Saturday, December 3, 2016

Carrier Commentary

When Paul Krugman, Larry Summers,  Sarah Palin, and the Wall Street Journal all agree on something -- that presidential deal-making and strong-arming over plant location is a terrible idea -- it's worth paying attention to.

I think Tyler Cowen did the best job of describing what's wrong with the deal, interviewed on NPR. (Transcript, Highlights and audio link).

(This is an impressive radio interview. I long to be able to express something that quickly clearly and coherently on radio. Tyler must have really prepared hard for it.)
INSKEEP: Don Evans says this is a way for the president-elect to send a strong message to workers and to corporations about what his priorities are. What's wrong with that?

TYLER COWEN: We're supposed to live under a republic of the rule of law. Not the rule of man. This deal is completely non-transparent. And the notion that every major American company has to negotiate person-to-person with the president over Twitter is going to make all business decisions politicized.


INSKEEP: What do you mean it's nontransparent, first of all?

COWEN: We don't know exactly what the company is getting. There's plenty of talk that the reason Carrier went along with the deal was because they were afraid their parent company would lose a lot of defense contracts. So this now creates the specter of a president always being willing to punish or reward companies depending on whether or not they give him a good press release.

INSKEEP: Why don't you explain to me the thing about the parent company, which is United Technologies?

COWEN: Yes, they do a lot of defense contracting. It's at least 10 percent of their revenue. Carrier, from the state of Indiana, was already offered the tax break before the election. They turned it down. Now, all of a sudden, Trump is President. Bernie Sanders is telling Trump to threaten the defense contract of the parent company, and now, all of a sudden, the company takes the deal. And Trump is known for being somewhat vindictive. This, to me, is scary. It indicates an environment where business decisions are now about how much you please the president.

INSKEEP: Now, you just said an interesting thing. Bernie Sanders, a socialist of the Democratic Party, did, a few days before the deal was announced, say that Trump ought to use the leverage of the defense contracts to get United Technologies to change its behavior. We don't know on a factual basis that's actually what happened, but - but you're noting that this is kind of a leftist thing to do.

COWEN: That's correct. Trump and Bernie Sanders, for all of their populist talk, their are actual recipes in both cases lead to crony capitalism.

INSKEEP: What's crony capitalism?

COWEN: Crony capitalism is a system where businesses who are in bed with the government and who give the president positive press releases are rewarded and where companies who oppose or speak out against the president are, in some way, punished.

INSKEEP: David Wessel of the Brookings Institution said on our air the other day that this act reminded him of something that is done from time to time in France - under the socialist government in France. And I'm also thinking of Venezuela, where the late President Hugo Chavez would go on TV and denounce companies and demand that companies do specific things. And of course, the economy there has ended up being a complete mess. Is that - is that a fair comparison at all?

COWEN: Well, we're not close to that point yet, but we're taking baby steps in that direction. And the way you avoid getting to that point is by having people speak out when they see the baby steps.

INSKEEP: If the president-elect gets results, at least some of the jobs - at least for now - are staying in Indiana. Does it really matter how he does it?

COWEN: Well, keep in mind the broader numbers. Since the year 2000, Indiana has lost 150,000 manufacturing jobs. And this, at best, assuming all goes well, saves a thousand of those. So to actually make a dent in the problem, jawboning isn't the way to do it. It's changing economic incentives and making it more cost-effective to hire people in the United States. And none of this really does that.
(If it's not obvious one could add, 1) Every million dollars of tax break Carrier gets to stay in Indiana is a million dollars someone else has to pay instead -- likely a smaller company that hires more people. 2) If the US could, in fact, take jobs back from Mexico, then each such job taken back is one more Mexican who wants to migrate to the US. 3) Capital and current accounts add up. If carrier invests $1 M in Mexico, then US exports must increase by $1M. And vice versa. 4) If it's profitable to build air conditioners in Mexico, then someone else will do it and that Carrier plant is toast anyway.)

Brooks and Shields

Who will defend President-Elect Trump? Surprisingly, Mark Shields, in a very interesting Shields and  Brooks segment on the PBS newshour.

