Anyone Else Hear That Giant Sucking Sound?

“If this agreement is signed as it is currently drafted, the next thing you will hear will be a giant sucking sound as the remainder of our manufacturing jobs (what’s left after the two million that went to Asia in the 1980’s) get pulled across our southern border.”

“We need jobs here, and we must manufacture here if we wish to remain a superpower. We must stop shipping manufacturing jobs overseas and once again make the words ‘Made in the USA’ the world’s standard of excellence.”

“We can do it. The question is: Will we? It’s up to us, the owners of this country: THE PEOPLE.” – H. Ross Perot, July 2, 1993

Word came out yesterday that Carrier will move their HVAC manufacturing and distribution centers from Indianapolis, IN to Monterrey, Mexico. Approximately 2,100 good-paying union jobs will be lost.

This will pretty much wrap up the era of HVAC manufacturing in the United States just the way no televisions are manufactured in America anymore.

Carrier had already moved part of their HVAC operations there in 2011. They join Panasonic, Reznor, Carrier, Luvata, Trane, Freidrich (the last American window air conditioner manufacturer when they left the United States), Titus, Ruskin, Hanon, Tuttle & Bailey, Thomas & Betts, Morrison, and Lau as HVAC or HVAC component manufacturers to leave America or other countries to set up operations in Monterrey, Mexico.

Surely, when this story escalates from press release to campaign trail fodder, voters will hear the same worn-out stories of blame we always hear.

Democrats will blame this on corporate greed. Republicans will blame this on unions, and corporate income tax rates. More than a few on both sides will blame NAFTA, the North American Free Trade Agreement Ross Perot referred to in his famous ‘sucking sound’ quote. But who running for President can truly run from this agreement?

NAFTA was a brainchild of the Reagan/Bush-41 years. That means Jeb either has to accept it as part of the baggage he must bear given his last name, or he must look Republican voters in the eye and tell them his father made a huge mistake and Ronald Reagan did more to harm the economy than help it with his economic agenda. That is not really accurate, and if it were, you will never hear Bush say it.

Despite being given ‘fast track’ status, George H.W. Bush ran out of time to get NAFTA enacted once he was upset by Bill Clinton in the 1992 Presidential election. Bush, along with Canadian Prime Minister Brian Mulroney and Mexican President Carlos Salinas ceremonially signed the agreement in December 2012. Responsibility was then passed to President-elect Bill Clinton to get the agreement ratified by Congress and enacted. Clinton signed the ratified agreement in December 1993, and boasted, “NAFTA means jobs, American jobs, and good-paying American jobs. If I didn’t believe that, I wouldn’t support this agreement.” Seems it would be as difficult then for Hillary Clinton to run against NAFTA as it would be for Jeb Bush?

Then-Congressman and current Governor of Ohio John Kasich voted in favor of NAFTA.

Ted Cruz and Marco Rubio were not yet in elected office. Ben Carson and Donald Trump have never held elected office. It would seem any of them could at least make a post-facto argument that HAD they been in a position to oppose it, they would have. That is the advantage of never having held political office, or of having held office for only a short time: you get to weight in on long-decided issues and choose the side that is most popular TODAY without having been required to take a side nearly 25 years ago.

Of course, as if Hillary Clinton needed another thing for Senator Bernie Sanders to use against her, then-Congressman Sanders voted NO on NAFTA. Then-Senator Hillary Clinton voted YES. Sanders also voted against the Authorization for Use of Military Force Against Iraq Resolution of 2002 which Clinton voted in favor of. So a massively unpopular (and history has proven, unfounded) war that cost trillions of dollars and thousands of American lives AND a trade law universally detested by unions and blue-collar workers (the heart of the Democratic Party), and in both cases Bernie Sanders was on the correct side and Hillary Clinton the wrong. You think Bernie might be mentioning the Carrier plant closing at his campaign stops in South Carolina this week?

The questions that should be asked of all the remaining Presidential candidates is HOW this problem can be fixed, or even IF this problem can be fixed, and how will you do it?

If the issue is the corporate income tax rate, why do companies like United Technologies (the parent company of Carrier) continue to have their corporate headquarters in Hartford, CT? Why is General Electric (one of the largest corporations in the world) moving their corporate headquarters from Fairfield, CT…to Boston, MA?  Why not out of the country to get away from these crushing corporate income taxes?

There are two ways companies address the corporate income tax issue: they either demand (and received) huge incentives to stay in America, while they at the same time reduce their overall American burden by headquartering many of their subsidiaries in other countries OR they just perform a corporate inversion and become a foreign corporation with an American subsidiary. Many corporations like United Technologies and General Electric choose the former and stay. Ingersoll Rand, the parent of Carrier competitor Trane, chose the latter, twice. In 2001, Ingersoll Rand reincorporated in Bermuda  to avoid paying United States corporate taxes. Still not satisfied, they again reincorporated in Northern Ireland for additional tax breaks AND the advantage of being in part of the European Union.

