Government Picks Winners—Produces Losers

https://grantcoulson.files.wordpress.com/2014/04/incentiveseverywherepicturecorrect1.jpg?w=444&h=288

        Do not think about, write about or deal with  human behavior without determining the effects of incentives. It’s not their money, of course they’ll waste it.

    Wherein we see that government support will produce world class technology leading to domination of a market and untold earnings enriching the industry and country. JUST KIDDING–the attempt by government to pick and produce winners always leads to more government subsidy.

    Bombardier, the producer of one of the first practical snowmobiles, which  has been propped up by government subsidies, visible and invisible, for decades, is now teetering. Governments will undoubtedly try to prop it up, promising that one last infusion will help turn the corner.

Bombardier and practical reality
National Post Editorial

In January, as the extent of the mess at Bombardier was becoming apparent — its flagship corporate jet project put on ice, its cash dwindling, its share price falling through the floor — the company’s then president and CEO Pierre Beaudoin, the grandson of founder Joseph-Armand Bombardier, was unruffled.

The company was all “about investing in the long term,” he assured a reporter. A little bit of short-term turbulence was to be expected. “We built the company,” he said, “whether it’s my grandfather, my father or myself, by setting bold targets and going after big projects.”

Well, not exactly. Over the last five decades, they have built the company with a hefty dose of public funds: a total of $2.2 billion, not counting the $11 billion the federal Export Development Corp. has lent to Bombardier’s customers in just the last five years to help it sell its wares. If Bombardier has dreamed big, it has been in part because governments were whispering in its ear.

That’s especially true of the project on which the Beaudoin family has more or less bet the company, the CSeries passenger jet, launched with the help of US$650 million in assistance from the Canadian and British governments. The C-Series was a bold attempt to, in effect, create a market for planes in the 100-to-150 seat range, and while it has been plagued with delays and cost overruns — the latest estimate: US$5.4-billion, more than 50% over initial estimates — it might have succeeded, but for one little thing: the competition.

Rather than simply stand back and cede a lucrative slice of the aerospace market to Bombardier, the company’s much-larger rivals —U S-based Boeing, Europe’s Airbus consortium and Brazil’s Embraer, themselves all recipients of gobs of government cash over the years — responded with their own downsized passenger jets. Bombardier had counted on them taking years to develop a whole new generation of aircraft. Who knew they’d just remodel their existing planes?

With healthier balance sheets, the established players could price their offerings more aggressively, adding to the competitive advantages they already enjoyed: a massive installed base of infrastructure and pilots around the world already trained in how to fly them. The C-Series is accordingly in big trouble, and having invested so much capital and energy in it, so is the company. Hence last week’s big shakeup.

There’s a lesson in this for industrial policy enthusiasts. To the complaints of economists and others that subsidizing “national champions” like Bombardier inevitably comes at the cost of other industries and other firms — that the capital and labour diverted into the favoured few is simply capital and labour denied to everyone else — advocates respond with an indulgent smile, together with some fatherly advice about such “ideological” positions being at odds with certain practical realities. “You have to understand,” they will say, as if anyone didn’t, “that other countries subsidize their industry.”

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   This brings to mind the old “all the kids are doing it” argument. “If all the kids were jumping off the bridge, would you?” The government’s answer is always, “Of course I would. Someone has to win the stupidity contest.”

Cars, aerospace, you name it, the argument is always the same: everybody else does it, so we have to. But in fact that’s precisely the argument against it. If nobody else had a large, subsidized aerospace sector, there might be something in it. It requires a lot of other if ’s to fall into place that never do, but nevertheless, if by the timely deployment of a subsidy we could acquire a worldwide aerospace monopoly, then the gargantuan profits that thereby flowed into Canada might — might — be worth the subsidy.

But as the same thought is as likely to occur to other countries, and as those countries typically have deeper pockets than we do, then the only thing we gain by subsidizing our industry is the right to go on subsidizing it: digging ourselves ever deeper, that is, into a contest we can’t win.
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   Remember the Concorde? Heavily subsidized and then extinct. No lesson learned.

Government Job or Respect–Which’ll It Be?
Cheerio and ttfn,
Grant Coulson, Ph.D.
Author, “Days of Songs and Mirrors: A Jacobite in the ‘45.”
Cui Bono–Cherchez les Contingencies

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