from The National Post, July 30, 2010
Do not think about, write about or deal with human behavior without determining the effects of incentives.
If the market speaks, unions are structurally unable to listen because government money is so much easier to get than earned money.
Creative destruction
Don’t replace one government-subsidized industry in Windsor, Ont., with another
This week, the city of Windsor was dealt a double blow. First, on Wednesday, after 91 years of production, the last transmission was built at the local General Motors plant. The following day, Ford Motor Company announced it will lay off nearly 400 workers at its Windsor engine plant, starting Nov. 1.
Understandably, these acts were greeted with a mix of sadness, nostalgia, anger and dread. Laid-off workers worry about paying the mortgage; families fear their children will have to leave town to find jobs; businesses grapple with the predicted loss of revenue.
The reaction from the Canadian Auto Workers Union (CAW), however, tells a different story. The CAW sees the GM plant as “a prime candidate for redevelopment as a factory for solar energy companies, which enjoy generous government subsidies.”
This response is telling, for it reveals much about the modern attitude toward private business: that it needs public money — aka corporate welfare — to succeed. Instead of hoping to attract a viable private enterprise to Windsor, the CAW’s reflex is to go from one government-subsidized industry to another, because, in its experience, government pockets run deep.
Indeed, over the past 40 years, federal and local administrations on both sides of the Canada-U.S. border have pumped billions of dollars into (what were then called) the Big Three automakers. Subsidies took the form of loans, tax breaks and, most recently, outright share purchases. The goal was to “save” jobs, in companies deemed too big to fail.
But jobs were not saved. They were given a reprieve, but inexorably disappeared anyway. Why? Because by constantly throwing these ailing businesses a lifeline, government actually made them less competitive in the long run.
Corporate welfare flies in the face of a basic economic principle: the law of creative destruction. This tenet, popularized by the Austrian economist Joseph Schumpeter, mandates that businesses innovate, rise, flourish and — if they cannot keep up with the demands of the marketplace — fail, to be replaced by new enterprises producing more popular products.
Examples are all around us. The horse-drawn buggy lost ground to the steam engine locomotive, and then to the gasoline-powered automobile. The candle was replaced by the paraffin lamp, and then the light bulb. The mainframe shrunk to the size of the personal computer, and further to that of the laptop.
Did the government step in and subsidize buggy manufacturers? Or the makers of paraffin lamps? Companies producing these goods either adapted or disappeared. Workers skilled in obsolete technologies lost their jobs, while new technologies spawned jobs that didn’t exist before.
Yet the state has felt compelled to ride to the rescue of select industries and companies, often for political reasons. And the results are predictable. In the auto industry, instead of responding to customer demand for fuel efficiency and other advances, the Big Three ceded this ground to foreign manufacturers. They failed to contain labour and benefit costs, making their prices uncompetitive. When the economic crisis of 2008 pushed their businesses over the edge, they again turned to government for help — but have cut operations, regardless.
…….
Governments can pretend to ignore the laws of economics and human nature, but in the end, they must obey.
Cheerio and ttfn,
Grant Coulson
Cui Bono–Cherchez les Contingencies
