By William Reinsch
The recent episode involving Carrier sheds some light on how a President Trump will govern. He clearly sees himself as a problem solver once he finds out about a problem. A company is going to leave town? Ok, let’s sit down and see if we can turn that around. Another company somewhere else? That one didn’t capture his attention, so nothing. The inevitable line of CEOs that will form hinting at moving overseas to see what they can get out of the feds? We’ll see. As the country begins to cope with a president who appears to govern case-by-case rather than by making policy, we will be talking about certainty a lot more often.
Both Larry Summers and Steven Pearlstein recently commented on the Carrier action in the Washington Post. For Summers, this was a profoundly unwise move that will undermine rule of law principles and invite favoritism, selective enforcement of our laws and rules, and other abuses of power. For Pearlstein, it was a recognition that American capitalism has gotten off track and a move to push it back in a more constructive direction — toward the good of both workers and companies over the long-term rather than focusing on short-term earnings.
In my view both are right. Summers is right because making policy transaction by transaction without regard to underlying principles inevitably leads to the erosion of those principles and invites corruption and favoritism. Pearlstein is right because capitalism has changed over the past 35 years, abandoning the implicit social contracts that had previously held the system together, and it apparently falls to government to try to restore the former equilibrium.
Summers fails to acknowledge the problem Pearlstein outlines so clearly, but Pearlstein has endorsed a cure that is worse than the disease — ad hoc transactional decision making that sends the right signal to business but corrodes the underlying principles of our democracy. We would all be better off if the next administration puts its economic policy into a clear and well-established legal framework that upholds rule of law principles and provides maximum certainty to businesses and investors.
Regardless of whether one is for or against the Carrier decision, however, there are some useful lessons we can draw from it about how the incoming administration is going to do business.
First, this was a transaction, not a policy. Generally, presidents do not make decisions about individual cases, although every administration has had its exceptions. Will the incoming president intervene every time a company proposes an offshore move? If so, the line of CEOs is going to stretch around several blocks near the White House. If not, what are the criteria that will be used to decide when government intervention is appropriate, and who will make these decisions? Not having clear answers to those questions, and not grounding them in our legal system, opens the door to all the things Summers is worried about.
Second, ad hoc decision making maximizes uncertainty for the business community. People know about the decision that has been made, but nobody knows what it means for the next one or the ten after that. This is important. Having represented businesses for fifteen years at the National Foreign Trade Council, I learned that companies really don’t like uncertainty. They can handle bad news — tax increases or new regulations, for example — but uncertainty drives them up a wall. For bad news they can moan and whine and hire lobbyists to try to forestall or undo it, but all the while they’re developing compliance plans to deal with it.
Uncertainty is different. Presidents and lesser bureaucrats like it because it gives them more room to maneuver by intimidating the other party and leaving him unsure of what to do next for fear of possible consequences. Trump’s threats of a 35% tariff on companies that leave the U.S. is a good example. These kinds of statements, along with the ad hominem attacks Trump has been tweeting against individual companies, make it hard for corporate executives to sleep at night. Will I be next? What happens to my stock price? (It will go down, at least for a while — validating Pearlstein’s point that these guys are thinking about the wrong thing).
Insomnia, however, is not our biggest problem. The other effect of uncertainty is decision paralysis. CEOs are afraid that what they do might be criticized so they do nothing. The danger is that they will continue to sit on their piles of cash, postponing investment until the fog clears. From one perspective, this means Trump will claim victory — foreign investment and offshoring may decline, at least in the cases he shines his spotlight on. The other side is that domestic investment may not go up either as companies wait for clearer signals. Congress can help that along with tax reform, and there are some promising signs there (though as someone who has confidently predicted major tax reform every one of the past five years, I’m not holding my breath). But even that may not be enough. The president sets the tone for business, and every word — or tweet — matters. An unpredictable president means an unpredictable economic environment, and many companies will simply wait for that to change before making long term commitments.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.