Luring Business: “Job Creators” in Texas

As of December 2012, Texas was giving out more financial incentives—mainly in the form of tax breaks and subsidies—to business than was any other American state. The government was handing out around $19 billion annually, while at least $80 million was being spent in the U.S. overall, according to the New York Times. Although at the time Texas had half of all the private-sector jobs created in the U.S. during the preceding decade, the Times points to “a more complicated reality behind the flood of incentives.” It cannot simply be assumed that good jobs will be created.

For example, Texas had the third-highest proportion of hourly jobs paying at or below minimum wage. In fact, Texas had the 11^th-highest poverty rate in the union. “While economic development is the mantra of most officials, there’s a question of when does economic development end and corporate welfare begin,” Dale Craymer of the Texas Taxpayers and Research Association said. In other words, one might ask how much the benefits from the financial incentive extend beyond the recipients themselves to the general public and Texas. Even though businesses cite “job creation” as a benefit of government help, one might ask what kind of job as well as how many?

That the government may have been relying on the businesses themselves or their “consultants” even as they would stand to gain suggests that a conflict of interest may have blurred the line between decision-maker and beneficiary. Indeed, political contributions from companies to re-election campaigns may have exacerbated the problem.

For example, Brint Ryan, a tax consultant specializing in finding incentives for large companies, was “a familiar presence at the state comptroller’s office . . . which must sign off on many tax breaks”—potentially blurring the line between beneficiary (agent) and decision-maker. He also donated $250,000 to Gov. Rick Perry’s ill-fated run for the White House. Texas had been largely bereft of financial incentives for big business when Perry became the head of state in 2001. He had smarted when Texas lost out to Illinois on a new Boeing plant and he was not going to repeat that mistake. Years later, he could point to expansions by Facebook, eBay and Apple in Texas. “They’re coming because it is given, it is covenant, in these boardrooms across America, that our tax structure, regulatory climate and legal environment are very positive to those businesses,” he said. This does not mean, however, that they deliver on well-paying jobs for Texans. There is also the opportunity cost to the government. As Texas spent more to lure big business, the education budget took a hit. Brint Ryan may have had Gov. Perry’s ear when students and even the poor probably did not.

In short, government officials engaged in industrial policy would be wise to distinguish corporate welfare from “economic stimulus.” The influence of money in the American political system doubtless created a conflict of interest blurring the line between the beneficiaries and the decision-makers. The temptation for policy makers might therefore be to lapse into corporate welfare at the expense of basic services. CEOs who are looking for financial incentives from the government as a way to make more money may claim that their respective companies are “job creators,” but the reality is that those companies are “profit creators” with jobs being a byproduct of sorts. The case of Texas suggests that market equilibrium may naturally be well short of full-employment. If so, government officials should not go overboard with the financial incentives in the mistaken belief that some full-employment market utopia is possible, even if providing corporate welfare does not hurt their own political welfare either.

Source:

Louise Story, “Lines Blur as Texas Gives Industries a Bonanza,” The New York Times, December 3, 2012.  

Losing the Middle Class: An Educational-Industrial Policy

Beneath the headlines showing new figures on unemployment (which do not include the unemployed who are no longer looking for work or applying for unemployment compensation) is the story of the changing distribution of jobs in the American economy. That distribution in turn can give rise to cultural or societal changes. When the jobs in the economic middle are disproportionately lost, American society increasingly resembles a tale of two cities—and by this I do not mean Augustine’s heavenly and earthly cities though the realms of the “haves” and “have nots” could admittedly be called as such by materialists.

According to CNBC, a “report looked at 366 occupations tracked by the Labor Department and clumped them into three equal groups by wage, with each representing a third of American employment in 2008. The middle third — occupations in fields like construction, manufacturing and information, with median hourly wages of $13.84 to $21.13 — accounted for 60 percent of job losses from the beginning of 2008 to early 2010.” The job market turned around since then, but those fields represented only 22 percent of total job growth. “Higher-wage occupations — those with a median wage of $21.14 to $54.55 — represented 19 percent of job losses when employment was falling, and 20 percent of job gains when employment began growing again. Lower-wage occupations, with median hourly wages of $7.69 to $13.83, accounted for 21 percent of job losses during the retraction. Since employment started expanding, they have accounted for 58 percent of all job growth. The occupations with the fastest growth were retail sales (at a median wage of $10.97 an hour) and food preparation workers ($9.04 an hour).” By mid 2012, each category had grown by more than 300,000 workers since June 2009.

