What the fuck does Trump’s Carrier deal really mean?
Following this week’s announcement of the deal to retain roughly 1000 jobs at Indianapolis-area air conditioner manufacturer Carrier Inc., much of the debate has predictably been split along party lines. While President-Elect Donald Trump has trumpeted the transaction as the first of many victories to come, the opposition - led by Sen. Bernie Sanders (I-Vt.) in Thursday’s Washington Post – calls it a dangerous precedent to set in future job-retention negotiations.
What follows is a rudimentary, non-partisan, economic analysis of what won’t be explained on your nightly news. In a way most people can wrap their heads around. In under 1000 words.
The Republican argument backhandedly supported by President Obama is basically that jobs staying in the United States is a good thing. The Democrat argument is that the trade-off to keep those jobs is a net loss for the American economy due to tax breaks (corporate welfare) given to a large corporation at the expense of the U.S taxpayer. Upon first glance, both arguments appear valid.
For the sake of this analysis and without knowing the specifics that have yet to be disclosed, it boils down to this: $7 million in state and federal tax credits to Carrier’s parent company United Technologies Corp. (UTC) in exchange for not relocating an Indianapolis-based manufacturing facility to Mexico – a focal point of Trump’s campaign. Additionally, conglomerate-manufacturer UTC protects itself from losing much larger federal (i.e. military) manufacturing contracts for its other subsidiaries, which constituted roughly $7 billion of its $56 revenue in 2015.
In any negotiation, we are dealing with carrots and sticks. Also in any successful negation or trade – just ask New York Yankees’ General Manager Brian Cashman – both sides should win.
So does the American taxpayer, namely you, win or lose in this trade? Unless you are one of the 1000 workers in question, the answer lies in what you get back in exchange for $7 million.
Aside from the general positive vibrations derived from knowing someone high up will be out there fighting for your job, the money spent by UTC in payroll alone far outweighs any tax benefits given it as concessions. Using the 1000 employee estimation, at a $26 per-hour average, UTC will be paying roughly $54 million per year in salary to those employees - eight times the tax breaks it is receiving. On top of that, UTC has pledged $16 million in factory upgrades, the bulk of which will go to third-party contractors.
That equates to just over $70 million going directly back into the US economy over the next year in the form of taxable income in exchange for $7 million in tax credits. Basically, if you were to throw a $7 tennis ball against a wall, you would get a $70 basketball bouncing back at you. And that doesn’t even factor in the billions in federal-defense contracts with UTC which should remain in place as a result of the good will on both sides, keeping countless other American workers employed.
Now for the nuts & bolts:
Focusing solely on those 1000 employees who are keeping their jobs, we have to look at the return on that initial $7 million investment. The $54 million in salary, assuming a 40% tax rate (based on 2015 tax brackets using the standard deduction), virtually guarantees $21.6 million in federal income-tax revenue alone – a greater than 300% annual return on investment.
And it doesn’t stop there. That leaves roughly $33,648 in disposable income per employee to spend back into the economy (not factoring state and/or local taxes, which vary). First and foremost, this comes in the form of mortgage- and car-loan payments (or rent, lease and other housing or transportation costs) each employee will be able to continue making. But also groceries, clothing, gasoline, home maintenance and other miscellaneous expenditures will continue to pour into the local economy.
The domino effect of the aforementioned $33.6 million cannot be understated. A manufacturing plant that employs roughly 1000 people keeps afloat the entire town, not to mention the plumbers, welders and other contract employees from neighboring cities who will benefit from the $16 million in factory upgrades.
The local and sales taxes on consumer expenditures pay teacher’s salaries, keep fire houses and police stations open and the roads paved. And all of those people, in turn, also spend their respective disposable incomes back into the local economy.
The shock of a single factory closure of even this relatively small size has ripple effects throughout an entire regional economy. So while we are only talking about 1000 or so jobs, the economy dependant on those jobs is exponentially greater.
Now you may rightly ask why a massive conglomerate with $56 billion in annual revenue needs a measly $7 million annual tax break. The short answer is: They don’t...What they do need is shareholder dividends. The more a company either pays shareholders in dividends or invests in equity buybacks, the more its stock price increases. Since UTC stock is a Dow Industrial and S&P 500 Index component, everybody with a 401k, Roth IRA or comparable equity-indexed retirement plan benefits - to a certain extent - from this corporate welfare.
In short, while Sen. Sanders and the opposition view isn’t necessarily incorrect, we are really just talking about different ways to skin a cat. But I think most would agree that a $7 million investment in the American economy isn’t a bad thing – and even preferable to the alternative - if it keeps 1000 people in their current jobs without having the shock of finding new work. After all, we are not communists.
Ed Note #1: KD is a registered Independent and voted neither Republican nor Democrat in the 2016 election.
Ed Note #2: Please don’t skin cats.
Recall February: This video shows the Carrier Indianapolis workers reacting as a company representative explained their 1,400 jobs would be shifted over next three years to Monterrey, Mexico.
Please follow Bob's Blitz on Twitter for exclusive Blitz stories.