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Why Trump’s Carrier Deal Isn’t The Way To Save U.S. Jobs

This is In Real Terms, a regular column analyzing the latest economic news. Comments? Criticisms? Ideas for future columns? Email me, or drop a note in the comments.


The U.S. gained 178,000 jobs in November. But the only ones anyone seemed to be talking about last week were the roughly 1,000 jobs in Indiana that are no longer moving to Mexico.

In terms of direct economic impact, Donald Trump’s deal with Carrier, a manufacturer of air conditioners and furnaces, was clearly a sideshow. But it was symbolically important, representing a campaign promise kept — or at least partly kept, since Carrier still plans to outsource hundreds of other jobs to Mexico — before Trump even takes office. More importantly, the deal may provide some hints about how Trump plans to approach economic policy as president. Last week’s announcement suggests that Trump will approach governing much as he approached business — as a dealmaker. That’s good for grabbing headlines, but it won’t do much to address the underlying forces that are eroding blue-collar jobs.

To understand why, it helps to ask why Carrier made the decision it made. Carrier itself offered two explanations: incentives offered by the state of Indiana and confidence that the new administration will improve business conditions. Trump, at least implicitly, offered a third possible explanation in his speech in Indiana on Thursday: “consequences” that could be coming once he’s in the White House for companies that outsource jobs. (He reiterated that threat on Twitter on Sunday morning.) It’s worth taking these one at a time.

First, the incentives: Indiana (still governed by the next vice president, Mike Pence) offered Carrier $7 million in tax breaks and other incentives in return for keeping jobs in Indiana and investing $16 million in its Indianapolis plant. That package probably wasn’t the primary driver of Carrier’s decision — the company told state officials that it would save $65 million by moving operations to Mexico — but experts have nonetheless argued that it sets a troubling precedent. There is little, after all, to stop other companies from threatening to move jobs to win similar concessions. And such deals offer ample opportunity for corruption and abuse as politicians decide which companies deserve help and which jobs deserve saving. Sarah Palin — whose blue-collar appeal has brought her comparisons to Trump and who has been rumored as a possible member of Trump’s Cabinet — implied that the deal represented “crony capitalism.”

Even setting aside such concerns, incentives like the ones Indiana offered simply aren’t a practical strategy for preserving or creating a meaningful number of jobs in a country of 300 million people. As Justin Wolfers wrote in The New York Times last week, the U.S. economy destroys millions of jobs each month. We can’t save them all — and we shouldn’t want to. Because the economy also creates millions of jobs every month, and that process of creation and destruction is what allows the U.S. economy to become more productive over time. Indeed, many economists are concerned by evidence that that churning process has slowed in recent decades, resulting in an economy that is less dynamic than in the past.

The flip side of the incentives coin is the threat of penalties for companies that outsource jobs. Trump has said that he will propose steep taxes on imports from companies that send jobs overseas or to Mexico. “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!” Trump wrote in a series of tweets Sunday morning. “There will be a tax on our soon to be strong border of 35% for these companies.” There are also other levers potentially available to Trump — Carrier’s parent company, United Technologies has valuable government contracts that could be in jeopardy if it runs afoul of the administration (although legal restrictions could stand in the way of following through on such threats).

There are practical hurdles to enforcing such threats — distinguishing between companies that are outsourcing jobs and those that are expanding overseas operations, or shutting down underperforming U.S. plants, will require complex rules, which companies will then try to work around. But even assuming such rules could be effective, penalizing companies that outsource jobs won’t change an underlying truth: It is cheaper for companies to make many products in Mexico, China and other countries where wages are lower than they are here. If U.S. companies can’t outsource jobs, that won’t stop foreign companies from making products overseas and selling them in the U.S., undercutting American manufacturers on price. The U.S. could instead put tariffs on all imports from those countries, but that would bring retaliation that would hurt American exporters. The tariffs could also hurt U.S. manufacturers more directly — in an era of global supply chains, even many U.S.-made products rely on components made abroad.

That leaves the final explanation for why Carrier took Trump’s deal: the company’s belief that the Trump administration will “create an improved, more competitive U.S. business climate.” Greg Hayes, the chairman and CEO of United Technologies, cited in particular Trump’s pledge to lower corporate taxes and reduce regulation, promises that Trump repeated in his speech on Thursday.

There are strong arguments for reforming the corporate tax system. The current approach penalizes companies for investing overseas earnings back in the U.S. And because the U.S. has a relatively high statutory corporate tax rate but also lots of credits and loopholes, the system effectively favors big companies, which can often figure out ways to game the system to pay less in taxes.

But while corporate tax reform may be overdue, it isn’t clear that it would do much to reduce outsourcing, at least of production jobs like those at Carrier. A lower corporate tax rate would be good for Carrier, but it wouldn’t change the incentive for them to shift jobs overseas. In fact, to the extent that lower taxes make the U.S. a more attractive place to invest, they will tend to drive the trade deficit up, not down. (Greg Mankiw, a prominent Republican economist, explained this argument in more detail in The New York Times on Friday.)

