The More Things Change . . .

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I will confess that I found this past presidential campaign sheer hell. I detested both Clinton and Trump, and voted for neither. I hoped that both would lose, and my only consolation was that they both did lose: Trump was defeated decisively in the popular vote, while Clinton was defeated decisively in the Electoral College contest. My view was and is that Trump will transform the Republican Party into a populist one, pushing nativism, protectionism, corporatism, and isolationism. It saddened me to see writers I had previously admired — such as Larry Kudlow and Steve Moore — who have long argued against the populist siren call to the Republican Party, succumb to it at last, in the form of Trump — The Boss. They, along with a large group of other soi-disant free market commentators, have been seduced by populism. This group I call “the Herd.”

Now, when those of us who are classical liberals — i.e., believers in the free movement of products, of physical capital, and of human capital — expressed alarm at Trump’s explicitly expressed nativism, animus toward Mexicans and Chinese, sexism of the crudest sort, and obvious protectionist aversion to free trade, the Kudlow-Moore Herd mooed, “Oh, he’s just saying that to get the workers’ votes. Don’t worry — he isn’t serious — it’s just bait for the bubbas.” The Herd never asked why the rest of us would ever be attracted by the pitch “Vote for The Boss — he would never do what he says he will!”

Well, even before assuming office, The Boss has started making major decisions as if he were already in charge. It’s as if he couldn’t wait. And it seems he was serious in his campaign.

One highly touted decision The Boss made recently was to coerce Carrier, a division of United Technologies that makes HVAC units, to keep roughly half the workers who were slated to lose jobs when the plant was moved to Mexico. Under pressure, Carrier agreed to keep about 800 of the jobs here. (The Boss’ propaganda ministry said it was 1,150 jobs, but it turns out that included 350 support jobs that were slated to stay anyway.) Gregory Hayes, United Technologies’ CEO, gave in to The Boss, and The Boss and his myrmidons hailed this as a triumph. Indiana, veep-elect Mike Pence’s state, sweetened the deal by giving the company $7 million in tax incentives (read: taxpayer subsidies), but clearly Hayes was most concerned with the continuing bad publicity driven by The Boss and his Herd, and the threat of a 35% tariff on Carrier gas furnaces made in Mexico.

The Herd never asked why the rest of us would ever be attracted by the pitch “Vote for The Boss — he would never do what he says he will!”

The reactions to The Boss’ gambit have been fascinating, to put it mildly. Richly ironic was Sarah Palin’s denunciation of the deal as “crony capitalism.” She wrote ruefully, “When government steps in arbitrarily with individual subsidies, favoring one business over others, it sets inconsistent, unfair, illogical precedent. . . . 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.” This is rich, considering Palin was one of the Republican Party elite who came out in support of Trump. And she may come to rue her small speck of intellectual honesty, since she has been rumored to be under consideration for government positions and The Boss has shown he tends to appoint his supporters to administrative posts.

Moving now from the ironic to the surreal, the arch-free-market opponent Bernie Sanders also criticized the deal. Yes, socialist Sanders was angry that The Boss didn’t “save” all the jobs by immediately imposing a massive import tax on the products of any company that dares to offshore its operations. Sanders thinks that “United Technologies took Trump hostage and won,” by getting tax breaks in exchange for only half the jobs. In fact, Sanders holds that The Boss has endangered the jobs of countless American workers, because “he has signaled to every corporation in America that they can threaten to offshore jobs in exchange for business-friendly tax benefits and incentives. Even corporations that weren’t thinking of offshoring jobs will most probably be reevaluating their stance [now].”

