This post was originally published on the Huffington Post 12/13/2016.
On December 8, a month after the election, President-Elect Donald Trump used Twitter to attack a white male steelworker – a representative of the voting block that tipped the election in his favor. For his part, Chuck Jones, president of United Steelworkers Local 1999 in Indianapolis, started the fight by calling the President-elect a liar. Jones claimed that only 800 Carrier heating and air conditioning jobs would not be moving to Mexico, rather than the “more than 1,000 jobs” Trump claimed to save.
Notably, President-elect Trump blamed unions for manufacturing job losses. In the 1970s, unions were blamed for being uncompetitive, and unions fell over themselves to negotiate concessions. But most research showed the concessions mostly raised profits and made it cheaper for companies to close down and move jobs. So the jobs left faster. Smashing unions didn’t work. In Ohio, for instance, workers couldn’t compete with Chinese labor markets.
So what to do? How to keep good paying jobs in the United States?
The Carrier deal lifts up the one question taxpayers and voters have to answer. How much should a president, governor, or mayor pay to keep a job in the United States?
Vice President-elect Mike Pence, the current Governor of Indiana, gave Carrier $7 million in tax breaks from Indiana taxpayers. That is under $9000 per job. But the total cost to Indiana could run well beyond $7 million should the Carrier deal replicate previous practices of hiding the full costs of such agreements in various state accounts and budgets. But transparency issues aside, is it economically worthwhile for states to offer tax breaks as an incentive for companies to remain in-state, and at least preserve the incomes of a portion of their work force?
A consensus among economists from a variety of perspectives holds that subsidizing individual firms is wasteful, doesn’t boost long-term prosperity, and creates “economic war among the states.” In 1994, economists at the Federal Reserve Bank of Minneapolis argued against the practice because state tax incentives drain public budgets, create unhealthy competition to move businesses from one location to another, and ignore the economic fundamentals that determine optimal business location. The conventional economic view is that states and cities can compete by offering lower overall taxes and regulations, and other advantages such as lower crime rates, more effective transportation, and a better-educated labor force.
Many economists argue against giving particular firms tax breaks because most go to big firms. Big firms often exploit their economic position to capture “rents” of various sorts, including tax and regulatory advantages not available to smaller businesses. And subsidy policies are often allied with calls for lower overall taxes and broader attacks on minimum wages, unions, and other labor policies. Their combined effect is to depress incomes.
Instead, the economy could be boosted more by strengthening public sector and labor bargaining power and tying tax breaks to clear, measurable benefits that, if not met, can result in those tax breaks being recaptured, or “clawed back.”
The only major economists who have argued for firm-specific tax breaks are Michael Greenstone and Enrico Moretti, who found that winners of inter-state competition to host industry can see increases in related property values without significant overall revenue loss. But their research covers the construction of new plants rather than subsidies to existing ones, and the dominant finding is that plant-specific subsidies — such as those to Carrier — are inefficient rents captured by healthy, large firms, with little benefit flowing to employees.
Some analyses go further, finding that state subsidies increase inequality by strengthening anti-union, anti-regulation, “low-road” employers relative to other companies.
Economists are likely to offer a more nuanced and contextual view of the agreement and the issues it raises than the President-elect did at his Carrier event. While around 800 Carrier jobs in Indiana jobs will now be retained, over a thousand more will still move to Mexico, despite a large, non-transparent tax giveaway that will cost Indiana taxpayers millions of dollars. And economists of all stripes concur that such giveaways are bad policy that will do little to help the state’s industrial workers, while eating into public budgets needed for investments in infrastructure and education, which are essential in the longer-term recipe for healthy, equitable growth.