First David Brooks did a great job of slamming the deal, as Cowen did
 The job of government is to be a level playing field where companies compete and make money honestly. And by rewarding one company over another, by getting involved in these sort of petty deals, the first thing you’re doing is encouraging rent-seeking, for companies to make money off government, rather than the honest way. 
And the second thing, it’s — and especially in this administration, it’s an invitation to corruption. If you’re cutting deals with company after company, doing this kind of deal, that kind of deal, inevitably, there is going to be a quid pro quo. There is going to be under-the-table lobbying. 
And it’s just a terrible precedent for our economy and for the administration. 
 But that's easy. Shields, the "left" commenter, had the harder job, defending Trump's action:
I think it is bad public policy. I think it’s a political masterstroke. I think Donald Trump raised this issue during the campaign. When it first appeared, when Carrier showed the gross insensitivity, where it was on YouTube, where they went in and told the 1,000 workers that their jobs were leaving, that the company was leaving, and it was just — it was abjectly insensitive to the workers. And Donald Trump picked that up. It was part of his prairie populism of the time, unlike his Cabinet appointments to Treasury and Commerce.
And I think Donald Trump, this is a masterstroke that he said he would do something, he did it, and it’s been a long time since the president of the United States has made that kind of an announcement.
Is it a coherent national macro-policy? No. But as a micro-act, it’s a very positive act politically. And I think it reflects better upon him and his commitment to these people and their well-being and their survival than an awful lot that’s happened in the past.
I'm almost -- but not quite -- convinced. Shields' narrow window of hope is that this was a one-off, rather brilliant symbolic political act, and that now the Trump administration will focus on serious policy, which mostly means bringing rule of law back to regulation and eliminating interference of this sort.

Yes, presidential politics is not ivory tower economics, and occasionally Presidents have to do something abjectly wrong to garner support for a greater purpose. It's a delicate and dangerous act though -- if this is where we're going, early in an administration is the best time to do some hard things, set in motion policies that actually work, set a high bar against demands for cronyist payouts, and trust that four years of good policy will pay off.

The best hope in this direction is for the President to score some points, and for a loud chorus of serious policy people, from left and right, to denounce any more moves in this direction. This is exactly what has happened.  Really, it gives one great hope that just about every commentator left and right says this is not the way to go.

Shields and Brooks are also nicely consistent. Shields:
I give Barack Obama great credit for the rescue of the United States automobile industry. It saved hundreds of thousands of jobs. 
Unlike, say, Paul Krugman, who has been madly tweeting (correctly) that Carrier is bad policy -- but the same thing done by Democratic administrations such as the auto bailout are of course fantastic ideas.

Peggy Noonan

I was most disappointed in Peggy Noonan, usually excellent, in the Wall Street Journal, and approving of the deal for all the wrong reasons: to her it wasn't just a little political pandering thank you, but the path forward
This is called economic nationalism but whatever its name it suggests a Republicanism in new accord with the needs of the moment...
She went on to tell the story of a related Kennedy escapade. Excerpts:
It was 1961 and the new president, John F. Kennedy, had been trying to signal to big business that they could trust him.. His impulses were those of a moderate of his era: show budgetary constraint, keep costs and prices down, prevent inflation.....

That September Kennedy asked the industry to forgo a price increase. He asked the steelworkers union for wage demands... Early in 1962 his labor secretary, Arthur Goldberg, put together a deal. In the spring the union and the steel companies accepted it. Everyone understood the industry would not raise prices.

A few days later Roger Blough, chairman of the board of mighty U.S. Steel, asked to see the president. He handed him a four-page mimeographed statement announcing his company would raise steel prices $6 a ton. ...
Soon Bethlehem Steel raised its prices. Other companies followed.

Now Kennedy was enraged. Accepting Blough’s decision would undo all his wage-price guideposts. It would also constitute a blow to the prestige of the presidency. And labor would never trust him again.

So he went to war. At a news conference the next day he called the steel companies’ actions “a wholly unjustifiable and irresponsible defiance of the public interest” by “a tiny handful of steel executives whose pursuit of private power and profit exceeds their sense of public responsibility.” He implied they were unpatriotic in a time of national peril. ...

Kennedy ordered the Defense Department to shift its steel purchases from U.S. Steel to companies that hadn’t raised prices. The Justice Department under Attorney General Robert Kennedy launched an antitrust investigation, summoned a federal grand jury, and sent FBI agents to the homes and offices of steel executives. There were rumors of threats of IRS investigations of expense accounts and hotel bills. (my emphasis)

Bethlehem Steel was the first to back down. A week after informing the president of the price increase, Roger Blough returned to the White House to surrender...
I emphasized the paragraph of actions that Kennedy took. Each measure is blatantly illegal and an abuse of power. If you think abuse of the regulatory state and prosecutorial power for political purposes are new dangers, let this remind you just how far back it goes.

