The Trump Presidency: An Embarrassment for Those Who Believe in the Market

After two months, it is clear that the Trump industrial policy will be pro-business, not pro-market.

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By Luigi Zingales

After his election, it was difficult to predict what President Trump would do. In the election campaign he said everything and the opposite of everything: from a 45 percent tariff on Chinese imports to the reintroduction of the separation of commercial and investment banks, from an aggressive use of antitrust authority to the total abolishment of Dodd-Frank, the financial regulation that was enacted after the crisis. After two months, it is clear that the Trump industrial policy will be pro-business, not pro-market.

It may seem to be a nuance, but there is a fundamental difference. A pro-business policy favors existing companies at the expense of future generations. A pro-market policy favors conditions that allow all businesses to thrive without any favoritism. A pro-business policy defends domestic enterprises with favorable rates and treatment. A pro-market policy opens the domestic market to international competition because doing so would not only benefit consumers, but would also benefit the companies themselves in the long term, which will have to learn to be competitive on the market, rather than prosper thanks to protection and state aid. A pro-business policy turns a blind eye (often two) when companies pollute, evade, and defraud consumers. A pro-market policy seeks to reduce the tax and regulatory burden, but ensures that laws are applied equally to all.

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Paradoxically, a pro-business policy ends up damaging not only the economy, but also, in the long-run, those companies that it had originally benefited. This matters little to its supporters, because when the chickens come home to roost they will have already grossed billions. Angelo Mozilo, founder of Countrywide, the bank responsible for a large chunk of the toxic mortgages that led to the 2008 crisis, lives happily on the $600 million he accumulated, despite the enormous damage of the financial crisis that he helped to create.

During the presidential campaign Trump used many populist themes. The first signal that his policies will be neither populist nor popular, but strictly pro-business, is his choice of Cabinet members. Trump had promised to “drain the swamp” in Washington of lobbyists. Few realized that he would do that by making intermediaries pointless, as the lobbyists themselves would be in charge of the departments: the CEO of Exxon as head of foreign policy, a former Goldman Sachs partner at the Treasury, the daughter of a ship owner for Transportation, a raider at Commerce, etc.

The second signal was the president-elect’s picks to head the most important government agencies. As the head of the EPA, Trump placed a lawyer who sued the EPA in Oklahoma for the oil industry. As the head of the Securities and Exchange Commission (SEC), Trump has chosen a lawyer experienced in defending companies accused of fraud and international corruption. What’s more, the new chairman of the SEC is married to a partner at Goldman Sachs, a company regulated by the SEC.

The third signal was Trump’s threat to introduce a “border tax,” another name for a tariff on imports. This tax will not only serve the protectionist desires of some parts of U.S. industries, but also provide financial resources to cover the promised reduction in direct taxation. The tax would be contrary to the World Trade Organization’s rules. However, Trump has threatened that the U.S. will leave the WTO.

The worst signal, however, comes from the way Trump has used his tweets to attack and coax American businesses. United Technologies (UT) has been praised for its decision to cancel plans to close its plant in Indianapolis and relocate it to Mexico. Apparently this decision was the result of tax benefits offered by Vice President-elect Pence, who is the governor of Indiana. In truth, the decision seems motivated by fear of reprisals on government contracts, which represent a large sum of UT’s revenues. A fear that appears justified, as Trump attacked Boeing over the cost (which he considered excessive) of the new presidential aircraft and attacked Lockheed Martin over the F-35 aircraft. Trump is probably right on both counts, and this only adds to his popularity, but a president should address these issues by following the rules and not with an execution on the public square of social media.

With this strategy, Trump cleverly uses the carrot and stick approach. When Ford was publicly commended for deciding not to build a new plant in Mexico, the price of its shares rose 4.5 percent. Softbank did even better (+ 6.2 percent) after being praised by Trump for investing $50 billion in the United States. Softbank’s motive was simple: Softbank owns Sprint, a mobile operator that would like to merge with T-Mobile in order to increase market power. The authority to permit this merger lies with the new head of the Federal Trade Commission, yet to be named by Trump. Trump’s positive tweet feeds Softbank’s hopes that the merger will be approved.

We would expect such behavior from a dictator of a banana republic, not from the President-elect of the oldest democracy in the world. The Trump presidency has begun in the worst possible way for all those who, like me, still believe in the market.

Originally published at Pro-Market Blog.

2017 March 2

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  • Duncan Cairncross

    “Business friendly” is code for “Rich businessman friendly”, despite the two being almost entirely at odds.
    Business growth is higher under left-wing governments because they encourage reinvestment of profits in
    wages, R&D and modernisation, rather than allowing a small number of execs and owners to extract all the money as market rent.

