The Consequences of Carrier

05 Dec 2016

Key takeaways

  • The Carrier Corporation’s decision to limit planned offshoring of jobs to Mexico is unambiguously good news for the workers involved. But it raises a number of larger issues with the incoming administration’s approach to preventing the loss of manufacturing jobs to lower-cost economies.
  • Specifically, the incoming administration’s involvement – and Trump’s recent tweets – suggest a willingness to apply significant pressure to affect firms’ decision-making.
  • Such interventions could expand in scope in the future, for example to influence (and limit) hiring of foreign workers.
  • A wider scope of government intervention could ultimately undermine business confidence as well as hiring and investment decisions.

Full commentary

Since Donald Trump’s election, there has been much ink spilled over whether Trump the Populist, or Trump the Pragmatist, will ultimately govern. This can be a useful heuristic, and one that I have employed myself for thinking about the next four (or eight) years. Will we see a preponderance of policies that appeal to Trump’s base but may prove ineffective or even harmful to the economy? Or should we instead view many of Trump’s pronouncements as mere posturing, or negotiating tactics, that will have little bearing on the policies that the incoming administration will actually implement?

One issue with this heuristic, is that it tends to equate Trump the Pragmatist with good policy outcomes. In practice, this need not be the case – there are courses of action and policies that Trump may perceive as very pragmatic, but which could, over time, lead to poor outcomes. One example is the incoming administration’s intervention in the Carrier Corporation’s plans to move jobs to Mexico. I fully appreciate that Carrier’s subsequent decision to retain some of these jobs at their Indiana facilities is a very good outcome for the workers affected. However there are a number of worrisome elements of this event that should be flagged, not least because Trump likely views his intervention in the Carrier case as quite beneficial, and a pragmatic blueprint for encouraging firms to slow, halt or even reverse the outsourcing of manufacturing jobs.

First, the Carrier negotiations suggest that the administration will be willing to use any leverage at its disposal when pressuring firms to limit the outsourcing of jobs. A series of Sunday tweets from Trump suggests as much: “Any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S., without retribution or consequence, is WRONG!” In the Carrier case, the parent company, United Technologies, earns a non-negligible portion of its revenue from government contracts. In this context, a decision to curtail outsourcing of jobs may seem to be a reasonable price to pay for maintaining a good working relationship with the incoming administration. The form of leverage will differ by company, but we should not expect Trump to use kid gloves in his efforts to compel less offshoring of jobs. From his perspective, this represents effective negotiating.

Second, negotiating is a two-way street, and we should not underestimate the ability of firms to extract concessions from the government. Trump’s need to show results in his battle against outsourcing provides firms with their own negotiating leverage. In this particular case, press reports indicate that the Indiana state government provided financial incentives to Carrier to keep a portion of the jobs under question in-state. Such negotiations are not uncommon – state governments frequently reach financial deals to convince companies to relocate to or remain in their state. But the administration’s apparent willingness to engage in negotiations with individual firms over manufacturing jobs opens up a new avenue for firms to extract resources from taxpayers in what is likely to be an ad hoc and less-than-transparent process, with little to no opportunity for public input.

Third (and of greater concern), there is no legal basis for the administration to intervene in firms’ decisions regarding where to locate facilities and jobs. One may find it objectionable that companies are placing their own interests (and those of its shareholders) above those of its current employees, but they are well within their rights to do so. The prospect of government intervention in firms’ decisions may reduce business confidence and impact investment and hiring – why hire, for example, when future decisions to reduce the workforce in response to economic conditions might earn the government’s condemnation? Also, the avenue for intervention may only increase over time – today it is over outsourcing, but tomorrow it could be hiring of foreign workers. I am not at all confident that the administration will set reasonable limits on its involvement in the decisions of private economic actors.

Finally, we should be under no illusion that such efforts will have a material impact on employment in the U.S. manufacturing sector given the higher wage structure in the United States. This leads me to an uncomfortable inference. Specifically, given the substantial impact that reversing offshoring would have on company profits, the government would ultimately need to use much larger incentives, of both the “carrot” and “stick” variety, wto influence firms. This could take the form of punitive import tariffs on goods produced abroad by U.S. firms, or tariffs on foreign competitors’ exports to the United States. Either way, the result would be higher inflation and less household purchasing power.

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