July 27, 2017

Trump’s Job-Killing Carrier Deal

trump-carrierDonald Trump has not taken office and already he is delivering on his promise to keep manufacturing jobs in the United States. Yesterday, he visited Indiana to celebrate his part in persuading Carrier to keep 1,100 jobs slated to move to Mexico at its Indiana facility. Speculation of bullying, tax-funded quid pro quo (Carrier’s parent company, United Technologies, holds large defense contracts) and corporate welfare were plentiful.

Today, Zero Hedge reports Carrier was persuaded by none of the above. Instead, the company received “$700,000 a year for a period of years in state tax incentives.” That means keeping the jobs cost the government about $636 per job annually in tax revenues.

It would seem a win-win. 1,100 Americans keep their jobs, Carrier gets lower taxes to avoid having to pass on the cost difference to its customers and all the local businesses in Indiana benefit from the purchasing power that remains there with the domestic Carrier employees instead of being exported to Mexico.

That, as 19th century political economist Frederic Bastiat would say, “is what is seen.” What is not seen is all the consequences of Carrier not moving those jobs to Mexico, where they could produce their products at a lower cost. When those consequences are considered and the ledger is balanced, the deal will have made the United States as a whole poorer and will have cost it jobs.

Let’s first consider the decision in a vacuum, without the tax incentive. Carrier was moving the jobs to Mexico because it could produce the same air conditioner there at a lower cost, which it could then pass on to its customers. Keeping the jobs in Indiana raises the cost of production above what it would be with the move. That forces Carrier to raise its prices.

And we must assume Carrier would have saved more than $636 per worker per year in tax breaks had they moved those jobs to Mexico, or the move wouldn’t have made financial sense. With each worker on average producing many air conditioners per year, saving $636 per worker works out to a negligible cost savings per unit. So, Carrier is likely absorbing some of the higher costs of keeping the jobs in Indiana, over and above what they are receiving from the government. Those costs must be passed on to customers or taken out of profits, the latter resulting in either lower dividends or less money reinvested in future improvements to production.

“Ah,” says the supporter of this move, “but many people are willing to pay a little more to keep those jobs in America!” Perhaps, but the economic consequences remain. Assuming the price of an air conditioner would be $5,000.00 if produced in Mexico and keeping the jobs in America only raises prices by the $500, Americans are now paying $5,500.00 for an air conditioner instead of $5000.00. They get no more for their money than they would have paying $5,000.00. All they have in exchange for the $5,500.00 is the same air conditioner.

Had the job moved to Mexico and that same air conditioner been available for $5,000.00, the customer would have been able to afford an air conditioner and a bicycle, or an air conditioner and a new carpet, or an air conditioner and a new suit, for the same $5,500.00 he now spends to get the air conditioner only. The consumer is poorer because of the deal. His standard of living is lower. And let’s not forget that for every one employee producing air conditioners, there are hundreds or thousands of people consuming what those employees produce.

At the end of the day, the ledger balances to this: the same number of air conditioners are being produced, but at a higher cost. That difference in the cost of production is lost. The standard of living of everyone who consumes air conditioners is lowered by however much more it costs to produce air conditioners in Indiana instead of Mexico. We assume it is $500, but the exact figure is not important. They are poorer by whatever amount the diminished efficiency increases production costs.

“But kind sir!” says the apologist, “you have missed something. You have forgotten the purchasing power of those 1,100 employees, which will help local businesses and keep that wealth in America. That creates jobs that otherwise would have been lost!”

No, it is not forgotten. It is merely balanced against purchasing power lost by all those consumers of air conditioners and against all the jobs they would have created with the $500.00 they would have spent with local businesses, had they saved it in purchasing the air conditioner. The air conditioner customer who also bought a bicycle, a new carpet or a new suit also created jobs or supported existing jobs, which are now lost. And not one in a million knows where they went. The unseen killer of those jobs is the decision to make the same air conditioner at a higher cost in Indiana than at a lower cost in Mexico.

