Donald J. Trump, accompanied by some Republican politicians formerly known as free traders, has taken take a brashly promised leap into the land of economic idiocy. That is the land where we “save American jobs” by shoveling taxpayer money to firms to bribe them into keeping relatively inefficient production facilities in the United States. Instead of draining the swamp, which in fact does need draining, Trump just fortified it by opening wide the spigots of corporate welfare.
Trump’s very public bribery of the Carrier Corporation will affect economic decision-making virtually instantaneously. And it won’t be pretty. For instance, keep in mind that Carrier Corporation is a subsidiary of United Technologies, a very prominent military contractor, so it is especially vulnerable to political pressure. They got paid off anyway. Other manufacturers, especially those not related to military contracting, are almost certain to threaten to move their facilities to make sure they get on the gravy train.
The Administration is going to have to decide who gets subsidized and who doesn’t, and how much and why. Which means that all of a sudden we have a national industrial policy that liberals used to cheer and conservatives used to scorn. And rightly so. Why would anyone this side of sanity believe that the government is even remotely competent to make these sorts of decisions?
Over 50 years ago Frederick Hayek demonstrated the utter impossibility of successful central planning. No one is capable of collecting and analyzing all the data needed to set prices correctly; no one can tell how tastes will change; no one can successfully predict the next disruptive innovation; no central planner knows how to best deploy capital to achieve maximum returns. And that assumes good intentions, and decision-making free of politics. That’s why a successful economy depends on the information provided by market prices so that individuals and firms can intelligently assume risks in search of returns.
Donald J. Trump is in the process of corrupting that information and increasing the risks of doing business in the United States. Consider the impact on foreign firms. They will be more hesitant to invest in plant and equipment in the U.S. because they will now have to include heightened political risk into their calculations. That’s the kind of calculation firms usually make before investing in third world countries.
There is also the illusion that there is such a thing as an American product. But it’s only an illusion. For example, many low-end, low-tech components of “American” products are made overseas before they reach the United States for final assembly. Are we now to have a Czar of Component Parts to decide what may and may not be imported into the United States for final assembly? Or does the Czar demand that U.S. firms make all the component parts here until otherwise instructed?
Let us not forget that the United States has a trade deficit and a corresponding capital account surplus. The capital account surplus, the flip side of the trade deficit, represents foreign capital invested in the U.S. By discouraging foreign investment in the U.S., which is precisely what Trump is doing, he is raising the cost of capital in the U.S. The result will be an increase in interest rates for the Treasury, corporate borrowers and consumers. It will also put downward pressure on the dollar in foreign exchange markets. Which means higher prices for consumers and slower economic growth.
None of this is exactly new. Crony capitalism is and always has been harmful, a point so obvious it shouldn’t have to be made. Republicans used to at least pretend to be ashamed of this sort of thing. Now they appear poised to enthusiastically embrace economic stupidity–and that’s precisely what this is–with the gusto of Bernie Sanders.
At a press conference in Indiana, V.P. elect Mike Pence, defended the Carrier deal. According to Reason.com Pence claimed that “the free market has been sorting it out and America’s been losing.” After which, according to The New York Times, President-elect Donald Trump cut in to agree, saying, “Every time, every time.”
While Trump’s embrace of economic nonsense is long standing, there was a hope that Mike Pence, a conventional Republican, would be a lifeline to sanity. In the wake of the 2008 financial crisis Pence opposed TARP, the Troubled Asset Relief Program, saying, “Economic freedom means the freedom to succeed and the freedom to fail”. That was then.
The Republican Party used to have some reasonably solid defenders of free markets. Maybe, against the odds, they will rise to the occasion and put a stop to this before it gets worse. Otherwise it looks like it’s going to be a long 4 years for economic literates.