We Should Embrace the Real Risk-Takers

Frontier Centre, Media Appearances, Taxation, Uncategorized

What kind of entrepreneur should we embrace and who should be shooed away? I would choose to give a bear hug to those business folks who try to meet consumer needs without fleecing taxpayers and dismiss "entrepreneurs" who use the power of the state to get a slice of the pie and pig out on taxpayer subsidies. 

But that’s not the choice British Columbia Premier Gordon Campbell and Ontario’s Dalton McGuinty have made. Both are mollycoddling the pigs at the trough.

Canadian governments of all political stripes provided various businesses with more than $202 billion in bailouts, loans, and subsidies between 1994 and 2007, according to a recent study by Mark Milke of the Frontier Centre for Public Policy. That works out to $15,126 per taxpayer over that 13-year period.

While there are many more, two industries illustrate my point: clean energy and film.

Campbell wants to "… win the clean energy race."

So he has mandated all new electricity be generated by "clean" sources like biomass, solar, hydro and wind. McGuinty wants 25 per cent of Ontario’s electricity to come from renewable energy: wind and solar. Their diktat means that British Columbians and Ontarians cannot use natural gas, one of the cheapest ways of securing more electricity.

The total cost of producing a megawatt hour of energy is estimated to be the following by the U.S. Department of Energy:

Solar PV: $396 Solar thermal: $256 Offshore wind: $191 Wind: $149 Nuclear $119 Hydro: $119 Biomass: $111

Conventional coal: $100 Conventional gas: $83

BC Hydro says electricity rates must rise by 33 per cent over the next four years to pay for upgrades to our aging electricity grid, as well as higher finance costs and a bigger take from Victoria. Paying a slightly higher price as a result of necessary upgrades to the grid is fine, but why should we pay for Victoria’s continued plundering of the utility’s kitty?

On top of all this, the upshot of Campbell’s flawed electricity policy is higher prices for residential and industrial consumers, wiping away the competitive advantage B.C. has had in attracting business based on relatively low electricity prices.

Of course, we don’t know how much more than market prices we will be paying here because the public has been kept in the dark about what BC Hydro will have to pay for the new green energy from independent power producers.

In Ontario, Samsung Corp. and Korea Electrical Power Corp. have a sweet deal. Power distributors must pay 13.5 cents a kilowatt hour for wind power and 44.3 cents for solar power. The extra cost of the new power will be borne by all electricity consumers. Consequently, distribution rates are expected to jump 24 per cent by 2011 for households and critics contend
that the annual increase per household is going to be in the 30 per cent range.

Then there is Vancouver’s film industry (Hollywood North), which contributes about $1.3 billion to our gross domestic product of $162 billion.

The political entrepreneurs in this industry should get the gold medal for extracting subsidies from Victoria.

In February, the government announced changes to the provincial tax credit system that gives the video game industry its first major tax credit and sweetens B.C.’s labour tax credit for the film and television industry. This was in direct response to Ontario’s decision to provide more generous tax credits.

A study done four years ago — just before the province caved in to the last major demand for larger handouts — noted each $1 in labour subsidies could be expected to generate about $1.20 in extra production. If these subsidies were dropped, it said, the industry would likely shrink by about 15 per cent from just over $1.2 billion a year to about $1 billion.

"When you do all the math on the taxes paid by the industry itself and its workers, balanced against what government shells out, B.C. would save $45 million a year, the report said. Is it worth it?" wrote Sun columnist Don Cayo. After this latest round of subsidies, the answer could be a resounding no.

In fact, a compilation of recent studies by C.J. Perry of Film Slate points out that doling out tax credits is a losing proposition for taxpayers.

A Michigan senate fiscal agency study concludes that for every dollar the state spends on incentives, it only gets back 17 cents in return.

A New Mexico State University study concludes that the state gets back only 14 cents for every dollar spent on incentives for rich Hollywood producers.

The Wisconsin Commerce Department comes to the conclusion that its subsidy program is too costly for taxpayers.

So sacrificing the public interest is largely due to the Campbell and McGuinty governments’ embrace of what Burton Folsom of Hillsdale College in Michigan says is the difference between "political entrepreneurs" and "market entrepreneurs."

In his book, The Myth of the Robber Barons: A New Look at the Rise of Business in America, Folsom argues persuasively that genuine (market) entrepreneurs like Vanderbilt (railroads) and John D. Rockefeller (oil) during the Gilded Age of industrial expansion in the United States
between 1860 and 1900 succeeded because they created demand for their products
based on innovation. They managed to provide quality service at a competitive price.

In marked contrast, political entrepreneurs like Robert Fulton, Edward Collins and Samuel Cunard (steamships) lobbied New York politicians and got a 30-year monopoly and received subsidies from Washington. Those handouts did not stop them from providing lousy service at very high prices for everything from passenger fares to mail delivery.

In his other remarkable book, Empire Builder: How Michigan Entrepreneurs Helped Make America Great, Folsom points out that consumer-driven businessmen like Ford and Durant (cars), Kellogg (breakfast cereals) and Dow (household and industrial chemicals) made it big by offering products that consumers wanted at competitive prices. They made it from humble origins.
Billy Durant was a high-school dropout, Will Kellogg was a bookkeeper and did not strike out on his own until he was 46 years old, Henry Ford grew up on a farm and Herbert Dow’s father was a simple mechanic.

What these men had in common was their capacity for risk-taking and the vision to offer a product or service that did not exist. These kinds of entrepreneurs were not driven by just the acquisition of wealth, but by their need to make their dreams a reality.

In B.C., we have our share of Kelloggs and Dows.

Jimmy Pattison, with an estimated fortune of $4 billion, rose from humble beginnings to own a conglomerate that sells cars, TV programs, juice and billboards.

Chip Wilson, the founder of Lululemon Athletica, saw an opportunity to create a line of clothing that a yoga crowd yearned for and succeeded.

In Ontario, James Balsillie and Michael Lazaridis, the founders of the ubiquitous BlackBerry, are on Barron’s list of top 30 chief executives not because they went cap-in-hand to Queen’s Park. Then there is the Weston family of Loblaw grocery chain fame.

Politicians like Campbell and McGuinty would do well to remember where the word entrepreneur comes from. It’s a 13th-century French verb: entreprendre, meaning "to do something" or to "undertake."

By the 16th century, the noun "entrepreneur" had emerged and referred to someone who undertakes a business enterprise. The term was popularized by one of my favourite economists of the early 19th century, Jean Baptiste Say. He argued that entrepreneurs are individuals who create value in an economy by re-allocating resources from low productivity areas to ones which
have better potential. That’s how an economy creates wealth and jobs in the long run. 

Henry Ford … Bill Durant … Will Kellogg … Herbert Dow … What these men had in common was their capacity for risk-taking and the vision to offer a product or service that did not exist. These kinds of entrepreneurs were not driven by just the acquisition of wealth, but by their need to make their dreams a reality. In B.C., we have our share of Kelloggs and Dows.
 
In fact, market entrepreneurs have been a godsend over the last 10,000 years in helping to improve our lives.

In a new study — Markets, Religion, Community Size, and the Evolution of Fairness and Punishment — published in the journal Science, Joseph Henrich (lead author) of the University of British Columbia argues persuasively that "We live in a much kinder, gentler world than most humans have lived in" because of widespread market transactions and religiosity.

Unless politicians such as Campbell and McGuinty shove aside the pigs at the trough (political entrepreneurs) and give a bear-hug to the genuine risk takers (market entrepreneurs), pigs will continue to grow fat on taxpayers’ dough.