Less than zero


Great news! After many years, sales of Bombardier’s much-vaunted — and much-more-subsidized — C-Series regional passenger jet are finally off the ground, with Lufthansa finally commiting to buy the first 30 of the planes.

So let’s see. Governments have put, what is it, $780-million into the project? That means as of now Bombardier is into the taxpayer for roughly $26-million per plane sold, or just over half the sticker price. But it’s all right: it’s a “repayable loan.” Bombardier only needs to sell several hundred of the things and we get all of our money back, ie we earn a zero per cent rate of return. Until that day, we’re in negative territory.

So it’s not quite true, even now, to say that Lufthansa has “bought” 30 jets from Bombardier. More like: the taxpayers of Canada have paid Lufthansa to take them. And Lufthansa has, after much deliberation, accepted.


Less than zero

  1. i’m still hoping to hear how we recover our money from the airbus scandal participants.

  2. I am personally gratified to have contributed to Lufthansa’s enjoyment of these fine airplanes. Of course, aren’t the Fokker planes that Air Canada uses manufactured in Germany? Seems like a perfect system. German taxpayers fund our local planes and we fund theirs!

  3. I’m not sure we’re paying Luftansa to take them. Presumably they do actually have to pay for them at some point.

    I do agree that zero percent loans are BS. That should be an equity position, if anything.

  4. All is unfolding as it should. Bombardier is building an assembly plant in Mexico.

  5. But Andrew, don’t you see those commercials during various international sports competitions?!? When we go to Europe we can wander around like dopes obnoxiously taking pictures of train cars! THAT’S MY TRAIN! Without Bombardier vehicles, what will we take pictures of in Europe’s historic capitals?

  6. Okay Andrew, this is fair comment. Bombardier definitely eats up a lot of subsidies. However, Russia, Brazil, Japan, the US and the EU all subsidize their aerospace companies. So, we have three choices:

    1 – Implement some sort of worldwide set of rules (like, say, the WTO) that actually works to prevent these subsidies
    2 – Status quo
    3 – Don’t subsidize and see our aerospace industry die

    I personally prefer 1. But that is not remotely realistic. So, out of the two remaining options, I like 2 better.

    I may have missed a choice here, but that is how I see the problem.

    • That lays out the summary of options nicely, Scott. Allow me to vote for option 3.
      #1 runs the risk of, well, never happening, or being circumvented massively anyways.
      #2 will merely self-perpetuate its own insanity.
      #3 has the virtue(s) of:
      3a: getting imported planes cheap, subsidized by the taxpayers of other foolish countries;
      3b: removing Canadian taxpayers’ subsidies that reduce the price paid by international customers for their purchases;
      3c: forcing our industry to be profitable on its own two feet or quite deservedly die off;
      3d: pressuring other countries to reduce or stop their own insane unsustainable drains on their productive economies to favour their unproductive industries;
      3e: any combination of the above.
      I’m sold. Put me down for #3. Thanks.

      • That way we’d have the glory of taking one for the team, and eventually the Lord of Free Markets would smile on us for our righteousness. He would, wouldn’t he? Sure he would. He loves losers.

        • Apparently, J@ck, WE love losers: we keep paying out good money to keep ’em around to be fed over and over again.

          • If by “we” you mean “everybody in the whole world,” I agree. But what you’re proposing is unilateral disarmament. The way to dismantle the industrialised world’s aerospace subsidy system is not to appease the subsidisers by walking away, it’s to get serious about free trade.

          • J@ck,

            The unilateral disarmament metaphor is as inapt as it is overused. The reason why disarmament must be negotiated is that each side as missiles pointed at the other. But with subsidies and tariffs, the missiles are pointed inward: it’s the country that imposes them that suffers the most.
            If we were the only country to use subsidies, there might be a case: it’s at least theoretically possible that there could be industries where the economies of scale were so great that the subsidy would give one country’s industry a worldwide monopoly, and that the returns to this monopoly would be so enormous as to outweigh the costs (including opportunity costs) of the subsidy. But among the many conditions for this to hold is that other countries do not respond in kind. If they do, then there is no advantage to be gained from the subsidy: you’re just sacrificing one industry’s interests for another.
            The willingness of other countries to subsidize aerospace, in other words, makes the case against subsidy, not for it.

