The Carrier Corporation Tuesday announced that it will not fully follow through on its threat to move 2,100 jobs from Indiana to Mexico, and instead will keep 1,000 of those jobs in the U.S. The move comes in the wake of “wide-ranging policy talks” between representatives of the incoming Trump administration and Carrier officials. The New York Times reports that Carrier’s reward for this apparent change of heart will include new tax incentives from the state of Indiana and a commitment from the Trump administration to aggressively pursue federal corporate tax reform in 2017…For decades, footloose corporations have used the threat of moving jobs to different cities, states or even countries to extract special tax incentives from state and local governments, despite the lack of evidence that these strategies create jobs. Company-specific tax breaks reward companies for what they likely would have done anyway, give tangible benefits to companies in exchange for tissue-thin promises of job creation, and send a clear signal to other tax-avoiding firms that they will be rewarded for making similar threats…And Carrier’s parent corporation, United Technologies (UTC), certainly fits the description of a tax-avoiding firm. The company routinely pays effective federal tax rates of 10 percent or lower, far below the 35 percent statutory tax rate its executives have complained about. UTC also has aggressively shifted its profits offshore, holding $29 billion in undisclosed foreign countries at the end of 2015. If doling out tax incentives is a shopworn strategy, giving these tax breaks to bad actors such as United Technologies should be seen as an outright capitulation by the Trump administration, rather than as a savvy deal.While this is not a blatant violation of the WTO rules as tariffs on imports from Mexico, this combines the worst of trade manipulation and supply-side silliness. But the 1000 workers should be happy – right? Brad Setser weighs in:
Since the election, the broad dollar has appreciated by about 4%, presumably because of the impact of an expected loosening of fiscal policy…That works out to a very rough estimated loss of 390,000 jobs in export and import competing sectors from the stronger dollar (job losses that play out over time, as the exchange rate has an impact with a long lag)….And while the value of the dollar fluctuates, a persistent increase in the dollar – say from looser fiscal policy in the U.S. than in its peers – would have a persistent effect on the trade balance…To be clear, the loss of jobs in the tradables sector isn’t the loss of jobs in the economy overall, not when the economy is operating at full employment. A fiscal expansion that leads to a monetary tightening that pushes the dollar up will generate additional jobs in the non-traded parts of the economy.Now you might protest that we are not yet at full employment. Well I would so protest. But Brad’s point about looser fiscal policy that our “peers” is an important one. If only we could convince nations like Germany to appreciate its currency with respect to the Euro and then adopt more fiscal stimulus. But we are talking about North America today, which reminds me that the peso has devalued by 10 percent since the election. It is going to take a whole lot of Carrier deals to offset this exchange rate change.