The bad economics of Trump's Carrier deal
The 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
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.