The Volokh Conspiracy

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Volokh Conspiracy

The upcoming Trump administration, the Carrier deal and the rule of law


Two interesting op-eds in The Post today about President-elect Trump and the Carrier deal. Here's an excerpt from Steven Pearlstein's op-ed defending the deal:

Now comes Donald Trump—in the public mind, a successful businessman—who as the new president, suddenly declares that the [norm of maximizing shareholder value, even when that means sending jobs off-shore] is no longer acceptable, and he intends to do whatever he can to shame and punish companies that abandon their workers. It's one thing for a company to sustain a few days of bad headlines in the local newspaper when it decides to close a facility. It's quite another when the president of the United States is not only willing, but from a political point eager, to make a federal case out of it. Suddenly, maximizing shareholder value no longer provides the political and social inoculation that it used to.

Unlike their patron saint, Adam Smith, modern day economists tend to ignore such shifts in social norms because they can't quantify them in the same way they can quantify trade flows or technological innovation or changes in educational attainment. And if they can't quantify something, they can't include it in their complex mathematical models, or even the simpler mental models in their heads of how the economy operates. They assume that social norms change in response to economic fundamentals rather than the other way around.

Donald Trump understands better. He knows that he and his new commerce secretary will have to engage in a few more bouts of well-publicized arm twisting before the message finally sinks in in the C-Suite. He may even have to make an example of a runaway company by sending in the tax auditors or the OSHA inspectors or cancelling a big government contract. It won't matter that, two years later, these highly publicized retaliations are thrown out by a federal judge somewhere. Most companies won't want to risk such threats to their "brands." They will find a way to conform to the new norm, somewhat comforted by the fact that their American competitors have been forced to do the same.

And here's an excerpt from Lawrence Summers' op-ed criticizing the deal:

I have always thought of American capitalism as dominantly rule and law based…. Even though we know of instances of corruption, abuse of power, favoritism and selective enforcement, we take this rules-based system for granted. But looking around the world today or back through American history, this model is hardly a norm. Many market economies operate what might be called ad hoc or deals-based capitalism …. This is the world of New York City under Tammany Hall, of Suharto's Indonesia, and of Putin's Russia.

Reliance on rules and law has enormous advantages. It greatly increases predictability and reduces uncertainty. It reduces expenditures on both guarding property and seeking to appropriate property. It promotes freedom because most of the people most of the time do not take political positions with a view to gaining commercial advantage. The advantages of the rule of law are so great that I would claim that there is no country more than 2/3 as rich as the United States that does not have a strong tradition of the rule 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 of the United States decided in a purely ad hoc basis that he wanted Carrier to remain in Indiana. He deployed some combination of carrots and sticks at his disposal 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 forgone 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 of the United States.

It seems to me what we have just witnessed is an act of ad hoc deal capitalism and, worse yet, its celebration as a model…. [O]nly 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. Like Hong Kong, as mainland China increasingly imposes its will, we may have taken a first step toward a kind of reverse transition from rule of law capitalism to ad hoc deal-based capitalism.

This is not quite my field, and you should read the Pearlstein and Summers articles for yourself. But I'm inclined to favor the Summers view, and to be chilled by the Pearlstein defense of norm-setting by a president's "sending in the tax auditors or the OSHA inspectors or cancelling a big government contract."