United Technologies CEO Nets Cash Giveaway from the President-Elect
by Brett Linley
The Trump administration hasn’t even officially begun, and yet it’s already generating headlines. Trump led his campaign with promises to clamp down on free-trade and keep businesses in America. Thus, it should be no surprise that a big corporation already reeled in a big deal.
As The Wall Street Journal reports, “[Mike Pence] was offering $7 million over 10 years to encourage [United Technologies Corp] to keep in [Indiana] roughly one-third of the 2,100 jobs it planned to ship to Mexico. United Technologies would also get credit from the state for keeping 300 research and headquarters jobs that it didn’t plan to shift abroad.”
Trump’s team essentially handed the company’s CEO, Greg Hayes, a king’s ransom. The end result is that their subsidiary in Indiana, Carrier, will continue to manufacture air conditioners and furnaces here.
Indeed, many Trump supporters are celebrating the move. However, Americans should view the deal with caution. This event sets the tone for the Trump administration and, no matter how well-intentioned, may fuel the fires of cronyism and rent-seeking.
Sometimes the Best Deal is the One You Don’t Make
For sure, many libertarians and conservatives laud the merits of a tax break. In truth, reducing taxes across the spectrum for all businesses would be great. However, this is not what has occurred. In this instance, Trump essentially paid off one company to make an uneconomical decision.
As the Trump team implemented it, the deal is no different from when President Obama shelled out huge subsidies to keep failed solar-panel company Solyndra alive. Yet, while conservatives rightly called out President Obama for his crony-capitalist policies, they celebrate Trump now.
If Trump made a deal to hand out $7 million in subsidies to Carrier over 10 years, it would have the exact same effect. At the end of the day, there’s more money on their balance sheet than before. Trump strong-armed Carrier with an offer they couldn’t refuse. The offer, however, is far from perfect for the economy.
Crony Capitalism Does More Harm Than Good
Carrier wasn’t losing jobs to Mexico because they wanted to spite their American workers. They made a calculated decision, and their management recognized that moving to Mexico would allow them to stay competitive. It would allow them to give American consumers reasonable prices, and keep their exports alive.
Now, taxpayers are on the hook for an unprofitable enterprise. Carrier clearly could not operate in our business climate. Instead of working to fix the systematic problem, Trump instead decided to hand out special favors that Carrier’s competitors won’t have access to.
America is primed to learn the hard lessons that many Latin American countries have learned by insulating their favored companies from the outside world. The country’s industry ultimately becomes less competitive, both at home and internationally. An unprofitable enterprise doesn’t suddenly become a good idea because the state decides to throw money at it.
All the while, other companies are put at a comparative disadvantage to Carrier. They have to play by the convoluted rules, while Carrier does not. Unlike Carrier, “mom and pop” stores aren’t getting credit for jobs they already planned to keep in house. The jobs saved are the seen effects. The unseen effects, however, are the most disastrous.
Expect More Companies To Line Up and Cash In
It is most important to consider the precedent that Trump is setting. Trump is essentially threatening companies with harsher protectionist measures for simply trying to stay in business. As The Washington Post notes, “we may have taken a first step toward a kind of reverse transition from rule of law capitalism to ad hoc deal-based capitalism.”
Companies will likely try and “play ball” with Trump. Trying to make a deal to net some quick cash. Apparently, as Carrier’s deal has demonstrated, businesses can get special favors by making threats they may not even intend to pursue.
Resources will now be spent not on productive enterprise, but on trying to sucker as much cash as possible out of the new administration. Businesses hate competitive pressure, and Trump seems all to happy to relieve it for them.
For the businesses without connections, however, as well as for the American consumers, the ending will be less joyous. Trump is responsible for creating a stable set of rules to encourage business for everyone, not just a favored few. As the Rule of Law is eroded, expect the economy to follow suit.