Diary

Donald Trump's Solyndra Moment

Amid fanfare, Trump announced that he had achieved one of his campaign promises: depending on who you ask, 800-1,100 jobs at a Carrier plant in Indiana are staying put for now.  The deal worked out amounts to a government tax break and a promise of relief from regulations.  Others can do the mathematics of the deal and, using the same math, come to differing opinions on what it means.  And this deal has created a strange hodgepodge of bedfellows.  On one side, you have the naysayers like Bernie Sanders, Larry Summers and Sarah Palin.  On the other side, you have the likes of Eric (the moron) Bolling, Newt Gingrich and Kirsten Powers.

This is a parochial action more common to mayors and governors trying to keep or lure businesses.  Massachusetts offered GE a nine-figure offer to move their headquarters from Fairfield, Connecticut to Boston.  Connecticut offered a hedge fund company an eight-figure offer to stay put.  The competition between Texas and California for businesses is well-documented.  And the list goes on.

This is clearly a case of phony capitalism where the government has intervened and picked a winner.  In this case the winner is United Technologies, the parent company of Carrier.  This is a company which had over $50 billion in sales last year, received $50 million from the Import-Export Bank, $6 billion in defense contracts and a profit of $7.6 billion.

The proper role of government in a capitalistic economy is to enforce contractual relationships, protect property rights, and consistently enforce regulations promulgated under law.  In this way, there is predictability which allows a business/employer to function efficiently.  It is, or was, what set the United States apart from other countries and is a major reason the US was a beacon for businesses.

When the federal government gets involved in these deals, they have essentially distorted the market and introduced a level of unpredictability.  Further, it does not begin to address the underlying reasons for the original decision to move those jobs to Mexico.  The deal’s proponents are quick to point out the good effects in that 1,100 jobs are saved and these employees will remain Indiana taxpayers.  But, the reason Mexico was an option is because the average salary at this plant was $25/hour.  In Mexico, labor costs would have been one-fifth that amount.  Obviously, exorbitant labor costs need to be addressed as well as the federal corporate tax code and regulatory scheme.  One could also add, as concerns manufacturing, the impact of automation which is responsible for 85% of the loss of manufacturing jobs.

Proponents are also quick to point out that suppliers down the chain can also now breathe a sigh of relief knowing they have a willing buyer in Indianapolis.  But, isn’t that the very argument that these same people dissed with Obama’s auto bailout seven years ago?  In fact, that bailout involved vastly more jobs, yet was roundly condemned by these Trumpkin “capitalists” in 2009.  What, in principle, has changed other than certain people checking those economic principles at the doors of Trump Tower?

Instead, we have replaced capitalism by rule of law with ad hoc capitalism (in the words of Larry Summers) where the Deal Maker-in-Chief will intervene where he deems necessary. When asked if Trump would continue to make these deals, Pence proudly stated those decisions would be on a day-to-day basis.  That’s predictability?

Further, a company with $50 billion in annual sales clearly has more economic and political clout and demands more attention from this ad hoc system than does a business making considerably less and with fewer jobs at stake.  For years, we have been told that small businesses are the drivers of the economy, but now they are placed at a disadvantage.  Add to this the fact that any company that now even contemplates offshoring jobs will receive government attention and largesse, the damage wreaked is more evident.

Unless, of course, the government also uses the stick to penalize companies that decide to make a sound economic decision or move that happens to rile Trump on any given day.  Already, he has threatened companies with a 35% tariff on goods if they move manufacturing jobs out of the country.  But, if he is as good as businessman as he portends, he knows this rings hollow because Congress would likely never go along.  Instead, he is trapped into a continuous loop of deals.

This is nothing but another political stunt.  The proponents admit as much.  The importance of the stunt is clearly visceral.  People care less about the fact that long-term systemic deficiencies in the tax code and regulatory environment are to blame.  Nor do they care about the role of automation or any other abstract notions of capitalism.  Instead, they will remember the guy in the shirt with the Carrier logo whose job was saved by Donald Trump.  This is the Trump campaign all over again- no real policy, but great soundbites and greater photo ops.

Bernie Sanders plans to propose an Offshoring Prevention Act to deter companies from moving jobs out of the US.  They would pay an exit tax, repay any government subsidies/tax breaks, and be prohibited from government contracts, among other things.  Perhaps an exit tax of some type (absent the other garbage) is part of the solution.  But a better, more sound solution would be reforming the corporate tax code and decreasing the regulatory burden on employers.  Repatriation of foreign profits at a low tax rate in exchange for domestic employment and investment is another area to be addressed.  Truly competitive bidding for government contracts by getting rid of Bacon-Davis should be explored.  Maybe Trump will propose and attempt to enact true reforms, but that is a political minefield for a political novice.

Most ominously, one is drawn to the lessons of history.  It was an unholy alliance between businesses and corporations with an authoritarian leader that led to the rise of fascism in Europe after World War I.  There was also vindictive punishment against those that did not play along.  Most instances of phony capitalism do not end well once the deal is over, or even before that point.  Fascism ends even worse.