What do Amazon and the GM Layoffs Portend? (November 27)

Update 314 — An Economy Shifting Gears:
What do Amazon and the GM Layoffs Portend?

Major tidal shifts and cross-currents underlying the changing American industrial landscape have been on full display in recent weeks.  Last month, Amazon announced it was going to base its second headquarters out of both New York and Virginia, promising to bring 25,000 jobs to each.

In an equally important but opposite development yesterday, General Motors announced its plan to eliminate up to 14,000 jobs. This surprise decision has rattled the Trump Administration and Republican leadership, challenging the belief that the economy is running fine on high octane fuel and should continue unfettered.  

We take a closer look at these developments for economic harbingers and cautionary notes below.  

Best,

Dana

———

GM Stalled

GM’s decision, which comes less than two years after it announced it would add or keep 7,000 jobs in the United States, translates to an expected loss of 14,700 jobs. The decision comes only a month after GM offered buyouts to as many as 18,000 long-time employees, only 4,000 of whom accepted the offer by the November 19 deadline — 3,000 employees short of its 7,000 target.

With the buyout program behind schedule, the decision to idle five facilities did not come as a surprise to many. The Lordstown assembly plant in Warren, Ohio, for example, had gone from three shifts per day in January 2017 to one shift this past April. The United Auto Workers said it would challenge GM’s decision. If GM still hasn’t reached its 7,000 buyout goal by January, further involuntary cuts are likely.

Tax Cuts and Jalopy Act

While the Tax Cuts and Jobs Act (TCJA) of 2017 purported to create record tax windfall for corporations to reinvest, the picture with GM is more complicated.

In GM’s case, the TCJA did not account for “deferred tax assets” which the company was able to accumulate due to poor performance predating the Great Recession. These assets allow companies to reduce taxable income, meaning GM had already been afforded a low tax bill for over a decade. The newly reduced corporate tax rate therefore rendered these assets less valuable, forcing GM to take a $7 billion charge against earnings during the fourth-quarter of FY 2017. Executives expected to see an eventual benefit from the new tax law, but not for years to come.

It’s hard to claim that in absence of sizable deferred tax assets, GM would have even used their $157 million in federal savings to support American plants and employees. An October survey published by the National Association for Business Economics reported 81 percent of 116 companies surveyed had not changed plans for investment or hiring as a result of the TCJA.

Trade Wars Are Easy To Win

The tariffs put forward by the Trump administration are another possible contributing factor to GM’s financial troubles. The timeline of the trade war is highlighted below:

  • June 1, 2018: The Trump Administration ended the exemption of Mexico, Canada and the EU from aluminium and steel tariffs. GM representatives warned the White House that these tariffs would drastically hurt the firm, saying that “this could still lead to less investment, fewer jobs, and lower wages for our employees.”

  • July 25, 2018: GM was forced to reduce its profits forecast for 2018, tanking stock by 4.6 percent. GM’s CFO predicted the original tariffs in March and the ending of exemptions to the US’s most trusted partners in June could add “as much as 700 million to GM’s costs” for FY 2018.

  • September 24, 2018: The White House compounded the problem by unveiling a new, stringent set of tariffs on Chinese automotive exports, putting in place a 10 percent levy on brakes, car batteries, tires, etc. Analysts predict these new tariffs will lead to higher sticker prices for cars and lower car sales.

GM, like all other US car manufacturers, relies on foreign-based subsidiary plants and goods to create finished products, making broad tariffs doubly damaging to an already wounded industry. With GM historically leading the way in moving jobs to Mexico and a less favorable domestic/international tax rate differential introduced in the TCJA, the Trump administration’s tariffs have only produced escalated offshoring.

You (Don’t) Get What You Vote For

Starting on the campaign trail, President Trump made a series of promises to the American people about jobs, specifically jobs in manufacturing. During a speech in Michigan in October 2016, Trump promised to “bring back…jobs” and said “the long nightmare of jobs leaving Michigan will be coming to an end.” He blamed past factory closures on Democratic failures and promised not to let that happen again.

The GM decision reflects the fecklessness of Trump’s approach. Many voted for him because of his pledge to save the manufacturing industry. Instead, he has put forth policies that undermine that goal and expose fears that become self-fulfilling trade prophesies, aka, retaliation.  

