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News reports say the us government is getting to crunch time on whether to lend or give C which is not clear yet C $1 billion to Bombardier Inc., that is having trouble selling its new C-series aircraft.
This would be the latest in a long line of federal cheques for the company.
If $1 billion is too big several to obtain your mind around, consider it this way. There are 35 million Canadians. So $1 billion is roughly $28.60 per person. Every single one people stands to “contribute” $28.60 to Bombardier. Obviously, not everybody will pay.
Though you will find 27 million filers of income-tax returns, a little more than nine million don’t actually pay any tax, which leaves 18 million that do. Divide $1 billion among 18 million and that gives you – or gives Bombardier thanks to you – $55.55. Every single income-tax-paying Canadian will contribute $55.55 to Bombardier, if the company’s request cash is honoured.
As I write, Bombardier shares are selling for 81 cents each. Together with your $55.55 the authorities is weighing giving to Bombardier, you can buy 69 shares of Bombardier stock. Which may you rather have right now? $55.55 or 69 shares of Bombardier stock?
Unfortunately for Bombardier and its existing shareholders, millions of investors have been creating the stock. Though Fifteen years ago it was costing $26, it has been downhill almost ever since.
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How come? Mainly because the organization has spent tonnes of money developing a new airplane that, it turns out, very little airlines want to buy. The chances it will be profitable in the near future are therefore very slim. Owning a company’s shares means owning title to the profits. But who desires title to profits that appear to be like they will be negative for the next several years?
Do the federal government and the Quebec government, which last fall committed $1.3 billion to Bombardier (a hefty $325 per income-tax-paying citizen), have particular understanding of the workings of airplane markets that justifies overruling the apparent verdict of world capital markets that the C-series won’t ever fly financially?
Markets can be wrong, as Hollywood movies, most recently The large Short, keep telling us. However the movies, including The Big Short, also keep telling us capitalists are greedy, ruthless and daring. If there have been any chance of Bombardier recovering, wouldn’t some enterprising bank, billionaire or hedge fund be eager to take a (ahem) flyer onto it?
The governments will reason that Bombardier offers Canadians much more than financial benefits (which is a good thing since it’s offering precious handful of those at this time). We obtain pride from as being a player on the planet airplane market – though if our planes don’t actually sell, most likely the pride is reduced.
We get the advantages of local control of the company – though whether it’s run by cost-conscious capitalists, as we want it to be, local preferences should be slight. We get “externalities” from technological spillovers – though Bombardier has in the past sued to help keep researchers from understanding the details of how or whether it pays back government loans, so it presumably keeps its industrial secrets a minimum of as near to its chest.
And, finally, we save on employment insurance payouts to its thousands of employees if it goes belly up – though firstly, it’s not clear Bombardier would cease operations whether it got bought out, and secondly, employment insurance benefits really are a one-time cost, unlike corporate welfare, the present we keep on giving.
Investment gurus are always pushing the “strategic” view. Using the main issue, the view from 35,000 feet so to speak, for $55.55 a head we Canadian taxpayers reach keep selling airliners at a loss.
Government may well have a role to experience in providing foreign aid. But aid to the world’s air travellers?
William Watson teaches economics at McGill University.
