#Budget2013 – Market intervention, conservative style

by Eugene Lang. Posted March 26, 2013


The reviews of Budget 2013 are in.  It is a big yawn.   A nothing Budget, a one- day wonder in terms of press interest, most of the new measures in it having been leaked beforehand.

This misses a core point.  Budget 2013 is remarkable for one thing—the Conservative government has embraced a degree of market intervention we have not seen before.

Conservative commentators like Andrew Coyne, the Canadian Taxpayers Federation, the Fraser Institute and the National Citizens Coalition have lamented for years that the Harper government has strayed from conservative principles because it has been big spending and state expanding.  The Harper government’s fiscal record, say these critics, is anathema to conservative principles and history.  The critics are of course wrong.  Big spending has been the hallmark of every national level conservative government in North America for going on thirty five years.  Ronald Regan, George Bush 1 and 2 and Brian Mulroney delivered to their electorate massive deficits, ballooning national debts, and major expansions in the size of the state.  If you believe the critics that the Harper government has been big spending and has expanded the size of the state you can be secure in the knowledge that this sits squarely within mainstream North American conservative governance history.

What is new for conservative governments in this country, however, and what runs afoul of three centuries of conservative orthodoxy—all the way back to Adam Smith–is micro economic market intervention, what is sometimes pejoratively referred to as “picking winners” or “industrial policy”.  Too its credit, the Harper government’s 2013 Budget shows a willingness to depart from the conservative orthodoxy that the free, unfettered market always delivers the superior economic outcome.  Fortunately, this orientation sits squarely in the wheel house of most governments, regardless of political stripe, in most advanced industrial countries.

The 2013 Budget, then, gives us a glimpse of a government that is acting much less like a tribe that subscribes to the theology of Milton Friedman and Frederick Hayek, and much more like a government that wants to experiment with ideas that actually work.  In this connection, Budget 2013 contains three welcome market interventionist initiatives of note.

The first relates to the well-known problems of the Canadian labour market, specifically the skills mismatch that exists across the country, in which many employers cannot find workers with the requisite skills to fill jobs.  Five years ago, the Conservatives introduced Labour Market Agreements (LMAs), whereby Ottawa transferred, with no strings attached, $500 million per year to the provinces to improve labour market outcomes in their jurisdictions.  Half a decade of this hands- -off approach has evidently left the feds underwhelmed, as the skills mismatch has intensified.  As a result, going forward, Ottawa will play a more active role in labour markets through the creation of a new Canada Jobs Grant—funded out of the LMA envelope—a $5,000 grant to individuals to be matched by employers and provinces to help ensure workers get the training they need to fill the jobs the labour market is offering.  The free market and the provinces will no longer be left to their own devices in resolving Canada’s skills mismatch.  Ottawa is coming to the rescue.

The second welcome market intervention contained in the 2013 Budget is the response to the panel headed by David Emerson, former Minister of Industry and Trade, mandated to review Canada’s aerospace policies and programs.

It is a truism that the global aerospace industry is dominated by government interventions of various types.  Governments the world over have concluded that aerospace is an industry worth having and worth spending taxpayers money on because of the relatively unique positive spillovers that accrue to the economy as a whole from this sector.  Subsidizing aerospace is even supported by a body of serious economic theory—so-called strategic trade theory—that Nobel prize winning economist Paul Krugman pioneered thirty odd years ago.

To its credit, the Harper government seems to have been persuaded that a new, yet modest, market intervention in the Canadian aerospace sector is warranted.  Hence, Budget 2013 has committed to establish an Aerospace Technology Demonstration Program, with funding of $110 million over four years.  This program will help Canadian aerospace firms bridge the financing gap for large scale technology demonstration projects, which if left un-bridged can cost business opportunities.  This is a relatively low-cost and welcome market intervention that could make a big difference for the competitiveness of Canadian aerospace firms in the global marketplace.

Finally, after decades of neglect from both Conservative and Liberal governments alike, Budget 2013 is embracing the notion that Canada needs some kind of defence sector industrial policy.  This follows on the heels of the recent report led by Tom Jenkins, CEO of Opentext, which basically called for Ottawa to put in place, on an urgent basis, a number of measures that cumulatively amount to a Canadian defence industrial strategy.

Market intervention in the defence sector is of course also contrary to free market orthodoxy.  Yet governments the world over have recognized at least since the Second World War that this industry operates in a managed market, where governments are the main, and sometimes only, customers.  And for a variety of complex national security, economic and sovereignty related reasons, most governments around the world have chosen to put in place various types of market interventions to support domestic defence suppliers.  Canada has been a weird and almost inexplicable outlier in this respect.  Budget 2013 fixes our outlier status with its commitment to implement the Jenkins panel report and establish a Canadian defence industrial policy.

This, then, is why Budget 2013 matters.  Like all budgets, you can criticize it on many levels.  But the idea that it is a pretty meaningless document misses a core feature of it.  Budget 2013 signals an important shift—a maturing if you will– in the Harper’s government’s approach to economic policy, from one largely bound by free market orthodoxy to one that is more interested in policies that work in practice, but maybe less so in theory.