“Buddy, can you spare a vote”

Maritimers should be wary of federal Liberals bearing gifts.
Canadian Business, May 15, 2000

Derek DeCloet, Senior writer for CB

Cape Bretoners huddled in their churches earlier this year to pray for jobs. The federally owned coal mines are closing; the provincially owned steel mill is being sold; the region’s unemployment rate is 20%. Bring us some relief, they intoned. Heaven knows if their pleas were heard Upstairs–but they were definitely heard in Ottawa. Prime Minister Jean Chrétien went to Sydney in late March and passed out $13 million in federal subsidies to the Canadian subsidiary of Texas-based Electronic Data Systems Corp. to open a call centre, creating up to 900 jobs. He mused about repealing some of the Liberals’ reforms to employment insurance, to make it easier for seasonal workers to collect pogey. Only weeks earlier, his government gave a $50-million budget increase to the Atlantic Canada Opportunities Agency (ACOA), a federal office charged with economic development in the region. Prayers answered—Hallelujah!

If the good people of Atlantic Canada had any sense of history, however, they would be cursing Chrétien instead of praising him. Not because subsidies to business are, with few exceptions, a colossal waste of tax dollars. No, the trouble with Chrétien’s East Coast spending spree—and the reason it must be stopped—is that it will actually hurt the region’s economy, rather than help it.

You’d have a hard time convincing Maritimers of this, but the evidence is overwhelming. Research by Fred McMahon, a Halifax-born economist, shows that by the late 1960s, the Atlantic economy was actually catching up to the rest of Canada. Unemployment had fallen to near the national average; per-capita GDP was rising more quickly. But by the early 1970s, Atlantic Canada was again falling behind. What happened? The federal government turned on the spending tap, much the way Chrétien is today, and distorted the whole economy. Ottawa created the Department of Regional Economic Expansion in 1969, which quickly taught entrepreneurs there were easier profits in lobbying for government grants than in creating products and services people wanted to buy. (An ACOA-sponsored study in 1990 found that Nova Scotia firms make products of poorer quality and higher price than comparable firms in New England. The study blamed subsidies like those ACOA dishes out. The federal agency promptly buried it.)

Then came perhaps the most destructive policy of all: easy unemployment insurance. “It basically bribed people to remain in areas where there weren’t full-time jobs,” says McMahon, who later this year will publish a book called Retreat from Growth: Atlantic Canada and the Negative-Sum Economy. Incredible as it seems, McMahon found compelling proof that parts of Atlantic Canada suffered acute labor shortages, even with unemployment in double digits. (That’s true even in Cape Breton. Several years ago, when the Royal Bank wanted to fix the roof of its New Waterford branch, it was forced to hire construction workers from Halifax when it couldn’t find locals willing to do the job.)

So if you were thinking about starting a business in Atlantic Canada in the past 30 years, here’s what you faced: a) some of the most punitive taxes in North America; b) a government that could undermine you on a moment’s notice by subsidizing your competitors through one of dozens of publicly funded programs; and c) a tight labor market because thousands of able-bodied workers were content to stay home and collect UI. Is it any wonder few businesses dared to set up shop there? Yet Chrétien’s response to three decades of disastrous policy is more of the same, all in the name of winning some of the 20 Atlantic seats the Liberals lost in the last election. “Chrétien is prepared to trap another generation in these perverse programs just to keep himself in power,” says McMahon. “That’s going to destroy tens of thousands of lives.” Of course, Chrétien probably doesn’t give a damn. By the time Maritimers realize he’s led them down the garden path, he’ll have achieved what he’s really after: a third straight majority government.