    In the same way that spending is actually often lower under left-wing governments, after an initial burst, because preventative maintenance is much cheaper than crisis management.

    The right wing does everything by crisis management, because their ideology insists on “saving money” by cutting long-term preventative programs.

    • Rory Short

      There are basically two kinds of government, those who genuinely act in the public interest, and those who claim to be acting in the public interest but are in fact always acting from self-interest.

      • I think you are postulating one-too-many types. I’ll let you figure out the one that isn’t so.

  • MigT

    Trump and the neo-nationalists on the march everywhere are the end result of “market friendly” policies which disproportionately benefit a tiny few at the expense of everyone else’s financial security. The “free market” crowd have themselves to blame.

    For the elites, neoliberalism was always just some useful idiocy, now past its sell-by date.

  • Luigi,

    I am puzzled. You’ve decided to punch president Trump in the nose. This will not be helpful in getting through to him with the policy initiatives coming from the National Bureau of Economic Research and the Center for Economic Policy Research. He will curse their submissions in his twits because the man who bloodied his face hangs around there!

    Still, nice talking to you,

  • Rory Short

    Untarnished by self-interest ‘Market friendly’ policies would benefit the public at large. Any policy tarnished by self-interest simply cannot benefit the public at large no matter what its promoters might claim for it.

  • Ian Crowther

    The ‘fundamental’ difference of business and market is not so easily disentangled – this is challenging to discuss in a blog. The underlying contingencies and conditions of how these concepts are both defined and operate is problematic in of itself. How the corporation has developed and gained increasing power in financialised capitalism is coupled together with neo-liberalism from which the benefits flow to equity holders and which is heavily embroiled in widening inequality gaps.

    This piece looks at interventionism by the State which in this cycle of economy has been a post-crisis phenomenon. Guided principally through a politically driven Central Bank project, neoclassical economics, general equilibrium, the market as a de-regulated all-knowing super computer and conventional macroeconomic / microeconomic principles-models, became incapable of describing and controlling the 2007-2008 event and correcting the post-crisis economy. The market failed to control itself or anticipate problems pre crisis, and without the State, financialised capitalism would have failed too.

    This is why we saw the rise of the central bank project and unconventional means of managing the economy, such as ZIRP, NIRP, QE, TARP. Arguably the concepts supported the financial system and its immediate post-crisis liquidity problem, however as a group of actions, have created all sorts of unintended consequences, distortions and misalignments – i.e. reducing interest rates has not created more spending in the ‘real economy’, but has meant an increase in debt issued by banks (margin debt), resulting in markets reaching pre crisis levels again, which benefits wealthy people who engage in market based income. We have also seen further post-crisis regulation via Basel III, Dodd-Frank, Vickers and Liikanen.

    What we witnessed was the unwinding of theoretical propositions in neoclassical economics, many from the 50’s through 70’s (Kenneth Arrow, Eugene Fama et al.), as well as the unconventional post-crisis Central bank project failing to manage the economy too. What we are seeing now is the rise of the corporation and businessmen taking charge of the State balance sheet driven through what appears to be a prism of interventionism, Alt-right populism and a different brand of market – coupon capitalism, that works mainly for the wealthy and privileged again, through strong conservative ideals (small state, self-responsibility etc.) that supports business first, not people first, no matter how much spin Trump puts in the rhetorical statements about supporting Main Street. This is a political illusion, the difference between promise and outcome and watch where the money flows. For the majority, little will change between the so-called fundamental difference in business model from market to small state business propelled interventionism. The little guy still loses, so where is the revolution?

    The neo-liberal market is not a panacea for post-crisis economy. With this, however, it is unlikely that Trump-business-market interventionism will be either. Crudely put, financialised capitalism through the continual looping foundation of market fundamentalism (free market vs. interventionism) needs re-thinking. We may have lost the opportunity to conduct this project now as we have retrenched back towards neoclassical economics, the scientisation of risk, but now with a twist of continued post-crisis interventionism. It appears politics can steer around economic principles and regulation when a specific Alt-right political approach is adopted. Must we wait for the next steep trough to drop in market indices before we take action? How do we make a safer market that works for the wider majority with a better distribution of capitalisms spoils whilst caring for those who it leaves behind? This maybe idealism, however, I don’t see this as a bad starting point from which to drive ambition and to be ready with new ideas when the next crash arrives, which it inevitably will.

  • Ming Chung Chang

    However, Trump might be constrained by the thoughts of his supporters.