Surreal indeed! The loopy old Stalinist tool can’t imagine any other reason why businesses would legitimately want to move operations abroad than to get tax breaks. Certainly not to escape our punitive corporate income taxes, currently the highest in the industrialized world, and about triple the rate of Ireland. Certainly not because of our dysfunctional common law system, the only one without the “loser-pay” (or “British”) rule that limits frivolous lawsuits. Certainly not to escape Obamacare, a law that saddles companies with the obligation to provide costly health insurance to their full-time employees whenever they have more than 49 of them. And certainly not because of the metastasizing cancer of regulation, which under Obama has simply exploded. Here the senile socialist Sanders complains that United Technologies made a profit last year of $7.6 billion, and its top execs received $50 million each. (Imagine that! Top execs being paid less than one tenth of one percent of the billions in profits they helped produce! Outrageously generous!)

The loopy old Stalinist tool can’t imagine any other reason why businesses would legitimately want to move operations abroad than to get tax breaks.

In a revealing interview with CNBC’s Jim Cramer, United Technologies’ CEO Hayes explained his thinking. Nobody listening to the interview could doubt that Hayes is a decent and patriotic man, but also a man committed to running his company profitably and for the long term. He signaled that he caved to The Boss’ demands because he feared government retaliation against the other three United Technologies divisions — Pratt Whitney engines, Otis Elevator, and the aerospace division — no less than against Carrier. As he put it, “I was born at night, but not last night. I also know that about 10% of our revenue comes from the US government.”

Hayes outlined the reasons why his company had moved Carrier’s — but no other divisions’ — operations down to Mexico. While the skills of the employees at the other divisions are extraordinarily high, the skills at the assembly line for HVAC units are much lower. Moreover, Hayes noted, not only are labor costs lower in Mexico (80% lower) but the company’s existing Mexican plants, the absentee rate was only 1% and the turnover rate only 2%. These figures are much lower than those for the American plant.

Here Hayes touched upon two points I have to work to explain to my business ethics students — who, despite their choice of major, often incline to the Clinton-Sanders-Obama view of capitalism. First, besides intellectual virtues, employers have to consider moral virtues as well. And employees are often not “perfect substitutes” here: some are more inclined to show up for work reliably and work enthusiastically and conscientiously, because for them work is a moral prerequisite for being a virtuous person. Unfortunately, this attitude is more prevalent abroad than in heavily unionized American factories. (I attribute this to the unionization, not the Americanization, of the workers.) Second, what makes employees more valuable is their productivity, not their relatively low salaries. The top paid quarterback in the NFL is a lucky fellow named Luck, who earns $26.4 million a year from the Colts organization. Suppose I called the Colts management and offered my services for a mere 1% of that cost. Would the Colts jump at the chance to “snap up” an old, out-of-shape, overweight, nearsighted, clumsy, uncoordinated philosopher who has never played football in his ludicrous life? Hardly. But if the Colts management could find a man with the skill set of Mr. Luck for significantly less, then they might consider it.

What makes employees more valuable is their productivity, not their relatively low salaries.

Hayes explored this latter point when he noted that United Technologies sent 45,000 employees through their “employee scholar” program, with 38,000 receiving degrees. United Technologies spent $1.2 billion over the last two decades on increasing the skills — the intellectual virtue — of its workforce. And Cramer — an intellectually honest progressive liberal, which is as rare as a sympathetic fascist — pointed out for his CNBC audience (to wit, progressives who make money off capitalism even as they despise it) that United Technologies had early moved a plant from Nogales, Mexico to Florence, South Carolina — at a cost of $60 million in the first year. Notice that neither The Boss’ propaganda machine nor the Herd of establishment Republican apologists even mentioned the onshoring of the bigger Otis plant at great expense, nor the huge amount of money the company has put into improving the skills of tens of thousands of American workers. They mentioned only the 800 inefficient assembly-line jobs.

Hayes noted that United Technologies will now invest $16 million in the existing Carrier plant, to automate it as much as possible, to make it “cost competitive.” So the jobs “saved” by The Boss are not destined to last long. Yeah, the Mexicans won’t “steal them,” but the robots will. In short, don’t blame Juan — blame R2D2!

Hayes made one other point that one wishes The Boss could grasp: “The genie of globalization is not going back into the bottle. . . . Free trade is still essential to the growth of this country. This country was founded on two principles: immigration and free trade.” Boss, let me introduce you to Thomas Jefferson!

