Crony capitalism alive and well in Ontario

Oxford defines “crony capitalism” as an “economic system characterized by close, mutually advantageous relationships between business leaders and government officials.” Crony capitalism has been justifiably denounced by a diverse array of scholars, associations and politicians. These cozy relationships are typically unfair, expensive and ineffective.

And yet, the governments of Ontario and Michigan, according to a memorandum unveiled earlier this month, plan on “jointly developing new programs to address emerging technology needs,” which could lead to new spending on business subsidies (otherwise known as “corporate welfare”) on both sides of the border.

This plan will confiscate money from millions of people and businesses, diverting it to a privileged few with special government relationships. The “promotion” of one industry almost invariably results in the “demotion” of other industries, as businesses and people without political clout are forced to pay full freight.

Consider an example from Ontario, where the provincial government provided General Motors and Chrysler with a $4.6 billion bailout in 2009. A report from Ontario’s Auditor General identified several problems with handouts from the provincial government to businesses. It also determined that the government recovered only $3.6 billion and had to write-off $1 billion of taxpayer money from the bailout. If you add in the money given to the auto companies from Canada’s federal government, the total cost to Canadian taxpayers is estimated at $3.7 billion.

Of course, the money that fuels programs behind corporate giveaways and other “partnerships” comes from money that governments take from businesses and individuals through the tax system. The funds pay bureaucrats big dollars to oversee government programs, but they would be more effectively invested by market entrepreneurs who actually have the information and expertise to make informed investment decisions. Cronyism has another cost as well: It forces talented business officials to spend time and money making political calculations instead of purely economic ones.

Scholars from across North America have looked at government “promotion” efforts from every conceivable angle. The academic literature on official economic development programs is not flattering. Much of it was summarized in 2004 by economists Peter Fisher and Alan Peters in their peer-reviewed journal article, which notes that: “Since these programs probably cost state and local governments about $40-$50 billion a year, one would expect some clear and undisputed evidence of their success. This is not the case.”

Instead of selectively meddling in the private economy and promoting one industry at the expense of others, the governments of Ontario and Michigan should focus on advancing broad-based policies that will encourage investment and entrepreneurship.