Carrier Deal Speaks Timeless Truth – Markets Cannot be Bought

Commentary

Carrier Deal Speaks Timeless Truth – Markets Cannot be Bought

Surprise, surprise.  President Trump’s signature business incentive deal has gone sour.  Carrier, the recipient of a $7 million dollar business incentive deal to keep jobs in Indianapolis has announced they are laying off over 300 workers and may not meet the requirements in the 10 year deal – less than eight months into it.  And still, those involved are claiming the government is creating jobs.  The business incentives used in this deal are the most visible portion of an intellectually fraudulent iceberg deep-seated in bad policy.

The core logic behind economic development incentives and similar programs is that government officials can see ways to improve and fix “oversights” the market.  But in the grander scheme, how much impact does government really have on economic growth?

Economists (and math) across ideological spectrums generally agree on what enriches and grows modern economies – productivity.  The ability to sell the same or more while expending less resources. In a theoretically perfect scenario, if firm A and firm B both sell a product for $1, but firm B finds a way to do it for half the cost of firm A, they lower their price and increase profits to wipe firm A out of the market until firm A can find a way to compete or some other firm C can find an even lower cost, lowering the price again, and repeating the process.

Firms gain profits to pay better wages while consumers get continually lower prices and better products, which is where economists agree that this process enriches society in the long run. The important aspect to remember in the context of the Carrier deal is that firms and jobs are destroyed as a necessary part of this process. Economist Joseph Schumpeter called this “creative destruction” and argued that it was central to economic growth.  It’s the classic tale of Netflix ending Blockbuster.

The error in Trump’s thinking, and other politicians who advocate incentives, aka bribes, to businesses to locate in a certain place, is to forget the intensity and complexity of the market process and assume that the arc of economic progress depends solely upon government — “attracting” the right businesses, having the proper central bank interest rates, creating the “next” Silicon Valley, “diversifying” the state/region’s economy — or what have you.

But are we prepared to intellectually give credit to the government for the major gains in productivity? The cotton gin? The industrial revolution? The computer? The internet? Google? Amazon? Are we to credit California’s government for the rise of Silicon Valley? And bash the governments of the midwest for not producing more tech innovation?  Could incentives have changed where Silicon Valley was born?  Would that government then get credit for all the jobs? Where does the credit for government’s influence on the economy start and stop?  It is a ceaselessly fruitless task to empirically decipher in exact dollar amounts the “impact” government really has.

These questions may seem too “big” at first in relation to the Carrier deal, but they get at the fundamental intellectual error that too many people still makes about government’s relationship to markets – the notion that officials have enough information/data about the economy that they can “grow” it by taxing and spending or triggering the right policy levers.  Unfortunately, it is one that been thoroughly dismantled since Hayek’s “The Use of Knowledge in Society (1945)”.

Hayek, sparring with planned economy socialists and communists, argued that economic growth was driven by a vast nodal network so complex it exceeds the ability of humans to comprehend sufficiently to alter its path in ways we desire.  The destruction and addition of firms and jobs in our economy today is subject to forces that are supremely complex and beyond the computational faculties of the Indianapolis Economic Development Corporation and the Trump administration by magnitudes.  The idea that government has enough data to “manage” the economy (incentives, etc.) in any way in order to make it grow faster is a false pretense of knowledge.

Instant communication, big data, computer modeling, and other technologies are driving a great false pretense of knowledge to legislators.  Using high processing computer models like IMPLAN and REMI, consultants deliver estimates to legislators that convince them of the exact economic impact the government has made, for everything from business incentives to building roads.  I’ve written about how this thinking leads to ridiculous claims like Florida’s “Grow Florida” agency claiming it generated $900 million in economic activity with just $8 million public dollars.

Beyond establishing property rights as well as personal and economic liberties, there is little the government can ultimately do to “grow” the economy.  It is a nodal and organic process with nonlinear cyclical growth driven by emotional humans, unpredictable innovation, and a large dose of randomness, making it complex to the point of exceeding human mental faculties.

Even a well-intentioned, government subsidized business decision to entice Carrier to keep factory jobs in the United States is subordinate to the laws of economics.  Firms, as they should, are competing for productivity gains to best their competition, and government actions like incentives do nothing to affect this process.

As part of the deal, Carrier promised to invest $16 million dollars in the plant to create jobs.  That investment is now going towards automation technology that is replacing those promised jobs.  The irony of the situation captures my point – the check could have been $700 million and it wouldn’t be enough to stop Carrier from losing jobs due to automation, which allows for greater productivity than human labor in many instances.  They would be overwhelmed by more productive competition even if heavily subsidized by government.

Job destruction and creation decision making revolves around productivity, is complex, and is subject to so much randomness that it is pure intellectual folly to give credit to government for creating anything. The whole process is still largely beyond our understanding.  But the Carrier deal reminds us that the government cannot buy out the laws of markets.

 

Spence Purnell is a policy analyst at the Reason Foundation, where he works on pension reform, Florida policy issues and economic development.