Trump Carrier Deal Weathers Bogus ‘Crony Capitalism’ Charges
Incentives are a commonplace, key tool for states to compete in the free market economy
When President-Elect Donald Trump helped convince Carrier Corp. to keep 1,069 jobs in the Indianapolis region, you would have thought he had employed all manner of socialism to achieve this success — judging from the criticism lobbed by political adversaries.
The opposition to the Carrier deal came mostly from the Right — but in some cases, came from the Left, too.
If Trump implements tax and regulatory relief for employers, maybe state incentive packages will become a thing of the past.
Former Alaska Gov. Sarah Palin, an early Trump supporter, called it “special-interest crony capitalism.”
The Weekly Standard founder and the father of “NeverTrump,” William Kristol, said it violated the rule of law and was arbitrary government bullying (although Trump is not yet sworn in). Kristol also called it crony capitalism.
And Paul Krugman, the left-wing economist and columnist for The New York Times, called it — what else? — crony capitalism. Krugman said on Twitter that it violated the spirit of Republican’s free-market talk, which is remarkably restrained rhetoric for the sometimes kooky Krugman.
Pious lectures even from elected officials were in no short supply. Sen. Ben Sasse, a Nebraska Republican, warned conservatives to remember that jobs are not created by government. Many thought the Carrier deal was a perfect opportunity to lather on the free-market rhetoric.
But what exactly happened in Indiana?
Carrier, a United Technologies subsidiary, makes air conditioners and furnaces. It had planned to move about 2,200 jobs to Mexico.
It will now keep half those jobs in Indiana. In exchange, Carrier will get about $6 million in tax breaks (many of them conditional) and $1 million in training grants — if it keeps 1,100 workers at the Indianapolis plant.
The incentive package was arranged by the Indiana Economic Development Corp., a Hoosier state agency that seeks to promote Indiana’s economy and help the private sector create and retain jobs.
Each state has a version of this agency. And if a state doesn’t have one, it’s in trouble, because competition for employers is a daily brutal reality.
Every day, the states grapple with each other in the quest for existing jobs and likely business expansions. And that is a component of economic development and job creation that is often forgotten by Beltway politicians, pundits, and other members of the chattering class. Because states don’t just compete with Mexico and China. They compete with each other.
Florida Gov. Rick Scott, a Republican, often told newspaper editorial boards that he kept the names and phone numbers of U.S. company CEOs on his personal cellphone. Scott called many of them regularly if they didn’t already do business in the Sunshine State — to get them to move part or all of their operations to Florida.
One incentive Scott used was something he didn’t have to spend money on — Florida’s existing tax code. Florida, like Tennessee and Texas, has no state income tax. And it has low corporate taxes.
The pitch worked more than a few times. In 2013, Scott scored a major victory when he got Hertz Corp., the world’s largest airport rental-car business, to move its corporate headquarters from Bergen County, New Jersey, to Estero, Florida.
New Jersey is an easy target — it has some of the highest taxes in the nation. Scott and Texas Gov. Rick Perry have also traveled to California and New York — two other high-tax, high-regulation states — to pluck corporate headquarters or factories away.
In Indiana, Gov. Mike Pence and his predecessor, Republican Mitch Daniels, targeted overtaxed, over-regulated businesses in Illinois and Ohio.
Since the recession caused the economy to hit bottom, around mid-2009, Indiana manufacturing has grown 20 percent, according to the Illinois Policy Institute. Michigan has the regional record at 39-percent growth.
And Illinois has the worst performance in the nine-state region, at only 2.7 percent. Hobbling Illinois is the fact that Indiana is a quick and ready escape for manufacturers seeking to stay in the Midwest.
But not every state has zero income taxes. So Indiana uses targeted tax reductions for new employers, hoping the increased employment will cause new sales tax revenue, new income tax revenue, and new property tax revenues.
It’s a good gamble. And take note, Mr. Kristol, Gov. Palin, and Sen. Sasse: It’s also classic supply-side economics. Tax cuts sometimes cause increased tax revenue.
Incentives are also used to make up for complaints about federal taxes and regulations. Corporations move to Mexico and China not just to hire low-wage workers, but to avoid taxes and regulations. Federal regulations were a key complaint of Carrier, according to Pence.
Trump realizes this, and played a game of politics in the real world. And he hasn’t even taken office yet. All he did was use the bully pulpit. After all, this was not a federal deal.
When Trump does take office, the best thing he can do for U.S. workers is to ease the federal regulatory environment, reduce the U.S. corporate top tax rate (the highest in the developed nations), and stop the flow of illegal labor across the borders. If Trump does those things, maybe state incentive packages will become a thing of the past.