Subsidizing businesses brings much peril

The closure of two manufacturing plants employing some 2,100 Hoosiers has angered and disappointed many. That is understandable, as is the political rhetoric surrounding it, along with the simple question; ‘Just who are the bottom dwellers who own these companies?’

Brace yourself for the answer.

United Technologies, the parent company of both plants, is 83 percent owned by institutional investors and mutual funds. And who owns these mutual funds you might ask? Well it is us, and I don’t mean that in the abstract.

The Indiana Public Retirement System, including the Indiana Teachers Retirement Fund, TIAA-CREF (the leading retirement fund to almost all colleges and universities in the state) and even the United Steel Workers retirement plan invests in United Technologies.

My guess is that half of working Hoosier households in Indiana own a part of these companies. We are all capitalists now, and that ought to make us a bit more thoughtful about our policies towards business.

The now closing plants made HVAC systems. The biggest demand for these involves new home construction, which has been dormant for a decade. The workers who make these products reportedly earn $20 to $24 an hour. Health care benefits are surely more than $7 an hour, and other costs at least $4 an hour.

The company claims it is relocating to Mexico, where workers will earn perhaps $3 an hour. The American workers would have to be about 10 times as productive as the Mexicans to justify this wage differential.

The unfeeling laws of economics might demand this move, but I am skeptical this company is actually moving to Mexico. I think this claim is made simply to allow their workers additional benefits under the Trade Adjustment Assistance rules. I suspect that most of these jobs will be swallowed by automation, not Mexicans. That leads us to the role of government.

These plants are reported to have received millions of dollars of federal, state and local assistance. This means that through government largesse profitable companies and working households subsidized a company whose business plans couldn’t ultimately include staying in the U.S. In hindsight, maybe that wasn’t a good investment. Perhaps it would be wiser for government to invest in making people more productive.

We do want workers to earn $24 an hour, with health benefits and retirement and vacation. But to do so they have to produce $24 an hour in goods, plus the cost of health care and retirement and vacation.

They also have to help earn a profit for their company (6.1 percent last quarter for UT). Otherwise those troublesome owners will force them to become more profitable, either through automation or moving where labor is cheaper.

My suspicion and hope is that most of these workers will quickly find new jobs. After all, good manufacturing workers are not a commodity.

Still, the lesson is clear; directly subsidizing businesses is a seductive, politically popular but perilously ineffective method of keeping jobs in the U.S.

Michael Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to awoods@tribtown.com.