How government subsidies cause economic destruction

In his 1946 book Economics in One Lesson, Henry Hazlitt observed that “government ‘encouragement’ to business is sometimes as much to be feared as government hostility.” A parallel thought might occur to anyone seeing today’s record-high levels of government spending to help the economic recovery: Economic “development” undertaken by government is just as much to be feared as deliberate economic destruction.

The destructive attempts at government-led economic development are presently greatest at the federal level, but even before the pandemic and at the provincial level, governments destroyed plenty of economic value in the name of economic development.

Ontario’s recently released Public Accounts show, for example, that for the year ended March 31, 2020 — and so essentially before any pandemic-related relief, which is a different can of worms —the province’s Ministry of Economic Development, Job Creation and Trade made $577.1 million in transfer payments. These are payments for which the government receives no goods or services and expects no repayment or direct financial return. In other words, these are handouts from taxpayers to government-favoured businesses, organizations, and industries.

As in previous years, automakers were major recipients of these handouts. Honda received $44.0 million, Ford $21.5 million, automobile parts manufacturer Linamar $17.5 million, Toyota $8.4 million, and Chrysler $3.4 million.

Ontario taxpayers also paid millions in subsidies to food companies. Dare Foods, which sells cookies, crackers, and candy, received more than $8.5 million; Pepsico $3.8 million; and Dr. Oetker, known for its pizzas and desserts, $1.4 million. Subsidies ranging from $120,000 to $1.3 million were handed out for everything from packing meat, brewing beer, processing dairy, supplying eggs, and refining sugar to the production of sausages, candy, gravies, and biscuits.

Proving that there’s nothing governments won’t force taxpayers to subsidize in the name of “economic development,” video game company Ubisoft received $25.0 million, software company Open Text $12.9 million, Huawei Technologies $4.2 million, and Nokia $2.5 million. Steel production companies, solar power companies, and the transportation and aerospace industries also received millions.

When governments dispense these taxpayer dollars for “economic development,” they often claim that such subsidies help the economy by creating jobs. The problem with this argument is that if these millions of dollars represented profitable investments and productive uses of labour, private companies would have made these investments in the absence of government subsidies.

If some economic action — building a new factory or increasing the production of a good or service, for example — takes place because of the subsidies, but would not have taken place without them, we can reasonably assume that the investment was an unprofitable one in the first place.

This means that to the extent that these corporate subsidies create jobs, they are directing labour and capital toward investments where the goods and services produced are worth less than the economic resources consumed in production. That’s not economic development; by definition, it’s the destruction of economic value.

Yet more economic value is destroyed because these subsidies must be funded by taxes that discourage productive economic activity. Moreover, the economic development handouts cause private companies to dedicate resources toward filling out paperwork for government grants, which diverts labour and capital away from producing goods and services that consumers demand. This too is economically destructive.

If governments really want economic development, they should axe their economic development departments altogether. They do more destroying than developing. Real economic development must be led by the private sector, not driven by government handouts.

Matthew Lau is a fellow at the Montreal Economic Institute. The views reflected in this op-ed are his own.

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