Quebec, Bombardier and the sunk cost fallacy

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Appeared in the National Newswatch, December 6, 2018
Quebec, Bombardier and the sunk cost fallacy

Bombardier CEO Alain Bellemare is in New York this week trying to convince shareholders that the company’s woes are temporary. In the last few weeks, the Canadian aerospace giant suffered a series of body blows regarding sales of its new airplanes, which threw the company’s future in doubt—again. In response, the Government of Quebec announced it was ready to reinvest taxpayer dollars in the company to palliate for the bad news.

To justify the decision, the minister in charge, Pierre Fitzgibbon (now embroiled in a conflict of interest mess involving a company that sold parts to Bombardier) claimed Quebec had already invested large sums in the past and it would be foolish to stop investing now.

This is a fallacious argument. In fact, it has a somewhat wonky name—the sunk cost fallacy. Sunk costs refer to past investments—they have no relevance to future decisions. Normally, one should only consider the cost and benefit of continuing on a given path. One engages in the fallacy when one argues that more investments are warranted because of investments already made, and fails to consider the overall losses involved in further investment. Again, past costs have no relevance, and making decisions based on past costs leads to worse outcomes. In other words, sunk costs are bygones and it’s better to let bygones be bygones.

Appropriately, the sunk cost fallacy has a nickname—the “Concorde Fallacy,” referring to the supersonic jet that connected Paris and New York in less than three hours. Large government sums were invested in the initial project, which was and remained unprofitable. At each round of financial difficulties, more funds were reinvested by European governments. Each time, the previous sums invested in the Concorde were cited. We see the same pattern with Bombardier.

Notably, the fallacy cuts across party lines and government levels. Conservatives and liberals at both the provincial and federal levels use it to justify their move to invest more. A few years ago, it was the previous minister of the economy in Quebec, Dominique Anglade, who served us the argument. In the early 2000s, a minister for the PQ invoked the same logic. Today, it’s a minister of the Coalition Avenir Québec.

Bombardier has received aid in the past. Lots of it. In 2000, the federal government offered loan guarantees of $1.7 billion to Bombardier. In 1992, the Government of Ontario participated in the acquisition of Havilland by Bombardier. In 2003, it was estimated that 34 per cent of all commercial investments made by Exports Development Canada (a federal agency) went to Bombardier. In 2004, Quebec announced an investment of $1.6 billion over eight years. In 2006, Quebec offered the contract for Montreal’s metro wagons without resorting to auctions. In 2007, the federal government invested $900 million to assist Bombardier in research and development. In 2013, the Government of Quebec (again) offered $1 billion to the company. And finally, there was the last round of well-advertised government actions in 2016.

This is clearly a costly fallacy to maintain. The great number of reinjections and rounds of financial support offered to Bombardier have failed to yield results. Why believe this next round will yield different results? What’s even more unlikely is that further investments will offset all the previous losses.

Persisting with this fallacy will only make Canadians and Quebecers worse off. Surely, at this point, more people are starting to believe that pulling the plug on Bombardier is the best outcome.