Carrier Commentary

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Summary

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.

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.

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.

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. (Summers' essay is, like Matt Yglesias', a beautifully written but curiously timed discovery of threats to the rule of law in the US regulatory state.)

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 $1M 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.

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