For the people in Alliston, Ont., Honda's recent announcement of a $492 million facility expansion is welcome news.

But with nearly one-fifth of the financing ($83.6 million, to be exact) coming from the provincial and federal governments, the benefit for taxpayers — and for Canada's economy generally — is less clear.

The government's stated goal is, not surprisingly: "To maintain and create good middle-class jobs, growth and long-term prosperity." But putting aside the marketing and political slogans, the actual case for subsidizing Canada's industry is weak; it's costly, potentially counterproductive and better options are available.

Network of subsidies

Let's start with the costs. At roughly $3 per Ontarian, and slightly over $1 for everyone else in Canada, the Honda subsidy appears modest, but it's just one investment in wider network of programs. The federal dollars come from the billion-dollar Automotive Innovation Fund created by the former Conservative government in 2008 to help develop greener and more fuel-efficient automotive technologies.

There are many other similar programs, such as the $200 million Advanced Manufacturing Fund or the $100 million Automotive Supplier Innovation Program. The latest government financial statistics show total subsidies to all sectors, by all governments, exceeded $18 billion in 2015 alone — to say nothing of the various indirect ways industry is subsidized, from tax credits to trade barriers.

These programs are costly not just because public funds have valuable alternative uses, but because they can distort our economy and lower our productivity. So rather than creating long-term prosperity, targeted subsidies may do just the opposite.

How? Subsidizing one activity shifts workers and investment away from potentially more valuable uses. If markets work well, this shift misallocates workers, lowers our productivity and shrinks our economy. But if markets do not work well, then intervention may be justified. Consider a simple example: if consuming or producing something, such as gasoline, generates pollution that harms others, prices fail to capture this and a corrective tax can help. This is why carbon taxes make sense.

So for auto subsidies, there are two critical questions. How do markets fail? And how does the subsidy help? To the first question: auto subsidies tend to emphasize "innovation" and "advanced manufacturing," so the notional market failure is that research, technology and innovation are public goods. Once discovered, it is difficult to stop other rival auto companies from benefiting. And if the innovator fails to capture the full value of their discovery, they'll underinvest in research.

Tax credits

That's fair enough, but many broader policies already attempt to correct this. In Canada, governments tend to support research and development with generous tax credits. The Scientific Research and Experimental Development Investment Tax Credit (one of many such programs) was used by roughly 23,000 corporations in 2013, and cost the government over $3.2 billion that year. A typical company need earn only 87 cents to break even on $1 in R&D spending, which is more generous than grants in the U.S., the UK, Germany, Japan and other countries provide, according to the OECD.

In fact, Canada offers the second-most generous research and development credits in the G7, behind only France. From a political perspective, however, these grants are less visible than direct investments, with far fewer photo opportunities for politicians, which explains why various governments might opt for the latter. Still, it's not clear why additional subsidies — such as that for the Alliston Honda plant — are warranted.

Any change in policy must carefully consider the welfare of workers. (Reuters)

One possibility may be that subsidies are necessary to "compete" with other governments to attract investment. A recent New York Times investigation found GM, Ford, and Chrysler have together received over $4.7 billion in public subsidies from various levels of the U.S. government between 2007 and 2012. If we don't play the game, our industry loses out. While there's some logic to this, joining a race-to-the-bottom shouldn't be done lightly. It would be better for all to work together to collectively scale back our subsidies.

Of course, no discussion of industry subsidies is complete without recognizing that some workers would face challenges if governments withdrew support. So any change in policy must carefully consider their welfare, and help cushion the blow directly or indirectly by facilitating shifts to other employment or transitioning older displaced workers smoothly into retirement.

The government is right to worry about Canada's lagging productivity and innovation performance. But rather than subsidize this sector or that, governments should focus on structural reforms instead. Liberalize markets, ease trade and investment restrictions, and ensure taxes are broad, simple and competitive. Absent a clear and convincing case for intervention, which has not been made for the auto sector, the perpetual flow of public dollars to private firms must end.

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