Donald Trump is telling us how things are going to work in his economy. It sounds really great, if you’re on his good side.
You might get two thank-you’s in a press conference, like United Technologies, which reached a deal with the president-elect to keep several hundred Indiana manufacturing jobs from moving to Mexico, got on Wednesday. Or, if you’re a company like L.L. Bean, and you’re under fire because one of your board members donated to a pro-Trump political group, you might get an endorsement that reaches nearly 20 million people on Twitter, like this:
Thank you to Linda Bean of L.L.Bean for your great support and courage. People will support you even more now. Buy L.L.Bean. @LBPerfectMaine— Donald J. Trump (@realDonaldTrump) January 12, 2017
In his tweets, his press conferences, and his behind-the-scenes dealmaking, Trump is showing a willingness to cajole and bully individual businesses to a degree unseen in the modern presidency.
Trump bathes the companies that please him in the warmth of his social media spotlight. He also appears ready to wield a closet full of business torture devices, as gentle as public shaming and as severe as threatening to cut off lucrative government contracts. United Technologies has seen both sides of that sword: Its deal to keep jobs at its Carrier plant in Indiana was motivated both by a package of state tax incentives Trump helped arrange and by concerns over the fate of the federal contracts that account for one-tenth of its revenues.
A lot of voters are cheering Trump’s strategy. Most economists hate it. They call it “crony capitalism,” and they warn it will inject new and damaging uncertainty into America’s back offices and boardrooms.
“This can really change the incentives of firms,” says Scott Ross Baker, an economist at Northwestern University’s Kellogg School of Management, who studies the effects of policy uncertainty on the economy. “They can start to think about, the way they can make the most money in the future is not to make the best products but to ingratiate themselves.”
Research suggests the Trump approach will hurt consumers and small businesses. It will likely dampen hiring and investment.
But it’s going to be great for lobbyists. And it will probably help Trump’s approval ratings.
Trump is giving companies incentives to cater to him, not customers
Even before taking office, Trump persuaded a series of companies to announce plans to create or retain jobs in the United States, including Ford, Sprint, and Carrier, the United Technologies subsidiary. He took credit for expansion announcements that the companies said did not involve him, and he sometimes overstated the number of jobs involved.
Here he was on Wednesday, near the beginning of his press conference, riffing unprompted on his progress thus far:
We've had some great news over the last couple of weeks. I've been quite active, I guess you could say, in an economic way for the country. A lot of car companies are going to be moving in. We have other companies, big news is going to be announced over the next couple of weeks about companies that are going to be building in the Midwest. You saw yesterday Fiat Chrysler, big, big factory going to be built in this country as opposed to another country. Ford just announced they stopped plans for a billion-dollar plant in Mexico, and they're going to be moving into Michigan and expanding very substantially an existing plant. I appreciate that from Ford. I appreciate it very much from Fiat Chrysler. I hope that General Motors will be following. And I think they will be.
I think a lot of people will be following. I think a lot of industries are going to be coming back. We have to get our drug industry coming back. Our drug industry has been disastrous. They're leaving left and right. They supply our drugs, but they don't make them here, to a large extent. And the other thing we have to do is create new bidding procedures for the drug industry, because they're getting away with murder.
In those few short moments, Trump rewarded Ford and Chrysler for their recent jobs announcements. He poked at GM. That last line — a threat to drugmakers that seemed to link declining pharmaceutical manufacturing in the United States and a possible push to curb the amount federal insurance recipients pay for medicine — sent pharmaceutical stocks tumbling.
It’s easy to see why this is publicly popular: Workers love to see a political leader fighting to keep jobs in America. There are lots of reasons economists hate that approach, though, particularly as Trump is employing it.
One big worry is that such aggressive — and unpredictable — presidential intervention can change how corporate leaders think. There’s an argument that this can be good, which my former colleague Steven Pearlstein has made in his Washington Post column: Trump might be blowing up an inefficient norm of American business, one that prizes offshoring production even when it might be better to make things in the United States.
Many economists fear a more troubling likelihood: that companies will focus less on serving their customers and more on keeping the Trump administration happy.
Four of them — Tarek Hassan of the University of Chicago, Stephan Hollander and Laurence van Lent of Tilburg University, and Ahmed Tahoun of London Business School — recently produced a working paper that scoured years of corporate earnings calls to tease out the effects of government-induced risks on corporate behavior. They found that those risks were associated with lower investment and less hiring.
They also found that big companies responded to increased risks by spending more, the following quarter, on lobbying. “You might say that large firms are in a position to manage this risk, by influencing the political process, where small firms aren’t,” Hassan said in an interview. “We need to think about whether we’re comfortable with that.”
Crony capitalism distorts markets — and harms small businesses and entrepreneurs
If you work for one of those big companies, and that company has managed to stay in the president’s good graces, you’re probably more likely to approve of that approach. It’s trickier for small-business owners, and trickier still for any entrepreneur who dreams of disrupting one of the big kids someday. This is a market distortion, where some companies are favored for no economically efficient reason.
Congressional Republicans made this argument for years in their criticism of the Export-Import Bank, which guarantees loans for some companies that sell items across national borders, or of federal mandates for ethanol that benefit corn farmers. Here’s Rep. Paul Ryan of Wisconsin, shortly before he ascended to the House speakership, speaking out last year against the Ex-Im Bank:
There is this criticism of those of the free enterprise system who compare it to competition like a sport where the critics of free enterprise say there is a winner and there is a loser, just like a boxing match or a football game.
Well, that is true when it comes to crony capitalism. That is the case when it comes to corporate welfare because, in that case, the winner is the person with the connections, it is the company with power, and it is the company with clout. The loser is the person who is out there working hard, playing by the rules, not knowing anybody, not going to Washington, and hoping and thinking that the merit of their idea and the quality of their work is what will win the day.
Trump’s actions would appear to dwarf any market-distorting effects from the bank. Some Republicans have long warned of this. Last year, during the GOP primaries, Sen. Ted Cruz of Texas proclaimed that Trump “has promised to make deals and to continue the cronyism and corporate welfare of Washington.”
Republicans have stayed much quieter on Trump’s cronyism since he won the November election, but economists have only grown more alarmed. A Nobel laureate, Edmund Phelps, warned this month that Trump is leading “an expansion of corporatist policy not previously seen since the corporatist German and Italian economies of the 1930s.” Three other Nobel winners at the same event raised similar concerns.
Trump has arguably more ability than any president before him to elevate or denigrate individual businesses. “It’s new territory when you send companies’ stocks soaring or sinking with 140 characters,” said Matthew Mitchell, a senior research fellow at the Mercatus Center at George Mason University, who works extensively on crony capitalism issues. “For a long time, there was a certain taboo against policymakers seeming for or against certain firms. Now we’ve sort of dropped all pretense, and the president-elect is saying it’s a central role of government to decide which firms sink or swim.”
That’s different, of course, from building a better swimming pool for everyone. If Trump were simply promising to cut corporate taxes and reduce government regulations — and those are, indeed, other pillars of his economic program — then he wouldn’t fall too far outside the market-focused approach of, say, Jeb Bush.
But by threatening to shame companies for their job-location decisions, or to tax some of their imported goods at the border but not others, Trump is forging his own hand-to-hand approach to the economy. It could play well in the Heartland and on K Street. But it might not make him, as he promised to be on Wednesday, “the greatest jobs producer that God ever created.”