The Carrier Deal- Crony Capitalism or Economic Development?

The deal between Carrier Corporation and the State of Indiana, which will keep approximately 1000 jobs from moving to Mexico, has gotten mixed reviews. On the one hand, it has been applauded for being an economic development tool that preserved domestic jobs. On the other, it has been criticized as crony capitalism, with $7 million in tax incentives being financed by taxpayers.

There are valid considerations on both sides of the issue, but opinions may change if viewed from a different perspective. Consider for a moment that you’re the mayor of a small town with an annual budget of $15,000. One day, the owner of Mike’s Heating and Air Conditioning Service walks in and says he plans to move his business to a nearby town. His reason for moving is that the other town has a lot of unemployed people, and he thinks he can lower his payroll expenses.

You don’t want Mike to move his business because his employees pay $1 a year in income tax, and his customers pay an additional $1 a year in sales tax. After a brief discussion, about his plans, you entice him to stay by offering a $7.00 reduction in property taxes to be spread over 10 years, which amounts to .70 per year. As part of the deal, Mike agrees to spend $16.00 to fix a broken window.

In essence, by giving Mike a .70 per year break on his property taxes, the mayor has preserved $2 per year in sales and income tax revenue. As a city taxpayer, would you agree that the mayor’s offer was a good deal for the city, or would you object to it as crony capitalism that will lead to an increase in taxes?

Also consider that had Mike moved his business, the city would have also lost sales tax revenue on purchases made by Mike’s employees. Another consideration is that if those employees no longer shopped in the town, other businesses might have to reduce their work forces, thereby further decreasing tax revenues.

The ridiculously low dollar figures involved in this example make the decision to offer an incentive seem to be a no-brainer. And were this a real life scenario, there wouldn’t have been much debate over whether it qualified as crony capitalism. While the deal did offer Mike an advantage not enjoyed by other businesses, it could hardly be called crony capitalism- it’s doubtful that Mike’s business success or failure would hinge on a $7.00 tax break.

The difference between Mike’s hypothetical deal and the actual one enjoyed by Carrier is that the latter involves $7 million. That’s a sizable chunk of money, but in the context of Indiana’s annual budget, it’s small change. In fact, on a relative basis, it’s no different than the $7.00 tax break given to Mike’s Heating and Air Condition Service.

If you take the numbers in Mike’s hypothetic deal and multiply them by one million, you have the Carrier deal. Indiana’s annual budget is $1.5 billion, the state gave Carrier a $700,000 a year tax break for 10 years, which totals $7 million, and the employees that would have lost their jobs pay approximately $2 million a year in income and sales tax. Carrier has also pledged $16 million to upgrade it facilities.

Although the Carrier deal is somewhat troublesome because government was involved in the operation of a private business, it hardly qualifies as crony capitalism. Considering that Carrier’s annual sales are in the tens, if not hundreds of billions, $7 million is about as significant as $7 is to Mike.

Carrier management stated that it would have saved $65 million in wage costs had it moved the jobs in question to Mexico. That makes it even more difficult to label the deal crony capitalism- it’s upside down by $58 million.

Consequently, it appears that the Carrier deal was more about image than anything else. A president elect who railed against relocating jobs to foreign countries, didn’t merely draw a line in the sand, he etched one in concrete, and the company that was on the other side realized it would be foolish to cross it (although it’s still moving other jobs to Mexico). For all the criticism Donald Trump has received, he had relatively little to do with the deal aside from putting it on a national stage and shining a spotlight on it.

Obviously, he made his position known and undoubtedly provide “encouragement”, but the actual agreement was between the Carrier Corporation and the State of Indiana. Whether you consider it crony capitalism or a good deal for American workers, the Carrier agreement wasn’t much different than the countless other ones made by other states to attract foreign and domestic businesses looking to relocate or open new facilities.

From a philosophical standpoint, criticisms of the Carrier deal are justified. From a practical standpoint, it saved a thousand jobs. Either way, the only reason the art of this deal has inspired so much conversation is because it was caught in an election year spotlight.

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