It is a well-known principle of economics that subsidies are easy to give and hard to take away. But experts say current federal supports may have outlived their usefulness.
The U.S. and Canada — two economies that claim to be governed by market forces — hand out billions of dollars in taxpayer support for business every year. And as the COVID-19 crisis struck, those handouts increased.
When pandemic-related measures forced the shutdown of businesses and threw people out of work, central banks slashed interest rates and governments dumped money into the economy via wage and rent supports, hoping to prevent the long-term economic damage that is sometimes called “scarring.”
But subsidies always come with a problem: Figuring out how and when to end them.
And as we examine today’s jobs numbers from Statistics Canada, some — including the Canadian Federation of Independent Business (CFIB) — say the Canada Recovery Benefit, intended to help the jobless, may be making unemployment worse.
It is a well-known economic problem that, once begun, subsidies are hard to stop.
A growing number of critics now suggest that the government’s pandemic support for businesses and workers have outlived their usefulness and may be doing harm.
Stagflation risk
A flood of fiscal stimulus and low interest rates is already causing dangerous distortions in the economy that could lead to a combination of slow growth and high inflation, warned U.S. economist Vivekanand Jayakumar, writing this week for the political website The Hill.
“Additional stimulus risks tipping the U.S. into a stagflationary trap, characterized by a slowdown in growth (driven by constrained supply) and surging price levels,” said Jayakumar.
Already, the mania to bid up residential real estate, which Canadians often consider our own national concern, has begun to sweep the world as low interest rates and fear of inflation put housing out of the reach of many of the people the stimulus is supposed to help.
Subsidy addiction can be problematic, partly due to the unequal effect on those who pay for them and those who receive them. While creating the subsidy requires taking a few dollars from each taxpayer, cutting the subsidy requires slashing a significant chunk of revenue from those who have become accustomed to it, leading to a political outcry.
Globally, removing agricultural subsidies or price supports for cooking oil or fuel, once given, is so politically unpopular that governments often prefer to leave the supports in place — even when it is clear the effects are harmful.
‘Perverse subsidies’
Sometimes called “perverse subsidies,” many governments feel politically compelled to continue handouts to businesses that are doing the exact opposite of government policy. Multibillion-dollar subsidies to the oil and gas sector by governments claiming to fight climate change are an oft-cited example in Canada and around the world.
The CFIB’s vice-president of national affairs, Corinne Pohlmann, worries that the Canada Recovery Benefit (CRB) — the pandemic worker benefit that replaced the Canada Emergency Response Benefit (CERB) — may be turning out to be a perverse incentive, discouraging job hunters.
“We don’t necessarily have the exact, like, statistics on it, but anecdotally, it comes up multiple times a day,” said Pohlmann. “People should not be better off on a government-assistance program that they would be when they were working.”
While the current reduced benefit would not replace the salary of a full-time employee, Pohlman said part-time workers with childcare obligations or those going to school may be making more than they would in a job.
Ironically, while warning about the impact of the CRB, the federation welcomed the federal announcement on July 30 extending the two programs to help businesses: the Canada Emergency Wage Subsidy and the Canada Emergency Rent Subsidy.
“With only 35 per cent of businesses back to making normal levels of sales, any additional runway on these crucial federal support programs is welcome news,” the CFIB said in a news release.
Distorting the market
If the CRB is distorting the labour market, those business subsidies are doing something similar, says Amin Mawani, an associate professor at York University’s Schulich School of Business in Toronto.
“The [CFIB] is not really looking at the economic interests of Canada; it’s looking the self-interests of its businesses,” said Mawani, who has studied the government’s support programs.
Now that struggling businesses are getting taxpayer supports, quite reasonably, they don’t want to see them go.
Pohlmann agrees that, at some point, subsidies must end. Businesses would prefer a return of pre-pandemic sales rather than government subsidies, she said, but government restrictions have made that impossible for now.
Whether you blame the government or the necessities of public health, said Mawani, subsidies mute the market signals essential to showing that a business is successful.
If some businesses have prospered by adapting to the pandemic, it may not be useful for taxpayers to continue to bail out those that continue to struggle. Government subsidies are not free, he said, and at some point, businesses must pay taxes to help cover those costs.
Mawani has been researching profits during the pandemic and said some businesses made higher returns despite lower sales and smaller staff, even returning more money to shareholders than they had the year before.
“It clearly shows that some of the subsidies are flowing through to shareholders,” he said.
Subsidies are almost always ultimately political, he said, so taking them away can be politically damaging.
The political need to act quickly to patch the holes in the economy created by COVID-19 may justify what have turned out to be inefficient or badly targeted wage and business supports. And rather than go through the complicated and politically fraught process of fine-tuning the programs, Mawani expects they will soon be cancelled altogether.
“I think all this will stop when the election is over,” said Mawani. “If there is an election.”
While Mawani is not convinced that Canadian workers are refusing to go back to work for merely a few hundred extra dollars in subsidies, he said that if business leaders think that’s what is happening, they have an easy solution.
“Maybe they need to up their wages a bit.”
Follow Don Pittis on Twitter: @don_pittis