Last week, I was sharply critical of President-elect Donald Trump’s effort to pressure Carrier into keeping jobs in Indiana, on the grounds that it was a step toward degrading American capitalism from being rules-based to being deals-based. The Carrier case has generated much discussion, so I want to follow up and make clear why my concerns are now considerably greater than they were even last week.
First, no one should be confused: This was more of a mugging than a bribe. The tax incentives offered by Indiana total $7 million over 10 years, or less than $1,000 per job-year. Incentives at this level would be standard in any business location decision. So, given the stakes involved, the decision was surely based on a reasonable judgment by United Technologies (the parent company of Carrier) that it did not want to be on the wrong side of the incoming president.
Second, the president-elect made clear that he wanted the deal to be seen as a precedent and would plan on pursuing policies of this kind in the future. It polled well and was hailed by some, such as Peggy Noonan and Steven Pearlstein, as successful symbolic politics. On the current trajectory, micro-intervention policies are surely likely to grow, so the question of their ultimate consequences is not a small one.
Third, apart from the process and values questions stressed in my distinction between rules and deals capitalism, there is a certain incoherence in the economics here. If it is cheaper to produce air conditioners in Mexico than in America, won’t Mexican production by non-American companies ultimately render Carrier in Indiana noncompetitive? If Carrier does not export capital to Mexico, won’t Mexico run a larger surplus with America? And isn’t this what the president-elect sees as bad? If foreign companies are allowed to run production chains that include Mexico and American companies are not, won’t American employment ultimately suffer?
Fourth, there is a very legitimate question on which Pearlstein lectures economists regarding the extent to which companies should be run ruthlessly for the benefit of their shareholders rather than with broader interests in mind. This is a question Andrei Shleifer and I posed in the late 1980s in our paper “Breach of Trust in Hostile Takeovers,” and it figures prominently in the report of a recent commission I co-chaired on inclusive prosperity. I expect to return to this subject in the near future. But surely the right way to address it is through consideration of the relative virtues of different systems of corporate governance, not with intermittent bluster directed at particular companies.
Fifth, as many commentators have pointed out, and I tried to acknowledge, rules vs. deals capitalism is a continuum rather than a binary choice. For example, as vividly described in Steve Rattner’s book “Overhaul,” the auto industry bailout, which I helped supervise in 2009, involved ad hoc judgments regarding particular companies. We were very much aware of the dangers of our emergency actions. So we sought and received presidential approval for principles making clear that even in the context of the bailout, the government would not take advantage of its power to impose our preferred policies in areas ranging from environmental protection to union rights to plant location. And we insisted that the companies be returned to full private ownership as rapidly as practicable. Yes, in the case of the auto companies and in the case of the banks, there can be argument with some of the choices made, but the principle that government should do the minimum necessary to respond to the crises and not seek to bully its way to preferred outcomes was clear.
It is certainly also true that there are many policy areas, ranging from Buy America to support for renewable energy to allocating tax credits to granting licenses to defense procurement, where the government finds itself making choices that bear on individual companies. As an economist, I would support the elimination of a wide variety of policies that promote or reward rent-seeking. In areas such as defense procurement or the granting of licenses, it is surely best when, to the maximum extent possible, policy is governed by rule rather than discretion. And where discretion must be exercised, it is best kept as far away from politics and the president as possible.
There are difficult judgments to be made in managing the relation between business and government. For example, in many ways, conflict of interest and synergy are opposite sides of the same coin. But this should not cause any confusion about cases of presidential extortion of individual companies for symbolic political gain. Such actions are dangerous, and the more so when they generate popular acclaim.
Lawrence H. Summers, the Charles W. Eliot university professor at Harvard, is a former treasury secretary and director of the National Economic Council in the White House. He writes occasional posts on Wonkblog about issues of national and international economics and policymaking.