If the pact between Donald Trump and furnace maker Carrier Corp. to save 1,000 jobs in Indiana is an example of how the president-elect intends to conduct U.S. economic policy, rules-based global capitalism is in for a very rough ride.
And that should scare the wits out of not just corporate CEOs, but average workers everywhere who want a better future for themselves, their children, their countries and the world.
When business decisions are based not on sound economic principles, but on threats of retaliation by populist politicians or costly tax incentives that distort markets, everyone loses in the end.
Only a Scrooge would begrudge the sudden joy of the 1,000 Indiana workers who will, for now, keep their jobs as a result of the deal Carrier worked out with Mr. Trump and vice-president-elect Mike Pence, Indiana's outgoing governor and a politician with a penchant for doling out dubious state inducements to manufacturers.
But no one should be surprised to eventually see Carrier accomplish through the back door what it said in February it would do through the front one.
Back then, Carrier announced it would move 2,100 jobs from two plants in Indiana to facilities in Mexico.
A cellphone video of company officials breaking the bad news to shell-shocked employees went viral, leading Mr. Trump to use Carrier as a campaign device illustrating the "disastrous" impact of the North American free-trade agreement. The Republican nominee vowed to repatriate manufacturing jobs so the United States could "start winning again."
Carrier's announcement that it will continue to make gas furnaces in Indiana, saving fewer than half of the 2,100 jobs it had intended to shift to Mexico, provides it with positive publicity and $7-million (U.S.) in state tax incentives.
And it creates priceless goodwill with the incoming Trump administration that will ultimately dole out the defence contracts on which its parent company, United Technologies, depends.
Had Carrier made this decision, as some Trump supporters suggested, mainly based on the new administration's vow to push Congress to slash the U.S. corporate tax rate to 15 per cent from 35 per cent, it would be easier to defend.
But what company would agree to assume the cost of keeping jobs in Indiana in exchange for the same tax benefit that its competitors will enjoy at no cost at all?
The Carrier deal, it goes without saying, is a short-term political winner for Mr. Trump. He promised to stand up for working-class voters and he can reasonably claim to be doing just that.
But he has also set unattainable expectations that he can repeat this feat whenever a company announces plans to relocate.
He has encouraged politicians elsewhere to browbeat, if not bribe, corporations to locate in their jurisdictions. He has introduced an element of arbitrariness into economic policy making that will undermine business confidence in U.S. governance.
Corporations will now have to wonder whether they will be punished by the Trump administration for acting, as the law requires, in the interests of their shareholders. Of course, companies must also consider the interests of all of their stakeholders, including employees. But bad business decisions only end up costing jobs in the long run.
Like it or not, any company that puts politics over productivity is eventually going to be put out of business by more efficient competitors.
Sound U.S. economic policy would emphasize retraining and income-support programs for workers who lose their jobs to technology or outsourcing – and make no mistake, automation is a much bigger threat to Indiana's manufacturing workers than free trade with Mexico. Unless American workers obtain the skills to move up the ladder to knowledge-based jobs, including factory-based ones, the U.S. economy will fall behind the rest of the world.
Economists typically measure the effectiveness of deals such as Carrier's in the cost per job saved.
They almost never measure up. Systemic economic meltdowns such as the 2008 crash aside, the case for state aid to save jobs is always and everywhere a weak one. Jobs rendered unsustainable by technology or foreign competition almost always end up disappearing within a few years anyway, leaving a hole in government budgets without anything to show for it.
The greater cost of such interventionism lies, however, in the extent to which it undermines faith in the integrity of the policy-making process. When threats and intimidation are routinely used by strongmen politicians to influence business decisions, you're no longer talking about an advanced capitalist democracy. You're talking about a banana republic in the making.