Trump saved Carrier! But what does that mean for the economy?

by | Dec 1, 2016

Trump saved Carrier! But what does that mean for the economy?

by | Dec 1, 2016

At this point, we don’t know exactly how Donald Trump was able to convince Carrier to cancel its plans to relocate operations in Mexico. But even before Trump takes office, he’s been praised for keeping his campaign promise for saving American jobs.

What does this mean for the overall economy, though?

We have to look at why Carrier would want to move in the first place. Carrier saw in Mexico a cheaper place to produce air conditioners and other goods. Relocating naturally would have meant the loss of 1,000 American jobs. So, the protectionists and economic nationalists assume that 1,000 people can retain their wages and spend them on consumer goods to further push the economy forward.

But we have to look at the unseen effects of this inaction.  Carrier would have been able to produce air conditioners more efficiently and at less cost. Say, for example, a consumer could buy an Indiana-produced air conditioner for $2,000.  Also say that the price of air conditioners would drop to $1,500 by moving operations to Mexico. A consumer could then buy an air conditioner and have $500 left over to spend on something else (which would increase demand elsewhere in the economy and thus expand production and employment in those sectors) or save the money and increase capital for other businesses to produce more and employ more workers.

Mind you, the jobs would not have simply disappeared if Carrier moved. They would have just been shifted to a different part of the economy, namely in Mexico. The 1,000 American Carrier employees would feel the short term consequences of the move and may have to be retrained in some other manufacturing skill. But, there will be a net gain in jobs created in the economy as a whole as production expands in other industries because of the increased efficiency and lower consumer price.

But, again, we can’t offer a complete analysis without knowing what Donald Trump promised Carrier. If Trump promised some sort of competition-limiting government intervention such as subsidies, increased import tariffs, or government contracts, then the consumer will not benefit. The government would be preventing firms from taking advantage of the cheapest production processes or extracting resources from consumers in the form of taxation.  However, if he promised a reduction in overall taxation or of previous government intervention, then production costs would legitimately fall, and efficiency of production could be restored to the point where it would no longer make financial sense to move production elsewhere.

The news stories abound with rhetoric of “saving jobs.” But, as Henry Hazlitt warned in Economics in One Lesson that we must look at the effect of this policy on everyone in the whole economy, rather than looking at one individual or one group in the short term.

About Scott Duryea

Scott Duryea is the host of Essence of Economics, a podcast that teaches the classic books and articles of free market economics. He earned his PhD in international political economy from Old Dominion University. Scott can be reached at drscott@essenceofeconomics.com and his podcast can be found at essenceofeconomics.com.

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