It doesn’t end there. Let us not forget the 1,100 jobs lost in Mexico, the third largest importer of U.S. exports. Because of the lost purchasing power of Mexican consumers, U.S. companies who export to Mexico lose revenue and must lay off workers.

When the whole ledger is balanced, the jobs lost in the U.S. at least equals those 1,100 retained and likely far exceeds them, as inefficiency grows exponentially as its effects ripple throughout the economy.

Finally, the apologist for the deal makes his last stand. “Yes, good sir, you make many fine points. But this deal involved lowering taxes for Carrier, which bestows upon them the same savings they would have realized by moving the jobs to Mexico. And even you must agree that lowering taxes and paying productive workers is better than allowing the government to use it less efficiently!”

Well, there is the rub. The government is doing with those lost taxes precisely what the apologist said. It is using them less efficiently than the market would have. The market would have moved those jobs to Mexico and lowered the cost of air conditioners. The government has used its taxing power to keep the jobs in Indiana and raise the cost of air conditioners above what it would otherwise be if the jobs moved to Mexico, with or without the tax incentive.

But even on the tax incentive there is more that is not seen. It is not as if the $700,000.00 in tax revenues were left in the hands of the taxpayers, who might use it productively. 100% of it went to subsidize the higher cost of producing an air conditioner in Indiana instead of Mexico. And the government went on spending the same amount as before, simply collecting the $700,000.00 Carrier doesn’t pay from others, now or in the future.

So, while the cost of the tax break is not added to the sticker cost of the air conditioner, the public is still paying that additional $636 per worker per year in the additional taxes collected to make up the government’s loss on Carrier. The public is also poorer by whatever price increase or profit reduction is necessary to offset the additional costs the company agreed to absorb to make the deal work.

No matter what defense the apologist offers, there is no escaping this. By keeping those jobs in Indiana instead of letting them move where the market is directing them, the net effect is the United States as a whole is at least $636 poorer per year for every employee kept in Indiana by the deal. It also loses jobs due to the higher prices it still pays for air conditioners, over and above what the tax break could alleviate, or the wealth lost in dividends or reinvestment Carrier sacrificed to absorb whatever additional cost savings it had to forego to keep the jobs in Indiana.  And this is one little company and just 1,100 jobs. Imagine if Trump delivers on his promise to keep or bring back millions?

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Comments

  1. Sorry, I don’t buy your theory. The socialist, communist agenda has had 8 more years under Obama to destroy our economy and quality of life. I say keep your silly talking in circles to yourself and let Trump prove to you what it takes to REBUILD AMERICA AND MAKE HER GREAT AGAIN!!!!!

  2. My point is out-sourcing our jobs to another country and taking jobs from our citizens is part of the CLINTON free trade agreement that has weakened America! It is a Socialist, Marxist, Communist, Progressive, leftist movement that destroys us. Not to mention invites tons of scams to America because of the confusion with these foreign companies handling our business.

    America was at it’s greatest until the GLOBAL ELITE left killed John F Kennedy!!!

    Your playing with numbers isn’t real to Americans! American jobs, manufacturing power, and ability to control the quality and the exports is what is most important.

    I am not an economist, but I have common sense. It has paid off better than any communist controlled education that I could have received.

  3. As I see it, your math is just totally off and based upon assumptions, not facts. First of all, this tax break does not add $636 per air conditioner.. it removes $636 in tax revenues for the federal government per worker per year, Those same tax revenues instead go to paying workers who will spread this wealth far more effectively than the government would. The tax break offsets the difference in cost between manufacturing their machines in Mexico versus the U.S. enabling the company to keep the price the same as they’d be able to sell it for if they made the machines in Mexico. Also, each worker makes lots of machines per year, so the $636 is not tied to each individual machine produced, it’s spread out across all the machines they manufacture in a year, and so the price doesn’t go up by this amount, especially not per machine. No, instead it stays the same as it is now because the difference in wage costs is offset by the lower tax burden provided by the federal government.

