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