The bad economics of Trump's Carrier deal

The Week ^ | 12/01/2016 | James Pethokoukis

[SeekAndFind]

There's no doubt Team Trump is delighted by Carrier's decision to keep in Indiana roughly half of the 2,100 jobs that the maker of heating and air conditioning equipment had planned to shift to Mexico. As Steven Mnuchin, Trump's pick for treasury secretary, told CNBC yesterday, "This is a great first win without us even having to take the job."

Actually, it's their second win. Trump also lobbied/nudged/cajoled Ford into changing its mind about shifting a sport utility vehicle production line to Mexico from Kentucky, not that doing so actually would have cost American jobs. But Carrier, especially, had become a potent symbol of Trump's economic nationalism after video of Carrier's initial offshoring decision went viral. And in response to Carrier's reversal, Trump took a victory lap on Twitter: "Big day on Thursday for Indiana and the great workers of that wonderful state. We will keep our companies and jobs in the U.S. Thanks Carrier."

But how many Trump "wins" can the American economy afford? By themselves, the moves by Ford and Carrier are inconsequential — maybe even to Carrier's workers over the longer term. It's hardly an uncommon practice at the state level to offer incentives to lure corporate relocations or to keep firms from leaving. But the practice has mixed results. For instance, Dell closed a North Carolina plant in 2009 just five years after receiving millions in state tax incentives to open it. Production then moved to Mexico.

But more broadly, this is all terrible for a nation's economic vitality if businesses make decisions to please politicians rather than customers and shareholders. Yet America's private sector has just been sent a strong signal that playing ball with Trump might be part of what it now means to run an American company. Imagine business after business, year after year, making decisions based partly on pleasing the Trump White House. In addition, Trump's hectoring on trade and offshoring distracts from the economic reality that automation poses the critical challenge for the American workforce going forward.

To be fair, exactly why Carrier reversed course is still something of a mystery. Carrier says state "incentives" were an "important consideration," along with Trump's commitment to creating a more pro-business climate in the country. Those would be the carrots. Then there are potential sticks, which may have been far more critical than tax incentives or other potential subsidies. Carrier's parent company, United Technologies, is a large federal government contractor and perhaps views the potential costs of keeping those factory jobs — a small fraction of the company's 200,000 employee workforce — in America as the price of doing business with Trump's "America First" administration. Indeed, one Indiana official, Politico reports, thinks the deal was driven by concerns United Technologies "could lose a portion of its roughly $6.7 billion in federal contracts."

Of course it wasn't so long ago that Republicans were attacking the Obama White House for its "crony capitalism," including the auto bailouts and clean energy investments in firms like Solyndra. Republicans, on the other hand, were supposedly stalwarts for competitive capitalism and vehemently against government "picking winners and losers." Some even said they were "pro-market" rather than "pro-business."

Now, not so much. Which makes you wonder if either party is willing to strongly fight for free enterprise and market-driven economic policy anymore. In her 1998 book, The Future and Its Enemies, Virginia Postrel saw the major dividing line in American politics as less left vs. right than the "dynamists" vs. the "stasists." The former values change and experimentation, as messy as those things can be. Dynamists live in anticipation of the future because they just know it will be a great place. The stasists often are nostalgia-ridden and willing to use top-down control to keep things as they are or try to shape them into familiar forms. Today they fight globalization, tomorrow it might be robots and artificial intelligence in order to "save jobs."

This time, at least, score one for the stasists and the cronyists.

[semimojo]

There’s a lot that “the state” (notably including the Fedguv, so let’s not exclude the elephant in the room from our view by means of quibbles)

No, I was careful to use that term because the tax concessions are all coming from Indiana.

The promised changes at the Federal level are nice, but no sophisticated execs, like those at UT, would put much stock in that until they hear specifics from the Congress too.

[zeestephen]

Re: “2% is anemic, historically...”

Not sure I understand your point.

The number of manufacturing employees went down for two years.

But the value of the goods they produced went up 2%.

We are currently producing as much as we produced in Q1 2008, just as the Great Recession began.

However, we are producing it with 1.5 million fewer workers!

