Reflections on the Carrier deal

November 24, 2016 wasn’t a typical Thanksgiving Day in Indiana news. The then-president-elect tweeted about making progress on keeping jobs in Indiana that Carrier had announced earlier in the year were leaving the state.

On Tuesday, November 29, President-elect Trump and Governor Pence announced that on December 1, they would unveil the deal that would result in keeping some 1,000 jobs in Indiana.

Carrier – was it a good deal?

Then the phone started ringing. Broad outlines of the negotiation were reported and state-based reporters wanted to know “if it was a good deal for Indiana.”

What they didn’t ask, perhaps wisely, is if the deal made sense and was a good economic idea. The chattering class had plenty to say about that, so one’s contribution on those particular questions would have been marginal at best. Esteemed conservative economists like John Cochrane and Tyler Cowen were resolutely against the action, considering it crony capitalism where firms make money off the government. The deal represented baby steps to a dysfunctional economy like France or, worse, Venezuela. On the opposite end of the political spectrum, the likes of former Treasury Secretary Larry Summers and former Enron advisor Paul Krugman likened it to a government protection racket and presages of a scary economic and political future.¹  

The Electoral College had not yet met and both the right-wing Never Trumpers and the left-wing Clinton apparatchiks were still in high dudgeon.

The hand wringing and contempt for the deal was well expressed across the political divide. (Perhaps Trump would pull the country together after all!) Left-leaning radio news program guests and call-in listeners were suddenly discovering the wisdom of the government not picking winners and losers. They definitely did not approve of Trump winning a deal at taxpayer expense.

Which brings us back to the question of the reporters: Was it a good deal? To me, that question translated into this: What do the numbers say? Or better still, what is the cost-benefit? I had an envelope handy so I went to work.

These sorts of calculations require several assumptions and are done quickly. The annual cost to the state was reported at that time to be about $1 million a year for 10 years and the number of jobs to be saved was 1,000. Assuming each job is full-time with no overtime hours, that is about 1,960 hours per job per year, or about $0.51 an hour cost to the state. Does the state extract any financial benefits? State income taxes run at 3.3 percent. My initial guess for the wage rate was $27 an hour which yields state income tax revenue per hour of about $0.89.

If one pays 51¢ and gets 89¢ back, that is a pretty good deal.

If one pays 51 cents and gets 89 cents back, that is a pretty good deal. So good in fact, that even if one overestimated the hourly wage by a third—that would be $18 an hour—the math still works, although not as favorably. Taxpayers are not footing the bill.

Were those workers made redundant, they would qualify for several state and federal displaced worker programs, at a cost to the taxpayer.

Like any good journalist working on a deadline, the reporter called several economists, even those from rival universities. Turns out, when I provided the reporter my quick and dirty, back-of-the-envelope calculations, she said they basically matched the results of another economist at a rival state-supported university to the north and west of me that will go unnamed because they poached one of our best economic analysts. (Not that I’m bitter.)
He must have used the same envelope.

Based on this one dimension—Indiana’s costs and benefits—it was a good deal.

About a week later, Mike Kwatinetz, commenting in Fortune, made an even stronger case.²   Mr. Kwatinetz not only included Indiana taxes in his cost-benefit analysis, he included the other taxes and contributions that a “Carrier job saved” provides the federal government: Social Security, Medicare and income taxes. His estimates, based on an average hourly wage of $20 an hour, totaled $12,300 per year, or $6.27 an hour. Kwatinetz, a venture capitalist and self-proclaimed non-supporter of Trump, put the cost-benefit ratio at 1-to-14.

And Kwatinetz was not as comprehensive as he could have been. There are government support programs like Trade Adjustment Assistance that workers can avail themselves of, not to mention unemployment benefits.