Essentially, the job expansion in the wake of the 2008 recession proceeded on two fronts—the high and low ends, rather than in the middle. Microsoft, Google, and Facebook represent high-end employers, while McDonalds, Walmart, and Starbucks hire at the lower end. The wealthy increasingly shopped at Whole Foods while the service industry employees bought their food at Walmart. This rendering is of course simplistic, but separation of two distinct cultures based on wealth is clear as gated communities were becoming increasingly popular among the upper middle-class and the rich in the first decade of the twenty-first century.

In terms of education, the wealthy can send their kids to an Ivy League college, while the pro-profit colleges give a training-based inferior education to the service employees. In actuality, those employees are being trained rather than educated. The lack of education can be seen by the reliance on scripts for employees at many retail establishments. The unthinking herd mentality can be observed from the ubiquitous “have a good one!” which is grammatically incorrect and generally vacuous in meaning. A good what? The antecedent is never specified. The sheer reliance on scripts suggests that were the customers to gleam the true condition of the employees, there would be shock and awe, as in, how could we as a society have so failed the younger generation? Put another way, the centralized training of the chains (we are born free but chained to the culture invented by retail) supplants the education (not training!) that every young person should have. The eclipse of the value of education is a salient though invisible feature of the earthly city, while the inhabitants of the heavenly city make sure that their kids are well-educated. In the earthly city, the blind are leading the blind, and nobody believes he or she can be wrong. Yet how different is the actual condition on the ground!

In the post-industrial society, government policy can emphasize education for the masses, such that the higher-end vocations are “filled to the brim” and the lower-end jobs minimized. The United States can and should orient its citizenry to areas of comparative advantage rather than simply relying on the labor market to assign the distribution of jobs. For example, after its import-substitution policy, India stressed “home grown” computer science and engineering vocations in line with the view of G.D. Birla and J.N. Tata that British India needed to replicate British industry rather than be dependent on it (Gandhi opposed this strategy). In the United States of the twenty-first century, expanding excess to college and university education that is not immediately eclipsed by training would ironically enable people entering the workforce for the first time to go into the higher-end professions. In short, America needs an industrial policy that highlights education such that the upper- and middle-income professions expand proportionately at the expense of the lower-end jobs.

Source:

Catherine Rampell, “Majority of New Jobs Pay Low Wages, Study Finds,” The New York Times, August 31, 2012.

Disentangling a Worsening Trade Deficit: Sector-Specific Industrial and Macro Economic Policy

he U.S. trade deficit rose 9.6% in January, 2017, to the highest level since 2012. The gap of $48.5 billion of exports exceeding imports looks daunting, yet the story is more complex at the sector level.[1] According to Neil Irwin of The New York Times, “What really matters is not whether the trade deficit is rising or falling. What matters is why?”[2] Distinguishing macro factors such as a strengthening dollar from sectoral strengths and weaknesses is thus necessary.

 The Port of Oakland. (source: Jim Wilson/NYT)

In the automotive sector, a $1.3 billion increase in exports corresponds to a $900 million increase in imports—essentially a draw. The $2.1 billion more in exports of industrial supplies is favorable, suggesting that that sector is doing well, but exports of civilian aircraft fell by $611 million, and other high-tech capital goods were also down, while imports of consumer goods—notably cell phones—increased by $2.4 billion. Boeing may simply have had a bad month, though it is also possible that Airbus had been out-competing its American competitor. The numbers on electronics add to the general perception that the U.S. is not competitive in such manufacturing. Industrial policy could address the possibility that automation and tax incentives (and penalties on American companies producing abroad only to import the finished goods back to the domestic market) could rectify this weakness in the American economy. 

Meanwhile, the balance of trade in services worsened by $5.3 billion. The fact that the money that foreign travelers spend in the U.S. on hotels and restaurants counts as exports suggests that a strengthening dollar could have been in play.[3] The Federal Reserve’s monetary policy was thus in play, for rising interest rates mean a strengthening of the dollar. Industrial policy may thus be less relevant here.

