Donald Trump is making America great again by handing companies trying to move abroad sacks of cash. Well, actually, Governor Pence did that, but don’t let the details about Federalism slow you down.
It is important to ask: how many jobs were actually saved? This is a tricky question because there are a lot of moving pieces, but I did some back-of-the-envelope calculations (which I will spare you from). I kept getting pretty close to zero, though the model I found pretty compelling made me think it might be positive. The reason for this is pretty straightforward.
The Carrier move would lower air conditioner prices in the United States. Consumers do not, as a rule, notice prices have dropped and say, “Well, I notice I’m paying less for an air conditioner! I might as well light the difference on fire! lol, money!” No, they spend it on other things they want. Every dollar of the difference is redirected to other purchases or savings. Those purchases, in turn, put other people to work. Trump and Pence have raised the price of air conditioners for all of us, meaning our work does not go as far. This is a weak net-negative for the economy—and therefore for jobs.
There is one wrinkle that distinguishes Indiana from the Federal Government, however. Indiana is running a surplus, meaning Indiana is probably creating value on net by cutting taxes for Carrier*. Taxes carry a dead weight—one broadly offset when government spending addresses legitimate market inefficiencies. But since Indiana is not spending that money, we might as well “spend” it on this job preservation program. Most supply-side studies suggest that a market-wide cut is better so that the market can apportion the gains where they are most efficient, but a specific cut may well be a small net gain for the state anyway.
That’s a lot of words to say that it turns out that the Indiana Democrats were right that spending the surplus would help workers. It just took the need for a cheap political stunt to convince Governor Pence of that.
The Federal Government and most of the many states do not have a surplus. Widening the deficits would not help workers because that tends to push the balance of trade towards a deeper deficit and hurts domestic production. It becomes an exercise in feeding the dog its own tail. Pence was able to do this for his boss precisely because he is not yet the Vice President of the United States. Guess what he won’t be able to do in January?
To review, all of the gains are lost to higher prices and invisible job loss elsewhere. There might be some small gains from decreasing Indiana’s surplus, but this is probably not the smartest way get those anyway. Finally, President Trump won’t have access to a surplus, so this is a one-off thing for a small number of jobs.
But, you know, keep cheering on this tax break.
*Whether or not this is a fair or wise way to cut down the surplus is an issue that takes me beyond the economic question I raised. But suffice it to say, I want a few million dollars for threatening to go abroad!