Shakedown 101: Peanut Gallery Ruminations on Trump’s Carrier Deal

— By Jerry Cates. First published on 3 December 2016 and last expanded on 3 December 2016. © Govinthenews Vol. 7:12(2).


So, the Trump Team saved a bunch of jobs at Carrier (800-1100, depending on whose figures are used) and another bunch at Ford, within days of Trump winning the election. This was good news for the Carrier employees who won’t get furloughed, and for the new employees Ford will be hiring in America instead of in Mexico. It is also great fodder for pundits and armchair economists who are now chiming in, either to criticize the Carrier deal, or to praise it.

The Washington Post exclaimed on 12/02 that “Trump’s Carrier Deal could Permanently Damage American Capitalism.” Others in the media made similarly dire predictions. Gee whiz… who would’a guessed that?

The world knows how I stood, based on the praise I lavished on it in a post published here soon after Trump visited the Carrier factory. That stand has not changed, but it bears close scrutiny, especially since others, some of them respected (and semi-respected) conservative policy wonks, seem to have serious doubts.

Sarah Chimes In…

Everybody, on both sides of the political aisle seems to be jumping on one particular expression of dismay, that of former Alaska Governor and 2008 GOP VP nominee Sarah Palin. Ms. Palin is afraid Team Trump’s move on the Carrier deal might just be a case of “crony capitalism” exerting a bad kind of political influence on the free market:

When government steps in arbitrarily with individual subsidies, favoring one business over others,” she wrote in an op-ed for the Young Conservative website, “it sets inconsistent, unfair, illogical precedent. Meanwhile, the invisible hand that best orchestrates a free people’s free enterprise system gets amputated. Then, special interests creep in and manipulate markets. Republicans oppose this, remember? Instead, we support competition on a level playing field, remember? Because we know special interest crony capitalism is one big fail.

Palin then lists cases which she presumes to be similar to Trump’s Carrier deal, examples that were perpetrated by the Obama Administration:

Politicians picking and choosing recipients of corporate welfare is railed against by fiscal conservatives, for it’s a hallmark of corruption. And socialism, “she tells her readers. “The Obama Administration dealt in it in spades. Recall Solyndra, Stimulus boondoggles, and all their other taxpayer-subsidized anchors on our economy. A $20 trillion debt-ridden country can’t afford this sinfully stupid practice, so vigilantly guard against its continuance, or we’re doomed.”

Maybe she’s right. She is definitely right in predicting that a continuation of Obamanomics would be disastrous, but is she right to suggest Trump is heading down that same path? I am puzzled that she sees even the merest of parallels between Trump’s Carrier deal and Obama’s bail-out of Solyndra, Obama’s stimulus boondoggles, and the Obama approach to taxpayer subsidies in general.

Let’s be clear: If she is right about any of that, and about what Trump intends to do with our economy… like, if it resembles the Obama Administration’s economic policy even in the slightest… I’ll be the first to scream bloody murder.

The question bears careful, thoughtful analysis to arrive at a conclusion. OK. Let’s do that. We can start with Solyndra.

Obama’s Deal With Solyndra…

Here was a start-up company in the energy industry, founded in 2005 with one goal in its miserable little life, precisely that of pushing a new, unusual thin film solar cell technology utilizing cylindrical panels doped with copper indium gallium selenide (CIGS)s. It caught the Administration’s interest because green energy was one of Mr. Obama’s hottest buttons, and anybody who pushed Obama’s hottest buttons in a good way not only received gobs of his attention big-time, they automatically stood a good chance of getting tons of America’s taxpayer dollars, whether they deserved it or not. Evidently the path from Obama’s hot buttons to America’s coffers was super-dupershort.

In 2009 Solyndra reported revenues of $100 million, and predicted its production and sales growth could lead to a market cap somewhere north of $1.76-2.0 billion. Obama and his green energy gurus got so excited they jumped up from reading these numbers, did a bunch of high-fives, and — without so much as a second thought — forked over $535 million (that’s over half a billion dollars, kids) in U.S. Energy Department loan guarantees, all from your hard-earned tax dollars.

The reward for this exuberant spate of generosity came quickly. Revenues at Solyndra jumped to $140 million in 2010. But, strangely, nobody in the Administration or at Solyndra was paying attention to the price of polysilicon, the key ingredient in most technologies competing with Solyndra’s “ground-breaking” cylindrical CIGS invention (that was touted to produce 20% more energy than anyone else but, in fact, was inferior at energy production when compared to its competitors). Well, while Obama and the whiz-kids at Solyndra celebrated being awash in government-supplied $Millions, the price of polysilicon dropped 89%.

Whoa! Suddenly, the word on the street was a deflating, unsettling conclusion on this wise: “Solyndra could no longer compete!” In fact, it never could, because its core invention was a failure from the start.