          • Thanks for the reply, Mr. Coyne, but I don’t quite grasp what you’re saying. I can see why it would be self-destructive to initiate a subsidy (provoking an international subsidy race). Once those subsidies are in place, however, how would one country’s withdrawal from the race not result in the ruin of their particular slice of that industry? For instance, if we stopped subsidising Bombardier, how could they still sell planes to Lufthansa? Wouldn’t Lufthansa look to a fully subsidised French, Italian, or Bolivian aerospace company instead? This is what I mean by unilateral disarmament. As you say, the arms race wastes vast amounts of money, but without international cooperation I don’t see how Canada can eliminate aerospace subsidies without eliminating our own aerospace industry.

          • J@ck,

            If I could interject here, I’m not sure you’re a Simpson’s fan, as I seem to recall mentioning some time ago you have divorced yourself from tv. But there is an episode which illustrates the point, somewhat. It’s called “Mr Plow”.

            Homer gets into the snow plowing business through the purchase of a snow plowing truck – the result of needing a new vehicle after an insurance claim for running into the back of his car in his own driveway. So, he starts a business, and calls himself “Mr. Plow”. Eventually, through his good deeds etc. he becomes a hero – and is awarded the keys to the city by mayor Quimby.

            At Moe’s tavern Homer even earns a free beer from Moe in appreciation. In response to Barney’s musing, “I wish I was a hero”, Homer tells him to “get out there and be the best damned Barney you can be.” Still clad in his bonnet and diapers, Barney rushes outside. (And crashes into something.)

            At 7am, Homer wakes up to falling snow, but is shocked to find that all the driveways have already been plowed! A giant snow-plow cruises down the street: It’s Barney “Plow King” Gumble. To stimulate healthy competition, Barney produces a shotgun and takes out the tyres of Homer’s truck.

            transcript: http://www.snpp.com/episodes/9F07.html

            Eventually, Homer goes out of business – as he was out spent by Barney, and there wasn’t enough snow plow business to go around. And Barney gets complacent, and enjoys the good life.

            -Barney enters the business: http://www.youtube.com/watch?v=p0kio1e-jtA
            -Barney’s ad: http://www.youtube.com/watch?v=srfyVfH_nvs&feature=related

            The point being, there are no or low barriers to entry in the snow plowing business in Springfield, and because Barney entered the competition, it was ruined for both due to a limited market, overinvestment , and escalating competition (through essentially their banks subsidizing their spending).

            Everyone loses in the long run in an escalating subsidy war.

    • it is no fun watching an industry like this die out, but the skills and resources that went into that activity are rapidly deployed elsewhere more productively. Plus, as madeyoulook notes, we get to buy other people’s planes for less, an additional return for us.

      • it is no fun watching an industry like this die out, but the skills and resources that went into that activity are rapidly deployed elsewhere more productively

        You mean China, right?

  7. I understand – though don’t agree with – the ideological stance that gov’t shouldn’t subsidize industry, but to call Canada’s return “less than zero” simply because interest hasn’t been collected in cash is absurd.

    First, this transaction alone – $1.53B – will bring in all kinds of tax revenue, directly and indirectly via employee salaries.

    Second, Bombardier now has the physical and intellectual property to keep producing these planes at declining costs, for sale into a massive new market. Their estimate of their market opportunity is up to $147B.

    Third, aerospace is just the kind of high-tech industry we need to have, unless we all intend to become bankers, lumberjacks or cashiers.

    Fourth, aerospace manufacturing produces huge amounts of spin-off manufacturing opportunities and good, high-paying, progressive jobs.

    I could possibly be convinced that this taxpayer money was somehow wasted, but I’m not about to be convinced by this facile, misleading bit of grouchery.

    Also, is your math correct? “Bombardier only needs to sell several hundred of the things and we get all of our money back.” Several hundred (let’s say 200) at $47M per plane is almost $10B in revenue for Bombardier. Are the terms of our investment really that poor? If so, *that* is your scandal, not the fact that we invested in the first place.

    • First, imagine the no-strings-attached tax revenue that would have been generated had these workers been doing something self-sufficiently productive instead.
      Second, how has the payback been from aerospace / automotive / forestry / shipbuilding / etc in their spectacular histories of declining-cost profitability / market opportunity upon which these, ahem, gently nudged industries have capitalized? All of a sudden “less than zero” becomes more and more apt.
      Third, you got any-other need-to-have exporting industries we should nationalize?
      Fourth, see the first, imagine the no-strings-attached spinoffs that would have been generated had these workers been doing something self-sufficiently productive instead.
      And to bring together:
      Fifth, do you seriously trust GOVERNMENT to pick and choose these *cough* winner industries for their long-term economic merits rather than their short-term vote-buying and kickback-supplying payoffs?