My point is completely valid.

Technology is destroying wages and employment in USA manufacturing much faster than trade treaties and foreign competition.

[elhombrelibre]

Do you think this process only happened in the last election? The Republican Party has been growing at all levels across the nation since Obama was elected. You can ascribe this to your beliefs about free trade if it makes you happy, but the fact is that rise has much to do with an entire rejection of the liberal agenda. You can champion Smoot-Hawley Tariff Act as the model for making America Great Again all you want, but free trade (for or against) has had little to do with the rise of the Republican Party. Credit for that turn around belongs to the current president of the United States.

[Elsie]

Technology is destroying wages and employment in USA manufacturing much faster than trade treaties and foreign competition.

HAs anyone dialed "0" for the operator lately?

[Elsie]

http://govthub.com/unemployment-benefits.aspx?utm_source=bing&utm_medium=cpc&utm_term=unemployment&utm_campaign=GH+Jobs+Unemployment+Benefits+Year

 

https://www.amazon.com/Making-Living-Without-Job-revised/dp/0553386603

 

http://madamenoire.com/461876/welfare/

 

 

[central_va]

It is ridiculous to keep perpetuating Smoot Hawley as some kind of tariff boogie man. Smoot Hawley had a minimal impact on the US Great Depression and the FACT bear that out. But that won't keep religious zaealot from repeating theor BS dogma.

To put this in perspective, let's compare all the GDP components together:

1929 ------------------->1930

GDP $103.6 billion----------->$56.4 billion ( -$47.2 billion)

Consum. Expend $77.4 bil---->$45.9 billion ( -$31.5 bill)

Private Invest $16.5 bil----> $1.7 billion ( -$14.8 billion)

Trade Balance +$0.3 bil---->+$0.1 billion ( -$0.2 billion)

Exports $5.9 billion--------> $2.0 billion ( -$3.9 billion)

Imports $5.6 billion--------> $1.9 billion ( -$3.7 billion)

Again, at the risk of being repetitious, how much difference to US GDP did the export loss make? The Trade Balance worsened by only -$0.2 billion, or about -0.19% of our 1929 GDP, or less than 1/5th of 1% of 1929 GDP. Meanwhile, our total GDP wnt down a whopping -46%.

[bert]

I want to jump in here and ask you...... is Carrier paying 35% tariff on any thing being imported from Mexico?

Some how the notion of tariff appears to have been sidetracked by men that know business actually doing business. Too bad for the Etrogs

[central_va]

washington was a farmer and not relevant to current world trade

Oh so now Free Traitors™ count George Washington's actions as irrelevant because he was an agrarian. You schmucks have no bottom do you?

Listen if you had a brain you'd know that what you said is counter intuitive. Agrarians HATE tariffs but George did what was best for the country unlike today's Free Traitors™ fiends. What maroon you are.

[elhombrelibre]

As a high tariff advocate, how high do you want this to be in percentage? Do you want it on everything coming in to the USA or just somethings?

[central_va]

If it were up to me I would want an across the board import tariff. I would increase it from its current <1% an amount of 3% per year. I would increase it 3% per year until 25% is reached or the trade deficit goes to zero. Which ever comes first. I would also decrease to marginal income tax rates 3% per year until 20% is reached.

I want more tariffs and domestic industry and less income taxes. That formula combined with immigration enforcement and regulation reform would put the USA's economy on rocket fuel.

[elhombrelibre]

And do you believe that those nations where our goods are sold at would not retaliate? Or does it not matter if they do? Do you think America should just trade with Americans, maybe follow the North Korean model?

[central_va]

Other countries are already retaliating. We pay import tariffs to other countries on a daily basis. But I've explained that to you before. It think the import tariff on US made cars to China is 40%. That is just one example.

We.Are.In.A.Trade.War.Now.

And we are losing.

[Thibodeaux]

reactionaries just can’t seem to grasp the simple fact that it is not 1789, but 2016

[central_va]

reactionaries just can’t seem to grasp the simple fact that it is not 1789, but 2016

Tell that to the Adam Smith Cult.