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In Brief:

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Corporate Canada’s Ladies of the Night

Given the takeovers, mergers, bail-outs and bankruptcies among financial institutions in the United States, advocates for corporate welfare are out in full force here. They argue government intervention is back and this justifies it in Canada, albeit in different sectors.

But corporate welfare has, regrettably, never been out of style and its proponents, found most often in the aerospace or automotive industries, make an argument akin to the one our mothers warned us against: just because a friend jumps off a bridge is no reason for us to follow.

If American government intervention can be justified on the basis that the world would otherwise face a credit cataclysm, such actions do not resemble traditional government handouts to business on either side of the border.

For example, consider the U.S. Federal Reserve’s intervention to have Bear Stearns swallowed up by J.P. Morgan earlier this year. Shareholders in Bear Stearns ended up getting $10 per share for a stock once worth $172 and thousands of employees lost their jobs. That’s hardly a “bail-out”.

Similarly, when the U.S. federal government took over Fannie Mae and Freddie Mac in a trusteeship last month, the “bail out” characterization was an exaggeration. Washington insisted on warrants that would give the U.S. treasury up to 79.9 per cent each of those companies. Also, both companies were ordered to shrink their business by 10 per cent annually starting in 2010, this to prevent future bail-outs of the mortgage behemoths.

The result of such an intervention is that shares for both dropped from the fifty and sixty dollar range last year to penny-stock territory in September and about a buck or two ever since.

Then there was Washington Mutual’s forced receivership collapse and selected asset takeover by JP Morgan. That collapse meant Washington Mutual shares once worth $50 became as valuable as Bre-X stock.

The harsh measures were justified. If the U.S. government had to act to avoid a systemic collapse in the financial system, such an obligation does not extend to bailing out bank shareholders or employees.

But emergency actions are akin to firemen breaking into a house to save its inhabitants, douse the flames and prevent its collapse; they don’t justify similar break-and-enters in any other context.

Similarly, a $700 billion package which attempts to avoid a financial meltdown doesn’t lend support for any ongoing practice of corporate welfare. If anything, it heightens the obvious difference.

Still, the usual suspects are in Washington and Ottawa in search of handouts, and despite repeated trips to the trough in the past and for which they still owe taxpayers money.

In the U.S., the automotive sector lobbied for and received U.S. $25 billion for itself; now the Canadian side wants a proportional pot of gold. Late last week, the Canadian Manufacturers and Exporters Association also called for more government cash for that entire sector.

Justifications for Canadian corporate welfare based on the U.S. bail-outs are ill-advised and opportunistic. If Canadian business subsidies were structured akin to what’s happening in the U.S., existing shareholders in automotive companies would end up with a tiny percentage of their previous stakes, this after a government insists on a substantial equity shares in exchange for loans.

Also, Fannie Mae and Freddie Mac, Ford, GM and Chrysler would be required to shrink themselves over time, this to prevent the possibility of future bailouts. And thousands of employees would be government-mandated given pink slips.

In justifying their actions, the U.S. Federal Reserve, the White House and many in the U.S. Congress have argued the very foundations of the U.S. and world economy would crater without their measures.

Let’s suppose the analysis and remedies for what ails the American financial system are correct: Even if so, that wouldn’t make Canadian corporate welfare any more justifiable or similar to the actions taken in the U.S. financial sector.

After all, actual similar actions in Canada would include substantially diluted share ownership (or the vapourizing of stockholder assets altogether), massive layoffs in the automotive and aerospace sectors, and the eventual forced mergers and ending of such firms.

When Canadian and American businesses lobby for taxpayer-financed subsidies because an attempt is being made to prevent a systemic collapse, they are akin to prostitutes alongside a burning skyscraper who look for “help” from passing firemen. The requests from the ladies of the night are of a different nature from those inside the building.

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Mark Milke, Director of Research

also lectures in Political Science at the University of Calgary where he received his doctorate. He is the author of three books on Canadian politics, including the 2006 A Nation of Serfs? How Canada’s Political Culture Corrupts Canadian Values from John Wiley & Sons. He is a former director (first in Alberta and then British Columbia) with the Canadian Taxpayers Federation 1997-2002. Since 2002, among other work, Mark has written policy papers on British Columbia’s treaty process, the Canada Pension Plan, Alberta’s Heritage Fund, automobile insurance, corporate welfare and the flat tax. He is writing a book on the effects of anti-Americanism on deliberative democracy in Canada and is a Sunday columnist for the Calgary Herald. In addition, his columns on politics, hiking, nature and architecture have been published across Canada including in the National Post, Globe and Mail, Reader’s Digest, The Western Standard, Vancouver Sun, and Victoria Times Colonist and the Washington DC magazine on politics, The Weekly Standard.