Curiously, Peggy seems to get that.
It was a big win for Kennedy but it was a bloody affair, and on some level he knew it. His relations with business never quite recovered. The administration’s brutality left a stain. Robert Kennedy’s ruthlessness inspired the anti-nepotism law that is said, these days, to bedevil the Trump family. A nascent, national conservative movement was embittered and emboldened: Barry Goldwater said JFK was trying to “socialize the business of the country,” and decided soon after to run against him.
... presidents shouldn’t abuse their power—and he did. They especially can’t do it to shore up their own political position, and he did that, too. 
So how does she justify it?
But it’s also true he thought he was right on the policy and that the policy would benefit the American people.
And the American people could tell. His approval ratings, high then, stayed high. People appreciate energy in the executive when they suspect it’s being harnessed for the national good. The key is to wield it wisely and with restraint. But yes, a little muscle judiciously applied can be a unifying thing.
No, Peggy.  Crucially, he was wrong on the policy. No, we do not fight inflation by jawboning companies and unions not to raise prices. That does not "benefit the American people." This isn't fancy economics. Leaders from Emperor  Diocletian to Nicolás Maduro have tried to quell inflation by muscling businesses -- sending police to terrorize businessmen in their homes -- not to raise prices, and it always ends with more muscle and more inflation -- as Kennedy's did.

He may have "thought" he was right. His Keynesian advisers had also forgotten lessons of two thousand years of history and thought jawboning an excellent idea. But this is precisely why we have a rule of law -- so that leaders who "think" they are right about the proper level of steel prices cannot wreck the economy.

Just as Trump's action is abjectly wrong on policy. For just as many thousands of years, leaders have been cutting Carrier-like deals, to just as contrary effect. It is our duty to say that, to undercut the political popularity that presidents can gain by counterproductive policies, especially when the means trample the rule of law.

"a Republicanism in new accord with the needs of the moment" is a Republicanism that works. And the point of "work" is not just to win the next election, or give people things that feel good but impoverish them. The need of the moment is leadership, to channel people's well deserved anger into a productive direction.

I hope Peggy will someday write a piece titled, "the worst sentence I ever wrote," in honor of
"A little muscle judiciously applied can be a unifying thing," 
especially when the "unification" comes by feeding people falsehoods like Carrier deals save jobs, or jawboning lowers inflation.  Just how does this not describe Castro? Or Chavez? Or...well, fill in the blanks.

17 comments:

  1. In an Analog editorial at the time, John W. Campbell said that was a matter of the US government possessing steel companies similar to demonic possession.

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  2. Reuters Business News: Thu Sep 29, 2016 “The Federal Reserve might be able to help the U.S. economy in a future downturn if it could buy stocks and corporate bonds, Fed Chair Janet Yellen said on Thursday."

    WTO Panel Finds “Prohibited Subsidies” in US-EU Boeing Case: 1 December 2016 “WTO dispute panel circulated its ruling in an EU-US row over aircraft subsidies on Monday, finding that the US state of Washington provides an illegal, “prohibited” subsidy to American aerospace giant Boeing.”

    I would argue separation of private/business and public/governmental issues in the United States is becoming an illusion. This is not a Donald Trump phenomena and it appears to be happening worldwide.

    A new era of mercantilism?

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    Replies
    1. I recall this argument happening in the UK in the early 1970's. At university we (engineering students) were required to read, and extract economics ideas from, a treatise by, I don't recall exactly who, but some chap like the chairman of the board of ICI. He made much of the fact that the government was habitually giving incentives for companies to site factories in this place or that. His principal comment was that after much time consumed by wrangling between companies, local government, and central government, with miscellaneous tax breaks and subsidies, the factories would end up getting placed exactly where they would have been placed if there had been none of the time wasting wranglings and incentivisings.

      So the thought occurs that in this Carrier affair the only real outcomes of the Trump et al intervention are these....
      1. Trump gets some extra publicity (that he does not need)
      2. Carrier et al get a subsidy (that they do not need)
      3. Everybody else, in order to fund that subsidy, get a higher tax bill (that they do not need)

      --E5

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  3. Another interesting perceptive along Shields defense is this post by scott adams
    http://blog.dilbert.com/post/153905823756/the-new-ceos-first-moves-and-trump

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  4. Way too much generalisation in this column. And way too much association of the boondogles of crony capitalism with the left.

