By Neville Nankivell
There’s compelling evidence now from several studies to conclude that government-subsidized job creation and regional development programs produce negligible economic benefits and are generally a huge waste of public funds. Sure, some jobs are generated, but often fleetingly and at an unreasonably high taxpayer cost.
Government job creation programs based on discretionary grants and loans are a breeding ground for economic inefficiencies. For instance, often they prop up declining low-growth business activities. They restrict rather than encourage labour mobility. They displace what would be more productive business investments. They can unintentionally put unaided competing firms out of business. They continue to be tainted with local political pork-barrelling, and sometimes cases of fraud. And there’s little effort by their officials to report on results in overall net new jobs in the areas targeted, rather than those directly related to the programs.
There’s not a lot of indication, though, that governments in Canada are taking any serious heed of this. Whatever their political stripe, most of them are still sinking grants, loans and other financial contributions into various kinds of make-work programs. Human Resources Development Canada (HRDC) finally scrapped its sloppily managed job fund last month. But the federal government intends to redirect the fund’s $100-million-plus annual budget into the job creation activities of federal regional development agencies across the country.
This will involve loans rather than outright grants, or so officials say. But the shift won’t likely be a big improvement. The regional development funds also waste a lot of taxpayers’ money on dubious projects and ailing businesses. Their performance reporting is fudgy — making it difficult to determine what lasting benefits have been achieved. Their activities remain highly politicized. When the federal Liberals regained power, they promised to rein in the agencies and trim their budgets. This is clearly out the policy window now.
The point about government-directed job creation efforts is made in a background paper released this week by the C.D. Howe Institute — “[they] are generally inefficient and ineffective.” The taxes levied to pay for them tend to distort the labour market, says author Ben Cherniavsky. It would be better to cut taxes on labour and allow the market, not bureaucrats, to determine what jobs are created and where, he recommends. If governments are determined to intervene in labour markets — in itself questionable — they should use widely accessible tax-based incentives, rather than making discretionary decisions on who most deserves a grant or loan.
Retreat from Growth: Atlantic Canada and the Negative-Sum Economy, a book published earlier this year by the Atlantic Institute for Market Studies, comes to similar conclusions. Its trenchant critique of the results of regional development programs in Atlantic Canada recommends a low-tax environment as a better way to encourage job-creating business investment. “Far from boosting economic growth, economic development programs and regional transfers caused firms [in Atlantic Canada] to focus on political connections rather than increased competitiveness,” says author Fred McMahon, now with the Fraser Institute. Indeed, he found the programs sometimes even subsidized environmentally bad business activities, drove away new private-sector investment and reduced incentives to upgrade job skills.
Despite the billions of dollars of government funds shelled out over the years in Atlantic Canada, the region still has, on average, the country’s highest jobless rates. Economically, it also has underperformed lagging areas of other major industrial economies — such as the neighbouring state of Maine.
For the C.D. Howe Institute, Mr. Cherniavsky, an analyst with Vancouver-based Goepel McDermid Securities Inc., reviewed studies on government-funded employment programs in Canada and the United States going back to the 1980s. The evidence, he says, is that while direct government intervention in the labour market can create some new jobs, they come at a high cost relative to the net benefits generated — which are mostly negligible.
One study found that a Canadian government tax credit program designed to encourage hiring of unskilled, jobless workers had no positive impact on long-term employability. It also estimated that two-thirds of the jobs associated with the program would have been generated without it.
There hasn’t yet been comparable research on the notorious showcase HRDC program, but Mr. Cherniavsky says, “Canadian taxpayers can be quite certain [the] cost per new job exceeded the range of observed costs per new job in tax-based programs.”
Tax subsidies and credits also have inherent weaknesses, but at least remove political bias. What’s preferable, though, is to lower taxes for individuals and businesses. This will raise incentives to work and to start and expand businesses.
As Mr. McMahon says, all that’s really necessary to encourage job creation is a “normal set” of economic policies, rather than heavy direct government intervention that usually just makes things worse and keeps everyone’s taxes high.