Autos and economic development

Someone asked me yesterday about the problems in the auto sector and the implications on the economy of New Brunswick. They also asked about the bailout request.

This is a complicated issue but here are my thoughts.

On the one hand…

I say good riddance. The auto industry and its unions never gave a rip about economic development in Atl. Canada. In fact, the piddly warehouses that GM and Chrysler had in Moncton have been closed. The Canadian Auto Pact was arguably the single biggest economic engine for the Canadian economy over the past 30 or so years and there isn’t a single direct job in New Brunswick to show for it.

But on the other hand..

the industry is so big (regardless of its concentration in Ontario) that if it were to go down – the ripples would be felt across Canada – with the possible exception of Alberta. You see the quid pro quo for all that economic development in Ontario over the years has been more equalization, transfer payments and EI here. If the largest manufacturing industry in Canada collapses, it will trickle down to New Brunswick in the form of less money from Ottawa and that will hurt us all. Think about the impact on consumer confidence and ultimately spending if this industry collapses. We will be in for a much longer and broader recession.

But on another hand…

Giving massive bailouts to companies that can’t produce a sustainable business model – it could be argued – is the opposite of economic development. I heard the UAW yesterday called the bailout down there as the same thing as Alabama giving incentives to attract Mercedes, Toyota, Hyundai, etc. That’s a smoke screen. Those incentives created thousands of new high paying jobs and bolstered the Alabama economy. The bailout of the domestic auto industry will not create one new job – in fact – even with the bailout – thousands more will be lost. Governments have to be very careful about propping up bad sectors of the economy for political motives. They risk turning whole regions of the country and whole industries into Cape Breton circa the late 1980s. In other words, industries completely dependent on government subsidies to survive. We do it with agriculture but I am not sure how many other industries we can perpetually prop up without serious damage to the economy.

But on still another hand….

There have been thousands of jobs created in the auto sector by the foreign-based firms. Just about all the major players are in North America now – some in a huge way. Toyota is now a major manufacturer on both sides of the border. How will the bailout of the domestic industry impact the potential growth of the foreign-based manufacturers? Maybe New Brunswick should come out strongly against the bailout and then position itself on the side of the foreign-based firms.

The truth is as you can see there are no easy answers here. My fundamental premise has been governments should almost never prop up or bail out companies or industries with bad business models. I think there are many examples of how in the medium and longer term that is bad for the economy. But, what about this whole issue of “too big to fail”? Can we really let Canada’s largest manufacturing sector collapse and ripple through the supply chains and into the broader economy? But can we continue to bail them out? The governments of Ontario and Canada have already given something like $2 billion to the domestic industry in the past 10 years – and not for net new jobs but mostly to retool.