"We were there for GM and Chrysler. Why not for Nortel?"

That's the title of Jeffrey Simpson's column in today's Globe and Mail. The realpolitik answer to that question bores me to tears, but I can think of a sensible answer based on economics. Whether or not this answer has anything to do with the the real reason for this choice is an exercise that I leave to the reader.

Policy-makers should be generally unconcerned when a particular firm is in difficulty: if a company is unable to make profitable use of productive resources, then those resources should be released to firms that can. If we were not in the middle of a recession, I would be stomping all over the GM-Chrysler bailout with my biggest, baddest hob-nailed boots; the job losses associated with a GM-Chrysler collapse would be more than offset by our normal rate of job creation (see this post). But these are not normal times.

There are other reasons for not throwing public money at Nortel:

• Compared to automobile manufacturers, Nortel doesn't have much in the way of physical capital that can pretty much only be used to produce a handful of products. The productive capacity of Nortel can be redistributed to other firms much more easily that that of Chrysler or GM.
• The human capital of Nortel workers is much more mobile than those of workers at GM-Chrysler. A former Nortel worker is much more likely to find a job that makes effective use of her skills than is a former GM-Chrysler worker.

And I must take exception to this bit in Simpson's column:

...here's a patriot who believes in doing something for his country and company at the same time.

Yikes. This is how oligarchs get their start.

Comments

[Nick Rowe]

I agree that's a sensible answer based on economics. It still worries me though. There might also be other good economic arguments going the other way.

If you view GM and Chrysler as the golden egg-laying geese that were slowly killed by UAW/CAW (an insider/outsider voting model in which the current cohort sets the path of wages just high enough that the goose survives just long enough for any of the existing cohort to lose their jobs), then there's a big moral hazard problem from putting the geese on life support. I keep thinking back to the British Leyland of my youth.

[Stephen Gordon]

Yeah, my support is state-dependent. Once employment growth is strong enough to handle a large positive labour supply shock (say, sometime in 2011), then the governments involved (Ottawa and Queen's Park) should focus their energies on getting the hell out of the business of building automobiles.

[pointbite]

Wait a minute, a worker can't find gainful employment elsewhere so we should prop up his failing company? That makes no sense to me. Forcing people who specialize in producing what consumers "don't want" to learn useful skills is a good thing. In fact, compared to Nortel workers the upside for the economy is actually greater by letting such a firm go bankrupt because the difference between their current skills and the skills demanded by the market is greater, so closing that gap has more benefit. I would rather use tax dollars to retrain GM (and other) workers in various trades than wrap their losing factories in scotch tape.

[Leo Petr]

Forcing a worker is one thing. Forcing tens of thousands of workers all at the same time is another. This ia matter of practicality, not principle.

[Patrick]

Apparently there is no shortage of interest in Nortel's assets. I take that as evidence that Nortel pretty well screwed the pooch, rather than succumbing to forces beyond their control.

I came across a StatsCan study:

http://www.statcan.gc.ca/pub/11f0019m/11f0019m2007302-eng.pdf

that suggests that laid off tech workers don't fare particularly well - at least they didn't post tech bust:

"Among laid-off high-tech workers, about four out of five did not locate employment in high tech, and about one out of three moved to another city. In Ottawa–Gatineau, about two in five laid-off high-tech workers left the city."

It'd be interesting to know what happened to them after they bailed on tech. Maybe they become real estate agent.

[lickedcat]

Hi-tech workers are more mobile (i.e. move cities, move industries) and more flexible (i.e. accept lower compensation) because they have less to lose. What I mean is the average autoworker can expect a gold plated defined benefits pension after 30 years of employment with the same employer. Hi-Tech workers if they have pensions, they are defined contribution pensions which based on the performance of the market may not be work the paper their quarterly statements are printed on.

So the average auto-worker will fight tooth and nail to stay with the same employer just to get that pension. Its all about the pension, they can't jeopardize that pension by accepting another job when they are laid-off. Its in their interested to stay at home, take whatever training the government offers until they get recalled. But they will NEVER look for another job. This is a typical socialist welfare state behaviour, the carrot and stick incentives of a free capitalist market don't apply in union based Canadian manufacturing industries.

Hi-Tech workers can't afford to sit a home and wait for there employer to recall them. They either respond to the carrot of a higher wage with another employer or they avert the stick of poverty by accepting a lower salary in another industry.

[Phillip Huggan]

I liked Nortel, but I don't see why you'd want to save any of these actors beyond bankruptcy. Obviously the autoplants have a lobby and are the safe choice. I'd rather give the money to a healthy actor like RIM, Bombardier, or Viterra...I'd keep my favoured company portfolio more flexible. Bombardier's train arm and CN/CPR are natural diversification from large car industry. Agriculture is counter-cyclical whereas our GOP like oil (and Dion tax rates preferred pro-cyclical banks). Conservatives aren't very good sovereign wealth fund managers. A country with the largest coastline should be the wave power R+D leader.

[Phillip Huggan]

...my point was governments are expected to "fix" recessions. This preference to deaden business cycle oscillations should be reflected in the portfolio. $10B to construct hospitals across the country is better for aging boomers than cars, but we seem to be stuck in a 50 year old trade agreement that carved up the North American car market. In the future maybe we need something like the USA 2 term Presidential term limit, in our industrial policy.
Nortel needed something like $600M and big auto got $10B, so this is entirely about auto sector supports. I say from now on until government ROI cost estimates are undertaken (not counting ridings), focus upon building and staffing nursing homes with bailouts. You really just need to pick a retraining sector and retrain workers while constructing the new infrastructures. If these infrastructures become so permanent as to be too big to fail, the government should be selecting this portfolio of permanent industries very carefully. A better solution is to mandate the company build up a retooling trust owned by employees to permit factory retooling if auto sector tanks (if governments committed to be a stable purchaser of retooled wind tubine parts in recessions, their employment is theoretically permanent).
Canadian Space Agency only gets $300M/yr and I think MDS's space and medical robotics reinforce eachother. Why not just give $10B to them to expand medical equipment rollout and give southern Ontario a tax break in being a part of supply chain? It isn't a binary question: cars or nothing.