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An early Christmas present for the aerospace industry

Appeared in the Financial Post
Authors:
Release Date: December 5, 2012

Most people wait until December 25th for Christmas presents. Apparently, the exception is Canada’s aerospace sector, recently the recipient of an early-season gift from former federal cabinet minister David Emerson. Emerson chaired a federally-commissioned review of the aerospace sector. The resulting report ostensibly challenges “companies, academic and research institutions, unions and governments” to “understand and adapt to changing realities.”

That would be fine if a policy review was all the report intended; after all, there is plenty to be said for rethinking how governments intentionally or unintentionally block the growth of enterprise, be it in the aerospace sector or any other industry. In reality, however, the report is a 75-page apologia for existing aerospace subsidies.

With red-ink budgets since 2008 and likely to continue for several years, continued subsidies for any business should be the first thing on the chopping block.

But the Emerson report won’t help us arrive at a world where politicians and bureaucrats stop picking winners and losers. Instead, the report justifies future subsidies based on past practice:  “Canadian governments have long devoted attention to the aerospace sector” notes the report.

Indeed, the federal government has subsidized the aerospace sector since the 1960s. Apparently the lesson to be drawn is not that it is time to end such subsidies, but that no aerospace “acorn” ever grows big enough to forego government-delivered nourishment with tax dollars.

The Emerson report recommends the federal government maintain its current, main program for aerospace subsidies, the Strategic Aerospace and Defence Initiative (SADI); it recommends nips and tucks to make it more “effective.”

Good luck with that. As my past work on corporate welfare has shown, Industry Canada programs are costly corporate welfare failures.

Consider the following gleaned from data pried away from Industry Canada: Counting only repayable loans –forget about the cost of grants given to aerospace companies over the decades—here are the results:

The Defence Industry Productivity Program (DIPP), in existence from 1968 until 1995, transferred billions of taxpayer dollars to Canada’s aerospace companies. For contracts that required repayment, Industry Canada disbursed just over $2.1 billion but only $767 million was repaid thus far. That is a 36 per cent repayment record in a program that has been defunct for 17 years.

On DIPP’s successor program, Technology Partnerships Canada, of the $3.1 billion loaned in repayable contributions between 1996 and 2006, just $789 million (or 25 per cent) has been repaid.

Poor repayments are likely to stretch into the future. A 2005 analysis commissioned by Industry Canada about Technology Partnerships Canada found that expected total repayment estimates were later revised downwards—i.e., long after the contract was signed. The analysis found that expected repayments were reduced by 55 per cent. It is akin to a bank writing down how much it expects back from a homeowner’s mortgage.

Just as bad as the lousy repayment record, peer-reviewed research on business subsidies does not support the flawed notion that corporate welfare is a net benefit. On occasion, such subsidies produce some effect on local economic behavior but which is typically offset by losses elsewhere in the wider economy.

However, every time such predictable failures of government-as-venture-capitalist are pointed out, reports like these appear and governments merely promise to do better.

Most audaciously, the Emerson report argues its recommendations “do not substitute the government’s judgment for that of the private marketplace, nor the public’s money for that of private investors.”

Actually, that’s exactly what corporate welfare (which the report’s authors spend 75 pages defending and promoting), does. To argue otherwise is akin to telling a man just soaked by a rainstorm that clouds haven’t been spotted in months.

In their report, the authors play one last card, the “everyone-else-does-it” justification but such advocacy contains two flawed assumptions.

First, given the population and size of the economies in the European Union, China and the United States, any subsidy game Canada wants to play can and is dwarfed by the dollars governments in those economies can bring to the table.

Second, such advocacy furthers the corporate welfare addiction; it doesn’t break it.

While the authors acknowledge the need for worldwide reform on trade matters, in part because business subsidies are so widespread, they want Canada to continue subsidizing aerospace companies anyway.

If the federal government really wishes to promote prosperity in Canada and abroad, another round of subsidy drugs to an industry hooked on them for the last 50 years isn’t the way to go. Instead, the path to a more competitive Canada - and to a more prosperous world - lays in tougher, tighter free trade agreements that ban subsidies to aerospace companies and every other business, not more of the same, failed, expensive, 1960s-era industrial policy.



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