$1.4-million for every job saved

With the projected cost of bailing out GM and Chrysler mounting by the day, the federal and Ontario governments may need to come up with a new sales pitch to persuade maxed-out taxpayers to go along for the increasingly wild ride.

Ottawa and Toronto were already asking a lot of Canadians - most of whom have no private retirement fund and earn significantly less than auto assembly workers - by allowing some of the bailout money to go toward fixing an estimated $7-billion shortfall in GM Canada's pension plan.

But with the latest forecast pegging the overall bailout bill at as much as $13.5-billion, or more than three times the original estimate, politicians are testing the limits of recession-racked Canadians' tolerance and financial wherewithal. The ballooning bailouts are pushing Ottawa deeper into the red, with this year's deficit projected to surpass $50-billion.

At General Motors of Canada Ltd. alone, the rescue package could amount to a staggering $1.4-million for every job saved, with no guarantee that the bailout will ensure the long-term survival of the company's remaining auto assembly and engine plants.

"What makes me glum about it all is that it's extremely difficult to get around the political necessity of subsidizing employment at an extraordinarily high cost per job," said Finn Poschmann, vice-president of research at the C.D. Howe Institute in Toronto.

Even supporters of the bailouts say governments must slap tougher conditions on the loans, starting with a demand that the companies move high-paying research jobs to Canada from Detroit.

As governments continually revise the cost of the bailouts upward and rejig their employment projections downward, critics are seizing on the forecasts as evidence that propping up the car companies was a bad idea in the first place.

"You're not going to save jobs. All you are going to do is destroy jobs at Ford and Toyota," said Mark Milke, director of research at the Frontier Centre for Public Policy in Calgary.

Mr. Milke dismisses the bailouts of GM and Chrysler as "a massive transfer of wealth to companies that consumers have already rejected." The result, he maintains, is that governments "are punishing the companies that have actually run their businesses very well."

Besides, no matter how many conditions Canadian politicians place on the loans to GM and Chrysler, or how ironclad the guarantees may appear, governments will find themselves with little or no leverage to enforce them.

"You have no guarantee that two years down the road, they'll say: 'Well, this Canadian factory is not up to snuff, so we've got to close it.' What are the governments going to do then?" That is what happened with GM's car assembly plant in Quebec, which received $220-million in federal and provincial interest-free loans in 1987 only to pull out of the province in 2002. None of the money has been repaid.

For Mr. Milke, the auto bailouts are typical of political decisions that benefit relatively few people at the expense of millions. But because the risk of a cross-Canada taxpayer revolt is small compared to the potential payback from voters in hard-up communities in Southern Ontario, the decision to bail out the auto companies is an easy one for politicians.

While such crude political calculus no doubt plays a role in government decisions, most analysts say it's been a secondary consideration for Ottawa and Ontario as they mull the alternatives to bailing out GM and Chrysler.

"Bringing orderly adjustment to what could have been chaos," is the aim of governments here, said Glen Hodgson, chief economist at the Conference Board of Canada. The permanent stoppage of GM and Chrysler operations in Canada would devastate parts makers and lead to shutdowns at the Toyota, Honda and Ford plants in Ontario that depend on the same suppliers, Mr. Hodgson said.

According to that argument, GM and Chrysler are linchpins necessary for the continued functioning of the entire Canadian auto sector and, hence, simply "too big to fail." Still, even if they survive, GM and Chrysler will be a shadow of their former selves. GM Canada's work force will have shrunk to around 7,000 workers by next year from 12,000 recently, and down from about 20,000 five years ago. At Chrysler Canada, where employment peaked at more than 17,000 in 2000, the work force will drop to 8,200 in July.

Neither company has ruled out further job cuts. Rather, the Ontario and federal governments have made their help conditional on each company maintaining a certain share of its North American production in Canada, likely somewhere around 15 per cent.

Prime Minister Stephen Harper, a fierce opponent of corporate bailouts when he ran the National Citizens Coalition, has justified his government's intervention by suggesting Washington forced Ottawa's hand. President Barack Obama has signalled his intention to keep GM and Chrysler alive with tens of billions of dollars in U.S. government aid.

"Either we participate in the restructuring or these companies, which are very big in the Canadian economy, will simply be restructured out of Canada," Mr. Harper said last week.

That argument resonates with University of Waterloo economics professor James Brox, an expert on Canada's manufacturing sector. "If they were failing on both sides of the border, you could make a case" against the bailout here, he said. "It might have been better if Obama had said they were gone. But it's fairly clear he's not going to do that."

Despite the unpalatable political optics of guaranteeing existing pension payouts to GM Canada's 25,000 retirees - a prospect so unsavoury for Ottawa that it disputes that any of its money will go to the pension plan - Prof. Brox insists governments have no option but to allow an estimated $2-billion of the bailout money to prop up the pension plan.

"If the pension obligation could be written off, the company wouldn't need the bailout in the first place," he said. And because pension rules in Ontario enabled GM to underfund its retirement plan for more than a decade, the provincial government has "a moral obligation to make it up" now.

The quid pro quo, Prof. Brox said, should be a requirement that GM and Chrysler perform more research and development in Canada. A recent study Prof. Brox prepared for the Institute for Research on Public Policy showed that Canadian-based auto makers spend only 1 per cent of sales on R&D compared to 15 per cent in the U.S. auto sector.

"Clearly, there are engineers and scientists that could be hired in Oshawa and Windsor just as much as Detroit," Prof. Brox said.

Canadian Auto Workers economist Jim Stanford counters that GM and Chrysler already do more R&D in Canada than their peers and points to the establishmentof automotive research institutes at McMaster University and the University of Windsor, which are jointly funded by government and industry.

Still, the relative lack of R&D in Canada shouldn't colour policy makers' decisions about whether to save GM and Chrysler assembly jobs in Canada, he said.

"Governments have to pay special attention to strengthening the presence of industries that are technology-intensive and trade-oriented. The most successful trading nations - whether it's Finland, Korea, Germany or China - have all done that in the past couple of decades. We haven't," Mr. Stanford maintains. "If we don't do that now, we will end up with two industries - one that digs stuff out of the ground to sell to other countries and another [made up]of doughnut shops."

That, Mr. Milke said, "is nonsense. It ignores the fact that [if GM and Chrysler go]someone else is going to come in and pick up those factories and production is going to increase at Honda, Toyota and Ford." For the politicians, the bailout sales job may have only begun.