Once, on a visit to the French countryside, I visited the most beautiful, picturesque little country farm I’d ever seen. The farm produced an organic yogurt for the market and, ever the annoying economist, I asked my host how this boutique operation could compete with factory farms. “We couldn’t possibly do so,” he told me. The farm never came close to profitability and only survived because of deep subsidies.
This revelation led to the inevitable compare-and-contrast discussion between the proud French farmer and efficiency-oriented American. The punchline of that conversation came back to me Wednesday for a topical reason I’ll reveal in a moment. The farmer explained to me that the way to think of his operation was that of a nonprofit that the public willingly supported in order to enjoy truly organic food and the existence of a quaint, non-corporate farm (it was open to visitors, which was how I happened to be there).
Consider President-elect Donald Trump’s deal with United Technologies to preserve 1,000 jobs at its Carrier air conditioner factory in Indianapolis instead of moving the jobs to Mexico. News reports suggested that the outsourcing would have saved the company $65 million a year, as the firm planned to pay Mexican workers about one-fifth of the U.S. wage ($5 vs. $25 per hour).
It’s not clear what carrots and/or sticks are on offer from various levels of government; the mayor, the governor — who happens to be Vice President-elect Mike Pence — and Trump himself were in on the deal. But company officials essentially said they’d eat the loss in the interest of positive PR, maintaining UTC’s lucrative deals with the Defense Department, and doing a solid for the incoming administration. Given annual revenue of $56 billion and profits of $4 billion a year, that may be a perfectly smart business decision for the firm.
But is it good economics?
It certainly doesn’t seem like a sustainable way to adapt to the pressures of globalization. Somebody has to make up that wage differential, either taxpayers (subsidies), consumers (higher prices), or shareholders. In fact, as Nelson Schwartz reported in the New York Times, “While the standoff loomed large in the lives of its employees in Indiana, for United Technologies the forgone savings is tiny — equivalent to about 2 cents per share in earnings.” (The other way to make up the difference would be productivity, but there’s little productivity differential between most new Mexican factories and U.S. ones.)
Members of team Trump claim they might want to do more of these types of interventions. And there’s no question that what they did here at Carrier is both smart politics and a real, unequivocal boon for the Carrier workers who get to keep their high-value-added jobs relative to what may otherwise be available to them.
But to make this type of intervention a core part of their job-growth strategy would be a mistake. I don’t think Americans want to subsidize factories the way the French subsidize farms. This sort of production cannot be sustained as some sort of non-competitive museum model, where we push back on trade-induced job losses through tax breaks and government contracts. True, governors and mayors commonly dole out such goodies as bribes to factories to settle in one state vs. another, but that’s a zero-sum game, and often ends up as a big waste of precious resources. Meanwhile, it’s also a game of corporate whack-a-mole. While Trump et al. were brokering this deal, nearby factories were packing up for Mexico.
As I recently wrote, we’ve generally failed to even try to implement a solution to this problem of global competition eroding our manufacturing base. A systemic approach, as opposed to what Trump is up to here, will require reducing our trade deficit in manufactured goods by pushing back against countries that manage their currencies to make our exports expensive and their exports cheap. It will require investments in advanced manufacturing so we can close the wage gap with productivity. It will require systemic state and older city economic development of the type economist Tim Bartik describes here and here. It may require direct job creation to employ displaced workers when none of the above comes through.
For all my American efficiency, I see nothing wrong with highly inefficient, yet lovely and healthy, French farms. But let’s not conflate that with a sustainable policy to meet the economic needs of the millions of workers, along with their families and communities, on the wrong side of the globalization equation.