When governments give us a “Leg Up,” I say we’d better make sure they are not about to piss our money away – or worse.
As I have said before, protectionism mostly hurts the protected.
There are two main tools that governments use to “protect” industry. The most popular one involves tariffs, which are essentially taxes on imports – I’ll call this form of protectionism The Wall.
The other protectionistic device is subsidization: hand-outs from government. I’ll refer to this as The Leg Up.
The Wall hurts the “protected” country by increasing the cost of goods as they cross the border, which in turn increases their price. Such artificially high prices might be considered an indirect form of taxation.
The Leg Up, by contrast, is more direct, but still costly. In many cases, the government taxes its citizens and hands that money out to whatever industry or sector it might favour at the time.
One variation of The Leg Up is loan guarantees, which involves the government giving high-risk capital to
ventures that bankers and investors won’t touch.
In the softwood lumber dispute with the U.S., our southern neighbour contends that Canada’s stumpage system constitutes a Leg Up because the fees that producers must pay to harvest logs are not bid at open auction.
The U.S. lumber producers think that our raw logs would sell for more on the open market, even though the opposite may be true. (This is difficult to prove one way or the other.) Regardless of who’s is right or wrong in this
dispute, Leg Ups hurt the “protected” country through lost potential governmental revenues.
Apart from the taxation or revenue side of the equation, the hidden-but-dangerous aspect of any and all forms of protectionism is that they distort the marketplace: very often the weak thrive, the strong can’t stay alive.
To illustrate this point, allow me to cite two examples, one of how the strong survive in the face of countervailing duties, and the other how the strong can die under subsidization.
I talked with Ed Greenberg, the spokesman for the Alberta Forest Products Association (AFPA), last week. I wanted to know if the recent 27-per-cent duty on softwood lumber was causing mill closures or layoffs in Alberta, as we have seen in Quebec and B.C. of late.
In Quebec, Abitibi-Consolidated has closed three relatively small mills (700 jobs) for an indefinite period, while the B.C. Lumber Trade Council reports that 32 mills have temporarily shut down there.
Greenberg, however, told me that his organization knows of no closures or layoffs in Alberta to date. This promising situation illustrates that the strong, vibrant provinces such as Alberta stand to lose the least when the crap hits the fan.
And losing the least means gaining the most when this conflict finally resolves itself – i.e. when American consumers get fed up with the increasing costs of their softwood.
Alberta lumber producers face lower taxes, a lower cost of living and higher efficiency than other (protectionist) provinces.
While the AFPA members are facing tough times, they are already up against less competition than before the tariffs came into effect (although demand has admittedly decreased too), and they have been innovating.
One such innovation is an emphasis on value-added products, which skirt the tariffs, such as finished wood frames.
Canadians may soon be manufacturing huge numbers of American homes, shipping them to the States for assembly, which could in turn seriously damage the U.S.’s home-building industry.
Who knows? Only time will tell which innovations will take hold, but the incentives to experiment are powerful.
With the least-efficient sawmills now withdrawing, either the surviving producers will benefit (by tighter supply and thus higher prices), or lumber consumers such as
homebuilders will benefit, because the lowest-cost wood will be the only stuff left on the Canadian market (both can be true to one extent or another).
That’s how American tariffs can benefit Alberta in the long run. But the reverse is true too.
In the early 1950s, Alberta’s premier, Ernest Manning, had the idea of celebrating our province’s 50th anniversary by granting new “multi-purpose” auditoriums, one each to Edmonton and Calgary: the Jubilee auditoriums.
While noble in concept – Manning wanted to subsidize community theatre, music, dance, etc. – his gift proved to be the kind that kept on taking.
Completed in 1956, the hidden costs of the Jubilee auditoriums (excluding the roughly $700,000 spent every year on running the buildings these days) have taken years to emerge, and even today few people recognize them.
In the 1950s, the theatre business was struggling. Television and new film technologies were altering the demand for big movie houses and live theatres across Canada.
The trend was towards smaller auditoriums. By 1963, the Royal Alexandra Theatre in Toronto (seating roughly 1,700) was in desperate need of restoration. Let’s compare that with Calgary’s Grand Theatre, a similar building that was in the same situation as the Royal Alex. Built in the same era (Royal Alex 1907, Grand 1912), both had almost exactly the same number of seats, and inside both were plush examples of ornate, early 20th-century style. And both were losing money.
hat eventually set them apart was that in 1963 Ed Mirvish, the consummate Canadian businessman, bought and restored the Royal Alex, which ever since has been run as a successful for-profit theatre.
Here in Alberta, at almost exactly the same time, the historic Grand Theatre was gutted of much its ornate interior and converted into a movie house, later to be split into two movie theatres. The Grand’s proprietors of the time cited the formidable competition that was coming from the government- subsidized Jubilee Auditorium (seating more than 2,500) as one reason why the Grand was not attracting enough business to justify keeping it a live theatre.
So, while the government in Alberta was spending money on new auditoriums whose shortcomings were becoming clear (bad acoustics, too big, etc.), Alberta was losing the Grand.
With understandable pressure today from preservation groups to restore the now- less-than-grand Grand – the last theatre of its calibre and age left in this province – the government is left with the odious choice of spending millions restoring a building that will never pay for itself, or letting a theatre die.
Unfortunately, this Hobson’s choice is of Manning’s making. I’m not against subsidies or grants or tariffs in all circumstances. But let’s be smart about them and learn from history.
Combine a Leg Up and a Wall, and too often that urine smell is what you think it is: a pissing shame.