Plants will be closing in two states that helped propel trump to victory — Michigan and Ohio. The GM closures thwart his guarantees to protect manufacturing and undermine his portrayal of a healthy economy that is growing with no end in sight and equitable for minority groups.  

Juxtaposition to Amazon

Almost simultaneously, Amazon announced its locations for its new HQ2. After a country-wide tax benefit bidding war, it has pledged to bring 25,000 jobs to both New York and Virginia, as well as an estimated 67,000 and 22,000 indirect jobs to each respectively. In return, Virginia agreed to give Amazon $819 million and New York agreed to $1.85 billion. Both states believe the benefits accrued from Amazon will far outweigh these costs. Gov. Ralph Northam of Virginia expects “Amazon to invest $2.5 billion in the commonwealth and create $3.2 billion in tax revenue.” Will this model work?

Amazon is encouraged to fulfill its jobs promise through “performance-based direct incentives,” meaning that for each pledged job that comes to fruition, they get a certain amount of tax breaks. This kind of city and state tax break is by no means an uncommon way of driving business to invest in a given area, and has been utilized in the past by other tech company giants, such as Google.

Although the model has proven very effective at creating jobs, there are some accompanying flaws. In Seattle, Amazon’s first HQ brought an economic boom and more than 40,000 jobs to the city; it also cost taxpayers hundreds of millions of dollars in ongoing infrastructure and transportation upgrades around the site, while neglecting other areas of the city. Affordable housing underwent a serious crisis.

Amazon has worked with Virginia and New York governments to try and get in front of some of these issues, pledging money for additional schools and low-income housing. Moreover, Arlington and Long Island are not Seattle. Bringing 100,000 jobs to these areas is a boon even to these booming coastal metropolises.

Trump v. Bezos

Trump has criticized Amazon repeatedly in the past and again following the announcement of HQ2.  The economic tide seems to be working against him — 44 cents to every dollar spent online goes to Amazon. As much as Trump wants new jobs in the manufacturing sector, the evidence shows that the tech sector is the one to watch. States are quite literally fighting over these Amazon jobs, whereas auto manufacturing jobs in the rust belt have become more burdensome than beneficial. Although tech jobs differ slightly from traditional manufacturing jobs in terms of benefits — i.e. GM offers pensions and Amazon offers 401ks — they still provide similar stability for their workers.

Even GM will be using its hefty savings to further bulk up its electric and autonomous vehicle development through R&D programs that already see more than $1 billion a year in company investment. Trump can no longer keep up the facade of a booming economy fueled by the manufacturing industry, and his supporters, especially in Michigan and Ohio, will soon come to realize the false hope and broken promises.

Much Ado About Detroit (Aug. 9)

Mike & Co.,

Trump delivered a speech before the Detroit Economic Club today on the theme of “economic renewal for America,” featuring an overhaul of his published plan for tax reform.  An adumbration of previous policy pronouncements and clarity as to his vision of the economy and how to achieve it was widely anticipated.

But Trump’s main message, as regards policy specifics, was “I’ll Tell You Later.”  Voters seeking concrete details as to economic initiatives and goals got more platitudes than prescriptions.  His plan for the economy, promised at the time of the convention earns an Incomplete.  Still, some themes emerge.

Below  is a look at the “four reforms” on taxation, regulations, trade, and energy policy addressed by Trump and some items for initial consideration in a rebuttal.

Best,

Dana

——–
•. Tax Reform

Trump described his proposed tax plan as the “biggest tax revolution” since the 1986 reform under Reagan and stressed his bracket reductions.  But the most discernible reform is to his own original tax plan announced this spring.  It was famously estimated to cost $10 trillion over a decade. His campaign now says his new tax policy will cost $3 trillion over the same period.  As more details are released — it a matter of “weeks” — it appears his plan hews much closer now to the House Republican proposal released by Speaker Paul Ryan earlier this year, which could signal a shift in rhetoric towards more traditional Republican policies.  Providing only a thumbnail sketch of this “revolution,” Trump may be hyping his eventual rollout or just trying to change the subject after a week of errors.

Trump supported reducing the number of tax brackets from seven to three, at 12, 25, and 33 percent.  It is not certain whether Trump intends to keep his original proposal that Americans earning less than $25,000, $50,000 for married couples be exempt from income tax.  He did reiterate his support for ending the estate tax and the carried interest deduction, a curious pair of positions.

