On the Carrier Deal

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Last week, President Elect Donald Trump signaled his intent to follow through on his campaign promises when he personally intervened in a situation in which would have seen over 1000 manufacturing jobs move to Mexico from Indiana. Carrier, the business in question had planned to move those jobs and announced that the plant would be shut down in February. It became a campaign issue right after that, as Trump latched onto it, citing that specific deal as a symptom of the overall multi-decade problem of manufacturing being gutted in America.

Over the Thanksgiving festivities, Trump took to Twitter to note that a deal was being discussed:

Then a few days later, when it was completed Trump announced that he was going to visit the plant to meet the workers, as part of a ‘Thank You’ tour:

While the move clearly had a ton of political symbolism attached to it, it was a functional reminder of the Trump Doctrine, as it pertains to the economy, jobs and trade. It was a symbol that represents the Trump’s ‘America First’ outlook that he campaigned on.

The whole situation has been met with scorn from commentators on both the left and the Principled Right. From the left, the charge has been that United Technologies, the parent company of Carrier, was enticed to keep the jobs through a smattering of tax cuts and a promise of a more favorable regulatory situation. This was outlined by Bernie Sanders in a Washington Post op-ed.

The specific charge Sanders and others make is that Trump is flip flopping by giving ‘concessions’ to Carrier when he ran on being tough on corporations who send jobs overseas. In particular, Sanders says that Trump promised to levy a tax on these businesses, and here he is actually giving Carrier a tax cut.

This is yet another willful misinterpretation of something Trump does/said that has been a feature of leftist vituperations for 18 months now. During the campaign, Trump spoke of levying a ‘tax’ (tariff) on goods of companies which moved their jobs out of the country. That is a conditional statement. Carrier agreed to keep jobs in the country, and as such are not going to be subject to any additional ‘tax’ on their goods.

Furthermore, the reason for the about face isn’t cause for outrage. All reports indicate that Carrier was to receive a $7 million tax break over 10 years,or $700,000 per year. As Eric Bolling points out, the amount generated by state in taxes from the 1000 plus jobs that will remain far exceeds the amount in tax breaks for Carrier:

This is not to mention the amount of taxpayer money that won’t be spent on welfare for potentially 1000 people and their families.

During the statement Trump made at the Carrier plant, he indicated that his presidency would create a great environment for companies such that they wouldn’t want to leave:

But also, I just want to let all of the other companies know that we’re going to do great things for business. There’s no reason for them to leave anymore because your taxes are going to be at the very, very low end, and your unnecessary regulations are going to be gone.

 

We need regulations for safety and environment and things. But most of the regulations are nonsense — become a major industry, the writing of regulations. And that these companies aren’t going to be leaving anymore. They’re not going to be taking people’s hearts out. They’re not going to be announcing, like they did at Carrier, that they’re closing up and they’re moving to Mexico — over 1,100 jobs.

He cited the fact that during his travels campaigning, the one thing he kept hearing from businesses was that the poor regulatory state was their number one concern. Indeed, the average cost of regulations for a manufacturers was about $20,000 per employee. The Carrier plant specifically was under the burden of 53 new regulations in the last few years, which ultimately had made doing business in America unprofitable. This is why businesses are leaving America, and Trump has vowed to change that, by lowering taxes and massively scaling back regulations.

Many are failing to understand that this Carrier deal is a symbol of what will happen across the business community in a Trump presidency. It is not that Trump will get on the phone with every CEO in America and cut individual deals – of course that is unfeasible. It is that the basics of the deal – the government allowing a business to keep more of the money it earns while not being burdened by onerous regulations – is a generous enough ‘offer’ from the government to business in America such that they will want to keep their operations in the country on their own. That is the point.

Justin Wolfers, a leftist economist, also missed the point when he described this deal as Trump interfering with the natural churn of the economy, in that it creates and destroys jobs on a regular basis:

But the Carrier case also illustrates a larger point about how the economy works. In Mr. Trump’s telling, the economy is a fixed set of jobs getting shifted around a global chess board. Mexico’s loss is our gain and vice versa.

But you should think of the economy as being in a state of constant churn. The economist Joseph Schumpeter used the now-famous phrase “creative destruction” to describe this process by which new firms push out the old. The result can be cruel, but an extraordinarily fluid labor market, many economists argue, is the secret of American dynamism.

For a start, this deal was not about destroying jobs. These jobs were not being destroyed, but moved to another country. These jobs are not obsolete in the context of a modern economy. They were moving because they could have been done more efficiently elsewhere. The key is that the relative inefficiencies of staying in Indiana were totally self-wrought as opposed to being fundamental in nature. Removing those inefficiencies should really be no big deal, but for government it has been.

Furthermore, it is really rich to see an economist like Wolfers cite Schumpeter’s creative destruction. Economists of his ilk decry the phenomenon when it is correctly applied to our bubble economy as a whole. Many, such as myself have called for the American economy to shed its reliance on unstable bubbles and to move towards a more robust economy infused by the dynamism Schumpeter’s of creative destruction concept.

This involves the ‘destruction’ of the bubbles of yore, and thus necessary declines in asset prices, and debt levels, along with substantial increases in interest rates. That is beyond the pale for economists such as Wolfers who think that falling prices are the worst possible thing to happen to an economy.

Back to Carrier, many of the Principled Conservatives on the right are having big problems with the image of a specific company dealing with the government on a one on one basis in this manner. This group of critics (also some leftists, with a sudden reverence for Adam Smith) have slammed Trump for being anti-free market, dictating to individual businesses how to run their companies.

The first response is that in reducing taxes and regulations, Trump is actually moving towards a free market, not away from one. The ‘deal’ Trump is offering is not ‘Stay here, and be subject to high taxes and high regulations or face huge tariff,’ but ‘Stay here, we’re going to lower your taxes and regulatory burdens, but if you want to go anyway, you’ll be subject to a tariff.’

The latter option is a far superior one, despite its protectionist bent. I’m not a hardcore protectionist per se, I do recognize that tariffs are an effective tax, and they are not necessarily a free market construct. But tariffs are superior to a higher income tax, corporate tax and higher regulatory burden. Income and corporate taxes accrue to the government, while a tariff accrues to a protected class of business. The tariff influences behavior, but to a much lesser degree than do income taxes. In my view, the trade off for isolated tariffs for lower income taxes and regulation is a net positive.

Secondly, this specific deal has an element which hasn’t been discussed much – the Military Industrial complex. It has been speculated that Trump threatened the lucrative government contracts that United Technology has with the US government. These sort of contracts, and the existence of the MIC generally are a negative to anyone who of a free market mindset. Over the past 5 or 6 decades these sort of webs have been slowly built and expanded upon to the extent that corporate welfare is a very big problem.

The length of time over which this situation has developed means that untangling them isn’t going to be a quick thing. We aren’t going from a Corporatist attempt at Social Democracy to a free wheeling free market overnight. In (possibly) threatening United Technologies in this manner, Trump has done a very pro-market thing. He (possibly) used a feature of the corporatist landscape as leverage to benefit ordinary Americans.

That same dynamic applies to the arguments over the tariff question. The Principled Conservative argument of free trade listens well, but the reality is that multinational trade agreements such as NAFTA and TPP are not examples of free trade. Republicans and Principled Conservatives always argue against tariffs in that they are ‘regulated’ trade, yet thousand page bills written by politicians and special interests are apparently ‘free trade.’ Real free trade requires no agreements, no legislation, nothing. What we already have is far from free trade. So let’s mold it in our favor. Ideally this landscape would not exist, but when life gives you lemons, make lemonade.