Although the government swore in the last federal budget that it is not doing industrial policy, how else do you describe the $20 billion provided to some sectors or technologies over the next 5 years?  And what about the $14 billion provided to Volkswagen?  By providing benefits to certain sectors, regions, or technologies at the expense of other sectors and taxpayers, these policies are, really, discriminatory. 

Why are these policies seen positively by so many? It is because they are presented as creating “good jobs” since they encourage or keep alive some economic activities that would not have taken place otherwise, or would have taken place in another country. We think that without that money there will be either too few jobs, existing jobs would be of lower quality, or investments and innovation, particularly in desirable areas (e.g. green technologies), would be too few. We also think that supporting domestic firms protects us against being too dependent on foreign countries, especially at times of crisis. 

Is this really the case? Subsidies to industries do not create jobs, it just displaces them. When an industry expands its activities, where do they find their new workers? They typically, and certainly in the current situation of labor shortages, take them from other industries, which have to reduce their own activities.  

Are these new jobs better ones? There is certainly no evidence that foreign multinationals or  particular companies are necessarily better at treating their employees or at sharing in their profits. It does not necessarily lead either to higher skill jobs. Having a greater demand for higher skills – let’s say engineers – will not suddenly make the current plumber, or student, have a greater desire or ability to become an engineer.  It may lead to higher wages in some occupations as companies fight for the same workers, which may have some effects on occupational choices down the road, but the effect is certainly not fast and far from certain.  

A common argument for these policies is that it stops some companies from closing down and laying many people off, with all the negative implications on their families and communities.  It does stop them from closing, but only temporarily as experience has shown again and again. It also encourages young workers to stay working for that company and stop them from moving to growing sectors or regions. It just thus pushes the problem down to future generations. A better solution is to provide very good financial and non-financial support to displaced workers and their families. 

One nuance to this. While it is important to let markets adjust, it is also important to ensure low skill individuals can continue to have opportunities to earn a good living for resiliency and equity reasons. Although market forces may require it, upskilling is not always possible for everybody and having a decent job is important in terms of mental health benefits. The best way to achieve this objective is not clear and more research is needed but protecting ailing sectors is certainly not the solution. Again, providing these people with generous and efficient financial and non-financial support is a better avenue to explore. 

While encouraging the ailing sectors is not a good idea, is encouraging “growing” sectors good? Some people argue that the new age of intangibles has created a “winners-take-all” world where the winners monopolize the market and reap large rents. Supporting our “national champions” thus seems necessary for profiteering from these rents. However, evidence clearly shows that the dominant – or “winners” – players of today are not necessarily the ones of tomorrow making it hard to identify the “right” company to support. Moreover, independently of where they are located, these large firms are really good in avoiding paying taxes or sharing their excessive profits with others other than top management. Better solutions for capturing or minimizing these rents include taking some public ownerships in these companies, find innovative ways to tax the revenues they are making in Canada (e.g. digital tax), putting regulation in place that encourage companies to share some of their to excessive gains with workers (e.g. recognition of gig workers as employees), and reinforcing our national and international competitive framework.      

What about the argument that government support is necessary to boost innovation? It is true that commercial innovations are often built on government-financed research. It is also true that the private sector would not sufficiently engage in basic research or socially beneficial innovations without government support and direction. However, this does not mean giving a blank check to companies. The government needs to direct investment in broad areas that are beneficial to society (e.g. green innovation) but must avoid “picking a technology” (e.g. carbon, capture and storage, solar, etc.. ), leaving this decision to arm-length experts (e.g. academic peer-review process). The idea of “mission innovation” proposed by some economists like Mazucato can also be problematic as the government may not be the best placed to determine what these missions should be.  Second, the government must ensure that taxpayers enjoy some return on the investment and are not only the risk bearers. Currently the taxpayers provide large subsidies (or beneficial treatment) to support investments whose financial returns and rents are fully captured by companies’ executives (and often foreign ones). With current government support, the risk is socialized but the rewards are kept private, leaving the taxpayers always at the losing end. There are ways to change that, including providing some risk financing through equity stakes or innovative ways to tax, as suggested above. 

Finally, what should we think of industrial policies to encourage the “reshoring” and “friendshoring” of our production? The argument behind those is that we need to ensure access to essential goods and services and not count on other countries who could abandon us in times of crisis (e.g. earthquake, war, pandemic, etc..). However, research shows that going into autarky is not the best way to protect against global risks but to diversify supply sources and increase flexibility of adopting alternative sources. There are roles for government policies to facilitate this flexibility including infrastructure, trade agreements and competition regulations. Still, as in the financial sector, non-financial firms may not take sufficiently into account the impact of their decision on the risks to the system.  For example, a “just-in-time” inventory system may be beneficial for an individual  company but risky for the system if all companies adopt this strategy. Government regulation or support may thus be needed to encourage some activities, like moving from a “just-in-time” to “just-in-worst-case” inventory system.  Identifying these areas is difficult and exploring the idea of setting up arm-length institutions to identify problematic areas, similar to our financial macroprudential framework, should be considered.

So what do we conclude? Giving money to big corporations is not a good idea despite their rhetoric. It only ends up benefiting rich companies and capturing governments. A recent Statistics Canada study shows that firms kept alive artificially are hoarding an increasing share of productive capital. If these firms exited the market, productivity would be 5 percent higher. While the study is silent on the reasons why these firms survive, government support is one real possibility.  

An appropriate industrial policy should support research in areas with social benefits but ensure taxpayers are not only the risk bearers but also profit on their investments. It should put regulations in place that encourage competition, minimize rent seeking, and force companies to share part of their excessive revenues with their workers. It should ensure infrastructure, international cooperation and regulation are in place to enable firms to adapt to alternative supply sources. It should provide generous and efficient financial and non-financial support to displaced workers and their families, especially lower skill ones, and should put institutions in place to stress test the country’s supply chain system and ensure it will be able to adapt quickly to any crisis that comes its way. And it should certainly stop responding to corporate threats and engage in subsidies’ war with other countries.  If other countries’ taxpayers are willing to pay taxes to give to corporations so that we can purchase goods at cheaper prices, we should be just fine with that.