How Not to Create Jobs

Commentary, Economy, Matthew Lau

Corporate welfare handouts are a policy staple of politicians of all stripes. Liberals who mistakenly think government spending is the driver of economic growth love handing out free cash to claim they are “creating jobs.” Conservatives say they are against corporate welfare – but only sometimes, and only if it’s the Liberals who are in government. 

In Ontario, the Conservatives decried wasteful Liberal corporate welfare from the opposition benches, but have now spent more than a year in government continuing to torch taxpayers’ money on business subsidies. The federal Conservatives have similarly given lip service to free markets, but have no plans to end corporate welfare if they defeat the Liberals next month.

One problem with corporate welfare often pointed out by opponents of the policy is that the promise for jobs do not materialize. Take for example the current Liberal government’s “Strategic Innovation Fund” which they said would create 56,000 jobs – an Access to Information request from Blacklock’s Reporter found that in reality only 6,600 jobs were created.

The larger problem with corporate welfare is that even if those handouts did create lots of jobs, the policy would still be a failure. Why? Because more jobs, in and of itself, is not an economic benefit. Labour is an economic cost, not a benefit. The benefit is the goods and services produced by labour.

This point is well illustrated in an often told but perhaps apocryphal story of a visit to China by economist Milton Friedman. During the visit, he observed thousands of workers building a canal with shovels and asked the Chinese bureaucrat who was hosting him why they weren’t using tractors and other machinery instead of shovels.

The bureaucrat replied that using tractors, by finishing the work more quickly and with less labour, would make those thousands of workers unemployed. The response from Friedman: “Oh, I thought you were trying to build a canal. If it’s jobs you want, you should give these workers spoons, not shovels!”

Even if the extravagant claims about corporate welfare funds creating lots of jobs are accurate, it does not follow that corporate welfare is a good idea. Taxpayers should keep in mind that whenever there are claims about governments “creating” jobs through corporate welfare programs, there are one of two possible scenarios.

First, it might be the case that those jobs would have existed even without the corporate welfare, which means the handouts are simply a transfer of money from taxpayers to a few privileged rent-seekers, with the government taking some of the money off the top to pay for the bureaucracy.

Second, if those jobs would not have existed without the corporate welfare, then the jobs created are actually an economic loss, because the economic costs of these new jobs exceed their economic value. If the opposite were true and the value of the goods and services produced exceeded the labour costs, the jobs would have existed in the absence of the subsidies.

In either case, corporate welfare causes an economic loss, which is exacerbated by the fact that it encourages businesses devote large amounts of resources to chasing government funds, instead of producing useful goods and services.

It’s unfortunate, therefore, for Canadian taxpayers and consumers, that there does not seem to be any politicians anywhere who are likely to put an end to corporate welfare.