Let's Not be Bad Economists

Beginning an Exploration of Canada's Emerging Industrial Policy

“In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first along is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

Frederic Bastiat

In our post of May 23,^[1] we observed that, if governments are interested in engendering labour markets that generate steadily rising real wages, they should be asking two basic questions about their major policies:

i. How will policies impact employers’ ability to afford to pay increasing levels of real compensation to their employees year-over-year?

ii. Will policies compel employers to share fairly with their employees any improving ability to pay these levels of real compensation?

In the three posts since then we have looked at how the federal government’s immigration policies – aka cheap labour strategy – seem to have answered both of these questions in exactly the wrong way.^[2]

I will have more to say on Canada’s immigration policies over time, but for now I want to shift gears and discuss Canada’s industrial policies. The focus will be on the first question above – how do Canada’s industrial policies affect Canadian companies ability to pay higher real wages?

Governments Don’t Create Jobs

The Bastiat quote above, written in 1850, succinctly captures the primary challenge in making economic policy in a democracy. Many initiatives sound good on the surface, and therefore are politically attractive. What sounds good on the surface, however, will almost always have consequences that are not immediately apparent, but will emerge over time, and quite often those consequences will be not so good. On balance, will the initiative have a positive or a negative impact? Perhaps or perhaps not.

Let’s consider this in the context of governments “creating” jobs. It is standard fare for many government announcements to claim that initiative X creates Y jobs. The real story is that, rather than creating jobs, the government is choosing some jobs at the expense of other jobs.

If there is an increase in the number of jobs in the public sector, taxes will have to be raised (either now or in the future) to pay for the costs of those extra public sector employees. Taxpayers will then have lower after-tax income, so they will purchase fewer goods and services from the private sector, meaning fewer jobs in the private sector.

If governments provide favourable tax treatment, subsidies or regulations aimed at increasing output from specific industries or segments of industries, this may lead those industries or segments to expand and increase their employment levels. But these tax breaks or subsidies also will have to be made up with higher taxes on other parties. If those taxes are levied on the general taxpayer, this will have the same effect as in the previous paragraph – lower after-tax income, fewer goods and services purchased, and fewer jobs in the non-favoured part of the private sector. If those taxes are levied on non-favoured industries, that will impair the competitiveness of those industries, leading over time to reduced investment, production and employment.

Regulations aimed at boosting output in favoured segments by restricting the ability of parties (either consumers or other businesses) to purchase alternatives to the output of those segments will necessarily impose costs on the purchasing parties - otherwise the restrictions would be unnecessary. As the impacts of those costs work their way through the economy, the non-favoured sectors will see demand for their products reduced or their costs increased, leading over time to reduced investment, production and employment.

Apologies if this all seems needlessly ponderous or, dare I say, blindingly obvious. But it is important to establish the key point here: Governments don’t create jobs. Rather, they choose to favour the creation of some kind of jobs at the expense of other kinds of jobs.

There are myriad policy instruments that governments can use to do this. A partial list includes:

· Different tax treatments for different industries (e.g., Ontario’s lower corporate income tax rates for manufacturing) or different types of businesses (e.g., lower small business tax rates);

· Tariff and non-tariff trade measures protecting specific domestic industries (e.g., supply management, the recent tariffs on Chinese EVs);

· Provision of explicit or implicit subsidies for specific industries or companies (e.g., subsidies for the film industry, the recent subsidies for battery plants};

· Provision of explicit or implicit subsidies for specific activities (e.g., R&D);

· Provision of explicit or implicit subsidies for activity in specific regions (e.g., the federal government’s regional development agencies);

· Government funding of infrastructure that will be relatively more important for some industries (e.g., the federal government taking over and completing the TMX pipeline);

· Regulation favouring one segment over another (e.g., the federal government’s clean electricity regulations), or one type of product over another (e.g., the federal government’s emissions regulations for light vehicles.)

Canadian governments at all levels have always done this to a greater or lesser extent. All governments around the world do this to a greater or lesser extent. No government has ever fully committed to “leaving everything to the market.” Governments have always engaged in the exercise of “picking winners and losers.” Differences over time and between different governments are ones of degree, and the extent to which this is done in a very explicit and comprehensive way.

Industrial Strategy

When governments are very explicit about a comprehensive approach to steering the direction of the market economy this is commonly referred to as “industrial strategy.”

From the late 1970s through the turn of the century the tide was running against the notion of industrial strategy in most developed economies. While no jurisdiction went full neoliberal, the general consensus was towards less steering and shaping of the market economy. For a variety of reasons, the tide now seems to be running in the opposite direction.

In Canada, the recent federal election was won by a proponent of “nation building projects,” Canada as “conventional and clean energy superpower,” and other explicit industrial strategy directions. Since the election, Mr. Carney’s government has passed legislation that would allow it to short-circuit regulatory processes for projects deemed to “be in the national interest.” It has also laid out a list of criteria for determining which projects will be in the national interest. His senior staffing decisions have a distinct “Quebec Inc.” stamp to them, which may be a further hint as to his leanings to a dirigiste approach to the economy.

There is little point in railing against measures that “interfere with the market.” I have never worked for a government that strictly practised market fundamentalism – political considerations always persuaded even the purest of believers in “the market” to bend here and there. We are now moving into a period where we will be bending more extensively than we have in quite some time.

We should, however, be prepared to rigorously interrogate the industrial strategy that is being proposed:

· What exactly are the primary objectives of the proposed industrial strategy?

· Will it achieve those objectives at reasonable costs – how feasible is it?

· Do we understand Bastiat’s key point that there will be a series of consequences resulting from the various initiatives of the proposed industrial strategy?

· Do we understand that we will be choosing some jobs at the expense of other jobs?

· Will we ask whether the jobs we choose are actually, on a true net-net basis, better than the jobs we are implicitly sacrificing?

· In particular, will our choices strengthen Canada’s ability to pay ever higher real wages to our broadly defined middle class?

We will explore these questions in the next series of related posts.

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^[1] https://donwright.substack.com/p/how-did-the-wheels-fall-off-the-progress?r=78jix

^[2] https://donwright.substack.com/p/class-matters?r=78jix