The Carrier-Trump Jobs Deal: Cynical Ploy, Strategic Hedge or Worrisome Signal?

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As the dust settles over the deal that Carrier agreed to with Indiana, and the analysts weight in, one starts to get a preliminary sense of what the deal really means for Carrier workers and for the incoming Trump approach to business.

Let’s look again at the specifics of the situation and the deal:

  • Carrier, which is part of defense contracting powerhouse United Technologies Corp., had planned to shut down an aging furnace manufacturing that today employs 1,400 people.
  • Carrier will now keep 800 manufacturing jobs in Indiana.
  • Carrier will keep an additional 300 management jobs in Indiana, but it did not have any plans to move those to Mexico anyway.
  • Carrier will still outsource (not “move,” by the way) 600 jobs to Mexico.

In return for keeping those 800 line jobs in Indiana, the Indiana Economic Development Corporation (the State’s business development agency) promised $700M in tax cuts spread out over 10 years, which means the following:

  • Carrier will get a break of $700,000 per year.
  • Divided by 800 workers, that’s $875 per worker per year.
  • So a total of $16.83 per week per user will be saved in taxes by Carrier (= $3.37 per day).

Now, typically, taxes are about 2% of costs for large U.S. manufacturing companies, so in no way can a tax break of $3.37 per day per worker offset the increased labor costs of keeping those 800 jobs in Indiana. Given this fact, then, we may ask why Carrier agreed to keep the jobs in Indiana, despite sound economic reasons to move them to Mexico?

John Muntz, who sits on the IEDC board, noted in Politico that it’s probably because of the close to $7B in business UTC currently does with the Federal government:

“United Technologies is a huge company, and the Carrier deal is a very, very small part of it,” he said. “This is a much different set of circumstances if you’re talking about all of the contracting work that United Technologies does for the federal government. That’s a big deal.”

So let’s recap: Carrier threatens to move jobs to Mexico. Indiana gives it a token tax break, which suddenly causes it change its mind. As a consequence, Mike Pence (former Indiana governor, of course) and the new Administration get to claim an early win. Lastly, UTC scores some points with a major client, the Federal government, that it no doubt wants counted in future defense contract awards. Indeed, in a recent interview on CNBC the CEO of Carrier, Greg Hayes, said as much:

JIM CRAMER: What specifically do United Technologies– we heard about this $700,000 incentive, but that’s obviously much less– $700,000 a year– much less than you would’ve saved. 

GREG HAYES: So– there was a cost as we thought about keeping the Indiana plant open. At the same time– and I’ll tell you this because you and I– we know each other, but I was born at night but not last night. I also know that about 10% of our revenue comes from the U.S. government. And I know that a better regulatory environment, a lower tax rate can eventually help UTC of the long run. And so we weighed all of things in making the decision with the board—

Were this any other country, the mainstream, press would have labeled this clearly for what it is: a perversion of capitalism by government interference in free market decisions. Fortunately, at least one commentator, Claude Barfield at the American Enterprise Institute, has noted this clearly:

“For market-based economists or analysts, this is really a version of crony capitalism, and it’s the kind of thing you really don’t want to get into or have government get into,” Barfield said. “This gets back to who … actually has the ear of the government. So you get the situation where decisions are not made in terms of their economic sense, but in terms of gaming the political system.”

What’s also sad is that “shinny object” deals such as this one continue to mask the reality, which is that U.S. manufacturing jobs are not coming back because they don’t have to come back, since manufacturing productivity in this country has never been higher. As a Michael J. Hicks noted in MarketWatch earlier this year:

Manufacturing employment peaked nationwide in 1977. Since then, the U.S. has lost 7.5 million manufacturing jobs. The share of employment in manufacturing has been in steady decline since 1944. But the typical factory today worker makes twice as much “stuff” in an hour as he or she did in 1977.

These changes shouldn’t surprise anyone. In the 1930s, more than half of American household consumption was in manufactured goods such as clothing, automobiles and appliances. In 1970, this dropped to half, as the consumption of services — education, health care, entertainment and travel — came to dominate household spending. Manufacturing now accounts for only a third of family consumption.

These are simple facts deviously hidden in every public library in the country and on the Internet accessible only by the 550 million smartphones and computers in use in America.

Ironically, one of the least-reported aspects of the Indiana deal is that Carrier agreed to invest some $18M in the Indiana plant in the future. Will this $18M go to find and add new workers? The answer is probably not, since I suspect a lot of it will go on new technologies and automation, which is the rational business choice. Indeed, Carrier itself admitted as much in the letter it handed out to plant employees after the deal was complete:  “this announcement is good news for many,” said Carrier management just before adding that “we recognize it is not good news for everyone.”

So, in the end, it seems Carrier/UTC keeps a happy client. The incoming “Republican” administration gets to claim it is “protecting American jobs.” This may seem like harmless political shenanigans, but, as USA Today noted in its analysis of the deal, the agreement opens up a raft of potential complications in the future:

The Carrier deal could also create an endless line of imitators, just as settling lawsuits can invite more lawsuits. If a state or the federal government cuts a special arrangement with an individual company, others will come forward, wanting in on the action. Some might even announce factory closures just to see what the response is.

This is actually happening within the United States, as companies play one state against another to see which will give it bigger breaks to stay or relocate. The lost revenue from these deals means that others have to pay higher taxes, or enjoy reduced services. Pressure from the White House might also make companies reluctant to invest in the United States if they think they won’t be ably to respond to rapidly changing business conditions.

Were the 800 jobs saved worth this potentially detrimental impact to the U.S. economy, not to mention the undermining of free market principals Republicans are supposed to support? I suggest that it was not, and the best one can hope for is that this was a sop to Indiana from its former governor and not a portent of a determined policy to use government tax policy to alter business logic on an ad-hoc business. In fact, Carrier itself said it agreed to the deal because the new administration signaled a promise to “create an improved, more competitive U.S. business climate.” We can certainly hope that such a promise portends less regulation and more liberal markets, and not the sad side-show, of fleeting and illusory benefit, that the Carrier deal represents.

 

 

 

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