Many may say this is a false calculation. A redundant Carrier worker will find employment elsewhere. Yet, that worker will have a tough time finding work as remunerable. A worker may be able to find a job in the appliance department at Home Depot or Lowe's for $18 an hour, in which case, the net is slightly in the state’s favor to have the Carrier job disappear and be replaced by the appliance sales associate. (Home Depot: $18 times 0.033 ≈ $0.60 an hour in state revenue, versus $0.90 minus $0.50 ≈ $0.40 an hour net state revenue with the Carrier deal.) But there are at least two problems with the last calculation and its attendant assumptions. One, workers who are “made” to work in production don’t tend to migrate to other industries easily. In a study reported in these pages recently, the IBRC found that a majority of workers who had lost their jobs in transportation equipment manufacturing (TEM) or primary metal manufacturing (PMM) from 2002 to 2014 just vanished from the official employment records. They could have become self-employed, moved, retired, passed away or become grand-daddy daycare, but they were not working in a traditional, taxpaying sense. Those who did lose their jobs and took advantage of education and re-training benefits—a troubling small share of those who were displaced—went back to work in TEM and PMM because that is where the higher wages are.

The second problem is that the hourly wage base was wrong. One didn’t have time to double-check his assumptions about hourly wages when using the first envelope. The average hourly wage for Indiana workers in industry NAICS 333415—Air-conditioning and warm air heating equipment and commercial and industrial refrigeration equipment manufacturing (yes, that is the complete industry title)—was $30.82 in 2015, according to the U.S. Bureau of Labor Statistics. This is a full $10 an hour greater than what Kwatinetz assumed. Given what we know about human behavior—how workers find new employment—and given more realistic assumptions about costs and benefits, the Carrier deal looks better and better.

Those familiar with measuring the benefits of securing a new greenfield investment from out of state or the costs of closing a large facility will, by now, have asked the following question: What is, or would have been, the total economic impact of losing 800 Carrier jobs?³ The IBRC routinely conducts such economic impact analyses (EIA). But we rarely do those analyses for free—it requires more than an envelope—and our EIA staffer was overburdened anyway. But the issue of total economic impact is important because any large economic event like a new plant or a plant closure or dramatic scaling back has ripple effects. The plant sources inputs and services from around the region and those firms stand to gain or lose when an anchor production facility is added to, or removed from, the economic landscape. In short, those 800 Carrier jobs may support another 400 full-time jobs across a spectrum of occupations in the region, along with all the attendant state and federal taxes and contributions associated with those additional jobs. There are several companies that have developed sophisticated EIA software and done EIA studies for clients, among them, EMSI, IMPLAN and REMI. These firms help answer the question: What is the total expected economic impact of losing those 800 jobs?

This, in a roundabout way, brings us to the last chapter of my Carrier story. When I presented my quick and dirty analysis of the Carrier deal to a room full of business economists, no one challenged me about the political economy of the deal, whether it was a baby step to Mafiosos picking industry winners and losers. Rather, at the end of the Q&A, a gentleman in the back of the room stood up, said he was with REMI and that they had run their models on the deal.

He said he agreed with my conclusions.

Φ The views and comments expressed are the author’s and do not necessarily reflect the views of the IBRC, the KSoB or IU. No parasites were harmed in the writing of this article, at least none that the author knows on a first-name basis.

Epilogue

It turns out that the Indiana Economic Development Corporation approved the Carrier deal on March 28, 2017 (www.insideindianabusiness.com/story/35016839/iedc-approves-incentives-for-carrier). The terms of the deal became more clear. The total value of the incentives were materially less than originally bandied about: $7 million in contrast to $10 million. The number of jobs settled at 800. The duration (10 years) remained the same.

This enhanced the cost-benefit ratio to approximately $1 in cost to $2 in benefit. This cost-benefit ratio doesn’t include any of the other contributions and costs that Mike Kwatinetz used in his analysis to get his 1-to-14 ratio. It also doesn’t include the social costs of people losing their jobs, and often the attendant hopelessness of being out of work.

One wonders how we can save more.