The Subsidy Game

One of the worst examples of the negative effects of regional subsidies occurred in the 1970s when unemployment insurance benefits were expanded to cover seasonal workers. This, in effect, created a huge subsidy for the east coast fishery. It did not allow the market to naturally adjust and rationalize and encouraged people to stay in an uneconomic industry. Not only did this delay the inevitable re-structuring of the fishery, it contributed to over fishing of stocks and the collapse of the east coast cod fishery.

Parzival Copes, Professor Emeritus at Simon Fraser University, reflects on this phenomenon in Taking or Making Wealth, one of the undergound royal commission books:

The problem in the fishing industry …is a misuse of subsidies for a wrong purpose. In creating a dependency you’re creating a very large labour force in a fishery that cannot sustain the incomes that are necessary to keep those people employed and keep them in decent incomes….The unemployment insurance scheme was used as a way of subsidizing the fishing industry by picking up half of the income that is needed for a fisherman to stay in the fishing industry….The problem really is that we have used the subsidies to lure people into jobs that are economically not viable.

The use of unemployment insurance as a subsidy to an industry and a region is only one kind of subsidy. Governments also often provide private industry with grants, tax breaks, or loan guarantees. The problem with these types of subsidies is threefold: 1) governments do not have the requisite skills or abilities to pick “winners” in a free market economy, 2) the risks in making a wrong decision are usually not that great….no one will likely be fired, and the government will not have to declare bankruptcy, and 3) such subsidies undermine and distort the market that is already in existence.

Decades of millions upon millions of dollars in federal government subsidies to the Atlantic Provinces have not substantially altered the standard of living there. In fact, according to the Atlantic Institute for Market Studies, if the federal government had invested the money it has funneled to the Atlantic Provinces during the previous quarter-century into U.S. 90-day treasury bills instead, it would have about $1 trillion, enough to wipe out the national debt and give everyone in Atlantic Canada a $400,000 nest egg.

Arnie Patterson, a broadcaster and journalist, feels that it should not be the government’s role to be a banker to private sector firms, even in the name of regional economic development. As he puts it in Taking or Making Wealth:

The direction of regional development in Canada should change. I would rather see the money spent on infrastructure than on individuals in the form of either grants or loans. To me, if the Royal Bank of Canada or the Bank of Nova Scotia won’t fund your new business, then there’s not much chance that you should be starting a business. If the bank turns you down, there’s not much chance of success. It’s kind of fool-hardy for the governments to jump in and start throwing money hoping that they’re going to create jobs.

When governments, at whatever level, support private sector businesses via grants, tax breaks, or loan guarantees, they are, in essence, taxing existing productive enterprises to provide risk capital to those who are not able to raise it themselves.