But the Herd was mightily pleased with what The Boss did to United Technologies. Larry Kudlow and Neil Cavuto, who should know better than to tout protectionism and cronyism, approved on air, with Cavuto adding the deft ad misericordiam touch that these jobs were saved just in time for Christmas — which rather makes The Boss the Savior.

The jobs “saved” by Trump are not destined to last long. The Mexicans won’t “steal them,” but the robots will.

One of the founding members of the Herd — Glenn Reynolds — chimed in his support for The Boss’ crony capitalism. Reynolds wrote an amazing — really, psychedelic — piece favorably comparing The Boss and his tweets with FDR and his radio “fireside chats.” Like, far out, man, America is in the Great Depression redivivus, and the Boss is here to save us!

Of course, as Reynolds himself concedes, FDR probably extended the Depression by seven years, but he certainly made economically illiterate Americans feel like he cared. And I guess it’s better to feel the pain you cause in others than to be oblivious to it, although I am more inclined to say you shouldn’t cause the freaking pain to begin with.

But Reynolds’ point is that The Boss, in “saving” these pathetically few jobs, showed more “compassion” than Obama, because when Obama was asked about saving jobs at this Carrier plant, the Prez said that the answer was improved job (re)training. That caused Reynolds to wax sanctimonious, saying that when a factory closes (from outsourcing, free trade, automation, or just plain producing a product the public doesn’t want), the people laid off and the local economy suffer. And the existing job retraining programs — including the Trade Adjustment Assistance program (TAA) — don’t work well. Here Reynolds quotes a study done by the Heritage Foundation that says the TAA doesn’t work — though considering the infamous hit-report the Heritage Foundation did some years back on the cost of immigrants to the nation, which cemented the organization’s turn from conservativism to populism, I no longer put any credence in its reports.

Now, readers of this journal over the last eight years will, I believe, not accuse me of being a blind Obama supporter — far from it. But in this case, Obama is correct and Reynolds, the Heritage Gang, and the rest of the Herd is wrong. We all learned from Joseph Schumpeter that economic progress is driven by “gales of creative destruction,” when old, less efficient ways of doing business are eliminated by newer, more efficient ones. Cathode ray tube TVs died rapidly when flat screens came out; VHS tapes died rapidly when DVDs became available. And human-piloted cars, trucks, and buses may soon be replaced by autopiloted ones. And we all know what Schumpeter pointed out, that this process is often a hardship on some workers as they undergo retraining for more productive jobs. No doubt, if truck, delivery van, and bus drivers, as well as cab and Uber drivers are all put out of work by self-driving cars, some people will find it hard to find other, more productive jobs over a relatively short period of time. But most will find other, more productive work, easily.

FDR probably extended the Depression by seven years, but he certainly made economically illiterate Americans feel like he cared.

For those workers who can’t make the shift easily, the answer is precisely to retrain them. What other options are there? To let them languish on food stamps? Or (as the lumpenprotectionists, Luddites, and nativists would urge) simply outlaw progress? Let’s face it: progress is a bitch!

Let’s consider this for a moment. No doubt many truck and cab drivers will oppose self-piloting vehicles. But we as a country lose roughly 38,000 people a year in auto accidents, more than we lost in the Korean War. Does Mr. Reynolds — so much more compassionate than we unpatriotic, cosmopolitan, hard-hearted, elitist, and egoistic globalists — really want to see those deaths occur forever, lest some cabbie in Queens can’t find work?

As to why the TAA and the other few dozen other government retraining programs don’t work well, they don’t work well for the same reason public schools don’t work well: when the government runs a monopoly, it fails just all other monopolies do. The answer (in both cases) is to separate the government funding from the service by voucherizing it.