Reduced regulation, on the other hand, could make it cheaper for companies to produce goods in the U.S., albeit at the risk of increased threats to workers or the environment. That could save some jobs at the margin — a company on the edge of moving jobs overseas might stay in the U.S. if it didn’t have to upgrade its plant to comply with a new environmental rule, for example. But the driving force behind outsourcing isn’t regulation — it is labor costs. The Carrier employees who stood to lose their jobs reportedly earn $30 an hour in wages and benefits, about 10 times as much as their Mexican counterparts. The biggest reason Americans are worried about disappearing manufacturing jobs is that they generally pay well (although in many cases not as well as they used to); there isn’t much point in saving manufacturing jobs by slashing wages until they are competitive with those in Mexico or China.

In other words, a combination of bribes and threats may have saved Carrier workers’ jobs — and still only some of them — but it isn’t going to bring back the glory days of American manufacturing. Nothing will. The forces that have driven the decline in U.S. factory employment — globalization and automation — are here to stay. Even if Trump could somehow entice companies to bring production back to the U.S., they wouldn’t bring back nearly as many jobs as have been lost over the past 20 years, as anyone who has spent time in a modern manufacturing plant — with its gleaming automated machines and tiny handful of workers — can attest.

The good news for workers is that the wave of outsourcing has probably crested. Rising wages in China and Mexico have made them less attractive as destinations. But outsourcing and automation continue to take a toll, particularly in parts of the country that voted strongly for Trump. Worse, we haven’t yet found a source of well-paying, stable jobs to replace the millions of manufacturing jobs we’ve lost. If Trump wants to help the people who carried him into office, he would do well to focus on that challenge rather than on chasing deals to save the jobs of whichever individual workers have managed to grab his attention.

Trump’s economic team

After the election, I argued that Trump’s choice of economic advisers matters more than usual because he provided so few policy details during the campaign. Well, his team is beginning to take shape, and his advisers have one thing in common: They’re really, really rich.

Trump’s pick for treasury secretary, Steven Mnuchin, is a hedge-fund manager and former Goldman Sachs partner. His commerce secretary, Wilbur Ross Jr., is a 79-year-old billionaire. And on Friday, Trump announced the creation of a “Strategic and Policy Forum” to advise him on economic issues; the group will be led by Stephen Schwarzman, head of the investing giant Blackstone Group, and is made up almost entirely of corporate titans, including JPMorgan Chase head Jamie Dimon and Disney chief Bob Iger (who, because Disney owns ESPN and ESPN owns FiveThirtyEight, is ultimately my boss).

There is nothing new about private sector leaders being tapped by presidents for their administrations. Ross, assuming he is confirmed by the Senate, will take over from Penny Pritzker, whose net worth is estimated by Forbes at $2.4 billion. But as Neil Irwin wrote last week in the Times, Trump is relying to an unusual degree on advisers without policy experience. Mnuchin, in particular, had barely spoken publicly about policy before his involvement in Trump’s campaign. Ross has been more vocal, but when it comes to details, we’re still waiting to see how (and to what extent) Trump’s campaign pronouncements will translate into actual policy.

Oil prices

The OPEC cartel last week announced a deal to cut oil production by about 1.2 million barrels a day in an effort to drive up prices. On the surface, the announcement shouldn’t have been a surprise — OPEC has been discussing such a move for months in response to a glut of oil brought on by the fracking-driven boom in U.S. oil production, among other factors. And at a more basic level, the move makes sense — limiting production to keep prices high is the whole point of a cartel.

But the deal was a surprise because few analysts believed the cartel’s members could reach an agreement on who, exactly, would do the cutting. This is the fundamental challenge of a cartel — everyone benefits by limiting production, but each individual member would be better off selling more oil. OPEC in recent years has struggled to overcome that challenge.

OPEC’s announcement had an immediate effect — oil prices soared on the news. But many experts are skeptical that the cartel’s members will stick to the deal for long, especially if U.S. producers rush to fill the gap. (Then again, it pays to be skeptical of experts on energy issues.)

Last week at FiveThirtyEight

The “Fight for $15” minimum-wage movement turned 4 years old on Tuesday. I looked back at what it has accomplished and the questions that remain about its economic impact.

Amid reports that Trump will appoint retired neurosurgeon Ben Carson to run the Department of Housing and Urban Development, Andrew Flowers argued that it’s time to stop treating HUD like a second-tier department. And I wrote that Trump’s selection of Mnuchin for treasury secretary doesn’t reveal much about his economic plans.

Friday’s jobs report sent mixed signals about the state of the labor market. But the big picture is still one of an economy on firm footing.

Elsewhere

Hillary Clinton won fewer than 500 U.S. counties, but those counties represent nearly two-thirds of U.S. economic output. Mark Muro and Sifan Liu of the Brookings Institution look at how the gap between “high-output America” and “low-output America” helps explain the election results.

Weak wage growth has been a defining theme of the economic recovery. Writing in Bloomberg View, economist Noah Smith asks what the government could actually do to change that.

Uber has disrupted the taxi industry. But it hasn’t necessarily found a sustainable business model of its own, Izabella Kaminska writes at The Financial Times.

Nicholas Confessore of The New York Times Magazine tells the fascinating tale of a divorce battle between two wealthy entrepreneurs and what it reveals about the maze of shell companies and offshore tax havens that the ultra-rich use to hide their money from the authorities — and from each other.

What does work look like in America today? The Atlantic interviewed dozens of workers across the country about their jobs and presents their stories in their own words.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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