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

The U.S. and Canada two economies that claim to be governed by market forceshand out billions of dollars in taxpayer support for businessevery year. And asthe COVID-19 crisis struck, those handouts increased.

When pandemic-relatedmeasures forced the shutdown of businesses and threw people out of work, central banks slashed interest rates andgovernments dumped money into the economy viawage and rent supports, hoping to prevent the long-term economic damage that issometimes called "scarring."

But subsidies always come with a problem: Figuring out how and when to end them.

And as we examine today'sjobs numbers from Statistics Canada, someincluding the Canadian Federation ofIndependent Business (CFIB)say the Canada Recovery Benefit,intended to help the jobless,may be making unemployment worse.

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

A growing number ofcritics now suggest that the government's pandemic support for businesses andworkers have outlived their usefulness and may be doing harm.

Stagflation risk

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 U.S. economistVivekanand Jayakumar, writing this week for the political website The Hill.

"Additional stimulus risks tipping the U.S. into a stagflationary trap, characterized by a slowdown in growth (driven by constrained supply) and surging price levels," saidJayakumar.

Already, the mania to bid up residential real estate,which Canadians often consider our own national concern,has begun to sweep the worldas low interest rates and fear of inflation put housing out of the reach of many of the people the stimulus is supposed to help.

Subsidy addictioncan be problematic, partly due to the unequal effect on those who pay for them and those who receive them. While creating the subsidy requires taking a few dollars fromeach taxpayer, cutting the subsidy requires slashing a significant chunk of revenue from those who have become accustomed to it, leading to a political outcry.

Globally, removing agricultural subsidiesor price supports for cooking oil or fuel, once given,isso politically unpopular that governments oftenprefer to leave the supportsin placeeven when it is clear the effects are harmful.

'Perverse subsidies'

Sometimes called "perverse subsidies," many governments feel politically compelled to continue handouts to businesses that are doing the exact opposite of government policy. Multibillion-dollar subsidiesto the oil and gas sectorby governmentsclaiming to fight climate change are an oft-cited example in Canada and around the world.

The CFIB'ssenior vice-president of national affairs, Corinne Pohlmann, worries that the Canada Recovery Benefit (CRB)the pandemic worker benefit that replaced the Canada Emergency Response Benefit (CERB)may be turning out to be a perverse incentive, discouragingjob hunters.

"We don't necessarily have the exact, like, statistics on it, but anecdotally, it comes up multiple times a day," said Pohlmann. "People should not be better off on a government-assistance program thanthey would be when they were working."

While the current reduced benefit would not replace the salary of a full-time employee,Pohlmansaid part-time workers with childcare obligations or those going to school may be making more than they would in a job.

Ironically, while warning about the impact of the CRB, the federation welcomed thefederal announcement on July 30 extending thetwo programs to help businesses:the Canada Emergency Wage Subsidy and the Canada Emergency Rent Subsidy.

"With only 35 per cent of businesses back to making normal levels of sales, any additional runway on these crucial federal support programs is welcome news," the CFIBsaid in a news release.

Distorting the market

If the CRB is distorting the labour market, thosebusiness subsidies are doing something similar, saysAminMawani, an associate professor at York University's Schulich School of Business in Toronto.

"The [CFIB] is not really looking at the economic interests of Canada;it's looking the self-interests of its businesses," said Mawani,who has studiedthe government's support programs.

Now that struggling businesses are getting taxpayer supports, quite reasonably,they don't want to see them go.

Pohlmannagrees that, at some point, subsidies must end. Businesses would prefer a return of pre-pandemic sales rather thangovernment subsidies, she said, but government restrictions have made that impossible for now.

Whether you blame the government or the necessities of public health, said Mawani, subsidies mute the market signals essential to showing that a business is successful.

If some businesses have prospered by adapting tothe pandemic, it may not be useful for taxpayers to continue to bail out those that continue to struggle.Government subsidies are not free, he said, and at some point,businesses must pay taxes to help cover those costs.

Mawani has been researching profits during the pandemic and said some businesses made higher returns despite lower sales and smaller staff,even returning more money to shareholders than they had the year before.

"It clearly shows that some of the subsidies are flowing through to shareholders," he said.

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

The politicalneed to act quickly topatch the holesin the economy created by COVID-19may justify what haveturned out to be inefficient or badly targeted wage and business supports.And rather than go through the complicated and politically fraught process of fine-tuning the programs,Mawaniexpects they will soon be cancelled altogether.

"I think all this will stop whenthe election is over," said Mawani. "If there is an election."

While Mawani is not convinced that Canadian workers are refusing to go back to work for merely a few hundred extra dollars in subsidies, he said thatif business leaders think that's what is happening, they have an easy solution.

"Maybe they need to up their wages a bit."

Follow Don Pittis on Twitter:@don_pittis