A curious thing that happened this weekend was when Sarah Palin rightly accused Donald Trump of crony capitalism. She bemoaned the President-elect’s deal with Carrier to keep 800 jobs in Indiana by extending the company $7M in tax breaks.
This all got me to thinking, how much does it cost to keep a job in the United States?
Well, let’s do some math. Let’s say a Carrier employee earns $50K/year (or $24/hour). That’s just shy of the median income in the US, and it’s (I’m ashamed to say) more than anyone working for me (including myself) makes.
This Carrier employee pays $8,271 of her salary back to the federal government in income tax every year.
Additionally, this employee, because she’s in Indiana, will pay $1,650 in state income tax.
So for every person that Carrier employs, the government earns $9,921. May we round that up to $10K? Great.
If we make A LOT of assumptions (## of years people work, governments’ discount rates, the time value of money, median age of US workers, present value of an annuity, etc.) we can estimate that the value to the government of keeping a job in the US is $220,000.
According to Mr. Trump (can we believe him?) Indiana is keeping 800 jobs at a cost of $7M in tax breaks. If those details are true, then by my layperson’s rationale, Mr. Trump made a VERY FAVORABLE deal, retaining jobs at a cost of $8,750 each.
Did our President-elect just buy 800 jobs for 4 cents on the dollar?! Did Tommy just sell a half a million brake pads?
I don’t know. Is this fake news? My calculations are admittedly pretty crude.
Let’s see what the market is doing.
Camden, New Jersey is a city that is very much in want of jobs. The unemployment rate in Camden is 19.6% and the median annual income is $18,007. It is, by all measures, America’s poorest city. If there’s a place where we should be willing to spend money to bring in jobs, it’s Camden.
Consequently, the New Jersey Economic Development Authority is working very hard to incentivize large businesses to move to Camden. Here are a few of the deals they’ve struck:
Company — Tax Break — # of Jobs Created/Retained — Cost Per Job
Holtec International — $260M — 235 jobs — $1,106,383 per job
ResinTech — $138M — 265 jobs — $520,755 per job
Lockheed Martin — $107M — 250 jobs — $428,000 per job
Philadelphia 76ers — $82M — 250 jobs — $328,000 per job
American Water — $164M — 700 jobs — $234,286 per job
Subaru of America — $118M — 600 jobs — $196,667 per job
Cooper Health System — $40M — 372 jobs — $107,527 per job
Taking a weighted average, it appears New Jersey is willing to pay $320,316 to create/retain 1 job in Camden. Seems a little steep compared to the deal that Donald Trump was able to strike with Carrier, no?
It also seems steep when you consider that most of these jobs are not going to Camden residents, and that small businesses are not being equally incentivized.
So how much does a job in Camden really cost?
I am a small business owner in Camden, so let’s take my business as an example. What is my cost to create a job?
Right now, my plant employs 15 people. We only run 1 shift and that shift uses about 35% of our plant’s capacity. But with about $270,000 in equipment and electrical upgrades, we could run 3 shifts at 100% capacity and employ 32 people.
That means I should be able to create 17 jobs for $270,000, or $15,882 per job. Because these are $12/hour jobs (not like the $24/hour jobs at Carrier), I’ll concede that they’re only worth $110,000.
Nevertheless, if the government wanted to strike a deal with me, they could buy 17 jobs for 14 cents on the dollar.
Sadly, though, I do not have any cronies with whom to engage in this crony capitalism I’ve been hearing so much about.
Or do I?
Crony capitalism sets several very dangerous precedents:
First, can companies that were incentivized to retain jobs in the US extort the government again and again by threatening to move jobs overseas whenever they deem their tax bills or regulatory burdens too high?
Second, should elected officials who rely on corporate donations to fund their election campaigns be able to select which businesses get to receive these tax incentives?
Third, do tax incentives for outdated businesses thwart the innovations of new businesses whose technology might undermine the incumbent businesses?
These are serious questions. Labor disruption is second only to climate change as the principal challenge of our generation. A fairy-godmother-President tapping his wand on some companies and not others is probably not the best answer to the question. So what is? If you ask a small business owner, her answer will be access to capital. If you ask the CEO of a large corporation, his answer will be decreased regulation. And both will agree that lowering taxes and the burden of health insurance costs wouldn’t hurt either.
If the government(s) of Camden, or New Jersey, or the US decide that creating/retaining jobs in Camden is a priority, they should roll out a plan that has separate provisions for small and large businesses. For small businesses, set up a small business line of credit that increases by $15,000 for each full-time job you award to a Camden resident. For large businesses, turn every 5% of your workforce that is made up of Camden residents into a 1% tax credit. These incentives will get Camden working again and do not require a visit from Donald Trump.
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