Would they have stayed incorporated in the United States if the corporate tax rate was 20% instead of 35%? What if it were 10%, or 5%? First, anyone with knowledge of accounting (or who files their taxes) knows that the tax rate is not actually the rate at which business or people are taxed. Warren Buffett is one of the richest Americans, and has annual income in the top 1%, so he should be footing a massive income tax bill every year, right? Well, in terms of the size of the tax payment, yes. But as a percentage of income, the effective tax, he has often noted he pays taxes at a lower rate than his secretary. The Tax Foundation disagrees with his calculation, but still, there can be little agreement that the published rate is NOT the effective rate. The same is true for corporations. Yes, they lobby for lower rates, which would reduce their burden, and everyone from a corporation to a worker wants more in their pocket at the end of the year. But in most cases the corporate tax rate is NOT the reason corporations leave the United States.

Where corporations maximize their savings is by moving manufacturing operations out of the United States, as Carrier announced they will do. There was a time when the cost to ship those finished products to America would wipe out the labor saving my manufacturing them in China or Vietnam or Mexico. That was especially true of large and heavy items like commercial air conditioners and automobiles. There was a time when that same cost/return argument applied to making things in the South instead of in New England, but eventually textiles and other manufacturing became viable for relocation as shipping cost reductions AND reduced labor costs made relocating a win-win. It was also necessary to compete with cheap imports from China.

That is a big part of this argument that is often overlooked. This has all happened before, except in the past it was from New England, and the industrial areas long the mid-Atlantic, and from the Great Lakes to non union factories in the South and Midwest, without unions and where lower cost of living allowed for lower wages. The only difference this time is the jobs are leaving our country instead of our state. And this battle still rages between states, yet instead of complaining like when a company moves to mexico, it is considered a political victory. Former Texas Governor Rick Perry delighting in bragging about all the jobs (like Toyota) that he stole away from California with massive tax incentives and lower wage/land/utility costs. Boston won a battle among a half-dozen states to see who could give General Electric the most freebies in exchange for their relocation. Massachusetts’ Governor is just as proud of his steal as was Perry. Yet Americans are surprised when a manufacturer seeks a better deal in another country as they have exhausted all they can extract in concessions here?

The workers at Carrier in Indiana averaged $23 per hour plus benefits as part of the Steelworkers Union. The workers in Monterrey will earn $5 or so, and if they have benefits at all, they will not be like the benefits afforded to the workers in Indiana. Is it the union’s fault? Would Carrier have stayed if the unions took a cut to $20? Or $15? Or $10? United Technologies likely would not have needed to get it down to the $5 they will pay the Mexicans to make staying an option. They will, after all, incur costs related to the move. Yet look at the list above of HVAC companies that have fled to Mexico. Even if the wages and benefits were slashed in Indiana, all Carrier’s competitors are in Monterrey. That is also now where all the component suppliers have migrated.  To stay in Indiana, Carrier would incur shipping costs for parts that other manufacturers would avoid. That made Indiana non-competitive regardless of wages or taxes. This is not NAFTA. This is Economics 101.

Do we have a trade deficit with Mexico? Yes, $55 billion in 2015. Was it less before NAFTA? Yes, it was as low as $5.5 billion in 1985. So that it is 10x higher is a huge issue and proves NAFTA is not working? That depends. Donald Trump sure believes that, and moreover, believes it is (like almost everything) Barack Obama’s fault. But there is more than the size of the deficit to consider.

Yes, a LOT of American manufacturing jobs fled to Mexico in the last 25 years. But as a percentage of trade with Mexico, that $5.5 billion in 1985 represented more than 40% of all United States exports to Mexico. The $55 billion last year represents only 22%. So yes, the trade deficit with Mexico is increasing, but exports to Mexico have risen from around $10 billion in 1985 to around $250 billion in 2015. That means a LOT of companies are still based in the United States and are making their money selling products to Mexico that they never could before. Of course, the workers at those American companies are likely now making minimum wage or just above instead of a living wage, and many only get part-time hours so employers avoid benefits. More jobs, less pay, less benefits. Is that better or worse than no jobs?

And remember, as wages have plummeted and job security has evaporated, Americans have been forced to turn to places like WalMart that sell cheap, imported goods. Would people like to pay a little more for that ‘Made in the USA’ label? Sure they would. They used to when they could afford to, and when the options existed. But they cannot now. they cannot because they have two part-time jobs making $8.00 per hour at each because the air conditioner factory where they used to work packed up and moved to China or Mexico. So now when they have to buy a new air conditioner, the deciding factor is NOT country of origin, it is cost. So faced with a drastically reduced income, the new American consumer buys the cheaper air conditioner from Mexico instead of the one made here in America. Eventually, the American manufacturer has to move to Mexico or go out of business as no one is paying an extra $40 anymore for the same air conditioner. Like water circling in the toilet bowl before going down the drain, the cycle starts over with each flush.

So back to the political question everyone should ask of their preferred candidate (or of all candidates) if you have the opportunity:

First, and an honest answer please, “Can this ever be put back to the way it was in our parents’ and grandparents’ days, or have globalization and legacy costs limited how much American manufacturing workers can ever earn again?”

Second, if you believe this is NOT an irreversible change, “How do you propose to fix it?”

I doubt any will have an answer other than to blame Reagan and the Bushes (if they are running on the Democratic side) or Clinton and Obama (if they are running on the Republican side) but we can help them figure out the right answer.

We vote every time we go to the store. We vote every time we take that paycheck to the bank. We vote every time we drive a friend to the unemployment office. And we will vote loudest in November. The man (or woman) with the best plan to turn this around gets our votes.

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