Trump’s Carrier Shakedown Workers don’t prosper when politicians force companies to make noneconomic decisions.
http://www.wsj.com/articles/trumps-carrier-shakedown-1480639199
A giant flaw in President Obama’s economic policy has been the politicized allocation of capital, from green energy to housing. Donald Trump suffers from a similar industrial-policy temptation, as we’ve seen this week with his arm-twisting of Carrier to change its decision to move a plant to Mexico from Indiana.
Carrier announced Wednesday that it will retain about 1,000 jobs in Indianapolis that would have moved to Mexico over the next three years, and on Thursday Mr. Trump held a rally at the plant and claimed political credit. The President-elect had made Carrier a piñata for his trade politics during the campaign, and post-election he lobbied Gregory Hayes, the CEO of United Technologies Corp. (UTC) that owns Carrier, to reconsider.
Everyone—even the Obama White House—is hailing the move as a great political victory, and in the short term it is for those Indianapolis workers, who make more than $20 an hour on average. But as U.S. auto workers have learned the hard way, real job security depends on the profitability of the business. Carrier wanted to move the production line to Mexico to stay competitive in the market for gas furnaces. If the extra costs of staying in Indianapolis erode that business, those workers will lose their jobs eventually in any case.
This isn’t to fault Mr. Hayes’s decision, since Mr. Trump made him an offer he couldn’t refuse. The state of Indiana threw in $7 million in tax incentives, but those weren’t decisive. Mr. Trump’s real hammer is his threat to impose a tariff on Carrier imports to the U.S. Carrier has a 30% share of the U.S. gas-furnace market, and a 35% tariff could kill the business. That’s the same sword Mr. Trump previously held over Ford Motor Co.
United Technologies also gets about 10% of its revenue from sales to the Pentagon, another source of government leverage. Then there’s the potential damage to the Carrier brand, especially its consumer air conditioner sales, if Mr. Trump decided to blast it from the bully—and we mean bully—pulpit. So United Technologies decided to take the small cost against earnings and invest to make the Indiana plant more competitive.
The company is also betting that Mr. Trump will fulfill his promise for tax and regulatory reform to make U.S. manufacturing more competitive. United Technologies does about 61% of its sales outside the U.S., and it has some $6 billion in cash overseas that would be taxed at a 35% rate if it brought the money home today. Carrier currently pays a 28% effective tax rate, so a tax reform that cut the corporate rate to 20% and only taxed earnings in the country where they are earned would more than make up for the Indianapolis concession.
UTC is also no corporate scofflaw. It pays $2 billion a year in taxes and offers to finance four years of college for every employee. Its exports are worth $10 billion a year, mostly in aerospace products, which support some 40,000 American jobs. CONTINUE AT SITE
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