Some may consider comparing President-elect Trump to President Franklin Delano Roosevelt as high praise. Before continuing, I want to assure you it is not.
The Trump-Carrier deal is problematic for a number of reasons. The first is corporate welfare. While this is not the main point I wish to make, I wouldn’t have a very good economics blog without making it. Despite being relatively modest compared to other deals routinely struck between businesses and local governments across the country, $7 million is still real money and money for which other Indiana taxpayers must now compensate. This gets at a problem French economist Frédéric Bastiat first postulated in his 1850 essay Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Not Seen). We see Carrier leaving a few jobs in Indiana. What we don’t see is how Indianans would have spent that $7 million if Vice President-elect and current Indiana Governor Mike Pence hadn’t spent if for them. We also don’t see what the labor and capital being employed in production that is clearly unsustainable could do in the absence of government scale-tipping. We don’t see the benefit of sustainable employment in Mexico or the money we save on buildings and homes from cheaper air conditioning systems. The list goes on and on. The point is, one hundred and seventy-six years later, we’re still falling for the same political gimmicks.
The second issue that comes to my mind is moral hazard. For those unfamiliar with the concept, moral hazard broadly refers to decisions that create incentives that potentially lead to negative outcomes. A simple example is if you put on a helmet and then ride your bike more recklessly because you feel protected. With that, what sort of message does it send to corporate America that threatening to move a few jobs abroad can get you a photo-opp with the President of the United States and a sweet little basket of tax breaks?
This brings me to my main argument, which is the other side of the messaging coin. Given the rather modest amount of kickbacks from the State of Indiana, I have to assume that political pressure is what led to Carrier’s partial about-face. Carrier is a subsidiary of United Technologies, a multi-billion dollar conglomerate with numerous contracts with the federal government, including defense contracts. It’s not that I see a problem with businesses putting a value on customer loyalty, but this dynamic becomes an issue when the customer is the taxpayer as represented by the President of the United States. I could be wrong, but it seems clear to me that some sort of threat was made behind closed doors.
Following the announcement of the deal, Trump took to the bully pulpit (named that for a reason) to announce a 35 percent tariff on American companies that choose to outsource their production. There’s a lot to unpack there, but I’ve already gone off on two tangents so I will save that for another time. The main issue with threatening businesses is what Austrian economist Ludwig von Mises said in his 1922 book Socialism, “Economic action demands stable conditions.” If business owners and executives feel the earth shifting under their feet, they are very unlikely to make the risky, yet important decisions to invest and hire. This can lead to economic stagnation. In fact, there is strong evidence that it has already.
Franklin Roosevelt is commonly seen as a great economic reformer with his “New Deal” during the Great Depression. An economic reformer he was, but he was only great in the same sense that the Depression itself is described. There is growing literature debunking the economic fable that FDR “saved” the United States from the Great Depression and, instead, made things markedly worse with his administration’s constant tinkering and central planning. Again, a lot to unpack for another time. That being said, one of the most thorough yet relatively concise rebuttals to this lingering popular myth belongs to Jim Powell and his book FDR’s Folly: How Roosevelt and His New Deal Prolonged The Great Depression.
FDR routinely took to the airwaves to lambaste private businesses, causing infinitely more economic problems in doing so than he ever solved. Powell details this throughout his excellent book but sums up the effect in the following, rather striking, passage:
“New Deal policies had taken their toll. Opinion surveys of private sector employers suggested widespread fear of the federal government because of FDR’s policies. An American Institute of Public Opinion poll reported that a majority of employers anticipated more government control of the economy in the future. Employers felt so much hostility from the Roosevelt administration that according to an October 1940 Fortune poll, 77 percent were reluctant to get involved with the government’s rearmament effort. A December 1940 Fortune poll asked whether it made sense to invest for expansion, and 61 percent of employers said, ‘only in war industries.’ Finally, in a November 1941 Fortune poll, 93 percent of employers said they expected their property right to be undermined and also anticipated the possibility of a dictatorship.” (page 86)
The Trump-Carrier deal is certainly problematic, but Trump’s threatening rhetoric, should it keep up, will abort the creation of countless more jobs than he could possibly imagine “saving” through doling out corporate welfare.
For more on the concept of corporate welfare, read this great short (very) book, The Pathology of Privilege by Matthew Mitchell. Available free online: https://www.mercatus.org/system/files/Mitchell-Pathology-March-2014.pdf