"At the Trough": Laurent Carbonneau on Fixing Canada's Flawed Economic Policy

An interview on why our public services are deteriorating while businesses thrive and how we get better outcomes for Canada.

Happy Monday! I’m heading off on a much-needed family vacation tomorrow. While I’m away, I’m scheduling a few older Deep Dives articles to be reposted that might interest newer subscribers. I’ll also share a couple of posts that were paywalled when I first sent them out. Regular scheduling will resume the week of June 16th.

For today, though, I have something a bit different. Last week, I had the great pleasure of chatting with Laurent Carbonneau about his new book At The Trough: The Rise and Rise of Canada's Corporate Welfare Bums, published by Sutherland House. It is a great read that explores the history of corporate welfare in Canada from the 19th century to today. Laurent examines how our subsidies to businesses have consistently delivered great profits to companies, yet failed to deliver great results for Canadians.

It is an important book and innovation and productivity, and how we have so long lagged in both, are central to it.

Laurent is familiar with these topics both as a policy practitioner and writer, given his role as the Director of Policy and Research at the Council of Canadian Innovators. He has held the pen on CCI’s policy reports, including the recent Mandate to Innovate report I wrote about a few weeks ago. He also previously worked in federal politics in legislative, policy, and issues management roles for a senior MP and in the NDP leader’s office, as well as on a national central campaign, before working in government relations in the post-secondary education sector.

This was a fun chat that covered a lot of ground, including the connection between social services outcomes and economic growth, shortcomings in Canadian economic analysis and political culture, institutional weaknesses and the need for reform, challenges with FDI and value chains, the problems of Brain Drain and capital flight to the US, and much more. It has been edited for length and clarity.

I hope you enjoy reading it!

Growth Vs. Social Services and an Inclusive Economy

Tom Goldsmith: Thanks for taking the time to chat with me. Let’s dive straight in. Your book highlights that while “public money flows faster than ever to businesses, Canadians are getting less and less value from their public services. Many programs overseen by the same governments writing those big cheques are rapidly deteriorating and approaching crisis points in their basic functionality.” I’d love to explore the balance between growth and social services more and hear your thoughts on why we don’t typically see the connection between social services/outcomes and growth.

Laurent Carbonneau: Very good question. Part of it is a hangover from how we've traditionally approached industrial policy and economic development, which has largely focused on production-oriented sectors like manufacturing, agriculture, and mining. In that traditional mindset, it was much harder to see how social services could add value to the broader economy.

An interesting model to consider is the "Preston Model" in the UK, which focuses on making their council and anchor institutions a hub of regional growth. This kind of model wasn't really on the table 60 or 70 years ago, but it very much is now. I believe we don’t do ourselves any favours as advocates of industrial and economic development policies when we sideline the social dimension. While there’s a role for production-oriented initiatives, we need to think more broadly.

Another example is the U.S. CHIPS Act and the IRA. Early on, the Biden administration's decision to condition grants and loans on things like childcare was criticized as “everything bagel liberalism.” I understand that impulse, but I don’t think it’s crazy that opening a large factory would create new childcare needs. Incorporating that into long-term economic infrastructure planning is a completely reasonable and not at all exclusive way to look at this.

On the other side, we often discuss growth as the engine that creates a surplus to distribute. This is true and important, and to some extent, progressives have underestimated its importance. The post-2000 economy had a lot of surplus, but the post-2008 economy has been more about catching up. We're now in a new environment where the marginal dollar is much tighter, and we have an obligation to spend it more carefully than perhaps we did ten years ago when interest rates were low. It's a changed environment, and progressives need to keep their economic analysis updated with current realities.

TG: Do you think Canadian political parties have kept their economic analysis up to date? In the US, the Roosevelt Institute and the Washington Center for Equitable Growth have done a lot to connect inclusion with broader economic growth. Has Canada developed that depth of thinking? And do political parties, provincially and federally, reflect this kind of thinking?

