By Jason Clemens and Tegan Hill
Last week, with their latest tranche of corporate welfare for the electric vehicle (EV) sector, the Trudeau and Ford governments announced a $5.0 billion subsidy for Honda to help build an EV battery plant and ultimately manufacture EVs in Ontario. Here’s a challenge: if politicians in both governments truly believe these measures are in the public interest, they should tie their personal fortunes with the outcomes of these subsidies (a.k.a. corporate welfare).
One of the major challenges with corporate welfare is the horrendous economic incentives. The politicians and bureaucrats who distribute corporate welfare have no vested financial interest in the outcome of the program. Whether these programs are spectacularly successful (or more likely spectacular failures), the politicians and bureaucrats experience no direct financial gain or loss. Simply put, they’re investing taxpayer money, not their own.
Put differently, the discipline imposed on investors in private markets, such as the risk of losing money or even going out of business, is wholly absent in the government sector. Indeed, the history of corporate welfare in Canada, at both the federal and provincial levels, is rife with abject failures due in large measure to the absence of this investing discipline.
In the last 12 months in Ontario, automakers have been major beneficiaries of corporate welfare. The $5.0 billion for Honda is on top of $13.2 billion to Volkswagen and $15.0 billion to Stellantis. That equates to roughly $979 per taxpayer nationally for federal subsidies and an additional $1,372 for Ontario taxpayers. And these figures do not include the debt interest costs that will be incurred as both governments are borrowing money to finance the subsidies.
And there’s legitimate reason to be skeptical already of the potential success of these largescale industrial interventions by the federal (Liberal) and Ontario (Conservative) governments. EV sales in both Canada and the United States have not grown as expected by governments despite purchase subsidies. Disappointing EV sales have led several auto manufacturers including Toyota and Ford to scale-back their EV production plans.
There are also real concerns about the practical ability of EV manufacturers to secure required materials. Consider the minerals needed for EV batteries. According to a recent study, 388 new mines—including 50 lithium mines, 60 nickel mines and 17 cobalt mines—would be required by 2030 to meet EV adoption commitments by various governments. For perspective, there were a total of 340 metal mines operating across Canada and the U.S. in 2021. The massive task of finding, constructing and developing this level of new mines seems impractical and unattainable, meaning that EV plants being built now will struggle to secure needed inputs. Indeed, depending on the type of mine, it takes anywhere from six to 18 years to develop.
Which brings us back to the Trudeau and Ford governments. Given the economic incentive problems and practical challenges to a large-scale transition to EVs, would members of the Trudeau and Ford governments—including the prime minister and premier—want to attach a portion of their personal pensions to the success of these corporate welfare programs?
More specifically, assume an arrangement whereby those politicians would share the benefits of the program’s success but also share any losses through the value of their pensions. If the programs work as marketed, the politicians would enjoy higher valued pensions. But if the programs disappoint or even fail, their pensions would be reduced or even cancelled. Would these politicians still support billions in corporate handouts if their personal financial wellbeing was tied to the outcomes?
As the funding of private companies to develop the EV sector in Ontario continues with the support of taxpayer subsidies, Ontarians and all Canadians should consider the misalignment of economic incentives underpinning these subsidies and the practical challenges to the success of this industrial intervention.
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