Wall Street Pit

Corporate Welfare Doesn’t Pay

Conservative Republicans generally dislike government involvement in the economy; they especially hate government handouts. Progressive Democrats dislike favors to corporations and rewarding special interests.

We seem to have a consensus: Corporate welfare is bad. Under our new leader, Donald Trump, it will be different, though. Things will change and we will Make America Great Again. Hold that thought.

A couple of weeks ago, Carrier Corp. announced that it would keep 1,000 jobs that it had planned to move to Mexico at its Indianapolis plant instead, after reaching a deal with Trump and Vice President-elect Mike Pence. Trump had previously pledged to save the Carrier jobs and Pence, who is still Indiana’s governor, had a clear stake in the outcome as well.

While not all of the details behind the deal are known, the state of Indiana offered Carrier $7 million in tax breaks over 10 years to keep jobs in the United States. In essence, Indiana taxpayers are subsidizing the company’s higher labor costs in order to keep American workers employed instead of letting the company move to Mexico, where it could make the same product more cheaply. It is a wealth transfer from taxpayers to workers.

It should be noted that the $700,000 per year Indiana gave Carrier can’t be the only reason United Technologies, the parent company of Carrier, reconsidered a move it said would save it $65 million per year. The other, back-end part of the deal likely involves new or ongoing defense contracts with the federal government – also funded with taxpayer money.

Whether you personally believe corporate welfare is good or bad is up to you. But Trump framing the deal as a victory raises several questions. Will other individual companies come to the Trump administration and ask for tax credits, using the threat of moving jobs overseas as leverage? The answer is, of course, yes. This type of “job blackmail” has been going on for years at the local, state and federal levels. Trump seems to be signaling it will be business as usual.

Those who believe in the classic laissez faire, free market system were not thrilled at the Carrier outcome. Journalist and Fox News contributor George Will, writing for The Washington Post, argued that the deal represents a fundamental shift in the GOP’s outlook: “The Republican Party now shares one of progressivism’s defining aspirations — government industrial policy, with the political class picking winners and losers within, and between, economic sectors.” The Wall Street Journal’s editorial board, too, connected Trump’s behavior in the Carrier negotiations to President Obama’s tendency to allocate capital to politically favored enterprises, such as green energy.

Even Sarah Palin, who has been an outspoken Trump advocate, criticized the deal, calling it “crony capitalism” in an online op-ed.

There are two principal ways to view the policy of offering tax breaks in order to keep companies from moving jobs elsewhere. On one side, supporters argue that such a strategy saves or creates jobs. In this specific case, about 1,000 Indiana residents will continue to make a living, allowing them to buy homes, go out to eat, and shop for goods and services in their communities. The economy as a whole will benefit from such activity. All of this is true.

On the other hand, detractors argue that this solution is welfare by another name: a tax credit. Instead of paying welfare directly to the unemployed workers, it funnels taxpayer money through the company, which pays it to the workers as wages. These wages are higher than the market is otherwise able to bear, leading to an inefficient allocation of capital. All else being equal, Indiana taxpayers will all pay more in taxes in order to help support those 1,000 jobs. And all Americans, in theory, will pay more in taxes to fund the costlier-than-necessary defense contracts with United Technologies.

Some of those who are celebrating the Carrier negotiation’s outcome characterize it as a “trade victory.” But there seems to be little discussion of its viability beyond the next decade. Will these saved manufacturing jobs remain viable in the long term, at Carrier or other companies like it? Will corporate welfare levels need to increase over time, as workers demand higher wages and better benefits?

Foreign workers are not the only competition for Americans’ jobs, either. Technology has displaced, and will continue to displace, workers in the manufacturing sector – and in many others, as my colleague Ben Sullivan recently discussed in this space. The government should not be in the business of picking winners and losers in the private sector, nor should it control or subsidize wages. Nor should it stop or limit innovation and technological advancement. Such a course is neither desirable nor sustainable.

Indiana’s involvement is, in some ways, an example of entrepreneurial federalism: the idea that states should compete to attract businesses. This is generally a good policy and nothing I disagree with, but it should not be pursued through direct corporate welfare, whereby the government picks which industries or individual companies win. Such a policy rewards politics and lobbying over market forces and innovation.

States, and the federal government, should instead focus on reducing the overall tax and regulatory burden on all businesses. This will create a favorable business environment and spur entrepreneurial activity. Under these circumstances, the private free market system will allocate capital more efficiently and “pick” the long-term winners and losers. Certainly not all businesses will succeed. Even with the most favorable tax and regulatory laws, business will start and fail, and jobs will come and go.

Not every job should be done in America, and we can’t save them all. The advance of technology and globalization cannot be stopped. Existing industries will evolve, and some will be dismantled; new industries will be formed. There will be winners and losers. The government should not pick them, nor prevent the process of letting the market pick. It certainly should not save dying industries that send the wrong signals to future generations. Will the son or daughter of a Carrier worker look to continue their parent’s legacy in the manufacturing sector? They see a model of a well-paying job with a middle-class income – but is that sustainable? There are often generations of factory workers in a family, which eventually leads to the family’s economic hardship.

Children today should not necessarily look to follow in their parents’ footsteps, but rather look to the future and the jobs of tomorrow. Some of these industries and jobs are not yet known. A dynamic and flexible workforce rooted in technology, creativity and innovation are a must. Learning the basics of reading and math is not nearly enough to make new workers successful. They will need the ability to think, adapt and apply knowledge in varying situations.

Public policy should focus on fostering a system that allows for the efficient allocation of capital via good tax and regulatory policies, ensuing they are fair and transparent. This will create a vibrant business community. The government should support a robust education system that prepares Americans to work in the modern economy – not just through high school, but throughout life via continuing education and technological training. We need to provide a short-term social safety net during periods of transition, with a focus on re-employment and continuous education. These are all, of course, complex topics to be debated in the public forum.

Carrier’s decision made for a short-term victory and a useful photo op. But if Trump is serious about positive change, he should listen to the voices reminding him what a free market really looks like. Higher corporate welfare is not the answer for Making America Great Again.