LC: I definitely think we are a bit behind the eight ball on this. My experience in the federal NDP, for example, is that economic analysis is reasonably thin. Where it exists, it's very much focused on specific sectors like auto and forestry, and even then, policy prescriptions tend to be extremely high-level. There isn't much analysis of the productive economy or growth at all.

In the think tank space, Canada doesn't have many, and I don't see a go-to place for progressive Canadian economic analysis. People tend to stick to their long-held positions. While useful, there isn't much connection to what those on the other side of the table are actually considering when making decisions. When progressive parties enter government, they often start thinking very differently because they encounter new perspectives and pressures. They aren't always well-equipped to handle this or stand up to pressure when the advice might not be ideal. For instance, the BC NDP government hasn't been as progressive as some hoped, and the Labour government in the UK seemed ill-equipped to respond to pushback from non-Labour members. I think we lack the language to navigate this world effectively.

Political Failure and Risk-Taking

TG: In your book, you discuss the lack of institutional memory in government, a failure to measure outcomes rather than inputs, a bias towards the status quo, and programs that don't cohere. You attribute this to political failure, arguing that "the public service contributed but much responsibility rests first and foremost with elected officials declining to be honest of each other and with voters about priorities and trade-offs". What's behind this political failure, and how do we overcome it?

LC: The short answer is that our institutions aren't well-suited to deliver this type of policy, and there's little interest in the "slow boring of hardboards" that reform would require. The flaws you listed are almost verbatim from the Nielsen task force report from the Mulroney era, which is depressing because they're still relevant today. There's no quick policy fix.

We demand error-free government. However, if we make no mistakes, we're likely not taking enough risks. The example of Solyndra in the US is telling. It is like the domino meme where the little domino is the Obama administration making a somewhat bad load to a troubled solar panel company. The huge domino at the end is China completely dominating green energy production 15 years later. A relatively small loan to a solar panel company went bad, and for political reasons, the US effectively ceded technology leadership in green energy production to China. Taking risks is crucial, even if they don't always work. The opportunity cost of minimizing risk is enormous, something CCI has talked about a lot in the context of procurement reform. If you're not willing to have something go wrong occasionally, you're not taking enough chances that could lead to good outcomes.

TG: How do you build a culture for risk in a polarized environment?

LC: It's hard. Our Westminster system is perhaps uniquely bad for this. We lack a culture of independent or quasi-independent executive bodies accountable for their own conduct, which is common in places like France or the US. While the political accountability of the Westminster system is a strength, it's a weakness when it comes to building institutions that can plan over long-term policy horizons. There's a trade-off between responsiveness and independence, and I don't think we're mitigating the downsides effectively.

Another problem is the impermeability of the federal public service. Most people spend their entire careers there. The US, despite its "revolving door" problem, benefits from a healthy dynamic where experts from various fields can enter government in mid or late career and have informed discussions. That kind of expertise in Canada is thin due to this structural reason.

Business Engagement and Public Discourse

TG: You write that business engagement with government in Canada has been largely ad hoc, through individual firms or sectors, rather than through organized, sophisticated business associations, which has limited the benefit to the broader economy. You also highlight the lack of influence of organized labor. You now work for an association yourself. How do you see the role of associations?

LC: It's a really important counterbalance. If you can't make a deal with one party, you can go to another, which incentivizes everyone to come to the table. I've seen situations where, on specific sector issues, if industry isn't aligned, nothing can be done. It would be easier if there were just one organization to talk to instead of it devolving into lobbying.

TG: Why do you think we lack that culture of coordination and cooperation between businesses in Canada? And why is there a relatively thin public discourse on these issues?

LC: To some extent, it's a reflection of the country's size, both geographically and in its regional and linguistic diversity. The "two solitudes" are real, and it's hard to coordinate across a language barrier. Historically, Canada, like the US, has never had a mass labour party. Labour has had to balance representing members as workers, as Quebecers, as Westerners, and the regional economic interests that differ. This puts people in tough positions, leading them to go for the safest option – the lowest common denominator. This path dependency over 100-plus years is an impediment we need to be conscious of.

Additionally, regional rebalancing or economic transitions are much easier when the next job is "down the road" rather than in a different province, like Saskatchewan, if you're in the Maritimes. It's easy to underestimate this in our globalized age.