Trump also said he would set the corporate tax rate at a flat 15 percent.  Gene Sperling cited a key problem with Trump’s “15 percent solution” for businesses: anyone with “pass-through income” will benefit from the lower tax rate.  Individuals with business income, including consultants, lobbyists, hedge fund managers, investment bankers, and corporate lawyers, could all pay 15 percent in income taxes, a much lower rate than that faced by most middle class families.  Sterling noted the plan would increase income inequality.

Trump supported a childcare tax deduction equal to the average cost of care.  Tax deductions are typically regressive by nature, but Trump’s suggestion to make this deduction based on the average cost of childcare would in fact be a relatively progressive proposal (if not a breakthrough policy solution to the current structurally regressive nature of most tax credits and deductions; more on this upon request).

•  Regulatory Reform

Trump criticized current regulation as costing the American economy $2 trillion each year and called for a removal of the “anchor dragging us down.”  Trump promised a moratorium on all new agency regulations upon entering office, proposing to ask federal agencies to compile a list of regulations that “are not necessary, do not improve public safety, and needlessly kill jobs.”  He promised to eliminate all such regulations. Trump also pledged to cancel all “illegal and overreaching” executive orders.

Further specifics on regulatory reforms were not provided.  His stated intention to remove special interest loopholes that benefit Wall Street investors appears to be a bit at odds with his recently announced economic team, comprised of 13 men with amole experience on Wall Street.   Sen. Elizabeth Warren criticized Trump’s agenda, saying the latest plan was written by “rich corporate insider advisors” seeking to tilt economic in their favor.  Sen. Warren added that while “cheating customers and gaming the system” with fellow plutocrats might be Trump’s business method, it’s not how America will do business.

•  Trade

Trump stressed trade reform as “one of the most important,” and specifically criticized the TPP, NAFTA, and US-Korea bilateral.  He reiterated his previously stated support for a renegotiation of NAFTA, tariffs on countries with unfair subsidies, and protections against currency manipulation.  Trump remarked on the need for greater trade deal enforcement, particularly regarding intellectual property rights.  He criticized China for having poor standards on labor and the environment, despite the fact that virtually all trade agreements include  labor and environmental protections.   He pledged to support only trade deals that create more jobs and higher wages for Americans.  Again, these policies were all public prior to this speech and received precious little clarification today.

•  Energy Policy

Trump expressed his support for coal miners and steel workers and supported removing “job-killing energy restrictions.”  He stressed that lifting restrictions on all sources of American energy will increase GDP, tax revenues at the federal, state, and local levels as well as aggregate  economic activity.

General Assessment/Rebuttal Outlines 

Fact checkers have plenty but still less work than usual today following Trump’s speech.  In each of the four policy areas discussed, Trump stated that facts and details would be released in the coming weeks and no question and answer period was permitted at the end of the remarks.

Early in the address, Trump asserted that his economic agenda would focus especially on “those who have the very least.”  This remark garnered an awkward silence from the business-focused audience.  Trump was also interrupted by protestors over a dozen times.

He had precious little to say about the automotive industry, central to the Michigan economy once again, except to suggest that he would not have bailed it out.  It is possible that Trump’s economic agenda is being primed to line up closely with that of Speaker Ryan, particularly on taxation.  But if he is in the process of converting to Ryan’s proposals, is it worth asking if Trump may be abandoning his promise not to cut entitlements.

This address was hastily scheduled amid Trump’s difficult news cycle last week and recent drop in the polls.  On the merits, Trump’s economic plan remains, per American Enterprise Institute’s Jim Pethokoukis, “a hodgepodge of economic policies” with no coherent or even

colorable solutions to current economic problems in America.   Douglas Holtz-Eakin, former economic advisor to Sen. John McCain, dismissed the policy in the speech as a “hot mess.”
Everyone in the GOP knows you don’t roll out a major new product in August.  So Trump gets a mulligan for now.  But time is running out and the candidate still could end up — in economic policy terms — a populist,  a state corporatist, a supply-sider, a protectionist, a free marketeer, or some judicious blend of these.  You might think he, and we, would have a clearer picture by now but it is just as hard as last week or last year to eek out a coherent Trump economic policy in the flotsam and jetsam he offered in Detroit