What is the best way to play poker? Imagine you have a budget of hundreds of millions of dollars but the prize is unusual – if you win, you get to keep what you already have; if not, you lose everything. Oh, and you don't get to walk away from the game.
This is essentially the situation that the Canadian and Ontario governments find themselves in as they negotiate with Chrysler over the future of its Windsor and Brampton auto assembly plants. According to reports this week, Chrysler is considering investing $3.6-billion to upgrade the two plants to the latest technology. But in return, it is demanding a contribution from government of $700-million or more. If it doesn't get the contribution, Chrysler is threatening to shut down the Canadian plants and direct the investment elsewhere, which would terminate approximately 8,000 direct jobs.
Negotiations are continuing and details remain sketchy. In the past, assistance to auto makers in Canada has sometimes taken the form of interest-free loans, referred to as "repayable contributions," and sometimes taken the form of outright grants. In the case of a repayable contribution, the cost to taxpayers is the foregone interest (provided the automaker does not default). Thus, in the case of a $700-million loan, the Canadian and Ontario governments could be on the hook for roughly $100-million in interest costs, assuming a 10-year project lifetime, an interest rate of 2.5 per cent, and equal annual payments. Alternatively, we might see a mixed package – say half repayable contribution, half outright grant – which would yield a total cost to taxpayers around $450-million.
Is Chrysler bluffing? How much should we offer?
Over the years, many commentators have objected to spending taxpayers' money on what looks like buying jobs for well-paid automotive workers. In the case of the Chrysler proposal, if we assume a total government contribution of $450-million and 8,000 jobs, we arrive at a figure of approximately $56,000 of taxpayers' money per job saved.
But this type of calculation neglects the multiplier effect, as the firm buys inputs and the workers spend their incomes. In a study for the IRPP of the 2009 bailout of GM and Chrysler, my co-author Robin Somerville and I estimated the total impact on jobs was roughly five times greater than the headline number. Applying this multiplier to the present case, we get potentially 40,000 jobs in play, which translates into $11,000 per job saved, assuming a contribution of $450-million. Now deduct EI benefits that would have to be paid to unemployed workers and lost tax revenues, and it starts to looks like a wash.
But wait – is there no downside to paying subsidies for corporate investments? In fact, it is incorrect to assume that a one-time payment to Chrysler would secure these jobs indefinitely. Auto making is a global "pay-to-play" industry in which companies demand local contributions for all major capital investments. Assuming an average project lifespan of 10 years, this means that we should expect to hear from Chrysler at regular decadal intervals for subsequent investments at the same facilities.
In contrast, losing the employment and paying the adjustment costs to help workers transition to another industry is a one-time cost that could potentially free taxpayers from regular shakedowns by the global auto makers. Would the long-term gain be worth the short-term pain? And would we truly be free of demands for corporate subsidies?
As with most things in life, it is a gamble.
Leslie Shiell is an assistant professor in the department of economics, University of Ottawa