The solution to Canada’s struggling auto sector isn’t throwing more taxpayer money down the black hole that is GM and Chrysler.
If Canada wants a vibrant and competitive auto industry, the government needs to let these companies fail.
Unfortunately, Ottawa and Queen’s Park are doing the opposite by not allowing the free market to work.
Just last week, GM and Chrysler received $4 billion in bridge loans from the federal and provincial governments. The money came after the two companies were given additional time to come up with “believable” restructuring plans to get even more taxpayer money.
This type of corporate welfare should come as no surprise.
According to a report released by the Canadian Taxpayers Federation, in the last five years the federal and provincial governments have spent $782 million on the “Big Three” auto companies.
The government tells us that without these essential bailouts, hundreds of thousands of jobs will be lost.
Industry Minister Tony Clement reiterated this last week, saying GM and Chrysler were at risk of falling into a “disorderly bankruptcy” without taxpayer money.
What Clement fails to understand is the sooner these inefficient companies go into bankruptcy, the quicker competent investors can buy up their assets.
In economics, this is called creative destruction, a term coined in 1942 by economist Joseph Schumpeter.
This works to “revolutionize the economic structure from within, incessantly destroying the old [company], incessantly creating a new [company],” Schumpeter writes.
In a free market economy what is one day a marvelous company is the next day a lame duck. This is because fresh, innovative entrepreneurs take market share as they work to improve everyone’s standard of living.
If the government shuns GM and Chrysler, it’s true they’ll go bankrupt and jobs will initially be lost.
But the destructive part will be short lived. Capable investors, such as Honda or Toyota, will buy up Ontario’s plants and equipment and begin producing profitable vehicles again.
They’ll be profitable because the new management won’t be burdened by costly labour contracts, huge pension obligations, and a culture of inefficiency and wastefulness.
The restructuring will mean new jobs for the recently unemployed autoworkers.
Of course, these new employees will make less money than they do now. But as these new companies compete and innovate further, salaries for all workers will increase.
The government must get out of the way for this to occur.
There is also the unintended consequence of government handouts hurting businesses from other industries.
In order to subsidize GM and Chrysler, the government must first take money from productive companies and individuals through taxation.
Every dollar the government wastes on unprofitable companies is one less dollar invested in productive companies looking to expand operations and hire more employees.
The solution is for the government to remove its tentacles from the free market. That way all industry can benefit.