Bad economic arguments often come with a “tell” – a hand-waving catchphrase, inserted in place of reason or evidence as a means of coaxing agreement. Appeals for industrial subsidies are notorious for this.
For a long time the vogue phrase was “value-added.” Asked why a company’s fate should not be decided in the usual way – by its ability to sell a product to willing consumers or to raise capital from willing investors, rather than by its ability to lobby governments – the industrial strategy advocate had only to mumble something about the critical need to “move up the value-added ladder” to sweep away all objections.
Nowadays it has been overtaken by “supply chain.” Why should Canadian taxpayers fork over $13-billion to Volkswagen, for example, to build a battery plant in Ontario? Why should governments intervene to divert jobs and investment to this firm or that industry, and away from other firms and industries? “Well, you see, it’s all about the supply chain.”
I get it. Batteries are indeed part of a supply chain. That is, they are made from other, intermediate goods, as other goods are made from them. You will find that is true of a great many things, if you look.
“Critical minerals.” “Spinoff jobs.” “First mover advantage.” They all amount, essentially, to “because.” We should subsidize Volkswagen to make batteries because we should subsidize Volkswagen to make batteries – because the people in charge have decided batteries are the sorts of things Canada should make, and because Volkswagen was willing to make them here, as long as someone else paid.
Well, I’ve left one off the list: “We have no choice.” You hear this one a lot these days, ever since the U.S. passed the Inflation Reduction Act, offering hundreds of billions of dollars in subsidies to firms and industries that use green technologies – like electric vehicles, and the batteries that power them. The argument is that if we do not match these subsidies, those industries would simply not exist in Canada. Or rather, it is that nothing else would take their place.
The argument relies for its power on equal parts fear of the unknown and the fallacy of composition. The auto industry is a large part of the Canadian economy. Ergo, if the auto industry were to shrink, so would the economy. And since the industry is so very large, the impact of its demise would be very large also. Unthinkably, existentially so. Therefore pretty much any amount of subsidy is justified.
So it is a relief to report that none of this is true. To illustrate my point, let me tell you about another auto industry, in another country: Australia. Not so long ago, Australia had an auto industry about as large as Canada’s in proportion to its economy. At its peak in the 1980s it employed more than 100,000 people – nearly two per cent of Australia’s work force.
Like the Canadian auto industry, Australia’s was largely composed of branch plants of international manufacturers, established to jump a tariff wall. Like Canada’s, it had come under increasing pressure from offshore competitors, as tariffs fell and costs rose. And so, like Canada’s, it had sought, and won, billions of dollars in subsidies, backed by threats to depart if governments did not keep the money flowing.
Eventually, however, the money ran out. Fed up with paying blackmail, the government of Australia refused to deliver any more. Sure enough, the industry left: the last factory closed its doors in 2017. Australia had had an auto industry since anyone could remember. Now it no longer had an auto industry.
And? And life went on. The world did not end, though it had been predicted it would. Australia’s economy has grown faster than Canada’s since then, with a lower unemployment rate. To look at the charts, you’d never know that Australia had suffered an unthinkable economic catastrophe. Because it hadn’t.
In part that was because the auto industry, by that time, had already shrunk somewhat – as it has in Canada. At 125,000 jobs, counting the parts sector, it now amounts to just three-fifths of one per cent of Canadian employment.
But mostly the end of subsidy had little effect on overall output and employment for the same reason subsidy has little effect. Subsidy doesn’t create jobs, on net, and ending subsidy doesn’t destroy them, on net. All it does is shuffle them around.
As the auto industry contracted, other industries expanded – industries that could compete without subsidy, industries that had in fact been inhibited from expanding by the subsidies that kept labour and capital penned up in the auto industry.
We have a choice, in short. Australia called the auto industry’s bluff, and is better off for it. So could we.