The Winners and Losers of the Carrier Deal

National Review Online

Thursday, December 01, 2016

No one ever doubted Donald Trump’s talent for theater, a gift he is exercising with some flair in the matter of the Carrier air-conditioner company’s facilities in Indiana.

Carrier had planned to move a furnace operation to Mexico and to shutter a plant in Huntington, Ind., where it manufactures electronic controls. After the intervention of President-elect Trump and Governor Mike Pence, Carrier has agreed to keep the furnace operation going in Indiana, albeit with several hundred fewer employees. It still will close the electronics plant and offshore those 700 or so jobs. It will move about 600 jobs from the furnace facility to Mexico as well, though it will keep 800 of them in Indiana. It has also promised to keep 300 research-and-development positions in Indiana — jobs it had never planned to relocate in the first place.

There are two aspects of this to consider: The first is a question of principle, the second is a question of competency.

We are not very enthusiastic about government-run economic-development programs that rely on industry-specific — or firm-specific — tax breaks, grants, or other concessions. In the long run (and generally in the short run, too), these programs are almost always corrupt in themselves and a source of corruption in others, with the benefits going mainly to politically influential and well-connected companies, whether that means Solyndra during the Obama administration or Carrier in the Trump administration. Inevitably, what happens is this: The government creates a set of incentives to encourage certain kinds of business activity, from “green” energy to manufacturing, and then, after a few years pass, complains mightily that companies are responding to the incentives that the government created. Consider those periodic journalistic spasms over General Electric’s low corporate-tax bill or the criticism that Starbucks encountered for taking advantage of manufacturing credits in its manufacturing operations: Those deductions and carve-outs didn’t happen by accident — they happened exactly the way the Carrier deal is happening.

In the long run, cushioning the bottom lines of particular industries or companies is a poor model of economic development, and the rationale of “saving jobs” is almost never defensible once you run the numbers. It is a hard truth, but if a worker’s job is “saved” by writing his employer a $7 million check, then what you are engaged in is not economic development but income redistribution.

That’s the question of principle, which is the more important one. But there is also the subordinate question of whether those running these schemes are any good at it. For example, Texas’s two big economic-development programs operate in approximately the same way as the Trump-Pence deal in Indiana, but even critics of those programs could grudgingly credit Rick Perry for getting the most out of them during his governorship.

We are not so sure that is true in the case of Carrier. Carrier is a division of United Technologies, which is an interesting company, one that does a great deal of business with the federal government. In fact, it is reliant upon federal contracts for a quarter of its revenue. That means that the government has a great deal of leverage in dealing with it. Ask any business that relies on Walmart for a quarter of its sales what that kind of leverage looks like when wielded expertly. The incoming administration has the upper hand in the relationship, and the best it could do is watch as Carrier goes through with about two-thirds of its offshoring plans, sparing a few hundred of them in exchange for a trailer-load of money.

The return on investment here is not obviously positive.

Although it is a very good deal if it is your job being saved, it does not look like such a good deal if you pay the taxes that are making the deal happen. But nobody ever takes into account the poor taxpayer, whose resources are treated as though they were inexhaustible. This is a case of Frédéric Bastiat’s contest between the seen and the unseen: Every dollar spent subsidizing Carrier in Indiana is a dollar that could have been invested in a more productive enterprise that does not require government support, that could have put food on a family’s table or helped to fill up its retirement account. The benefits of the deal are easy to account for, but the costs are dispersed and diffused and difficult to account for, which is what makes these sorts of deals seem attractive: It is an exercise in one-sided accounting.

The Trump administration will no doubt get political juice out of the Carrier deal, whose symbolism will be particularly welcome in the Rust Belt that just delivered Trump the presidency. In the long run, though, corporatism is no substitute for a healthy overall economy and a subsequently strong labor market, which we hope the Trump White House and Congress will encourage with a new policy direction beginning in January.