Place: Provincial Economic Development and FDI

TG: This brings me neatly to a question around place-based policy making. You state that "reckless boosterism has tended to characterize provincial approaches to economic development". You quote Janice MacKinnon, NDP Premier Roy Romanow's finance minister, saying that one lever governments had was to persuade companies to come by offering public investment on "terms too good to refuse". While I believe in place-based innovation, provinces often get off too lightly in supporting innovation outcomes. And when they do get involved, this "reckless boosterism" and "cronyism" is not good for broad-based economic growth or communities. Why do provinces so often go down that path?

LC: Part of it is that they have fewer tools and less fiscal room. Historically, you see a tendency towards "big gambles," like Joey Smallwood's development program in Newfoundland or the Grant Devine years in Saskatchewan. While the Quebec mid-century governments' rural electrification program was different, this tendency towards big gambles seems to be a political imperative.

Provincial economies are often also less diversified and more trade-exposed, especially in the West. As Janice McKinnon notes, "commodity prices are not up for re-election, but governments are". Commodity prices have a much greater say on Saskatchewan's economy than the government, but the government still feels it "gotta do something". Also, provincial public services are smaller and lack the policy resources and capacity of the federal government.

TG: Regarding Foreign Direct Investment (FDI), you argue that while there's nothing wrong with it, we should be concerned with subsidizing the R&D efforts of foreign companies, especially if their products or services are based on intellectual property, and the spillovers aren't there for generating Canadian patents. I broadly agree, but given the size of our economy, we won't have leading-edge firms in every sector or technology. FDI can plug gaps or ensure some benefits accrue to Canada. Do you agree, and how should we approach FDI more healthily, recognizing we won't be leaders in everything? I get frustrated with the "own the podium" mentality, like "we need to own AI".

LC: We can't own every podium. We are a big economy; if we were a European or Asian country, we'd be quite rich. However, the pertinent fact is that the US is our next-door neighbor. While our productivity performance might be "middle of the pack," it doesn't matter because we're competing with the US for talent and investment. People graduating from Canadian universities are not largely deciding between staying in Canada or moving to Finland; they're moving to the US.

On FDI, you should allow it, period. Where it doesn't make sense to me is subsidizing it. If companies think they can make money in Canada, great. If we're going to provide public support, the bar for me is a very thorough analysis of how it builds Canadian strength in a value chain that isn't completely reliant on the company we're attracting. For example, with electric vehicle bets, even if we had succeeded, what would a couple of assembly plants do for Canada, especially given the 11-figure public money investment? Is that really going to act as a huge multiplier? I think this around data centres as well. My bar is to think about how FDI integrates into Canadian or global value chains, how we build Canadian strength in them, and how we build strength in areas where, if the company left, we would still have something valuable.

TG: That's interesting, and it comes back to issues of capacity for that kind of analysis. The organizations that subsidize FDI are fragmented across federal, regional, municipal, and provincial agencies. How do you get them on the same page in terms of capacity or approach?

LC: If I knew that, I'd be a rich man. I imagine it will require a lot of patient work, likely a combination of carrots and sticks from the senior order of government. The level of policy fragmentation in Canada is not sustainable or affordable in the long run; the opportunity costs are huge. Public spending on the economy needs to improve significantly in terms of quality. While the size of the public service has been discussed, the complexity of problems is geometric, not linear; they get much harder as they grow. We have existing assets across Canada in terms of government orders and people working on these issues. Joining them up better would be a huge force multiplier.

Business Taxes and Capital Flight

TG: You discuss the shift towards personal taxation and away from business taxation, noting that about 50 cents of every dollar in business taxes goes back to businesses through subsidies. This happens alongside record profits and declining public services, which seems like a raw deal for Canadians. However, when raising taxes on capital (e.g., capital gains or corporate taxes) is discussed, concerns about capital flight emerge. You highlight that industrial policy is often "the attempt by government to compromise with the power of capital to go elsewhere". Is the balance right now, and how do we move forward?

