(Originally appearing at LvMIC)
In his latest display of cronyism, Stephen Harper announced on Friday that the federal government will continue to subsidize the Canadian auto industry. According to the Canadian Press:
Ottawa is extending an auto sector fund the provides a $250-million pool of investment cash over five years for car companies and their suppliers.
Prime Minister Stephen Harper, speaking at the Ford plant in Oakville, Ont., said the Automotive Innovation Fund has helped the auto sector become more innovative, agile and competitive.
“The rebound of our auto sector in this country is one of Canada’s biggest economic and industrial success stories of the last five years,” said Harper, who cautioned that the “global economy remains troubled.”
“Therefore I’m pleased to announce today that our government will make another significant five-year investment in the automotive innovation fund.”
As is customary for such an announcement, Harper fails to mention the indirect consequences of this direct subsidy. Let’s do so. First of all, where does the federal government obtain $250-million to invest in the auto industry in the first place? Answer: it may raise the money directly by taxing Canadians, or it could borrow the money through the sale of government bonds (a process which may be facilitated by central bank inflation). Importantly, in the case of borrowing, the future tax obligations of citizens are treated as collateral. Barring repudiation or its Ponzi-like perpetual roll-over, this debt will also be paid by taxes. There are no free lunches. When the government pilfers taxpayers and redistributes the money (subtracting for seignorage, of course) to the auto industry, it should be obvious that the auto industry’s gain is the taxpayers’ loss.
But it is also more than that. When central planners in the Harper government attempt to pick winners and losers by subsidizing a struggling industry, they divert resources (e.g. capital goods, labour) away from the industries where they are more efficiently utilized to areas where they are less efficiently utilized. This squanders resources and destroys wealth. As Henry Hazlitt explained in his classic Economics in One Lesson:
In order that new industries may grow fast enough it is usually necessary that some old industries should be allowed to shrink or die. In doing this they help to release the necessary capital and labour for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it. We should have lowered the production of wealth and retarded economic and scientific progress.
Far from improving innovation, agility and competitiveness, government handouts create moral hazard, bloat and waste. The accompanying notion that Stephen Harper and his lackeys better understand how to spend your own money should strike any self-respecting individual as preposterous.