Lambert here: Zingales’s credulous simplicity is charming — the idea that the oligarchs who rule us believe in “markets” as opposed to (their own) “business” — but the article does give “free market conservatives” license to break with Trump on ideological grounds.
By Luigi Zingales is the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago – Booth School of Business. He is a Research Associate of the National Bureau of Economic Research, a Research Fellow of the Center for Economic Policy Research, and a Fellow of the European Corporate Governance Institute. Cross-posted from Evonomics.
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.
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.