President-elect Donald Trump and his future VP Mike Pence will say today that they convinced the Carrier Corporation to keep 800 jobs in the US rather than move them to Mexico, but their deal demonstrates how much leverage corporations have to force the president-elect to do their bidding.
Another way to put it is that Carrier will move 1,300 jobs to Mexico, keep 800 in the United States, and be paid for their troubles. The heating and air conditioner company’s original plan was to close two plants in Indiana and move their workforce to facilities in Mexico. There, they could pay workers as much as $23 less per hour, for a potential income loss of $67 million, state officials estimated, and a total loss of $108 million in the surrounding economy.
Trump made the loss of the Carrier plants a theme of his campaign and promised to save every job. Now, after talks with Carrier’s parent company, United Technologies (UTC), they’ll be keeping a furnace manufacturing plant open, a true win for the 800 workers who keep their jobs, but laying off 600 workers there, and closing an electronics factory where 700 people work; still a painful loss for their community. As details have leaked about the deal made to preserve those jobs, its broader aspects aren’t very reassuring. Here’s what’s at play:
State tax breaks
The most tangible part of the deal is an as-yet unspecified set of tax breaks for the company negotiated by Pence, still the governor of Indiana. Pence’s ability to do this now raises questions about what he was doing about this issue as governor for the previous year. Regardless, it is a classic move for state leaders when companies aim to leave town—throw money at them. And it sends a message to any company: Threaten to leave town, and you’ll get paid. Relying on subsidies like these rather than market forces is something that conservatives like Pence often call “picking winners” when they’re not doing it.
The Wall Street Journal reports that the tax breaks come out to $7 million over ten years, or about $8,750 per job. That’s clearly not going to make up the cost savings implied by the move, so there are other factors to consider.
It’s more than just bad publicity. UTC’s other divisions make jet engines and other airplane parts, and the company earns billions of dollars from contracts with the federal government. Indiana officials have speculated that the company is accepting a loss in the Carrier matter in order to protect its more lucrative arrangements. Populists like Senator Bernie Sanders have praised holding contractors accountable for keeping jobs in the US, but at least they hope to codify a legal standard limiting contracts for companies that outsource jobs. Trump’s ad-hoc system promises crony capitalism instead.
“Imagine giving an administration the potential to rule whether a given transfer of funds would endanger job creation or job maintenance in the United States,” economist Tyler Cowen writes. “That’s not exactly an objective standard, and so every capital transfer decision would be subject to the arbitrary diktats of politicians and bureaucrats. It’s not hard to imagine a Trump administration using such regulations to reward supportive businesses and to punish opponents.”
Promises of huge federal tax cuts
The final piece of Trump’s seduction was the promise that his administration will cut taxes to save major multinational companies like UTC hundreds of millions of dollars, far more than could be saved by moving workers to Mexico. It’s important to think about what this mean for workers. Trump has promised to reduce the top corporate tax rate by 20 percentage points to 15%, and create a special low repatriation rate to encourage companies to bring home overseas cash they have deferred taxes on. He hopes these policies will increase business investment in the US, and jobs.
Yet if there’s one thing we learned from George W. Bush’s repatriation holiday in 2004, it’s that it didn’t bring back US jobs (paywall). Corporations believe that they will be able to wait for the next repatriation holiday if they are patient enough. Congress is also likely to look askance at a repatriation holiday: Republicans there have been working on a more drastic overhaul that would end taxes on the foreign income of US companies entirely. Advocates of such a “territorial” system—like Trump transition official Curtis Dubay—argue that this system is neutral, and will neither encourage nor discourage investment in the US.
But many economists point out that even with lower rates in the US, American companies will still be able to find lower taxes and cheaper workers abroad. If the current system leads corporations to send money abroad simply because they hope they can defer it into the future, a system where they know it will be untaxed is likely to encourage further investment outside the US. Republicans recognize this threat, and intend to tax perhaps 5% of foreign income. Tax fairness advocates and labor leaders fear that this is not enough, and will simply empower the tools that major corporations are using to shift profits and jobs overseas already.
Ultimately, 1,000 jobs are still less than 1% of what the US economy created last month. To solve the US jobs problem, broader solutions will be needed, from education to infrastructure to, yes, sensible corporate tax reform. So far, Trump’s deal-making skills in this arena appear to be mostly giving corporations what they want; in this case, cash out of the public coffers. The hope is that by doing so, the companies will decide to create jobs in the US. The fear is that they will take the money, and run.
As Carrier ominously noted in its statement on the deal, “This agreement in no way diminishes our belief in the benefits of free trade and that the forces of globalization will continue to require solutions for the long-term competitiveness of the US and of American workers moving forward.”
This post has been updated with the latest reports of details of the Carrier negotiations.