Fraser Forum

William Watson: Quebec, Inc—has anybody around here heard of ‘profits?’

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For my sins I receive regular email from political parties: Green, Conservative, Liberal and Quebec Liberal. Actually, I don’t mind receiving it. It provides useful insight into what the parties are thinking—even if that’s often depressing to an economist—and if I don’t want to be bothered, “Trash” is always just a click away.

This week I got an email from the Quebec Liberal Party that gives new meaning to the term “Quebec, Inc.” The subject line is “Une industrie qui fait la fierté des Québécois / An industry that makes Quebecers proud” and the webpage the email links to you can see here.
Illustrated by the kid-friendly pictographs that are so popular these days, it reads: “The Aerospace Industry in Quebec, it’s: 40,000 jobs, 190 companies, $15.5 billion in annual sales, 50% of Canadian sales. That is why [Premier] Philippe Couillard, accompanied by [Industry Minister of Economic Development, Innovation and Export Trade]  Dominique Anglade, launched Quebec’s new 2016-26 Aerospace Strategy with a government investment of $510 million for the first five years.”

This is very weird. Telling you how big an industry is, how much GDP it produces, how many people it employs, both directly and indirectly—with the indirect employment customarily wildly exaggerated—is something you expect from an industry association, invariably just before it proposes the howling non sequitur that because it is so successful it needs or deserves some form or other of government support. “Too big not to bail out,” the argument amounts to.

But here’s the government doing the industry’s PR for it. And boasting about its own buy-in—though for some reason it doesn’t mention its biggest aerospace buy-in, its $1 billion investment in Bombardier’s C-Series, and its lean (no, not “lien,” though sometimes it’s hard to tell the difference) on the province’s public pension fund, the Caisse de Dépôt, for another $1.5 billion for the company’s rail division.

There’s a lift-out quote from the premier: “Our government has made a commitment to a modern and competitive industry that makes Quebecers proud.” OK, I’m a Quebecer and maybe I get a little bit of pride from our aerospace industry—though I’m not sure why I should, as I’m in no way responsible for its success. (If regular pride is a sin, what’s pride for somebody else’s achievement?)

There are 8.26 million of us Quebecers, so we’re each paying $61.74 to buy that proud feeling. I don’t know how my fellow citizens feel but, personally, my pride twinges aren’t that big. As for the investment advantages of aerospace, Bombardier stock is publicly traded so anyone who thinks it’s a likely winner is free to go ahead and buy his or her own share of the business.

The Quebec, Inc. email invites us to click to discover the sectoral plan’s “4 areas of intervention and 10 goals.” (It also invites us to share the email on Facebook and Twitter. I wonder how many people, maybe apart from the person who wrote it, would do that.)

The “4 areas of intervention” are:

  1. Reinforce and diversify the structure of the industry;
  2. Support the growth of the industry by supporting projects and investing in the workforce;
  3. Accompany small-and-medium-sized businesses in their development;
  4. Focus on innovation.

I have limited space in this blog and limited call on the reader’s attention but:

  1. How do you “reinforce” an industry’s structure? Do you punish any entrants who might change that structure by challenging existing operators? And how do you both reinforce and diversify the structure of the industry? If you’re diversifying it, presumably because you don’t think it’s diversified enough (though who exactly are you to judge?), are you really reinforcing it?
  2. I can see how supporting projects and investing in the workforce might well cause the industry to grow, but: are we certain that new industry growth will bring more benefits than costs? Why don’t we trust the market to “support projects and make workforce investments” whose benefits are greater than their costs and not those whose costs are greater than their benefits? Markets generally judge benefits and costs pretty well. Investors typically don’t want to lose money. How, by contrast, do we choose which projects to support? And how do we support them? Just by giving cash? (Not that I have anything against cash.) What happens to projects we don’t support? And what’s wrong with them, anyway? Why do we think they’re not worthy of support?
  3. “Accompany” small and medium-sized businesses in their development? How, exactly? What does “accompany” mean? Do such firms really want accompaniment? What if being “accompanied” means having to get everything cleared with the government? Does that sound fun? On the other hand, what if things don’t have to be cleared with the government? Does carte blanche with taxpayer money sound like fun for taxpayers? And what’s so good about little firms, anyway? Plus, if they are so good, why do we want them to become big firms?
  4. “Focus on innovation.” OK. I don’t have anything in particular against innovation. But how many firms do you suppose don’t understand that in the 21st century if you don’t innovate, you lose? Do we really need a government-sponsored sectoral plan to get aerospace firms to think about innovation? The ones that aren’t thinking about it but, when they read the government’s sectoral plan suddenly realize they should—do we really want those firms operating? In the end, isn’t a Darwinian solution for such firms the best outcome for everyone involved?

As for the “10 goals,” for the record, they are:

  1. Attract Level I et Level II foremen and suppliers
  2. Promote and reinforce the public safety and defense sectors
  3. Develop the drone sector and its civilian applications
  4. Support new projects
  5. Invest in the workforce
  6. Encourage small- and medium-sized businesses to become cutting-edge 4.0 companies
  7. Encourage mergers and acquisitions
  8. Stimulate exports
  9. Promote the development of new products and procedures
  10. Encourage innovation to flourish among small- and medium-sized businesses

I won’t burden the reader with a 1-10 analysis. But don’t items 4 and 5 look an awful lot like “area of intervention” number 2?

Item 8 is very dangerous: Bombardier’s chief competitor, Brazil’s Embraer, is always looking for reasons to haul Canada before the WTO, claiming we subsidize exports. A Quebec government bullet point stating that stimulating exports is a goal of policy will be telling evidence before a WTO panel. Moreover, on substance, what’s so good about exports?

And where does item number 7 come from: “encourage mergers and acquisitions.” The government evidently thinks the sector’s 190 companies—which, remember, it actually boasted about in its bullet points about the sector—are too many. If you’re trying to run a coordinated sectoral strategy, maybe having to deal with 190 distinct players can be demanding. So mergers and acquisitions might well serve the government’s purpose. But do they serve the industry’s purpose or, more to the point, the purpose of the companies the government is going to encourage to be merged out of business? (I suspect the inconvenience of having to deal with too many municipalities was behind the turn-of-the-century move by the minister of municipalities to force municipal mergers, many of which were undone when the people affected, the citizens of the merged municipalities, were given a say in the matter via referendum by a successor government.)

A final point: What’s the obvious omission from both these lists? In a word, “profits.” Successful businesses make profits. That may not be their whole purpose. Humans and their organizations are complex entities. But profitability is, and should be, a key goal of enterprise. “Should be?” Yes! A business that makes money and does so without government help produces benefits greater than costs. Which is exactly what we want business (not to mention government) to do. If on balance Quebec’s aerospace sector doesn’t make profits—which the private firms that constitute it have every incentive to try to do—then it’s not clear what its social purpose is.

Where is it ordained that Quebecers’ role in life is to provide airplanes to the world at less than cost? If Quebecers can make money selling airplanes, fine. If not, they—we—should try something else.

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