Threats & cronyism–and he’s still only President-elect!

 

If put into practice, “Trump’s disastrous pledge to keep jobs in the US would raise the trade deficit, politicise the economy, and bring on a corny-capitalist nightmare.” (But apart from that, Mr Trump, how was the play?)

The President-elect’s overnight “deal” with Carrier to keep part of the air-conditioning company in Indiana comes on the back of his threats during the campaign to slap tariffs on Carrier imports from Mexico, and since the campaign to end their lucrative defence contracts. This is just a small sign of how his policy will work. Tyler Cowen explains some of the consequences:

Economists might regard this [policy] as a misguided form of protectionism, but in fact, it’s worse than that: If instituted, it could prove a major step toward imposing capital controls on the American economy and politicizing many business decisions…
   Using the law to forbid factory closures would have serious negative consequences. For one thing, those factories may be losing money and end up going bankrupt. For another, stopping the closure of old plants would lock the U.S. into earlier technologies and modes of production, limiting progress and economic advancement.
    An alternative policy would prohibit companies from cutting American production and expanding in Mexico within, say, a two-year window. But would that be effective? If a law is needed, it presumably means that Mexican production is more profitable, at the margin, than U.S. production. So if American companies couldn’t shift production to Mexico, Mexican companies could expand production on their own. Or perhaps Mexico would look to non-American multinationals. The end result would be that Asian, European and Mexican investors would gain at the expense of U.S. companies.

So the policy would do the very opposite of what Trump claims to want, while raising prices for all those Americans he claims to help.

But it gets worse.

Perhaps most importantly, a policy limiting the ability of American companies to move funds outside of the U.S. would create a dangerous new set of government powers. Imagine giving an administration the potential to rule whether a given transfer of funds would endanger job creation or job maintenance in the United States. That’s not exactly an objective standard, and so every capital transfer decision would be subject to the arbitrary diktats of politicians and bureaucrats. It’s not hard to imagine a Trump administration using such regulations to reward supportive businesses and to punish opponents. Even in the absence of explicit favouritism, companies wouldn’t know the rules of the game in advance, and they would be reluctant to speak out in ways that anger the powers that be.
    In other words, the Trump program for protectionism could go far beyond interference in international trade. It also could bring the kind of crony capitalist nightmare scenarios described by Ayn Rand in her novel “Atlas Shrugged,” a book many Republican legislators[and voters] would be well advised to now read or reread.

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