Ginormous subsidies to clean-energy companies, whose owners will be enriched at the expense of other industries and taxpayers, are the latest example of misdirected — and misdirecting — industrial policy.

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Jack Mintz: Mega-subsidies for some companies, new taxes for others sets Canada up for skewed economic growth Back to video

Goldman Sachs, rubbing its hands in glee at the big profits it will earn, estimates that Joe Biden’s Inflation Reduction Act will cost US$1.2 trillion over 10 years, with a third of that related to electric vehicles (EV). In Canada, the $16-billion federal and provincial subsidies paid to Volkswagen will cover three-quarters of the cost of the battery plant the company is building in St. Thomas, Ontario. Given today’s low unemployment rates, the $5.3 million VW will get per worker won’t actually create any jobs but will merely draw workers from elsewhere in the economy. Complaining about its need to stay competitive, Stellantis is now blackmailing the federal and Ontario governments to provide a matching subsidy for its battery plant.

Who pays for all this? Either today’s hard-working Canadians, through their taxes, or future taxpayers paying interest on debt. With these companies standing to reap profits from battery production anyway, subsidies are just the (buttery rich) icing on the cake.

With mega-subsidies for some firms but heaps of new corporate taxes for others we are setting ourselves up for biased economic growth. We’ll have lots of battery capacity and chilled investment everywhere elsewhere.  Financial companies are being hit even harder: they already face a higher corporate tax rate on their profits and, thanks to the federal budget, they’ll get double taxation of dividends they receive from other companies. The cumbersome global minimum tax and the phasing-out of accelerated depreciation will primarily hit manufacturing and extractive companies. But batteries? Nothing but blue skies, free money and hearty handshakes all around.

Industrial policy might well save the auto industry, but Ontario, with per capita income little different than Alabama, may be left with little else as other industries wither under the tax load. And there are no guarantees. The EV industry will grow but it’s far from clear which company will succeed. Goldman Sachs identifies Tesla, which already has over half of the U.S. market, as best positioned to dominate the market, not Volkswagen or Stellantis. Besides, the electric lithium-based batteries Ottawa is clearly fixated on are only one technology — others, including manganese, phosphates and fuel cells, could be cheaper and last longer.

Underlying industrial policy is the belief that markets fail and only government can correct these failures. In a recent book, Darren Acemoglu and Simon Johnson argue that technology is fundamental to progress but not all technologies are good for us since it empowers some to the detriment of others who lose jobs. More controversially, they argue that the state needs to be a guiding hand, avoiding the harmful technologies by subsidizing “socially beneficial technologies” and imposing regulations like forced hiring of workers when introducing new technologies. This view that “Capitalism Bad, Socialism Good” is bonkers.

Such thinking is also typical of economics textbooks, which spell out the many ways “market failure” can lead to resource misallocation. Economies of scale lead to a monopoly or oligopoly dominating an industry so governments need to regulate prices. Credit markets are too risk-averse to fund “infant industries” so governments must. Pollution is not priced in markets so governments need to “make polluters pay.” Public goods like national defence and policing can’t be “sold” in a market: people benefit from them even if they don’t pay, so only the government can provide the service.

What’s missing from this theoretical construct? Government failure. Public decision-makers are not purely benevolent. (Read more history if you think they are!) Governments are powerful and, unlike business people, political leaders feel little pressure from competition.

Politicians who may only be in power for a short time develop a short-term perspective. They typically prefer to subsidize consumption rather than investment, as the latter benefits future voters. They also love deficits, since grandkids don’t vote today. Then there is the “tyranny of the majority.” Taxing the few to subsidize the many makes perfect political sense, even if it’s unfair and economically destructive. Large, populous regions get more attention than other places, which is deadly if a small, successful, rich region gets over-taxed — not to mention any provinces’ names. Even worse is the subsidization of money-losing companies in slow-growth but vote-rich regions.

Politicians like to reward their friends to maintain support (and do their best to get rid of enemies). When governments do industrial policy, their supporters get help even if their technologies are inferior. Decades of generous regional development grants to Atlantic Canada and Quebec have hardly made a dent in regional inequality.

Facing little competition, bureaucrats feel no more pressure than politicians to control public spending. There is no problem that doesn’t need a bigger bureaucracy to address it. Bureaucratic managers are rewarded for making the government bigger, not better.

Former U.S. president Ronald Reagan once quipped: “Government doesn’t solve problems. It subsidizes them.” That truth should be blazoned on the cover of every book or pamphlet that tries to persuade us only governments, not markets themselves, can fix failures.