      • So what’s this self-sufficient thing you magically figure all these people would be doing? I mean, it’s obvious you figure all of them would transfer wholesale to whatever it is, not to mention that other workers in the area, those who rely on the Bombadier workers to buy lunch and clothes and whatnot from them, obviously they’re figuring out how to self-sufficiently purchase their own lunches and clothes and make money off of that. Or are you assuming this self-sufficiently productive activity all happens in the same area that Bombardier happens to be located in right now?

        In case you haven’t noticed.. there’s layoffs happening all over the place now. Finding “self-sufficient employment” isn’t just a case of calling out for the magical hand of Adam Smith to grant you work. Not to say that many of them wouldn’t find other work. But to just assume they would falls to the standard explanation of an assumption.. asinine.

        And even for those who do, there’s that unfortunate fact that re-employment isn’t instant. There’s a delay that occurs. And what do these people do during that delay? After all, they don’t just conveniently cease to exist. What do the people who relied on them do? And the most important question, the one that the libertarian texts always avoid — how long does the damage last for and what do people do while it’s ongoing.

        The answer to that question generally isn’t very nice.

        • Well, I imagine the laid off workers would collect EI and go back to school to upgrade their skills or something of the sort. You know, like everybody else who has lost their job. Why are jobs at Bombardier and GM worth saving at all costs but those at Nortel aren’t? Why should workers in the high-tech sector (and lots of other sectors for that matter) support those at GM and Bombardier? What makes them any more valuable?

    • “aerospace is just the kind of high-tech industry we need to have, unless we all intend to become bankers, lumberjacks or cashiers.”

      What is it about bankers, lumberjacks and cashiers that you so dislike, that you wish to take their money from them and invest it in your favorite hi-tech gadget, when they would not invest in it if they were given the choice? Do you possess some genetically superior intelligence with which you have deduced that airplanes are a better use for their money than whatever they could come up with on their own? Must be a tremendous burden for you to have to worry about everyone else’s savings for them. I say, put down the burden and stop trying to be everyone’s Investment Czar.

      Besides, if throwing millions of dollars in taxpayer subsidies at fancy-sounding hi-tech gizmos was a successfully strategy then Nortel would be a giant of the telecoms industry rather than a sad, bankrupt carcass. Throw them on the ash heap of governmentopian dreams, next to Sprung greenhouses and the Bricklin cars.

      It’s a dead-end, failed strategy because (1) industries which can count on subsidies and protection inevitably end up flabby, weak and unprofitable; (2) politicians will always choose industries to subsidize based on political interests (or worse, utterly corrupt interests) rather than thinking about the long-term, economic consequences for the greater public; (3) politicians will tend to pick losing industries to subsidize rather than winners because (a) winning technology never lacks for private investment anyways, (b) promoters of losing ideas spend a lot more on lobbyists (and bribes), (c) picking losers is more profitable for politicians and bureaucrats in the long run because creating a weak economy leads to greater dependence on government “help” and therefore gives them a reason to constantly create new agencies and programs and seek expanded budgets and powers – claiming they are necessary to fix the economic problems which they themselves caused.

    • What about BlackBerry? We don’t pay for half of each device/plan used by the US Congress, and yet the folks in Waterloo seem to do okay. I could go on…

  8. A zero percent rate of return is absolutely stellar, these days. Even if we don’t break even on this it’s probably a more effective use of taxpayer funds than most of our upcoming “stimulus” spending.

      • And quite true, which all the praise heaped on deregulated banking in the last five years was manifestly not.

        • Hello, research desk? We need info on Fannie Mae & Freddie Mac & the US Congress and how waaaay off the perception is about lack of government interference leading to the current mess in the banking system. What’s that? Thirty minutes or free? Why, thank you very much. Deliver it to one J. Mitchell. No, keep it as the first initial — my delivery address software can’t handle the way he spells his first name. Ciao.

          • At the time , myl , Congress ” interfered ” by essentially privatizing the F twins. Congress only took them back into the public fold after the damage was done.

          • Make two copies, research desk.

          • Sigh. It wasn’t just the mortgage bubble, MYL (which, incidentally, was absolutely the result of deregulation), it’s the fact that the banks were fantastically over-leveraged. For eons, ilk of Coyne were chanting the efficacy of the market, whereas if this titanic schmozzle has shown one thing it’s that the market is subject to irrational giddiness and panic. That someone could still defend the All RIghteous Hand of the Market in the context of the last six months is, let us kindly say, a tribute to human willpower.