    There’s also no guarantee that the company would lower their retail prices upon moving their production to Mexico. That’s a complete assumption. They could just as easily keep the price the same and simply increase their profit margin, which they in turn might use to open up more factories providing jobs and income, not to Americans, but to foreign workers, thereby removing that economic power from the U.S. economy, and injected it elsewhere where it doesn’t benefit American’s at all.

    • Tom Mullen says:

      I am aware of the distinction. We don’t know how much the price of an air conditioner would go down by moving the jobs to Mexico. Certainly, it must be more than the $636 per worker divided by all units produced per worker or they wouldn’t bother to move the jobs in the first place. The company must be absorbing some losses somewhere else. In an effort to keep the example simple, I just grabbed the $636 as an example and stated it was just an assumption, but I can see it could mislead the reader to believe there is a one-to-one relationship that doesn’t exist. As for the rest of your argument, I and economists for hundreds of years disagree.

  4. Tom Mullen says:

    Thanks to Truth be Told for his comment on the math. The hypothetical $636 per air conditioner I used for the amount the unit price would go up if the jobs were kept in Indiana was misleading, in that the reader could infer a one-to-one relationship between the cost-per-worker-per-year saved by the tax cut and the unit price increase in keeping the jobs in the US. I changed the hypothetical cost increase to 10% of the sale price if the jobs were moved to Mexico. I believe it would probably be more or Carrier wouldn’t undertake the cost of making the move. I also added some further statements on the costs Carrier is likely absorbing in keeping the jobs in Indiana. Hopefully, the argument is clearer without the $636 number confusing the issue.

  5. The market is not directing those jobs to Mexico. The gub’mint through EPA rules and regulations are re directing those jobs.

    • Tom Mullen says:

      That’s certainly a factor. I believe if you eliminate the unnecessary regulatory and tax burdens on American companies, these types of jobs still move to cheaper markets, but I’d sure love to find out for sure.

  6. Utterly unconvincing globalist macroeconomic argument. Theoretical jobs are not the same as real ones, except to an academic policy wonk who doesn’t actually work for a living.

  7. Todd L Willaims says:

    Excellent piece Sir in evoking Bastiat and deconstructing the “unseen” built into this Carrier deal and detailing the unintended consequences of interventionism.

    Perhaps you could clarify this claim you’re making here:

    “But even on the tax incentive there is more that not seen. It is not as if the $700,000.00 in tax revenues were left in the hands of the taxpayers, who might use it productively. 100% of it went to subsidize the higher cost of producing an air conditioner in Indiana instead of Mexico.”

    In the event the taxes shifted to Carrier ($700,000) were indeed a direct cash transfer then yes, 100% would be left in the hands of Carrier to shift as they please. But if the tax incentive is just that, a reduction in tax burden to Carrier, then that reduction is in fact dispersed to the taxpayer via lower costs A/C units and therefore reinforcing your previous (and accurate) claim that in aggregate the taxpayer is potentially richer by one A/C unit AND one bicycle.

    Every dollar in tax reduction is one less dollar that the government would have at their disposal and one more dollar left in the hands of the person that earned it. The taxpayer.

    Where is my flaw?

    • Tom Mullen says:

      As I said in the article, what you have said would be true only if the government lowered its current spending by $700,000 and then cut everyone’s – not just Carrier’s – taxes by the corresponding, infinitesimal amount. They have not done that. Indiana’s government is going to spend the same as they did before, meaning they must collected that $700,000 from others, either now in present taxes or in the future in taxes to pay back any loans necessary.

      In addition, we’ve since learned after I wrote this that Carrier is raising its prices, just as the article predicts. And as the article speculated, the United Technologies (Carrier’s parent company) CEO has confirmed the lost savings to Carrier from not moving the jobs far exceeded the $700,000 tax credit. The labor costs in Mexico are 1/5 what they are in Indiana AND the Mexicans miss less work and have a lower attrition rate. Carrier only did this because United Technologies gets 10% of its revenue from defense contracts. So, it was all a scam and will make us poorer, cost more jobs than it saves.

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