Latest subsidy to Bombardier a reminder of the many problems with corporate welfare

The federal government’s recent announcement that it will provide Bombardier, a Canadian aerospace company, with interest-free loans totalling $372.5 million is a piercing reminder of the problems with targeted business subsidies.

For starters, Brazil has already filed a complaint with the World Trade Organization (WTO) against Canada on grounds of distorting the competitiveness of the global aerospace industry. The complaint claims that Bombardier has received “at least $2.5-billion in government support.”

The trade ramifications of the federal government’s actions are important on their own but the bigger issue is that business subsidies (so-called “corporate welfare”) are a failed approach to industrial policy. The historical record shows that policies where governments pick and choose particular companies or industries to support breed chronic dependence, and are unfair and ineffective.

Consider that the recent corporate welfare disbursement to Bombardier is part of a long history. The Montreal-based company has received subsidies from at least one federal department dating back to 1966. In the subsequent decades up to 2013, Industry Canada alone has provided a total of over $1.1 billion (in 2013 dollars) in subsidies to Bombardier. Keep in mind this support is from just one federal department so it excludes support from other departments and substantial support from other levels of government.

But a more fundamental problem is that such preferential treatment effectively amounts to crony capitalism. It’s fundamentally unfair that taxpayer dollars are used to support such initiatives, which take 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.

Nonetheless, we often hear of the supposed benefits that promoters of government subsidies trumpet including increased economic activity, jobs, and a more attractive environment for future business prospects. In reality, corporate welfare rarely, if ever, delivers on its promised benefits.

A 2013 Fraser Institute report on corporate welfare summarizes the academic literature as follows:

… as the literature overwhelmingly concludes, there may not be a demonstrable positive impact upon the economy, employment, and tax revenues, because of the substitution effect. In other words, a positive impact in a town, city, province, or country is typically offset by losses in elsewhere in the economy, including tax rates that are greater than would be the case without business subsidies. In summary, the literature suggests that subsidies to business are not the best means by which to encourage economic and employment growth.

Indeed, resources used for corporate subsidies would be more effectively used to reduce tax rates broadly for all businesses. After all, the money would be more effectively invested by market entrepreneurs who actually have the information and expertise to make informed investment decisions.