          • Capitalism: the worst system except for all the others.

            While lifting far more people out of poverty than every other system and delivering things like blogs and magazines, it has failed to create the utopian world where stocks always go up and unemployment always goes down.

            It actually allows people to take control of their own lives and make their own mistakes. Rather than every other system where people are beholden en masse to the mistakes of their superiors.

          • sf: “[Capitalism] actually allows people to take control of their own lives and make their own mistakes. Rather than every other system where people are beholden en masse to the mistakes of their superiors.”

            The people are beholden en masse to the mistakes of their superiors in capitalism too, sf. The massive job losses of the last few months are the direct result of their superiors’ mistakes. I agree with you that capitalism has been a lot more successful than other systems at creating wealth (though not, for example, at promoting piety or building step pyramids, among other possible goals), but to pretend that it allows everyone to take control of his own life is hyperbole.

    • New definition of “more effective than” — “not any more wasteful than”

    • That’s the worse part. Now that Bombardier has been receiving welfare for so long, the subsidies no longer have any vote-buyng power.

  9. “At the time , myl , Congress ” interfered ” by essentially privatizing the F twins. Congress only took them back into the public fold after the damage was done.”

    The government created Fannie and Freddie. The government pumped money into Fannie and Freddie through the low interest rate monetary pumping of “Easy Al” Greenspan. The government strongly leaned on Fannie and Freddie to lower standards and lend money recklessly. The government allowed the people buying Fannie and Freddie securities to believe that no matter how incredibly bad the mortgage companies were run, they would ultimately be backstopped by taxpayers. The government took no action whatsoever to either cast loose to the free market or to rein in or abolish the government-sponsored entities despite years of dire warnings about their business practices and financial position.

    There was nothing “private” about Fannie and Freddie (except the salaries and bonuses that were sucked out of them by their government-appointed management). I hope that you weren’t trying to tell us that these failures say anything about the functioning of capitalism or free enterprise.

    See The Bailout Reader – “Freddie Mac: A Mercantilist Enterprise”, Fannie Mae: Another New Deal Monstrosity”, “Who Made the Fannie and Freddie Threat?”, “Are Fannie and Freddie Too Big to Fail?”, “Fannie Mae Distorts Markets”, et al.

    • Why, thank you, research desk. I note the 30-minute guarantee kicks in, so I appreciate the freebie.

      • And it’s worth exactly what you paid for it. Enjoy.

        • Nope, nope greed had sfa to do with it! Blame govt, works every time!

          • And the best part is — hearken, o ye bankers yet unborn — that while you’re wrecking the international financial system you will actually be applauded for your upright Christian Utilitarian virtue by the world’s Coynes, who will defend if not applaud your God knows how huge bonuses, and when it all gets flushed down the drain as down the drain it must at last get flushed, random non-bankers who wish they were — and subscribe to the Economist — and once took intro economics — will demand that next time we listen to the bankers, the True Sons of Capital. Oh, it’s wonderful work if you can get it, and the best part is that anybody can.

          • To be entirely honest economics isn’t my strength. [ and that’s saying something] But i have lived a while, and it’s seems to me that pretty much since the end of the cold war, we’ve allowed our speculator class free rein – now we’re reaping the whirlwind!

          • Folks, greed went unpunished with the bailouts of stupid borrowers and stupider lenders! Your evil character “The Market” (cue ominous fanfare of doom) did not bailout the stupid.

          • MYL: “Your evil character “The Market” (cue ominous fanfare of doom) did not bailout the stupid.”

            But, unchecked and unregulated, it made the bailouts necessary. The Market did bring this on, MYL, any way you slice or dice it. It always wants to bring this on because it always wants to gallop as hard as it can. But instead of regulating, disciplining, and reining in the Market, Greenspan dug his spurs in. Because he stood in superstitious awe of Market. Rather like yourself and Mr. Coyne.

          • J@ck, necessary is in the eye of the incompetent do-something-do-anything government. We have richly earned this downturn / recession / depression. The Market (ominous fanfare of doom) SHOULD be allowed to punish the stupid. We somehow can’t allow ourselves to let it. You call it necessary, others call it pragmatic. I call it immoral theft from the future. Individual results will vary.

          • Except the markets don’t just punish the stupid. Iceland is the example here. No fannie, no freddie, just the unregulated greed of a few now putting huge segments of the population at risk.

