Business Okanagan

I know, everyone has 20/20 hindsight. Mea culpa.

That being said, the idea of bailing out failing businesses doesn’t sit well with me. The market delivered its assessment on General Motors and Chrysler. They have been in decline for a number of years.

I’m fairly sure that most businesspeople felt similarly uneasy with the bailout.

Yesterday, in the Penticton Herald (June 16, 2009), I read an article by David Bond, author and retired chief economist with the HSBC bank of Canada. Unfortunately, the article can’t be found on the Herald’s website. I think it is worth reading and it is reproduced below.

PENTICTON HERALD, P.A8, June 16, 2009

David Bond

Economic Letter: Bailout cash could be better spent

I am not particularly happy to be an owner of shares in of General Motors or Chrysler and I suspect there are many who share that opinion. Taxpayers have poured more than $10 billion into companies whose net worth is something close to minus $100 billion. I fail to see how that is a rational investment even though the prime minister and the premier of Ontario say that they had no choice.

Failure to advance the funds would lead to Canada exiting the auto game for good and job losses would, they contend, have been as high as six figures within six months.

Now how could that be true? The last time I looked, both Toyota and Honda were assembling cars in Canada and they, like Chrysler and General Motors, are not Canadian owned. And while car sales are down, that does not mean that Canadians have stopped buying automobiles. If the American-owned companies were not bailed out, would these other car companies pack up their factories and move elsewhere?

I doubt it. Their investment is too great; they would not do something that stupid. I suspect that it was politics more than anything that decided in favour of the bailout. Minister of Finance Jim Flaherty comes from the heart of GM country. Ontario is a rich source of seats for any government and out-of-work auto workers would be inclined to blame the government for their fate rather than the stupidity of the two U.S.-based auto makers and their own union.

So what do we get for our $10 billion? A remote chance that the two companies will survive on a much smaller scale. Some, but I doubt all, of the funds advanced might be repaid. And, if the firms fail, Canada will have a large labour force that has not been retrained for the postindustrial age.

What the politicians did not tell us is that there was an alternative to the massive bailout.

What makes this alternative so attractive is that rather than investing in an industry that may have seen its best days, it would prepare Canada to be able to play an important role in the new information economy of the 21st century. Moreover, it would probably be cheaper than the bailout.

In essence, the alternative would be to pay workers 60 per cent of their normal income or about $36,000 for a year if they agreed to follow a one-year course of job retraining. About 100,000 workers, if we believe the politicians, would be involved. That means $3.6 billion. Assume that the retraining would cost an equivalent amount or another $3.6 billion. This totals $7.2 billion, far short of the planned bailout. Both the pay and training should be tax free.

Of course with such a policy alternative there was little opportunity to make grandiose gestures to “save” a “vital” industry. And while the investment in re-training would be a sunk cost with no prospect of repayment, the end result would be a labour force equipped with the skills needed to remain competitive in the global economy.

The other unintended side effect of the bailout is that it sends a strong message to other industries that may have suffered from the combination of poor management and adverse markets. It says loud and clear: ” You will be saved from the consequences of your follies provided you are located in the right region and provided your voice is strong enough.”

Two questions that need to be asked are: Where does government draw the line? And doesn’t this type of regional favouritism further divide the nation? With the auto bailout, governments’ eyes are firmly fixed on trying to restore the past rather than building for the future. Once again, local interests were put ahead of the greater good of the nation. And, once again, we have sacrificed the future for the political expediency of today.

David Bond is an author and retired chief economist with the HSBC bank of Canada.