Remember Thy Broken Windows

Taking credit for about 1,000 jobs “staying” in Indiana from a Carrier plant’s decision not to move to Mexico, President-elect Trump proclaimed “Companies are not going to leave the US anymore without consequences.  Leaving the country is going to be very very difficult.”  This statement should strike fear into the hearts of liberty-loving, crony-capitalist hating people everywhere. Unfortunately, many of praised it as a step in the right direction, that the $7m in tax breaks is a “good deal.”  However, this is anything but a good deal.  It sets dangerous expectations that will cost Americans jobs, investments, and wealth.

Let’s start with the explicit threat in Trump’s words.  Firms, that operate or expand into the US, will lose their freedom to make business-effective moves.  This will increase the relative cost of doing business in the US (since the cost of relocation outside the country is now higher), making operating outside the country, not expanding operations at all, or automating, more attractive options. Firms will be far more cautious about their operations, thus reducing the total number of potential jobs and investment in the US.  This is the “unseen” effects of Trump’s threats.  The 1,000 jobs “saved” could come at the cost of many more unseen jobs “lost.”

Another side effect (which flies in the face of one of Trump’s campaign promises to “drain the swamp”) is this move will increase lobbying.  As Justin Wolfers tweeted: “Every savvy CEO will now threaten to ship jobs to Mexico, and demand a payment to stay. Great economic policy.”  There is now an increased incentive for firms to lobby government for funds should they want to leave or relocate.  Given lobbying is certainly an arms race, firms will pour more money into lobbying and less into R&D or their employees.  To be sure, this is already a norm in the US, but Trump is merely perpetuating and expanding it, as opposed to ending it.

So, we have reduced investment into the US and increased interest in lobbying, both of which are economically inefficient activities.  Seems like quite a steep price to pay to give a temporary stay of execution for 1,000 jobs.

2 thoughts on “Remember Thy Broken Windows

  1. Trump is a bigger government guy. Did anyone expect that he would not use the power of government (and seek to expand it) during his term in office? If a President can threaten business owners with punishment for just using their liberty to pursue their best interests, then how long will it be before Presidents start threatening others (majorities, minorities, individuals) for not doing what he wants them to do?

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