Making News: Video of Today’s CNBC Appearance on Trump’s Carrier Jobs Moves

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Carrier, CNBC, Jobs, Making News, manufacturing, Mexico, Trump, United Technologies

I’m pleased to announce that I appeared this afternoon on CNBC to discuss President-elect Trump’s initiative to prevent the Carrier division of United Technologies from moving manufacturing jobs and production to Mexico. Apologies for not posting this in time for folks to watch the segment live, but you can see the first half at this link, and the second here.

And keep visiting RealityChek for news of future media appearances and other developments.

(What’s Left of) Our Economy: The Case for Trump’s Carrier Jobs Policy

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2016 election, Carrier, Donald Trump, Jobs, manufacturing, offshoring, subsidies, tariffs, Trade, United Technologies, {What's Left of) Our Economy

Donald Trump’s initiative to prevent manufacturing jobs from being offshored from Indianapolis to Mexico (at least what we know of it so far) makes me feel like one of those “two-handed” economists that so frustrated former President Harry Truman. You know – the ones he complained would always give him an “On the one hand…on the other hand” answer when he was seeking clear advice. Here’s what I mean. (Spoiler alert: As you’ll see, however, on balance, the Carrier news is encouraging.)

On the one hand, I wish the President-elect had never vowed during the campaign to prevent the Carrier company from closing that factory and sending the production and employment south of the border in order to save on labor costs – or at least to punish it with tariffs if it proceeded. After all, individual offshoring decisions can be heavily dependent on the special characteristics of the products and/or markets in question. Therefore, it seemed the height of hubris and even folly to risk personal political credibility, or the credibility of an entire policy agenda (in this case, on trade) on stopping a single instance of such job flight.

Moreover, Carrier’s intent to carry out the operation by the middle of next year ensured that the new president had created an effective deadline that would likely force him to try to act before his new administration was fully in place. Addressing the problem before he even took the oath of office seemed even more ill-advised.

In addition, the kind of deal being reported, hinging largely on tax incentives for Carrier to stay stateside, wasn’t the kind I would have struck. As I’ve explained repeatedly, even with America’s remaining and often considerable productivity edge in most sectors of advanced manufacturing, tax-focused policies suffered too many shortcomings to prove an effective tool for reshoring, or persuading businesses not to leave in the first place.

For example, many multinational manufacturers in particular pay little or no actual taxes, whatever their nominal liabilities might be. Further, it’s difficult to see how a first world country like the United States – whose citizens rightly insist on first world levels of public services – could win or even be competitive in a tax-cutting competition with third world countries, where expectations of government are so much lower. (Unless Americans want to see their country’s budget deficits shoot even higher?) And when it comes to the flip side of tax breaks – subsidies – nothing that American leaders have ever proposed, or are likely to propose, is remotely in the league of the subsidy programs of countries like China.

Indeed, Carrier itself has a long history of offshoring even when offered or given tax incentives. As widely noted, the company had received breaks from Indiana shortly before it decided to export the Indianapolis facilities. And in 2004, the company actually turned down similar offers from New York State after announcing its intent to move production to the American South and to Asia. The numbers were simply too paltry.  (See the first link in the preceding paragraph.)

As a result, I’ve always favored what Mr. Trump emphasized during the campaign – imposing a stiff tariff on products that offshoring companies sought to sell back to the United States. As he rightly noted, access to the U.S. market remains paramount in the business models of nearly every business on earth that seeks world-class status. Consequently, conditioning that access on producing and employing domestically – no matter what the job and production flight destination – was the best bet to keep factories at home, to bring many back or induce new U.S. facilities, and to lure more foreign-owned capabilities.

And yet there’s that proverbial other hand – which strikes me as dominant at least in terms of Carrier’s Indiana facilities in particular. First, in conjunction with his repeated promise to kill the Trans-Pacific Partnership (TPP) agreement, it looks like Mr. Trump is determined to keep at least many of his trade and manufacturing-related campaign promises. This should be applauded both by trade policy critics and by anyone who believes that the yawning, chronic gap between politicians’ rhetoric and their actions has dangerously corroded American democracy.

