Carrier, Trump, and Cronyism: How Handouts Stifle Innovation

For hundreds of workers at Carrier’s Indianapolis plant, the bad news is that union officials have received official notice that their jobs are being shipped to Mexico, despite Indiana’s $7 million grant to the company. For 330 million Americans, the far worse news is the fact that governments across the country spend one thousand times that much trying to lure or keep companies to their jurisdiction – amounting to a fiscal murder-suicide pact in which the nation’s economy is the victim.

States and municipalities spend $70 billion a year to lure companies away from each others’ jurisdiction, according to the organization Good Jobs First, a non-profit watchdog group (as quoted by CNBC). It amounts to a game of whack-a-mole played with American taxpayers’ money. But the biggest cost cannot be measured in dollars and cents – it is the moral hazard that occurs when a private-sector company takes on a supposed ‘risk’ and taxpayers bear some of the cost. Basically, it turns on its head one of the most important principles of market economics – that willingness to bear greater risk offers the potential for greater reward. Too often the greatest reward goes to companies that offload some of the risk to governments and the people they represent.

The Carrier decision in December to keep a few hundred jobs in Indianapolis under pressure from then-President-Elect Trump illustrated the futility of government attempts to bribe or bludgeon companies. Days after Carrier announced its decision to keep some of the jobs in Indianapolis, the parent company CEO made it clear that many of them won't have a long shelf life. Carrier will be investing $16 million – almost half from Indiana the taxpayers – to automate its Indianapolis plant, eliminating jobs. 

Corporate welfare schemes represent a triple threat to wealth creation:

First, they distort investment, rewarding companies for locating facilities in locations based on how much a government is prepared to shell out, rather than relevant factors such as geographic location, infrastructure, or local skill levels. Instead of locating plants based on where they are apt to be most efficient, companies are given an incentive to follow the taxpayers’ money.

Second, these programs scare many off from investing in the United States, especially when cash inducements are accompanied by strong-arm tactics – as Trump employed when he pressured Carrier, whose parent company receives billions in defence contracts.  If companies are constrained from moving or eliminating jobs, they are far less likely to create them in the first place.

Third, they encourage companies to auction off jobs, and states and municipalities to enter the bidding, in a vicious cycle of government against government and taxpayer against taxpayer. And many, if not most, companies that receive financial incentives are just squeezing a few taxpayers’ dollars for locating where they had already planned to because of competitive factors. 

In fact, Trump made explicit the invitation to companies to barter away jobs, at least within the domestic marketplace, saying he was not concerned if companies moved within the United States. Maybe he should be. Good Jobs First estimates there are more than 950 state, local and federal subsidy programs doling out money to over 2,500 companies in a bid to buy economic growth rather than letting the marketplace fulfill its function. And megadeals to induce companies to locate or create jobs in a jurisdiction come with an average price tag of more than $658,000 per job. Major data companies have been awarded more than $2 billion by government, at an average cost of almost $2 million per job.

And too often sunset industries are favored over sunrise ones. A study funded by the Ewing Marion Kauffman Foundation of 41 organizations representing more than 24,000 small businesses found that they overwhelmingly believe that state economic development incentives favor big businesses, and are not effectively meeting the needs of small businesses seeking to grow.

The goal of governments should be vigorous competition that generates wealth creation, not payola that stifles it. The building blocks of economic growth are lower taxes, balanced budgets, an educated and skilled population, entreprepreneurship and risk taking, and efficient infrastructure – not government incentives to induce unproductive investment.