Painful as it may be, wage and business subsidies in a pandemic will eventually stop


The United States and Canada – two economies that claim to be governed by market forces – provide billions of dollars in financial assistance to businesses each year. And as the COVID-19 crisis hit, these handouts have increased.

When pandemic-related measures forced businesses to close and put people out of work, central banks cut interest rates and governments poured money into the economy through wage supports and to rents, hoping to avoid the long-term economic damage that is sometimes referred to as “scarring.”

But there is always a problem with subsidies: knowing how and when to end them.

And as we examine today’s employment figures from Statistics Canada, some – including the Canadian Federation of Independent Business (CFIB) – say that the Canada Stimulus Benefit, intended to help those without. -employment, could worsen unemployment.

It is a well-known economic problem that once started, subsidies are hard to stop.

A growing number of critics now suggest that the government’s pandemic support for businesses and workers has lost its usefulness and could do harm.

Risk of stagflation

A flood of fiscal stimulus and low interest rates is already causing dangerous distortions in the economy that could lead to a combination of slow growth and high inflation, warned US economist Vivekanand Jayakumar, written this week for the political site The Hill.

“Further stimulus measures risk tipping the United States into a stagflationary trap, characterized by slower growth (induced by limited supply) and soaring prices,” Jayakumar said.

Already, the craze for bidding on residential real estate, which Canadians often see as our own national concern, started to sweep the world like low interest rates and fear of inflation put housing beyond the reach of many people the stimulus is supposed to help.

Low interest rates meant to stimulate the economy have led to a global rush to invest in housing, pushing up prices and rents as construction falls short of demand. (Justin Tang / The Canadian Press)

Dependence on grants can be problematic, in part because of the uneven effect on those who pay them and those who receive them. While creating the subsidy requires taking a few dollars out of each taxpayer, reducing the subsidy requires slashing a significant chunk of income for those who have become accustomed to it, which has led to a political outcry.

Globally, the removal of agricultural subsidies or price support for cooking oil or fuel, once granted, is so unpopular politically that governments often prefer to leave the supports in place – even when it is. clear that the effects are harmful.

“Perverse subsidies”

Called a few times “perverse subsidies“, many governments feel politically obligated to continue giving out donations to companies that do the exact opposite of government policy. The multibillion dollar subsidies to the oil and gas sector by governments claiming to fight climate change are a example often cited in Canada and around the world.

CFIB Vice President of National Affairs Corinne Pohlmann fears the Canada Recovery Benefit (CRP) – the pandemic worker benefit that replaced the Canada Emergency Benefit (CEP) – may reveal itself be a perverse incentive, discouraging job seekers.

“We don’t necessarily have the exact stats on this, but for the record, it comes up several times a day,” Pohlmann said. “People shouldn’t be better off with a government assistance package than they would be when they were working.”

Corinne Pohlmann, CFIB vice-president of national affairs, fears government subsidies will discourage workers. (Canadian Federation of Independent Business)

While the current reduced benefit would not replace a full-time employee’s salary, Pohlman said part-time workers with childcare obligations or those who attend school may earn more than they wouldn’t do that in a job.

Ironically, while warning of the impact of the CRB, the federation welcomed the federal announcement of July 30 extending the two business assistance programs: the Canada Emergency Wage Subsidy and the Emergency Grant. for the rent of Canada.

“With only 35 percent of companies returning to normal sales levels, any further leads on these critical federal support programs is welcome news,” the CFIB said in a statement.

Market distortion

If the CRB distorts the job market, these business grants do something similar, says Amin Mawani, associate professor at the Schulich School of Business at York University in Toronto.

“The [CFIB] does not really look at Canada’s economic interests; he looks at the personal interests of his companies, ”said Mawani, who has studied government support programs.

Now that struggling businesses are getting taxpayer support, quite reasonably, they don’t want them to go.

Pohlmann agrees that at some point the subsidies must stop. Businesses would prefer a return to sales before the pandemic rather than government subsidies, she said, but government restrictions have made that impossible at this time.

Whether you blame government or public health necessities, Mawani said, subsidies dampen market signals essential to show a business succeeding.

While some businesses have thrived adjusting to the pandemic, it may not be helpful for taxpayers to continue to bail out those that continue to struggle. Government grants are not free, he said, and at some point companies have to pay taxes to help cover those costs.

Amin Mawani, of the Schulich School of Business at York University, says grants are often ineffective and always political. He expects many pandemic-related support programs to disappear after a federal election. (York University)

Mawani has sought profits during the pandemic and said some companies have achieved higher returns despite lower sales and smaller staff, even returning more money to shareholders than they did in the year. former.

“This clearly shows that some of the subsidies are reaching the shareholders,” he said.

Subsidies are almost always ultimately political, he said, so removing them can be politically damaging.

The political need to act quickly to close the holes in the economy created by COVID-19 may justify what has proven to be inefficient or poorly targeted wage and business supports. And rather than go through the complicated and politically charged process of tweaking the programs, Mawani expects them to be completely canceled soon.

“I think all of this will end when the elections are over,” Mawani said. “If there is an election.

While Mawani is not convinced that Canadian workers are refusing to return to work for just a few hundred more dollars in grants, he said if business leaders think this is what is happening, they have a solution. easy.

“Maybe they need to raise their wages a bit.”

Follow Don Pittis on Twitter: @don_pittis


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