Second, the President-elect’s initiative again signals his awareness that international trade and investment flows have been profoundly shaped by government – and therefore human – decisions; that these decisions at least as often reflect special interest priorities or simply mistaken perspectives as they do expert calculations of national interest; and that when evidence abounds that they’re doing more harm than good, they can and should be changed.

So at least for the next four years, Americans, and especially American workers, won’t have to be settle for leaders content to cry a few crocodile tears over trade-related job and production loss even while insisting that they’re the inevitable casualties of an impersonal, uncontrollable, and of course ultimately beneficial force called “globalization.”

Moreover, although the Carrier plan by no means rules out a more comprehensive, trade-centered response to offshoring over the next four years, Mr. Trump’s actions so far have also already usefully shed light on executive actions that can potentially make a difference before one is put into place, and that in certain cases might be superior alternatives to tariffs.

For example, it’s been speculated that the President-elect could use the reliance of Carrier’s parent company, United Technologies (UT), on government military contracts to keep the Carrier factories state-side. Ideas along these lines have also been proposed in Congress.

UT apparently isn’t devoid of leverage, either – e.g., it’s the sole supplier of engines for the new F-35 jet fighter. But does an American company really want to threaten an incoming president – and the country as a whole – with withholding a product crucial for national security? Be very, very skeptical.

In this vein, Mr. Trump also seems to be in the process of showing that the bully pulpit powers of the presidency still matter. Carrier’s Indiana offshoring decision attracted national attention because of some special factors. It both took place during a presidential campaign, and generated a video that went viral and dramatically illustrated the outrage and anguish felt by the workers seemingly fated to lose their livelihoods.

But most other such corporate moves fly under the radar, especially the national media’s. The president-elect seems determined to make sure that offshoring decisions become headline news and therefore that heat will be felt by politicians in both major parties who have grown accustomed to blithely rationalizing them with the “impersonal forces” argument – unless they’re ignoring them altogether.

Appreciating the bully pulpit effect also rebuts a criticism already widely being made of the Carrier deal – that it will simply persuade other companies to threaten to move factories overseas in order to get juicy tax breaks. As the Carrier-United Technologies latest reaction to this controversy has made indisputably clear, most businesses hate the kind of bad publicity that Mr. Trump’s spotlight has generated. They’ll like it even less if a President of the United States publicly accuses them of extortion – especially a chief executive who’s proved he can connect with large percentages of the electorate, and as a result who’s demonstrated over and over again that he can break the major rules of American politics and come out a winner.

(What’s Left of) Our Economy: Why Carrier’s Manufacturing Offshoring to Mexico Matters

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Carrier, China, currency, exchange rates, Financial Crisis, green manufacturing, Indiana, Indianapolis, Jobs, manufacturing, Mexico, Mike Pence, multinational companies, NAFTA, North American Free Trade Agreement, Obama, offshoring, peso, productivity, Trade, Trans-Pacific Partnership, United Technologies, wages, {What's Left of) Our Economy

The decision of United Technologies (UT) to move 2,100 heating equipment jobs and the related production from Indiana to Mexico is a major indictment of America’s longstanding approach to global economic challenges and opportunities on two levels – and has rightly become a presidential campaign issue.

Evidence abounds that UT and its Carrier subsidiary decided to ship this output and employment south of the border largely due to features of the post-Cold War global economy that U.S. leaders in both major parties have persistently ignored or rationalized away despite their destructive long-term effects on the domestic economy. But this latest instance of high-wage job flight also represents a failure of one of President Obama’s highest profile proposals for stemming the tide. Let’s deal with this narrower issue first.

As reported by Jillian Kay Melchior in National Review, in 2013, one of the Carrier plants heading to Mexico secured $5.1 million in federal tax credits aimed expressly at expanding production of energy efficient gas furnaces in domestic locations like Indianapolis. These tax credits came from a $2.3 billion Obama administration program designed to “create new jobs and supply more clean-energy projects in the United States and abroad with equipment made in America” in the words of Energy Secretary Ernest Moniz.

Indiana Governor Mike Pence and United Technologies blamed heavy federal regulations for the move – though the company reportedly failed when asked to identify any government mandates that tipped the balance toward offshoring. And although Indiana union officials complained about the low Mexican wages that they believe largely lured the company south, it’s not as if labor costs have been crippling United Technologies’ competitiveness in the sector.