    Whether you agree or disagree with the rescue of the car industry, those doing it were motivated by systemic macro considerations. Carrier is a drop in the ocean. That's not true of GM, particularly in the relevant region.

    It's also true that occasionally prices and wages can be jawboned down together - though it's rare and takes luck, statesmanship and a coordinated and integrated macro-effort - not just a few deals. The Hawke Government in Australia did it in the mid 1980s.

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  5. I don't really think the auto bailout and Carrier situation are comparable. The size alone makes it qualitatively different, as does the timing in the economic crisis. I do agree with criticism of the Carrier deal, whatever the details of it might turn out to be.

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  6. Dear sir: Lost amidst all this detailed exegesis is a simple but undeniable fact that defines why this act--good, bad, or indifferent--is neither policy-defining, precedent-setting, nor indeed indicative of Mr. Trump's future intentions.

    The title I use for him should give you a big fat hint: *Trump is not yet President.*

    (In fact, *he is not even President-elect.* That won't be true until either later this month, when the electors vote, or in January, when the votes are counted. At the moment he is at best President-presumptive.)

    Whatever persuasive powers Mr. Trump has exercised in this affair, they are those of a private citizen: one who stands to become President in very short order, to be sure, but a private citizen nevertheless.

    Just out of curiosity, did you evince these same concerns when President Obama--then in much the same situation--gave press conferences from behind a podium labeled "Office of the President-Elect"? Because if not, well...the phrase "special pleading" comes readily to mind.

    Anyone who had actually worked in the world of business would understand all this, by the way: Scott Adams does a far better job of explaining it than I can.

    I could go on with a few real-world experiences of my own, but let that stand for now.

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  7. I've talked to a few people that praise what Trump did because they don't like to see jobs disappear, and I have a hard time explaining the bigger picture and its implications. They're frustration creates bias that shadows bad decisions like these.

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  8. Interesting blog! But no surprise that Peggy Noonan likes the deal. Me thinks she has always wanted a fascist strongman type.

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  9. Did we just enter some type of time warp?

    The last time I checked, Donald Trump doesn't become President until Friday, January 20.

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  10. Cochrane writes, "Summers' essay is ... a beautifully written but curiously timed discovery of threats to the rule of law in the US regulatory state."

    This aside is off the mark. Summers' essay is a warning of future threats to the rule of law by a Trump administration, not of defects in the status quo under recent administrations.

    In fact, by reminding how the existing regulatory system is integrated with the rule of law, his essay is also a beautifully written rejoinder to Cochrane's recent appeals for laissez faire, in which he has obfuscated how regulation is authorized by law.

    Finally, Summers' timing is not a bit curious, given the outcome on Nov. 8.


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    Replies
    1. Curious timing or not, it's at least rather selective in its targets. So the aside is perfectly appropriate.

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    2. It really becomes apparent when one looks at the real numbers that the State of Indiana giving Carrier a 7 million 10 year credit in return for those 1000 jobs in my limited math prowess seems a pretty good deal. Those 1000 jobs over ten years equate with wages, benefits and employment costs and payroll taxes to about $750 million with probably about at least another $250 million in income taxes state and federal, local and national materials and services spending, living expenses, local and regional private spending, borrowings, etc., etc. So I see 1 billion dollars in economy being preserved locally and nationally for a $7 million expense. I call that a great return on investment alone. As a good business man I would make that deal all day long!
      Also those who get on their high horse and call this agreement as only domestic protectionism I say think about yourself being that loyal 10,20, 25 year employee and having to come to reality of losing your future, your home and the ability to support and protect your family and children and your children's future or existing higher education along with the destruction of your retirement possibility! Then think about agreeing to a severance package where you must agree to train your out of country replacement! Someone should shot the high horse you're sitting on!

      Delete
  11. Carrier and auto bailout are comparable. Obama abrogated contracts with GM bond holders and Trump muscled Carrier. The point, both of them inserted themselves with force or the threat of force. What's next from capricious elected officials.

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  12. "We're supposed to live under a republic of the rule of law. Not the rule of man."

    Wonderful sentiments.

    How come when the topic is illegal immigration, the sentiment becomes, "But there is nothing we can do about it."



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    Replies
    1. It seems to me people should be able to travel anywhere as long as they harm no one.

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    2. ""the sentiment becomes, "But there is nothing we can do about it." ""
      Well, there is a major obstacle to doing anything about it. There exist employers who lobby persuasively to have nothing effective done about it because they like having a cheap compliant labor force.
      --E5

      Delete

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