LC: This is the hardest problem we face as a country. The brain drain to the US is a significant issue that existed 50 or 60 years ago, and even then, countries like West Germany and Britain faced the same problem of losing engineers and scientists to the US. However, the industrial economy was different then; it wasn't the same "power law winner take all" intangible economy we have now.

If we annually lose our most entrepreneurial, money-motivated people, it's a serious concern. A young engineer graduating today faces a stark choice: live in an expensive shoebox in Toronto, pay high taxes, and earn a decent salary, or go to the US, where the weather is often better, housing is cheaper, taxes are half, and salaries are double. That's a hard choice to turn down, especially without family commitments. I worry about this because this small subset of people will have an outsized economic impact in the intangible economy, where network effects and economies of scope and scale are more important than ever. The ability to deny people the freedom to operate through intellectual property is also more important. We can't pretend this isn't true, or we'll only worsen the problem by offering a progressively worse social bargain.

I struggle with this. I believe people, especially the very fortunate, should pay their fair share of taxes. However, if we're looking at how to ensure Canada can offer a viable alternative to the US—a different vision of liberal democracy in North America—then we need to consider this problem clearly. If we slowly lose our entrepreneurial edge, and that reproduces itself, we'll slow down economically. We won't be able to produce large firms that can diffuse good practices across the economy. This problem doesn't sit comfortably with me, but I can't ignore it; it suggests we might have to make some concessions.

People are mobile. To me, that's almost more important than the mobility of capital. Someone can simply decide they've "had enough" and leave, and it's not hard for them to do so.

Institutions, Courage, and Vision

TG: You conclude your book by saying, "policy is nothing without institutions". Do we have the institutions we need in Canada, and if not, what might they look like?

LC: No, I don't think we do. We recently released a report with a key recommendation for an independent innovation agency. While it won't solve every economic problem, it's worth pursuing and experimenting with to build better government. People have become "incurious" about this question or have gotten "burned" by past delivery initiatives. If you're in political life, you have to have the courage to be criticized when things don't work.

TG: You mentioned courage, and I've written about the need for more courage among politicians to tackle complex issues and vested interests. What are your thoughts on building that courage?

LC: If there's one thing you could start doing, it's building consensus. While opposition parties naturally want to "defect" from government proposals, historically, a certain level of work could happen at the committee or informal caucus level in Parliament, or even in the Senate. When MPs have worked on an issue collaboratively and a rough consensus emerges, a party whip telling them to vote against it would be met with resistance. That culture isn't present in Parliament these days. I saw a glimpse of this collaborative spirit on the Hill when working on big tech issues; when a partisan line of questioning emerged, everyone shifted uncomfortably. People want to do good work and solve problems. You won't solve this from PMO communications staff. You need to get people in a room, make them comfortable with each other, and find areas of agreement. It's not "sexy," but it might be the path forward.

TG: My final question touches on the need for a compelling vision for Canada. There's often a conflation of means and ends in our policymaking. Productivity matters for living standards, but you can achieve it in ways that severely cut living standards, like removing clean air legislation. So, how you achieve it matters. If we want to keep people here and if we want better outcomes, is there a bigger role for a more compelling vision? And where does that come in to sell people on a Canada that isn't just the US, but also has a conception of the costs of participating in something better?

LC: You're teeing me up perfectly, Tom. The standard liberal political philosophy answer is no, because people are too hopelessly divided on what constitutes a good life. However, I believe in political democracy as an ennobling and good thing that makes people better, and a precondition for it is some form of rough economic equality.

It's interesting. I recently heard Adam Tooze discuss Donald Trump's remarks about how "maybe two dolls is enough". He said this is someone offering a vision of the future, suggesting there might be hard sacrifices, and people are saying, "That's fine; that's the deal we want". While that's not personally my preferred frame, there's something to the idea that if you put a future on the table, people are willing to consider some things. It was unimaginable for an American president to say, "you will not get as many treats," but it turns out that giving people hope for a better future makes them think differently about short-term costs. I don't know what that looks like politically, but it was a challenging and interesting insight to process and warrants attention.