“A big piece in the rise in imports was crude oil and other petroleum products. They were up by a combined $2.2 billion.”[4] Exports also increased, by $1.2 billion, so this sector obviously contributed significantly to the overall trade deficit. To be sure, an increase in the price of oil favored producers, but this matter is dwarfed by the strategic national-security goal of self-sufficiency on fossil fuels. In terms of industrial policy, an expansion of domestic sources of oil and refining capacity may have been advisable at the time—not so carbon emissions would increase, but, rather, so imports of oil could drop.

In short, analyzing changes in a trade deficit requires distinguishing sectors, and, moreover, discerning where industrial policy recommendations are in order from cases in which macro political economic policy is at issue. Ideally, sector-specific industrial policies and macro policies are “on the same page.”

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[1] Neil Irwin, “The Huge January Trade Deficit Shows Trump’s Hard Job Ahead,” The New York Times, March 7, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

Modern Day Mercantilism: Donald Trump Intervenes at Carrier

The tension between the free-market philosophy and mercantilism (e.g., an industrial policy) has been longstanding. I contend that the philosophy of international business (or international economics) is flawed terms of how far comparative advantage is applied, even at the expense of full employment at the city or country level. The case of Carrier in Indiana points to the legitimacy of government intervention even at the expense of comparative advantage.

A mix of ominous threats from Donald Trump as U.S. President-Elect, and enticing financial incentives worth $7 million from Indiana kept roughly 1000 out of 2000 jobs at Carrier, a unit of United Technologies, from being transferred to Mexico. The company had expected to save $65 million by relocating not only the fan coil manufacturing lines, which would still go, but also the lines that build medium- and high-efficiency gas furnaces, which would now stay in Indiana.[1] Carrier’s management must have factored in the likelihood of the upcoming Trump Administration and Republican Congress imposing steep tariffs on imports entering the United States from American companies that have moved production to other countries in order to take advantage of lower wages and comparatively lax regulations. In fact, Trump’s intervention with Carrier undoubtedly had the benefit of reminding other such company managements of the possible additional cost to manufacturing abroad and yet still having access to the huge American domestic market via importing (a tariff would make specific-company interventions unnecessary). So, the single-minded maximizing-profit calculus notwithstanding, we can understand why Carrier’s management agreed to take a bit—albeit just a bit—of a financial hit. “Every penny counts, but if we step back and I’m looking at earnings of $6.60 per share this year, 2 cents is an easy concession if the president-elect listens to some of the company’s bigger concerns,” noted Howard Rubel, a senior equity analyst at Jefferies.[2] The 2 cent per share reduction could in fact be offset (and more) by the possible redressing of such “bigger concerns,” especially if the company and its workers make politically strategic campaign contributions.

Unfortunately, pressures on company managements to focus on quarterly stock prices mean that assuming even a long-term profit-metric can be difficult. The allure of producing abroad and importing products back into the U.S. would likely continue; hence the rationale for a tariff. Lest it be feared that trade wars might be triggered, the companies subject to the tariff would be American rather than Chinese or European. Regarding the free-market alternative, the comparative-advantage philosophy of international business omits the practical need for manufacturing and low-skilled jobs in virtually any geographical area. Not everyone in a given population can be retrained to work in computer-tech industries, or educated to become CPAs, physicians, and lawyers. To say the U.S. (or E.U.) is a knowledge economy leaves a lot of people out—people who could be expected to be dependent on government benefits to live. Therefore, a mercantile government policy oriented to retaining a manufacturing sector makes sense for any government. The free-market logic applied to international economics is flawed because a sizable proportion of a country’s workforce cannot (or will not) be part of a “knowledge economy,” for instance. It also follows that not everyone is going to participate in a “manufacturing economy.” Geographically, economic diversity reflects the diverse makeup of the labor force. Put academically, the logic of international economics has its limits, or drawbacks, and so international political economy is a better, more realistic, approach.

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[1] Nelson Schwartz, “Trump Sealed Carrier Deal with Mix of Threat and Incentives,” The New York Times, December 1, 2016.

[2] Ibid.