Corporate welfare's new champions

Let us try to imagine a world in which subsidies to Bombardier made sense. Suppose there were a project, a passenger jet perhaps, with truly massive economies of scale -- that is, heavy upfront costs for research and development, but comparatively minor unit costs after that -- such that whoever grabbed an early lead in market share would secure an ever-larger advantage over his competitors, as those fixed costs were spread over longer and longer production runs.

Suppose the upfront costs were such that these economies of scale could not be realized in national markets, but only on a market the size of the world. And suppose it could be known with certainty that there actually was such a market for these jets, in order that these economies of scale could ever be realized. (The Concorde, for example, had spectacular economies of scale. It’s just that nobody wanted to buy the planes.)

Now suppose one country’s government subsidized the production of these jets, in order that its own manufacturer could enjoy that “first-mover advantage.” And suppose no other country subsidized its own aerospace industry in return, or if they did, not enough to keep pace. That first country’s manufacturer would then have lower costs out of the gate, and by virtue of the snowballing effect described above, eventually drive all of its competitors around the world out of business: a worldwide monopoly in passenger jets.

The enormous, “super-normal” profits that would then accrue to that country would be enough to overcome the usually unanswerable objection to subsidizing industry: that it is at best a zero-sum game, the investment diverted into the subsidized industry being simply the investment diverted away from all the others. Ditto the jobs, ditto the sales, ditto the fabulous “spinoff effects.” In this case, however, the returns to be had from this worldwide monopoly would demonstrably outweigh the returns forgone from alternative uses of the same funds.

Finally, suppose that any of this mattered, and that the subsidy was awarded on the basis of sophisticated economic reasoning, and not the usual grubby political process, in which assiduous lobbying and hefty donations of cash play their usual part. Under all these assumptions, it’s possible to imagine a world in which subsidy made sense.

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Now let us return to the world as it is, and consider the case for subsidizing Bombardier anew. The project on which it is currently accepting offers from various national and provincial governments -- that’s how it works in this business: the company issues a call for tender, and governments bid -- a 110- to 135-seat passenger jet called the C-Series, may or may not have the requisite economies of scale. Say it does: its sales prospects are far more dubious, and certainly nothing you could take to the bank.

But suppose it were a sure thing. Here’s the kicker. It turns out Canada is not the only country in the world to hit upon the idea of subsidizing its aerospace industry. Not only are other countries doing so, but in some cases countries with deeper pockets than ours: the United States, the whole European Union for crying out loud. So whatever else may be said about the $750 million in public money Bombardier wants to develop this jet, it is never going to result in a worldwide monopoly in passenger jets. All we are doing is throwing our money into the pit along with everyone else’s. Which suggests that perhaps sophisticated economic reasoning is not what’s at work here.

The willingness of other countries to subsidize their aerospace industries, in other words, makes the case against subsidizing Bombardier, rather than for it. This is quite the opposite of the usual rhetoric you will hear, and not only from Bombardier, to the effect that in a perfect world there would be no subsidies, but that because other countries subsidize their aerospace sectors we have no choice but to do the same, in order to “level the playing field.” You’d be surprised how many people believe this -- and believe themselves practical people for doing so, unencumbered by abstract theories of “comparative advantage” or “opportunity costs.”

The Conservatives, for example, as part of their long march away from their previous robust antagonism to corporate welfare, will shortly be debating this resolution from their national caucus:

“The Conservative Party of Canada favours reducing subsidies to for-profit businesses. We believe it will be possible to not ony reduce, but eventually to eliminate subsidies...” Eventually, note. And when is that? “A Conservative government will work with international organizations and individual nations … to secure agreements that benefit Canadian manufacturers by allowing them to compete and succeed through competition” -- wait for it -- “on a level playing field.” Translated: never. We’ll keep subsidizing so long as they keep subsidizing.

I have a counter-proposal. So long as other nations subsidize their aerospace industry, we refuse to do the same. But (to avoid accusations of free-market purism) the minute other countries get rid of their subsidies, we raise ours.

I have a feeling we will not have to make good on that threat.