Thanks to the two-tier wage system the company was able to impose on its Indianapolis workforce (thanks to the last recession, the slow recovery and, as will be seen, the implicit threat of offshoring), a quarter of the employees slated to lose their jobs were earning a mere $14 per hour – about $26,000 annually. That’s only about 55 percent of the current average private sector hourly wage, a slightly lower percentage of the current average manufacturing hourly wage, and just under 52 percent of the current average hourly wage in durable goods industries – the manufacturing super-sector to which the heating and cooling equipment category belongs.

The other three-fourths of the soon-to-be cashiered workers earn $26 per hour – a bit higher than the pay for the typical private sector and manufacturing worker, and a bit lower than the wage for the typical durable goods employee.

Moreover, wages in the heating and ventilation sector have been rising unusually slowly. Since the current recovery technically began, in June, 2009, they’re up in pre-inflation terms by only 10.10 percent. For the entire private sector, hourly pay has risen by 14.14 percent during this period, and in manufacturing overall, the increase has been 10.90 percent. At the same time, in durable goods – which still pays better in absolute terms than manufacturing in toto – wages are up only 9.46 percent since the last recession ended.

Of course, heating and ventilation equipment and other durable goods industries have no hope of competing with third world facilities based on wages. The key to keeping them in the United States, according to the conventional wisdom, is capitalizing on and increasing their innovation and productivity edge. But this is where one of those long-neglected aspects of the Age of Globalization comes into play.

As has been documented since the early 1990s as the debate heated up over U.S.-Mexico trade and the North American Free Trade Agreement (NAFTA), countries like Mexico offered offshoring-happy American multinational companies like UT an extraordinarily attractive combination: very low wages kept down by rapid population growth, high unemployment, and repression of unions, plus surprisingly high and rising levels of productivity.

The productivity levels weren’t high because Mexican workers were naturally smarter and more skilled than their American counterparts. They were high – and boasted major potential to rise quickly – because talent is evenly distributed around the world and American multinationals are exceptionally good at maximizing the efficiency of their employees. In fact, this is a prime feature of their fundamental business model.

And more than two decades of U.S. trade policy decisions like NAFTA – which enable firms like UT to supply the lucrative American market from very low-cost Mexico (and China and elsewhere in East Asia and Central America) – have naturally encouraged these companies to pour productivity-enhancing investment into Mexico, and often at the expense of their American operations. The result has been increasing foreign efficiency further, and therefore pushing the production costs of these facilities even lower vis-a-vis the United States.

I haven’t seen any data on productivity growth in Mexico’s heating and ventilation sector factories. But the country’s high-value manufacturing – much of it export-oriented and foreign-owned – boosted productivity by 5.8 percent annually from 1999 to 2014, according to the McKinsey & Co. consulting firm. We do have productivity data on American-based heating and ventilation manufacturing, and its performance has been much weaker. The cumulative growth between 1999 and 2014 has been only 30.7 percent.

But UT is also aware that Mexico’s cost advantages over American manufacturing are growing for another reason: Mexico’s peso has weakened in value versus the U.S. dollar by more than 26 percent over the last year. That means that producing in Mexico has become much cheaper versus producing in the United States during this period.

No one has yet accused the Mexican government of manipulating its currency’s value to gain trade advantage, along the lines of Chinese policy for so many years. But an American government that keeps failing to address exchange rates in its trade policy – as in its stance in the new Pacific Rim trade deal that includes Mexico – is inevitably going to preside over even more U.S. de-industrialization than has taken place so far.

A sliding peso could also mean that Mexico will pay more and more for the parts, components, and other imported inputs that go into its manufactures. By the same token, though, a weaker currency stands to solve the problem by luring more of that intermediate goods output to Mexico, too. But Mexico’s generally impoverished consumers are sure to face even greater obstacles to bringing bilateral trade flows into even rough balance by Buying American. And overall, current U.S. trade policies will continue creating a world in which America’s comparative advantage isn’t producing anything at all, but rather consuming the output of others on borrowed money.

I’m old enough to remember that the resulting imbalances and debt buildup helped trigger the financial crisis. Are any of America’s leaders? And how long will they continue claiming that yet more NAFTA-like trade agreements and green manufacturing subsidies can prevent a rerun?