Specifically, we should kill all the retraining programs, along with (say) the Department of Energy, and use all that money for vouchers for long-term unemployed so that they can go to a public or private community colleges to get retrained (or get the high-school diploma they should have gotten when they were young). I would allow trade unions and private industries to use these vouchers to expand their apprenticeship and training programs they already have, and to open full-fledged trade schools as well. For example, the United Electrical, Radio and Machine Workers of America could run a chain of trade schools where people could come to learn the trades, paying the union with vouchers and perhaps by agreeing to be dues-payers for some period of time (say, ten years). Oh, and end the Obama Administration’s war on for-profit colleges, a war that killed so many hundreds of decent trade schools for no reason other than a desire to please the teacher’s unions. (The fall of the ITT college chain alone eliminated 130 campuses.)

There are several reasons why The Boss’ “victory for American jobs” is in fact disastrously bad.

First, it forces Carrier to keep paying high wages to its employees, thus ensuring that it will be unable to compete with foreign-produced products in the long term. This is the kind of “good deal” the US autoworkers received: ludicrously sweet contracts that drove two of the major American automakers into bankruptcy.

Government retraining programs don’t work well for the same reason public schools don’t: when the government runs a monopoly, it fails just all other monopolies do.

Second, it punishes American consumers, who will be forced not just to pay continuing high prices for Carrier’s products but also to pay higher taxes to provide the subsidies. The Boss’ “big-hearted” concern for the workers obviously did not extend to the consumers or taxpayers.

Third, as Bastiat would note, while the populace — with the Herd leading the cheers — hails the Boss for the 800 jobs saved, it will not see the many of thousands of jobs that will be lost. Any company, foreign or domestic, that is thinking of building new plants here knows that if any of those facilities turn out to be unprofitable — say, because the workers form a union as unreasonable as the UAW — and the company moves to close the plant, The Boss will punish it with whatever sort of sanctions he can dream up. As the French have discovered, the harder you make it to fire workers, the more reluctant companies will be to hire them in the first place, so you wind up with chronic high unemployment.

This is where the Herd may be miscalculating. Kudlow, Moore, Laffer, Cavuto, Reynolds, et.al. assume that with lower corporate taxes and fewer regulations, the economy will boom and job growth explode as companies repatriate foreign profits and open new plants here. But in the face of The Boss’ demagogic, autocratic governance, the companies may instead use the money to buy back stock in their own outfits or invest the money abroad. The good effects of The Boss’ more classically liberal policies may be trumped by the bad effects of his populist ones.

The harder you make it to fire workers, the more reluctant companies will be to hire them in the first place, so you wind up with chronic high unemployment.

In fact, the Herd’s admiring lowing in response to his bullying of Carrier may be confirming to The Boss that his protectionism is working. He moved on rapidly to attack another company — Rexnord Corporation — for daring to move a plant to Mexico and “viciously fire” 300 existing employees. So far the company hasn’t caved, leading The Boss to renew his threat to hit Mexican imports with a 35% tariff. Ford, which he threatened earlier, still appears to be moving forward with plans to build small cars in Mexico. So The Boss may well be forced to carry through with his threat.

This is all reminiscent of Obama’s first year, in which he started trade wars with Mexico and Canada, while engaging in crony capitalism with environmentalist companies. As the cynical but insightful French put it, the more things change, the more they stay the same.




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Comments

Scott Robinson

Dear Gary,

Thinking about the 35% tariff, the trade tax is like a wall. In this way it would be similar to the Berlin Wall, making sure that residents didn't leave East Berlin. When you think of it, wasn't East Berlin a great paradise? It will be good to keep many jobs here so that we will have plenty of work to do in our labor camps. I left out the "forced" adjective for labor camps because that's too judgmental of ensured employment. A good point is that restrictions of competitors doesn't make you more competitive. The problem of free enterprise and free trade is all of that discriminatory responsibility that befalls you.

I think that the lesson of that saying, "The more things change, the more they stay the same" is that even though you try creative changes to deny the truth, the truth is still there just like it was before to bite you. My point about the truth biting you is expressed by the saying, "The truth hurts".

In Consistency,
Scott

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