed to raise taxes and resistant to cutting entitlement programs, where the funds will come from to recapitalize remains one of the most consequential issues of our time.
The United States is already heading toward the same policies it used after previous recessions. It is printing more money, thereby dropping the value of the world's reserve currency, and leaving those who hold U.S. Treasury bills with a declining asset. Foreigners, in other words, will be helping the Americans pay off their debt in devalued dollars.
The depressed worldwide economy makes inflation seem remote, but the threat will be real once recovery begins, as governments try to ease the pain of paying for debt through inflation. The subsequent pressure for interest rates to track inflation upward will be large, thereby making debt repayment even more difficult.
Add to this the likelihood that the recovery will bring an increase in the price of oil, perhaps a very sharp and sudden one, which will again depress economic activity. A double-dip recession seems as likely as a steady recovery.