Poor little Solyndra filed for bankruptcy, ceased all business activity, and laid off all employees in September 2011. When the FBI raided the company’s $733 million plant, they found… oh, you could take a guess, but you won’t divine in a million years what they discovered. Things like, well, whistling robots (imagine!) and spa showers, among a long list of other signs of idiotic spending (of your tax dollars, may I remind you). Makes one think of the lavish parties your tax dollars paid for at the IRS, and… Golly, let’s not go down that trash-strewn road, or we’ll get mired in the muck and never get to the main point.

At its height Solyndra employed 1,100 employees, the same number of Carrier employees whose jobs Trump saved with his deal. But there, as you will see from the following, the comparisons end.

…And, now, Check out the Carrier Corporation…

The beginning, as they say, is the best place to start, and it starts with Willis. Willis Carrier, that is…

Mr. Carrier invented modern air conditioning in 1902. Thank you, Willis. Here in Texas, in the midst of every summer, we worship you. Truly, we do. And we’ve been doing that for a long, long time.

In 1915, a century and one year ago, he, Willis Carrier himself, in cahoots with six other smart engineers, invested the then-princely sum of $32,500 to form the Carrier Corporation. The Carrier Corporation prospered, and went on to manufacture and distribute HVAC systems, commercial refrigeration equipment, and food service equipment. In 1979 the company was acquired by United Technologies, a multinational conglomerate headquartered in Farmington, Connecticut whose financial model required it to latch on to stable, profitable, well-run companies like Carrier.

In 2015, United Technologies reported revenues of $56 billion, an operating income of $7.3 billion, and a net income of $7.6 billion. As of 2016 United Technologies employs 196,200 workers. That, by the way, is more people than you will find in all of Round Rock, Texas, today (2016 population 122,727), even on a busy day. In other words, kids, United Technology employs a lot… I mean, a lot… of people.

Carrier’s annual revenues of $12.5 billion make it a sizable part of its United Technologies parent. It, alone, employs over 43,000 workers, about one-third the population of Round Rock, Texas, making it one of UT’s largest employers.

All good, thus far. Now, let’s get to the rub.

In February 2016 Carrier announced plans to close its Indianapolis, Indiana factory and move its production operations to Monterrey, Mexico. The reason given for this was “ongoing cost and pricing pressures” in the U.S., and Carrier’s “existing infrastructure and a strong supplier base” in Mexico. The move, said the Carrier spokesman, would allow the company “to operate more cost effectively.” No immediate impact would be made on jobs, as the move would take place over the next three years, so the first job cuts would not come any sooner than mid-2017.

After this announcement, a number of inquiries made by such individuals as U.S. Senator Joe Donnelly sought to get a grip on the main reasons behind Carrier’s decision. The conclusion, at least by Donnelly, was that regulatory issues were not at the root of Carrier’s concerns. However, differences in employee pay scales, between Indianapolis and Monterrey, played a big role.

That finding was not much of a surprise. As an American businessman who would love to employ thousands of people gainfully, I know all too well how difficult it is to do that and still make a profit.

Care to guess what Mexican workers get paid in the manufacturing sector? Here it is, according to one source, reporting on manufacturing wages there as of August 2016:

Wages in Manufacturing in Mexico remained unchanged at 2.10 USD/Hour in September from 2.10 USD/Hour in August of 2016. Wages in Manufacturing in Mexico averaged 2.51 USD/Hour from 2007 until 2016, reaching an all time high of 3.60 USD/Hour in December of 2013 and a record low of 2.00 USD/Hour in February of 2009.” TradingEconomics.com

So, how does that compare with manufacturing wages paid in the U.S.? The same source cited above puts the U.S. figure at $20.60/hour, almost ten times the wages paid in Mexico. In light of that fact, alone, if you ran a manufacturing company in the U.S., and were given the option of moving your operations to Mexico to make higher profits, wouldn’t you at least give it serious consideration?

The answer, of course, is yes. Corporations exist to make a profit. The higher the profit, the more stable they are and the longer they last. Carrier’s corporate management thought long and hard, and in the end agreed to make what was, from all indications, a savvy decision to close their plant in Indianapolis and move their HVAC operations to Mexico. American manufacturing costs had gotten too high to compete with those in our neighboring country to the south.

Putting aside the question of American patriotism, it was, purely from an accounting point of view, a smart thing to do. No, they were not going to go bankrupt by staying here, but they would not be as strong, and their future was brighter when moving to Mexico was factored into their plans.

To 1,100 employees in Indianapolis, that move simply meant they’d have to look for another job, somewhere else. Of course, the ripple effect of the loss of those 1,100 jobs would have been reflected in lots of other places in the local and state economy, too. Before the dust settled, the net effect of the move would likely amount to three times that in terms of lost jobs in Indianapolis.

How we got where we are…

But what about American patriotism? Well, these days, after eight years of Obama’s massive effort to downplay americanism in every possible way, the patriotic card is hardly in play. It certainly didn’t appear to play so much as a minor role in the calculus by which the Obama Administration made economic decisions.

