The Carrier Deal is the Trump Administration’s First Major Failure
…and he’s not even president yet.
It’s now been a little bit over a week since President-Elect Donald Trump announced that he had secured a deal which would allow Carrier — an air conditioning company and subsidiary of United Technologies Corporation (UTC)— to keep their Indiana plant open. Earlier this year, UTC said they would be closing the plant and moving its jobs to Mexico. Trump made his initial announcement on Twitter and then held a celebratory press conference, during which he praised Carrier for keeping 1,100 jobs in Indiana.
The first reports about the deal allowed Trump to enjoy a pretty good news cycle. In fact, a sizable majority of Americans (60%) said that they approved of the move in a Politico poll. So what’s the rub? Well, for one: Trump’s entire framing of the deal is almost a complete fiction.
First off, once the public was allowed to have a closer look at the deal, it became clear that Carrier would only be keeping 730 jobs in Indiana, not the 1,100 Trump originally touted. Secondly (and maybe the most important piece of information), 1,300 jobs are still moving to Mexico in spite of Trump’s supposed expert deal-making. Specifically, UTC announced that although they were going to keep some of the jobs at the Carrier plant, they still planned to close a separate plant in Indiana that Trump could not secure as a part of the deal (that plant employs about 600 people). In addition, Carrier is still planning to send around 700 additional jobs in Indiana down to Mexico. All in all, you get to around 1,300 jobs going to Mexico and 730 staying in the US.
You may feel as if Trump deserves some credit for securing the 730 jobs, despite the fact that he promised to save a lot more and because of the not-so-small-matter of him originally claiming he was saving 1,100 jobs. But even that small silver lining misses the dark cloud hovering over the deal.
The first question we should ask is: How did Trump get Carrier to go along with his proposal? The answer: Despite his threats of a 35% tariff on companies that shift jobs outside of the United States, the State of Indiana will gift Carrier a full $700,000 to keep their plant in the United States instead of Mexico. Yes, you read that correctly: UTC received a $700,000 tax break to ship a majority of the jobs they were providing in Indiana to Mexico. It gets worse when you realize that the deal spans over the course of a decade, which means UTC will see a full $7 million land in their pockets should they see out the deal (more on that later).
The decision to give Carrier a tax break in this instance is problematic in two respects: For one, it encourages other companies to use the same tactic to squeeze a deal out of Trump. In fact, Carrier themselves have used this tactic before on a certain Vice President-Elect: Soon-to-be-former Indiana Governor Mike Pence. In 2013, Carrier announced that they were planning on closing an Indiana plant and moving all of its jobs to Mexico (sound familiar?). Pence tried to entice Carrier and one other company with tax incentives. Carrier in particular received about a $600,000 tax break. At first, they agreed to stay in the state. However, after reality had the chance to wrap her coils around Carrier, they surmised that a move to Mexico would be more profitable in the long run. They ultimately opted to pay back Indiana taxpayers the money Pence gave them and close their doors.
Obviously Trump turned that around, but Carrier has to be looking at this from a pretty positive viewpoint: They initially received a small tax cut to stay in the US, held out, and then got a bigger one after realizing they were dealing with a President-elect who was willing to do whatever he could to manufacture a positive headline. Trump’s behavior does not discourage companies like UTC from shipping jobs overseas. If anything, it encourages them to make the threats and hope for a tax cut (when even an economic illiterate like Bernie Sanders starts criticizing your populism, it’s time to throw in the towel).
Lots of people are pointing out that UTC is still sending a majority of the jobs down to Mexico, but very few are noting Carrier’s previous deal with Indiana. Any definition of Trump’s “success” assumes that UTC will not do exactly what they did before: Take a tax cut for a few years and then close up shop anyway (presumably after Trump is in the White House and his supposed threat over witholding government contracts from UTC is gone).
It should be noted that local municipalities make deals with companies like Carrier all the time; they promise tax cuts and a company declines to ship jobs out of the country in return for a little bit more lee-weigh with their payroll. The Federal Government has a pretty recent history of taking similar steps, albeit on a more complex and bigger scale. For instance, Presidents Obama and Reagan’s bailout of American automobile manufacturers, which entailed companies like General Motors and Chrysler respectively, were not completely dissimilar from the populist approach Trump is taking.
The fundamental difference between a bailout like Obama’s (which came about in the middle of a tepid recovery to the most severe recession in 70 years) and Reagan’s (ditto with an asterisk) is that Trump puts himself in a weaker position by negotiating small-scale deals with companies like Carrier. As Paul Krugman pointed out, Trump would have to do two Carrier-like deals a week in order for him to recover just 4% of the manufacturing jobs we have lost since 2000, a tall order that he has obviously already failed. Trump has given Carrier the rope and now they can sell it to other manufacturing companies until the Trump Administration finally gives in and hangs itself.
Trump’s failure in this regard is really only half-way his fault. Contrary to popular assumptions, manufacturing output has actually increased in the United States over the past few years. On the other hand, hiring has not, the reason being that machines tend to do the jobs we used to do a lot better and a lot faster, for less money (for now). That is obviously a bigger discussion that Americans need to have, but for which Donald Trump has not prepared them.
Long, Macro-Economic story short: The answers to a quickly globalizing economy isn’t to save an individual plant in a Rust Belt state so that you can snatch a few good headlines. It will require policies that will allow Americans to weather, rather than shout angrily at the coming storm of creative destruction. But make no mistake:
The primary conclusion here is that Trump paid a company $7 million to ship a majority of their jobs down to Mexico without solving a single problem facing the American manufacturing industry, all so he could enjoy a couple of good headlines.
I have a feeling this will be a popular refrain over the next four years, because it has been a constant refrain throughout Trump’s business career: Make a deal; get fleeced; find some small amount of positive spin for yourself; declare victory. Carrier made a fool out of Trump and Trump made a fool out of his supporters who so gullibly believed what he was promising them. At least Carrier’s employees are starting to get a sense of the big picture: