Bailouts
help shareholders, hurt taxpayers
David Andolfatto
Financial Post
June 13, 2005
Buzz Hargrove claims there are "several" important examples in Canadian
history where government bailouts have "worked." (Fallacy Big Enough To
Drive A Truck Through, June 6.) These examples are evidently meant to
convince us that the "laissez-faire" view is wrong.
The great economist Friedrick Hayek suggested a reason for why markets
work well as a resource allocation mechanism. The allocation of
resources across millions of competing uses requires an impossible
amount of information for any one person (or agency) to absorb and
evaluate.
Market prices reflect an aggregation of unbiased information that
reveals which goods are more or less valued by society.
In light of this, what are we to make of Mr. Hargrove's claim of
"several" examples in which government bailouts have "worked"? Well, I
would recommend taking our Basil with a big grain of salt. In
particular, for every "success" that he cites, one could easily draw up
several unequivocal disasters (the $500-million B.C. government
fast-ferry boondoggle springs immediately to mind).
But what of the "successes" he cites? We are told, for example, that
the federal government helped save Chrysler in the early 1980s. Mr.
Hargrove states this as if, in the absence of government intervention,
Chrysler's manufacturing facilities would have "evaporated" into thin
air, leaving former auto workers with no prospects for the rest of
their lives.
In fact, Chrysler's assets would likely have kept running throughout
and beyond bankruptcy, much as Air Canada's operations have throughout
that company's recent restructuring. The Chrysler bailout served mainly
to save Chrysler's shareholders and creditors, at the expense of the
Canadian taxpayer.
What of the $65-million allocated to the International Truck and Engine
plant in Chatham, Ont.? Three years ago, a cyclical downturn in the
heavy truck industry, together with some nasty labour unrest (courtesy
of Mr. Hargrove's Canadian Auto Workers union), led to a threatened
shutdown of the Chatham plant. Evidently, the government's $65-million
"investment" changed all that. Or was it instead the subsequent
cyclical upturn in the heavy truck industry, together with union
concessions?
Let us imagine, quite implausibly, that the $65-million made the
difference. Then this intervention saved anywhere between one and two
thousand jobs in Chatham. We are told that this was a great investment
because these Chatham workers will eventually pay more in taxes to
cover the initial $65-million investment.
But this $65-million had to come from somewhere. In particular, it
represents $65-million less in the hands of Canadian households, who
would have used this money to support employment at thousands of other
firms. While 2,000 jobs in Chatham may have been saved, 2,000 jobs
elsewhere may have been lost (e.g., one job at 2,000 other
establishments).
How do we know what the net impact on job creation was? Hayek's point
is that we are not likely to know; not, at least, without a deeper
investigation. Mr. Hargrove's cost-benefit calculation conveniently
ignores this cost dimension. And why not? The cost is borne by
thousands of Canadians dispersed throughout the country, while the
benefits are concentrated among Mr. Hargrove's Chatham constituents.
Thus, the "success" Mr. Hargrove speaks of is political in nature, not
economic. The beneficiaries include a local group of workers, their
union representatives, company shareholders, and government
administrators. The costs are borne widely by households in general and
by the businesses they patronize. The point of laissez-faire economics
is that if everyone were to behave in this way, the economy would soon
cease to function.
David Andolfatto, Department of Economics, Simon Fraser University,
Burnaby, B.C.
© National Post 2005