Truth be told, Obama couldn’t have cared less how many American jobs were lost in favor of his irrational penchant for green energy at all costs, reducing emissions beyond all reason, phasing out clean coal at the expense of one of West Virginia’s most profitable enterprises… Name it, if it exudes even the faintest intoxicating wisp of erudite, sophisticated, leading-edge greenie-technology, he’s for it even if it has been constructed entirely of smoke and mirrors, and even if it puts whole sectors of the American economy on the dole. Solyndra was only one of a long list of similar crap-heaps he and his minions propped up only to see them crater into huge, stinking messes of rubble. Rubble you and I paid for with our tax dollars, and got zero in return.

On this score Hillary Clinton promised to mimic Mr. Obama in overdrive, with both afterburners engaged. Yes, the American economy dodged a massive, excrement-loaded projectile when America’s voters wisely put Hillary’s presidential aspirations to bed. Boy, howdy…

So, anyone stupid enough to compare the Obama Administration’s behavior with the response of the Trump Team to the challenges posed by Carrier’s move is… Well, let’s be nice, and just say such people are non attendens ad rem (not paying attention). Paying attention, by the way, is a good thing to do, so don’t wrinkle your nose here. A wise man once said that if you attend to the little things, the big things tend to take care of themselves. Our American economy is a lot like that. Let the little things — things like 1,100 manufacturing jobs in Indianapolis — fall off the grid, and, if you are not careful, bigger things start falling apart as well.

That, it seems to me, is what has been happening to the American economy over the past 25 years. Certain events in our economic history caused us to forget how important the little things are, and to foolishly focus primarily on “Big Things” (I put that in quotes because the supposedly Big Things we were focused on in those days turned out, in the end, to be a lot like the promises Solyndra made, smoke and mirrors and little else). The wisdom mentioned above, though, doesn’t work in reverse. Focus on the big things, and neglect the little ones, and before long you’ve got Big Trouble knocking at your door.

Bill Clinton was credited with the boom of the 1990’s but the truth is he just happened to be in the right place at the right time. He was president when the dot-com bubble took place, and it made him look good when he had absolutely nothing to do with it. I vividly remember the dot-com bubble. Through it all I lamented (mostly to myself, as nobody else would listen) how we’d taken our eyes off the little things because Big Bucks had us by the onions. I was in my 50’s back then, old enough to have been through a few bubbles already. Funny thing about bubbles. They always pop! Bubbles have short lives, but while they are expanding the blusterous torrent of energy they exude sucks the life out of everything else, like there’s no tomorrow.

Well, kids, tomorrow always comes…

That bubble began to collapse in the latter part of the 1990’s. Shortly thereafter, while the bubble still had enough flatus to appear viable, George W. Bush was elected to take Clinton’s place. What he was faced with was an economy that really had no idea where it wanted to go. The whole world was still inebriated, reeling on the verge of a looming hangover of immense proportions. The death of dot-com had taken all the oxygen out of the room, and hypoxia was rife, everywhere. That may explain why G.W. didn’t have a clue about much of anything (though, let’s be honest, G.W. just didn’t have much of a clue, period.)

In any case, the trek back to reality, after dot-com’s big pop, has been a hard slog through a big swamp. Along the way we got one of the worst presidents we’ve ever had, but — you may think I’m crazy for saying this — that’s not all bad. At least we learned from that how low we can go. And if the latest election is any indication, we’re finally ready to get off our behinds, roll up our sleeves, and go back to work rebuilding from the ground up.

The Trump Team’s Conundrum…

Part of the rebuilding process has to involve coming to grips with conundrums presented by such things as Carrier’s decision to move its HVAC operations from Indianapolis to Monterrey. Put yourself in Donald J. Trump’s shoes. As a businessman himself, he has to be logical in the way he handles this. And logic says the move to Monterrey makes perfect sense, from a profitability point of view. The only bargaining chips Trump has, at the moment, consist of incentives to stay, incentives that blur the lines of profitability between Indianapolis on the one hand, and Monterrey on the other. So he used those chips. And it worked, at least for the moment.

Now, Trump and his Team recognize this kind of victory means nothing if it is only temporary. If, say, two years from now the economy has continued to lope along just like it is doing today, all bets are off. Carrier and all the other American companies that stood up and took notice when it decided to move to Mexico (and that have now quietly sat back down, fidgeting impatiently in their boardroom chairs, waiting to see what will happen in the next few months) will begin to pine for the low manufacturing wages south of the border once more. So Trump has his work cut out for him, and he knows it.

There is a bigger picture here than little Ms. Palin seems to be taking into account. Maybe I’m foolish for believing the Donald has a clearer vision of the way America’s invisible hand works than she and his other detractors have at the moment. If so, time will make that evident to all.

Me? I’m looking to the future with a lot of optimism. After all, Trump and Carrier have a lot more in common than the naysayers give him credit for. They speak the same language. It’s the language of sound economic policy, if I have this right. And it’s about time that language became the lingua franca of this land.


References:

  1. Palin, Sarah. 2016. But… Wait… The Good Guys Won’t Win with More Crony Capitalism. Young Conservative (youngcons.com)

— Questions? Corrections? Comments? e-mail jerry.cates@govinthenews.info. You may also register, log in, and leave a detailed comment in the space provided below.

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