Fraser Forum

William Watson: There’s no such thing as a free ‘saved job.’ Or is there?

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Donald Trump started off his “Thank You” tour this week in Indianapolis with a visit to that Carrier air conditioner plant that had been such a big talking and tweeting point for him during the primaries and general election because it was leaving for Mexico. Count on it being big in his talk and tweets for at least another year because, in Trump’s first big presidential coup, Carrier has decided 1,000 jobs won’t be going to Mexico, after all, this following discussions with the state’s former governor and now vice-president elect, Mike Pence, and his even more famous running-mate.

In this very first stop on the tour, all the “Thank You’s” were for Trump.

Only an economist wouldn’t find people getting to keep their jobs three weeks before Christmas a good-news story—an economist and the many hundreds of people who were counting on employment in the new plant Carrier has almost finished building in Mexico and who, as a result, will now have a greater incentive to try to smuggle themselves into the United States to find work. Be that as it may, the economist is bound to ask: What did the saved jobs cost? For just as there is no such thing as a free lunch, there is no such thing as a free saved job.

(Actually, I have sat through many lunches I didn’t pay for. But of course I did “pay” for them—by sitting through them, which involved listening to the favoured luncheon speaker of whatever organization was buying me the lunch. Usually, it wasn’t much of a burden. Once or twice, ironically, the speaker’s theme was the non-existence of free lunches.)

Unfortunately, we don’t know the exact terms of the Indiana job bail-out. (Call it “The Art of the Secret Deal.”) So far, reports talk about $7 million in tax incentives—which doesn’t actually sound that bad, “only” $7,000 per job saved. But moving a thousand-person plant is a big undertaking. It’s hard to believe Carrier’s anticipated benefit from leaving would have been only $7 million, so that if some government paid it that, it would be happy to stay. If it’s $7,000 year after year after year, well, that’s a more substantial amount. And maybe there’s more cash to the deal than so far reported.

In any case, whatever the final amount may be, the money has to come from somewhere. Either other taxes or government debt will go up or public spending will go down. Whatever combination of the three occurs, there will be job losses. The readily identifiable 1,000 Carrier workers are happy and can show their happiness by cheering Mr. Trump to the rafters. The unnamed, unknown future job-losers can only stuff their pink slips in their pockets and wait until the next election.

To hear Mr. Trump tell the story, he was inspired by a report about Carrier that he saw just a week ago on one of those network news shows he despises but never misses. So he phoned up Greg Hayes, the CEO of United Technologies, which owns Carrier, to tell him about all the good things he plans to do in the way of lowering corporate taxes and eliminating unnecessary regulations, which will make it so beautiful doing business in the U.S. that now Carrier really doesn’t have to leave.

CEO Hayes, if he’s a good CEO, had read about all that in the newspapers and, even so, hadn’t changed his mind about moving to Mexico—the new plant is almost built! But then he got a call from the president-elect and in less than a week ditched a move Carrier has been working on for almost two years. Reading about it in the newspaper is one thing. Being wooed—or maybe browbeaten—by the incoming president of the United States evidently is another.

If the coming reduction in corporate taxes is what persuaded United Technologies’ CEO, well, the same conclusion applies. Better that aid to business be given to all business on a non-discriminatory basis, as a tax cut does, but unless U.S. corporate taxes have ventured onto the wrong side of the Laffer Curve, so that lower tax rates will actually raise revenues, the revenues lost due to lower rates will have to be made up in some other way, which will cost jobs.

If, on the other hand, what did the trick for United Technologies was the imminent removal of regulations that are economically costly but have minimal or no benefit, then that is a free lunch. Barack Obama’s foreign policy was premised on the dictum “Don’t do stupid sh**!” If U.S. regulators have been doing “stupid sh**,” getting rid of these stupidities does amount to a benefit with no cost—a free lunch.
A more ominous possibility, to which Mr. Trump alluded in his remarks at Carrier, is that he made clear to the CEO, as he will make clear to all CEOs, that “leaving will have consequences.” If firms think they can leave, produce elsewhere and then ship goods back to the U.S., they are mistaken, he said. If they try, they will be hit with high tariffs and other so far unspecified costs.

The real cost of such a policy would not be the retaliatory tariffs, though U.S. consumers would indeed be hurt by them. The real cost would be the message sent to potential future investors: If you invest in the U.S., that is an irreversible decision—you will not be allowed to leave without major consequence.

For years, economists have argued that an important reason Europe’s employment is so anemic is that Europe’s rules against laying people off are so stringent. If you know you can’t easily fire people, you are very careful about hiring them.

If foreign firms know that if they invest in the U.S. they won’t be allowed to leave, and the president himself will see to that, they will be very careful about investing in the U.S. Trump-suasion may be great for holding onto firms already in the U.S. But it’s poison for firms thinking about setting up there in the first place.

 

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