            The free market is like a chainsaw. It’s a useful tool that can very quickly cut through a lot of difficult tasks, making things useable that weren’t before.. but like a chainsaw, if allowed to run uncontrolled, it can also very quickly cut through you, everything you hold dear, and your neighbors as well.

          • I keep having to remind myself, MYL, that you actually don’t grasp the enormity of the catastrophe we face(d) with the credit crunch. The bailouts were necessary in a totally pragmatic sense: without them more big US banks would have gone belly-up and the ripples would have been twice as big. Don’t you understand that credit is not like aeroplanes? It isn’t a finger on the economy’s hand, it’s the blood of the economy. Letting the Market “correct” itself wholesale for the banks’ incompetence might well have meant permanent liver damage or even death.

          • Wow, J@ck, thanks for clearing ‘er up. I’m convinced. Damn the next generation, we have to avoid bold-typed cirrhosis and mortality now!
            It’s neat that as I read your passage, I was overcome by this ominous fanfare of doom. Shiver…

          • MYL, that “Next Generation” line is so trite. You prefer to leave a Stone Age international financial system to our heirs? I hope you are shivering, because the international financial crisis actually was about more than your own bank balance. I know, it sounds incredible: macroeconomics! Who knew?

    • Even the government themselves noted that the companies had a dual mission, one mission being to provide low cost housing to low income people, which is similar to any other social program, and which is used a crutch by the CEOs to explain why they should shoulder no blame for the fiscal disaster that these companies became.

    • Except the ones that are having the most trouble now, such as AIG, are the *insurers* of this supposedly government imposed debt. Are you now trying to claim that the government forced them to insure this stuff as well?

      The theory that the free market wouldn’t have got us into this mess except for the government fails because a purely free market company — AIG — looked at these things (from all over the world, mind, not just the US) and thought “Hey, that’s a reasonable risk to insure.”

      So all it really shows is that nobody, no organization, whether public or private, is all knowing. And knowing that, it strikes that deregulating them so as to allow those involved to leverage their ignorance as quickly as possible probably isn’t the best of ideas.

      • “…all it really shows is that nobody, no organization, whether public or private, is all knowing.”

        So it follows that we should give one organization in particular, the government, more powers to regulate everybody, everywhere.

        • Er, yes it does, because regulation involves slowing things down — let’s call it Prudence — and AIG et al. erred on the side of Recklessness. Neither is all-knowing, but the risks of the latter are wildly greater.

          • I’m with Jack – I don’t see how the government’s lack of omniscience is a reasonable argument against government regulation. Obviously governments are often crappy regulators, but the solution is to make them better regulators rather than dispense with regulatory functions altogether.

          • While you’re waiting for them to get better, they will likely get worse. What makes you think politicians have more expertise than the rest of us?

          • And the government is the one entity that has any form of accountability to the population as a whole.

            Seldom used , often evaded , subject to manipulation, open to pressure from powerful groups , captive to the flaws of humanity , often the triumph of hope over experience ….. but still a form of accountability subject to judicious use.

            If …. the money and pressure put into the issue of bank mergers a few years back had been successful , does anyone really believe we wouldn’t be worse condition today ?

  10. Ya, lets allow a foreign builder to lead the way and we will follow….like the auto industry. Negative sentiment articles like this about great canadian companies makes me laugh !

    • I’m sure people said the same thing about Nortel.

      I assume you would support subsidizing the greatest Canadian company, the Hudson’s Bay company, based on the reasoning that it is so great.

  11. Anyone who believe the banking “market” in the US is unregulated is a complete loon. They are regulated at the federal level by several large orgs. including the treasury, FDIC and federal reserve. Then there are reams of state regs on insurance and banking as well. One reason Canada’s banks do so well is there is largely only one level of compliance required and that makes things fairly clear and efficient.

    The only unregulated aspect of the US financial sector are certain portions of the derivatives market, which are large part of the problem right now, however, the government does needs to have only a minor role in the likely market guided correction to the problem, which is exchange traded derivatives, to better track counter parties and systemic risk.

    BTW J@ck, Fannie and Freddie were part of the problem because Congress (Dodd, Frank, Pelosi) was encouraging them to issues larger and larger amounts of sub-prime mortgages. In this case, contra your fantasy land ideal of government as a brake on the excesses of the private sector “market,” government was throwing fuel on the fire. Who were 2 key people who tried to warned about risk in the mortgage market as early as 2005? George Bush and Alan Greenspan.

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