"We have in this country a federal government that increasingly is engaged in trying to determine which business, which regions, which industries will succeed, and which will not, through a whole range of economic development, regional development corporate subsidization programs. I believe that in the next election we have got to propose a radical departure from this."
So spoke Stephen Harper in February, 2002. He has come a long way since.
The younger Mr. Harper repeatedly stressed the evils of government subsidies and attempts to pick winners and losers in the economy, while stating that the government should focus on creating the underlying conditions for growth through lower taxes and reduced regulation.
In power, however, the Prime Minister has demonstrated a curious mix of free-market preferences on the one hand and knee-jerk nationalist reactions to protect Canadian industries in politically sensitive sectors on the other. A report issued this Tuesday provides an opportunity to test which of these inclinations is the stronger.
The report was written by the special adviser to the Minister of Public Works and Government Services, Tom Jenkins, on 'leveraging defence procurement through key industrial capabilities'. Mr Jenkins concludes that through targeting certain sectors, Canada can use the money it will be spending on defence over the coming years to boost economic growth. Underlying this view is a boldly asserted assumption that, 'many aspects of defence production are particularly effective growth promoters', especially as defence industries are 'important sources of technological dynamism and innovation.'
To maximize the economic benefits of defence spending, the report says, 'key industrial capabilities' (KICs) have been identified, which the Canadian government should protect and promote. Canadian companies should be preferred over foreign competitors when awarding contracts in KIC areas. Such a policy, the report claims, would produce 'very substantial long-term economic benefits'.
The French word for such economic thinking is dirigisme, a word which aptly describes the belief that governments can direct money into the most productive sectors of the economy. Once a widespread philosophy, by the 1980s it was firmly discredited as a result of its manifest failure. Unfortunately, the Jenkins report repeats all the failed mantras of dirigisme.
Take, for instance, the claim that defence spending is a 'particularly effective growth promoter'. There is no evidence for this. Mr. Jenkins and his panel consulted exclusively with defence industries and other members of what one might call the 'military industrial complex'. Unsurprisingly, the opinion they heard was that defence industries are good for the economy, and Canadian taxpayers should support them. What the panel did not do is make any reference to even one of the myriad of studies by economists which have analyzed the link between military spending and economic growth.
It is true that some economists do claim to have found a positive short-term link between military spending and economic growth, but even more have found the opposite, while the most common conclusion is that the effects of military spending on the economy are statistically insignificant. While one cannot say for certain that defence spending is harming Canada's economy, one equally cannot say that it is helpful.
The claims about innovation are equally shaky. While defence research can produce some useful spin-offs, many of the results have no civilian purpose or are secret. Nor is there any evidence that defence industries are more innovative than other ones. If they were, the Soviet Union would have won the Cold War, not the West. The idea that pumping taxpayers' money into defence industries will make the Canadian economy as a whole more innovative is unfounded.
In short, the Jenkins report rests on rotten foundations, and its premise that one can leverage defence procurement to boost economic growth is false.
Furthermore, the policy which the report recommends is faulty, being based on the idea that the government is capable of correctly identifying KICs in which investment will produce the greatest benefits. One of the many reasons why socialist economic planning fails every time is that central planners do not have enough information to allocate resources efficiently. The Jenkins report admits that it 'found neither adequate data nor the analytical base to support a thorough evaluation' of what should be a KIC. It identified six of them anyway! The report thus asks the Canadian government to direct billions of dollars of taxpayers' money based on a bureaucrat's best guess. This is a recipe not for growth but for waste.
Experience suggests that rather than nurturing self-sustaining industries, the recommended policies will more likely create companies which are uncompetitive on the international market, and which produce goods inferior to what the Canadian Forces could have bought directly from a foreign supplier. The result will be that our troops have worse and more expensive equipment, while the money spent slows rather than stimulates economic growth.
While one might excuse the NDP for not understanding this, a Conservative government ought to. Stephen Harper would do well to remember his youthful instincts. He should reject this report entirely.
Paul Robinson is a professor in the Graduate School of Public and International Affairs at the University of Ottawa.