Autos and economic development

Someone asked me yesterday about the problems in the auto sector and the implications on the economy of New Brunswick. They also asked about the bailout request.

This is a complicated issue but here are my thoughts.

On the one hand…

I say good riddance. The auto industry and its unions never gave a rip about economic development in Atl. Canada. In fact, the piddly warehouses that GM and Chrysler had in Moncton have been closed. The Canadian Auto Pact was arguably the single biggest economic engine for the Canadian economy over the past 30 or so years and there isn’t a single direct job in New Brunswick to show for it.

But on the other hand..

the industry is so big (regardless of its concentration in Ontario) that if it were to go down – the ripples would be felt across Canada – with the possible exception of Alberta. You see the quid pro quo for all that economic development in Ontario over the years has been more equalization, transfer payments and EI here. If the largest manufacturing industry in Canada collapses, it will trickle down to New Brunswick in the form of less money from Ottawa and that will hurt us all. Think about the impact on consumer confidence and ultimately spending if this industry collapses. We will be in for a much longer and broader recession.

But on another hand…

Giving massive bailouts to companies that can’t produce a sustainable business model – it could be argued – is the opposite of economic development. I heard the UAW yesterday called the bailout down there as the same thing as Alabama giving incentives to attract Mercedes, Toyota, Hyundai, etc. That’s a smoke screen. Those incentives created thousands of new high paying jobs and bolstered the Alabama economy. The bailout of the domestic auto industry will not create one new job – in fact – even with the bailout – thousands more will be lost. Governments have to be very careful about propping up bad sectors of the economy for political motives. They risk turning whole regions of the country and whole industries into Cape Breton circa the late 1980s. In other words, industries completely dependent on government subsidies to survive. We do it with agriculture but I am not sure how many other industries we can perpetually prop up without serious damage to the economy.

But on still another hand….

There have been thousands of jobs created in the auto sector by the foreign-based firms. Just about all the major players are in North America now – some in a huge way. Toyota is now a major manufacturer on both sides of the border. How will the bailout of the domestic industry impact the potential growth of the foreign-based manufacturers? Maybe New Brunswick should come out strongly against the bailout and then position itself on the side of the foreign-based firms.

The truth is as you can see there are no easy answers here. My fundamental premise has been governments should almost never prop up or bail out companies or industries with bad business models. I think there are many examples of how in the medium and longer term that is bad for the economy. But, what about this whole issue of “too big to fail”? Can we really let Canada’s largest manufacturing sector collapse and ripple through the supply chains and into the broader economy? But can we continue to bail them out? The governments of Ontario and Canada have already given something like $2 billion to the domestic industry in the past 10 years – and not for net new jobs but mostly to retool.

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0 Responses to Autos and economic development

  1. richard says:

    Pragmatically speaking, if the US offers aid, Canada will too. Not to do so would be harmful to any federal government wanting to hold seats in ON. Flaherty, after all, is in an auto industry riding. Being seen to do nothing in Canada would allow manufacturing capacity to move south of the border.

    So there will be aid. And why not? Given the impact of the auto industry in ON over the past 50 years, there is no reason to withhold support now. Perhaps the 'big three' will go belly-up no matter what the feds do, but aid now can be seen as an investment. Strings need to be attached (R&D in Canada; fire execs; new technology committments; 'you're on your own after this'), but I don't see why one would not provide aid.

  2. nbt says:

    To be honest, I think NB has been goin through a recession dry run for 30 or so years now. Largest employer, the government, businesses that only survive on government handouts, high levels of unemployment and seasonal work.

    If we aren’t a region already prepared for an economic slow down, I don’t know who is.

  3. David Campbell says:

    NBT, despite the Macabre nature of that statement, it may be among the salient ever made on this blog.

  4. Anonymous says:

    Perhaps a depressed Canadian economy will provoke mational ED efforts that stimulate NB despite our government’s love affair with seaonal highway and tourism jobs.

  5. richard says:

    “If we aren’t a region already prepared for an economic slow down, I don’t know who is.”

    That’s why life here is so great – no worries, it’ll be the same here tomorrow as it was yesterday.

    While ON govts and industry try to get whatever they can from the feds, NB does zip. Perhaps there is something to the cultural argument after all.

  6. mikel says:

    Keep in mind that the Auto Pact did the same thing-it was a ‘subsidy’ to ‘create thousands of jobs’. How long before Volvo is in a cash crunch? Volvo has had plenty of its own ups and downs, as has Mercedes. We know you like autos as a development model, but the reality is that the only difference is ‘new vs. established’. We don’t KNOW that Volvo may someday need a bailout, but it can’t be dismissed-if they want money when they are doing well, imagine what it would be like when they do poorly.

    But again, unions shouldn’t be mentioned in there, they serve their members, that’s like saying “the people of Costa Rica” didn’t do anything to set up ED in New Brunswick. Unions in manufacturing , particularly the auto sector, have NO say in those kinds of decisions and have barely been able to stay in existence. It’s always too bad to see the rampant anti unionism from the media, because the evidence is virtually indisputable that it is the own form of economic activity that acts to raise incomes, increase economies, and increase the standard of living.