The costs of protecting 800 American jobs

Last week President-elect Trump announced that he had convinced Indiana-based Carrier not to outsource about 800 U.S. manufacturing jobs to Mexico.
Since then in a series of tweets Mr. Trump has:
  • publicly attacked another firm, Rexnord, for considering outsourcing jobs to Mexico;
  • made clear his approach to Carrier and Rexnord is the beginning of a broader policy;
  • threatened all American firms with “retribution” if they outsource jobs; and
  • proposed a 35% import tariff against U.S. firms that do so.
What, then is so bad about President-elect Trump paying, telling, or forcing Carrier, Rexnord, and American firms generally not to outsource American jobs to Mexico?
About 800 Americans now working for Carrier benefit from the President-elect’s actions. Here are five costs of his approach.
  1. It is unfair to other Americans.
  2. It weakens American firms relative to their foreign competitors.
  3. It does long run economic harm to the U.S.
  4. It abandons any pretense of free trade on a level playing field.
  5. It is easily abused.
President-elect Trump’s approach is unfair to other Americans: consumers, taxpayers, and employees of other firms.
  • Forcing Carrier to pay higher labor costs than they could pay in Mexico will make Carrier gas furnaces more expensive. Some American Carrier employees win, while everyone in the market to buy a gas furnace loses. Many of those losers are American consumers. Mr. Trump is helping a few American workers a lot and hurting many more American consumers a little. These consumer losses increase the more one replicates this policy.
  • Some Americans (Hoosiers in this case) will pay higher taxes to subsidize the wages of others. Why should the employees of Eli Lilly (10,000 Indiana employees), Rolls-Royce and Roche (~4,500 each), and countless other Indiana employers subsidize the wages of Carrier employees because the President singled out this particular firm? That is unfair to those taxpayers.
  • A one-off beating with a government stick is unfair to that firm, while a one-off taxpayer-financed carrot for one firm is unfair to others.
President-elect Trump’s approach weakens American firms relative to their foreign competitors.
  • Mr. Trump’s threatened import tariff applies only to firms that (a) shut down U.S. manufacturing capacity and (b) set up a foreign plant to replace the closed U.S. facility. He would punish movement. Setting aside the difficulty of monitoring this, this disadvantages firms that today employ U.S. workers, since movement is measured relative to your starting point.
  • Any firm that does not now make gas furnaces in the U.S. could set up shop in Mexico, pay lower labor costs than Carrier, avoid an import tariff, and therefore have a significant cost advantage over Carrier. This firm could be U.S-based or foreign. The Trump import tariff would not apply to gas furnaces manufactured by these low cost competitors set up anew in Mexico, only to Carrier if they move capacity there from the U.S.
  • More generally, any manufacturing firm that today employs Americans may now be at a competitive disadvantage, relative both to new firms and firms now employing cheaper foreign labor. If threatened by the Trump Administration, firms employing American workers must either pay higher labor costs than their competitors or face an import tariff their competitors will not face. In the hope of protecting American workers the President-elect is handicapping the firms that employ them.
President-elect Trump’s approach does long run economic harm to the U.S.
  • In attempting to protect the status quo, the President-elect’s threats (tariffs, jawboning, and unspecified other policy sticks) tell business leaders in the U.S. and around the world not to invest in new U.S. manufacturing capacity and not to expand their existing American plants. Why would any firm hire American workers, knowing that they would be penalized if they try to move out of the U.S. at any future time?
  • We can see similar problems in Western Europe. There government policies make it harder for businesses to fire workers. As a result, managers hire fewer workers since they can’t correct their hiring mistakes or lay people off when times are tight. In the short run this looks compassionate but in the long run Europe has much higher unemployment than the U.S. Let’s not replicate the slow growth policy failures of Western Europe.
  • Similarly, if you penalize American firms when they try to lay off employees and shut down manufacturing plants, you will help those employees in the short run but you will get less new investment and create fewer American manufacturing jobs in the long run. That’s bad, and the long-term losses to America are not worth the short-term gains. We should want to expand and attract new investment to the U.S., not just prevent what’s here from leaving.
President-elect Trump’s approach opposes free trade on a level playing field.
  • During the campaign, candidate Trump said he opposed (a) bad trade agreements negotiated by the U.S. government and (b) cheating by foreign governments and foreign firms. Neither is in play here. There is no claim that NAFTA disadvantages Carrier, nor that Carrier’s foreign competitors or Mexico are somehow cheating. Instead Mr. Trump is opposing free and fair competition. The playing field is level, the rules are fair and fairly enforced. Mexican workers are simply less expensive than American workers. By threatening retribution (his word) against firms that outsource American jobs without any mention of bad trade deals or cheating, the President-elect is now embracing straight-up protectionism.
President-elect Trump’s approach is easily abused.
  • Abuse #1 (policy slippery slope) — After successfully pressuring firms not to outsource American workers, why not pressure them not to fire workers for any reason? Why not pressure them to meet other “legitimate” policy goals? This already happens with the force of law through fuel economy requirements, health insurance mandates, and affordable housing goals. The novelty here would be a President pressuring individual firms to meet his own arbitrary policy goals without any democratic process. When you have a hammer everything looks like a nail.
  • Abuse #2 (political selection criteria) — There are too many firms to pressure them all, so how will the new President choose? Over time he or his advisors will be increasingly tempted to pressure firms that employ workers in politically important regions before elections.
  • Abuse #3 (others join the game) — Even if the President does this completely above board, he makes it easier for other elected officials to do the same but with less noble goals. Elected officials already do this with varying degrees of success. When the President does it he signals to other elected officials that this is appropriate and can be effective.
  • Abuse #4 (crony capitalism) — Business leaders will try to curry favor with the President and his advisors so they can nibble on carrots and avoid sticks. Those who like the President and whom he likes will benefit, and vice versa. When a politician rewards his business friends and punishes his business enemies it’s called crony capitalism. It is corrupt and it creates incentives for other business leaders to spend their time and money trying to get similar political access with elected officials. And a firm leader now knows it can initiate a negotiation with the Trump Administration simply by threatening to outsource jobs.
However well-intentioned, President-elect Trump’s new policy will do far more harm than good. I hope he instead embraces free trade and competition and that he stops trying to tell individual American business leaders how to run their companies. He can best strengthen the American economy by developing broad-based neutral policies that create favorable economic conditions and allow smart business leaders to expand, hire, and make the American economy grow.
By | 2017-12-09T19:59:08+00:00 Monday, 5 December 2016|