There are many aspects of the economic policy of the new administration I find misguided. But I am most troubled by what President-elect Donald Trump did with Carrier to hold on to 700 jobs in Indiana. Ronald Reagan’s response to the air traffic controllers’ strike was a small act that had profound consequences. I fear in a similar way that the negotiation with Carrier is a small thing that is actually very big — a change very much for the worse with regards to the operating assumptions of American capitalism.
I have always thought of American capitalism as dominantly rule and law based. Courts enforce contracts and property rights in ways that are largely independent of who is before them. Taxes are calculable on the basis of an arithmetic algorithm. Companies and governments buy from the cheapest bidder. Regulation follows previously promulgated rules. The state’s monopoly on the use of force is used to enforce contract and property rights and existing laws.
We know of instances of corruption, abuse of power, favoritism and selective enforcement but we take this rules-based system for granted. Looking around the world today or back through history, this model is hardly a norm. Many market economies operate what might be called ad hoc or deals-based capitalism: Economic actors assume they have to protect their property and do their own contract enforcement. Tax collectors use discretion in assessing taxes. Companies and governments buy from their friends rather than the lowest bidder. Regulators abuse their power. The state’s monopoly on force is used to enrich and satisfy those who control the apparatus of the state.
This is the world of New York City under Tammany Hall, of Suharto’s Indonesia, and of Putin’s Russia.
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Reliance on rules and law has enormous advantages. It greatly increases predictability and reduces uncertainty. It reduces the cost of both guarding and acquiring property. It promotes freedom because most people most of the time do not take political positions to gain commercial advantage. The advantages of the rule of law are so great that I would claim that there is no country more than two-thirds as rich as the United States that does not have a strong tradition of law-based capitalism. And I know of no country where the people are free where the rule of law does not largely govern market interactions.
What about Carrier? The president-elect decided in a purely ad hoc basis that he wanted Carrier to remain in Indiana. He deployed some combination of carrots and sticks to lever Carrier into doing what he wanted. Implicitly or explicitly, there must have been sticks, as press accounts suggest that the tax benefits provided offset only a small part of the savings foregone by staying in Indiana. It is not hard to see from the point of view of United Technologies, the parent of Carrier, that for a company with more than $50 billion in revenue it’s surely worth $60 million to not be on the wrong side of a possibly vindictive president.
It seems to me we have just witnessed an act of ad hoc deal capitalism and, worse yet, its celebration as a model. As with the air traffic controllers, only a negligible sliver of the economy is involved, but there is huge symbolic value. A principle is being established: It is good for the president to try to figure out what people want and lean on companies to give it to them. Predictability and procedure are less important than getting the right result at the right time. We may have taken a first step toward a kind of transition from rule of law capitalism to ad hoc deal-based capitalism.
The commentary on the deal has emphasized its novelty, the difficulties of scaling, and in the case of Sen. Bernie Sanders, I-Vt., that the actions taken were insufficiently forceful because some workers will still be relocated to Mexico. All of this misses the point.
Presidents have enormous latent power, and the custom of restraint in its use that is one of the important differences between us and banana republics. If its ad hoc use is licensed, the possibilities are endless. Most companies will prefer the good to the bad will of the U.S. president and his leadership team. Should that reality be levered to get them to locate where the president wants, make contributions to the president’s reelection campaign, hire people the president wants to see hired, do the kinds of research the president wants carried out, or lend money to those that the president wants to see assisted?
Some of the worst abuses of power are not those that leaders inflict on their people. They are the acts that the people demand from their leaders. I fear we have started down the road of changing the operating assumptions of our capitalism. I hope I am wrong, but I expect that as a consequence we are going to be not only poorer but less free.
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Summers, a professor at Harvard, is a former treasury secretary and director of the National Economic Council in the White House.