That old stubborn law of unintended consequences

For some of you, my comments this morning will seem a little schizophrenic but it is really not.  I fully support efforts by government to use taxpayer funds (and tax credits) to attract industry to the province if it is required to compete with other jurisdictions and if it has a clearly demonstrated return on that public investment in terms of increased tax base for the province.

But all these bailouts are trickier.  It’s one thing to give a company support for clearly defined growth that will lead directly to new tax revenue for government.  It’s another thing altogether to give money to companies that are struggling to keep them afloat.

I never say never but that card should be used sparingly for several reasons:

1. You might end up propping up companies that have bad business models and will only survive with government assistance.  That, in fact, could be counter to the idea of economic development.

2. You divert scarce resources to areas where there is no direct increase in tax base.  $2 million per job to bailout GM and Chrysler and it will actually lead to less taxes paid to government (they are retrenching to 5,500 total direct jobs).  That $10 billion could have been used for wide variety of other uses.  I have not even taken a stance on this because it is so unprecedented but I think the rationale needs to be very strong for these things.

3. You get other industries asking for their share.  Even the casino industry has submitted a formal proposal for billions from government to help it through.  Every industry has a lobby group and every one has an ‘economic impact’ analysis of their industry.  In a recession, industrial activity retrenches.  When government decides to intervene it can set up a cascading effect that has both economic and political implications.

4. It’s hard to get support from other stakeholders.  It’s hard to ask doctors and civil servants to take a wage freeze when the budget in NB went up by $700 million this year.  Sure, much of that is ‘stimulus’ spending but austerity is austerity. 

The bottom line is the intention of government (provincial and national) to inject huge spending to limit the impact of the recession and then make up for it in the fat years after a recession.  Sort of like the biblical famines in Egypt (seven years of lean and seven years of fat).  But the law of unintended consequences kicks in and sets up moral hazard.  If it is okay to bailout industry a, why not industry b?

The last point here is that because Canada has committed to a very large social safety net, bailouts have another dimension.  If you do lose 50,000 people (direct, indirect and induced) from an auto industry collapse, that will cost the taxpayer well over a billion in EI payments, probably another billion in training and reskilling costs and a whole variety of other direct costs.  The collapse of pension programs could mean more retirees on the ‘supplement’ costing millions of dollars each year for many years. 

The reality is there is an economic calculation to this.  Lost tax revenue, increased social costs = to or less than the net present value of the bailout?  It’s a hard calculus.

I hope we get through this recession and on to efforts designed to address New Brunswick’s structural economic challenges.  Hopefully, in a year or so we won’t hear government promoting the fact that they ‘retained’ thousands of jobs by spending millions of taxpayer dollars and they will be promoting the fact they are helping to foster new jobs and new economic activity through their investments.

Cross your fingers.

3 thoughts on “That old stubborn law of unintended consequences

  1. The whole bailout is just such a slap in the face to the people who were laid off from the public service due to “hard times”. Kelly Lamrock is being roasted over the coals because he can’t find two million bucks in a nearly billion dollar education budget for TAs and librarians. These people, who make in the $30-$40 thousand range are laid of en masse. School libraries are closing, but we can find $50 million in the couch cushions to bail out a construction company?

    All that emotion aside, what kind of oversight generally goes into these bailouts and loans? Does the government attach any strings, or are we just cutting them a check? I remember the first TARP bill in the US, where no one was to be able to question or examine where any of the money was going. Hopefully someone in Fredericton was watching that debacle, and puts measures in place to ensure our money is being invested wisely.

  2. > The last point here is that because Canada has committed to a very large social safety net, bailouts have another dimension.

    True… but that said, the bailouts are required in large part because Canada’s social safety net is not sufficient. Because, even with things like welfare and employment insurance, people will still lose their life savings, their homes, and will even go hungry.

    If, on the other hand, we had something like a guaranteed income that provided a full measure of support, then bailouts would not be necessary at all. People could use the time and the space to develop new and innovative products and enterprises.

    Ah – you say – but then where is the incentive to work? OK then, we can say that people need an incentive to work and so lower the support mechanism. But then, we can’t just throw them out on the street when a major enterprise fails through no fault of their own. So sometimes you have to bail out companies that are not successful.

    Yes, it’s a system that should probably be reworked – but so long as we don’t have income security, we have to have programs like this.

  3. To lobby, or not to lobby, that is the question:

    “Who in their right mind hires a Liberal strategist to lobby a Conservative government,” Vanderspank — an originator of the militant Ontario Landowners Association — wondered loudly about the OWPMB’s motivation in an article he wrote in an agricultural newspaper.


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