When Ottawa picks winners through industrial policy, the economy is the loser

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Claude Lavoie was director-general of economic studies and policy analysis at the Department of Finance from 2008 to 2023. He has represented Canada at OECD meetings and has received many honours, including the Queen’s Diamond Jubilee Medal.

Creating “good” jobs in Canada, improving its competitiveness, and now fostering the green transition and making the country’s supply chain more resilient are typical excuses that roll off the tongues of politicians when defending subsidies to hand-picked industries.

In the 2023 budget, the federal government provided $20-billion to preferred sectors and technologies and $14-billion (and counting) afterward to Volkswagen. The government later did a similar deal with Stellantis.

Although Ottawa swears it is not about picking favourite sectors or technologies – often dubbed industrial policies – it is difficult to describe it in any other way. These policies are discriminatory and benefit particular sectors or regions at the expense of others and the taxpayer. They do not create good jobs, help with green transition or innovation, or make us more resilient. Yet these preferential treatments, regulatory or financial, are gaining momentum in many countries.

We’ve long known that preferential treatment to industries (or regions) does not create more jobs – it simply displaces them because the only way for the preferred sector to expand its work force is to take workers from other sectors. This is especially the case in the current situation of a tight labour market.

So are these better jobs that are created by this preferential treatment? There is no evidence that these preferred companies treat their employees better, share their profits or give their workers experience that could lead to higher-skill jobs. Industrial policies that increase the demand for higher-educated workers do not suddenly make lower-educated workers able or willing to go back to school, either.

Tegan Hill: Sadly, Stellantis and Volkswagen’s corporate welfare is nothing new

Will such industrial policy help with innovation – particularly green innovation? Commercial innovation often springs from government-financed research, as the private sector rarely engages in socially beneficial innovation on its own. And while Canadians benefit from American government-financed innovation, being a free rider is never a good idea.

But do governments even know how to pick the winning technology? The simple answer is no. Supporting basic or risky innovation is not an automatic win, as governments don’t necessarily know what technology or visionary company is the best investment. There is no convincing evidence that “picking a technology,” such as carbon capture and storage, is a good idea.

Deciding which innovation to finance should be left to arm’s-length institutions with expert review processes, and it should be designed with special measures to deliver tangible returns for taxpayers, such as equity financing, rather than subsidies and tax credits.

Otherwise, incredible as it may sound, when a government-financed innovation is successful, the industrial shareholders reap all the benefits. The only potential payback to Canadians is the (very low) corporate tax revenue. That meagre return assumes the company does not belong to, or is not sold to, foreigners, and that it does not have corporate headquarters in a tax haven country. And when a government-financed innovation fails, the taxpayer bears all the cost.

Finally, what about encouraging “made in Canada” solutions as the rationale for Ottawa’s picking of winners? Our neighbour to the south talks a lot about “reshoring” and “friendshoring” production so they don’t have to count on other countries for essential goods and services in times of crisis. But research shows that diversifying supply sources and being able to adapt alternative sources, not going into full-on autarky, is the best way to protect against global risks.

Facilitating this flexibility is where governments can have a big impact, through building infrastructure, reaching international agreements, encouraging competition and setting standards. This might require regulations in some areas, like those in place in the financial sector, to protect against system-wide risks – perhaps by encouraging some key sectors to move from a “just-in-time” to a “just-in-worst-case” inventory system. Identifying these regulations and areas is tough and may require setting up arm’s-length institutions, similar to our (successful) financial macroprudential framework.

But giving big corporations money, preferential treatment or engaging in subsidy wars with other countries is not going to help us achieve our productivity and environmental objectives. Not only do these policies create continuing pressure for the government to support failing industries, but they create excess profit (not shared with taxpayers), stifle competition and give a foothold for other corporate lobby groups to beg for their own slice of the subsidy pie.

Governments should not respond to corporate “blackmail” and give taxpayer money to rich shareholders. Better options include more stringent environmental regulations (and accepting that this will hurt some economic sectors), better competition frameworks, providing more support to displaced workers, and ensuring taxpayers and workers fully benefit from the returns on successful publicly financed innovation.