Competitive capitalism vs. the other kinds

Free market capitalism requires the rule of laws that apply equally to everyone. This is an important foundation for the enormous efficiency and productivity of free market capitalist economies as well as for their fundamental fairness. What PEOTUS Trump did with Carrier and promises/threatens to do with any other company that behaves in ways he does not like does not meet this test.

As the powers of feudal lords were restrained by laws, they and their friends used laws to protect their special interests when ever possible. Judged by modern standards such uses of the law have undermined both the efficiency and fairness of economies dominated by them. The United States has prospered more than most other economies in part because it has generally been freer of such misuses of the law. The idea that publicly spirited technocrats can make better decisions about the allocation of our productive resources, even if they could somehow avoid the inevitable rent seeking pressures of market players, has been firmly repudiated by history. “Trumps carrier deal is the opposite of conservatism”

Professions, and other service providers often, if not always, attempt to use laws and regulations to protect themselves from open competition. Labor unions are an obvious example, but professional licensing requirements for doctors, lawyers, electricians, plumbers, etc. often go beyond certifying basic competence in order to restrict competition that might force them to lower the cost of their services to the public. Disruptive new ways of packaging and offering services, such as we have seen recently with Uber and AirBNB, that challenge, as well as complement, established cab and hotel business models are often resisted by the incumbents. These challenges have little to do with public safety and product quality and everything to do with preserving quasi-monopoly rents to the incumbent firms. Free Markets Uber Alles

The recent case of auto dealers vs Tesla provides a good example of this behavior. A recent Washington Post article on this dispute began with: “Don Hall, president of the Virginia Automobile Dealers Association, was making the hard sell. Staring directly into the camera, using the language of war, he urged car dealers to unite against a force that he said threatened their livelihoods: electric-car-maker Tesla…. The reason that Hall was sounding the alarm: Tesla, which sells its cars directly to consumers rather than through franchise dealers, is trying to open a second store in Virginia.” Auto dealers sound alarm as Tesla pushes for second Virginia store

Mr. Hall defends “the franchise system that they say protects consumers as well as their own business interests.” Perhaps he is right, but if franchise dealers served consumers better than direct sales by the manufacturer they would be preferred by customers and would not need special protection from laws that prohibit alternative arrangements for selling cars. The simple issue is whether we are better off allowing the market to determine which products and retailing and servicing arrangements are best or giving that power to bureaucrats, who have rarely been able to resist the “pressures” of the entrenched firms. “Over the past decade, VADA [Virginia Automobile Dealers Association] has given Virginia politicians $4 million in campaign contributions” (Washington Post). What Mr. Hall is really concerned about is the “business interests” of the franchise dealers.

President elect Trump’s Carrier deal is a more blatant retreat from the free market. When combined with Trump statements and appointments that seem to give more power to markets, it is very difficult to see where Trump is going. It is shocking to hear Republicans say: “’The free market has been sorting it out and America’s been losing,’ Mr. Pence added, as Mr. Trump interjected, ‘Every time, every time.’” “Trump carrier pence jobs”

In negotiating deals with individual companies to keep specific operations in the U.S. or to continue operations a company planned to reduce or end, Trump is engaging in a form of industrial central planning that is contrary to our tradition of free markets. It should be strongly opposed and I was pleased (and rather surprised) to see Sarah Palin speak out against it. While we do not yet know the details of the Carrier deal (aside from the $7 million in tax subsidies from the state of Indiana that Carrier had earlier rejected) the knock on effects are difficult to track. For example, we don’t know what the effect on Carrier jobs will be of its loss of competitiveness from more expensive output produced in Indiana?

It would be highly objectionable if Trump used “the threat of pulling federal contracts from Carrier’s parent, United Technologies…. Mr. Trump,… said he did not directly raise the $5 billion to $6 billion in federal contracts United Technologies receives, much of it from the Pentagon.” (NYT) It would not be objectionable if Carrier’s decision reflected Trump’s pledge to lower corporate income tax rates and reduce costly regulations, as these would apply to all similar firms.

Evaluating the specific economic effects of the Carrier deal is also made difficult by Trump’s loose relationship with the truth. According to Chuck Jones, the union leader representing the Carrier workers whose jobs Trump claims to have saved, Carrier announced in February that it would “would move 1,300 jobs to a plant in Mexico.” After Trump got involved he “said he’d saved 1,100 jobs, he hadn’t. Carrier told us that 550 people would get laid off.” “Im-the-union-leader-donald-trump-attacked-im-tired-of-being-lied-to-about-our-jobs”

If you wondered why out of the blue Trump tweeted that: “Chuck Jones, who is President of United Steelworkers 1999, has done a terrible job representing workers. No wonder companies flee country!”, the answer seems to be that Trump was angry that his job numbers were being challenged by Mr. Jones. If this explanation is correct, it reflects shockingly immature behavior by the President elect.

On the other hand, Trump’s attack on the projected cost of a new Air Force One being planed for 2020 is of a totally different nature. Putting aside the inaccuracies of Trump’s tweet—at this point Boeing only has a $170 million contract to design the plane—it is totally appropriate for his administration to be concerned with the cost of the planes they are ordering and to negotiate the best possible deal. It may be that Trump’s dramatic tweets are part of his bargaining strategy. At this point, who knows? I am not competent to evaluate such a strategy, but Trump as President-elect has taken us where we have never been before. His behavior is wholly inappropriate for an American President. Hopefully he will realize this before too much serious damage is done.

” Donald J Trump@realDonaldTrump

Boeing is building a brand new 747 Air Force One for future Presidents, but costs are out of control, more than $4 billion. Cancel order!”

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About wcoats

Dr. Warren L. Coats specializes in advising central banks on monetary policy, and in the development of their capacity to formulate and implement monetary policy. He is retired from the International Monetary Fund, where, as Assistant Director of the Monetary and Financial Systems Department, he led missions to over twenty countries. Before then, he served as Visiting Economist to the Board of Governors of the Federal Reserve System, and to the World Bank, and was Assistant Prof of Economics at the Univ. of Virginia from 1970-75. Most recently he was Senior Monetary Policy Advisor to the Central Bank of Iraq; an IMF consultant to the central banks of Afghanistan, Kenya and Zimbabwe; and a Deloitte/USAID advisor to the Government of South Sudan. He is currently a member of the Editorial Board of the Cayman Financial Review and until the end of 2013 was a member of the IMF program team for Afghanistan. His most recent book is entitled "One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina."
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One Response to Competitive capitalism vs. the other kinds

  1. Joe Cobb says:

    I agree with all of this article, and I use the label “crony capitalism” all the time, but some friends have criticized using “capitalism” at all in the phrase. I don’t look upon the word as a bad label for anything, although Marxists and many young people do, who associate it with corporations and influence-peddling. That private ownership of capital is essential to a free society is over the heads of many people, due to the unequal degree of influence-peddling a crony society has. But neologisms are not useful unless one is making philosophical distinctions, above the level of discussions in the news.

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