Renewing America and Trump

click to order

Trumponomics: Can He Move Beyond Bluster to a Competitiveness Policy?

by Edward Alden, Bernard L. Schwartz Senior Fellow, Council on Foreign Relations, author, Failure to Adjust

• Reprinted from the Council on Foreign Relations blog, Renewing America, December 12, 2016
• This article originally appeared on nydailynews.com. 

U.S. President-elect Donald Trump and Vice-President Elect Mike Pence tour a Carrier factory in Indianapolis, Indiana (Mike Segar/Reuters).

It was hard not to root for President-elect Donald Trump when he went to the Carrier air conditioning factory in Indianapolis to announce a deal to save about 800 jobs the company had planned to move to Mexico. For those who have not watched it, the video that surfaced during the election—in which a company manager tells assembled workers their jobs will be sacrificed to “stay competitive and protect the business for the long term”—is a film noir of heartless corporate greed in an open global economy.

Yet the move has been roundly savaged—by conservatives, who say the President-elect is picking winners and losers, and by liberals, who point out that Trump exaggerated and that Carrier is still moving hundreds of jobs to Mexico, and besides, President Obama saved far more jobs when he rescued the auto industry.

And, cynics are quick to add, most manufacturing jobs aren’t coming back, and Trump should stop pretending otherwise; automation threatens them more than the move to lower-wage countries.

Anywhere you turn, you can find glib dismissals. Washington Post conservative columnist George Will wrote that, in Trump’s new approach, “political coercion shall supplant economic calculation in shaping decisions by companies.” Former Bill Clinton Treasury Secretary Larry Summers warned that “we have started down the road towards changing the operating assumptions of our capitalism.”

Even former Alaska Gov. Sarah Palin, hardly a darling of the establishment, denounced the deal: “Republicans oppose this, remember,” she wrote. “Because we know special interest crony capitalism is one big fail.”

In the face of this stiff wind, pardon me for sympathizing with Trump’s efforts and thinking that no good deed goes unpunished.

I fully admit the Carrier deal is imperfect. It preserved only half the jobs and required a bribe from the state’s taxpayers. But it was at least a small blow against such rootless profit-seeking.

That’s why the move was broadly popular, with 60% of Americans, including 87% of Republicans and 40% of Democrats, saying it improved their opinion of Trump.

“Rarely do we see numbers that high when looking at how specific messages and events shape public opinion,” said Kyle Dropp, chief research officer at Morning Consult, which conducted the poll with Politico.

Changing the “operating assumptions of our capitalism”—among them that it is not only acceptable but commendable for corporate managers to replace $25-an-hour Americans with $3-an-hour Mexicans—is exactly what many Trump voters want. They are part of a sizeable group that understandably feels, as I put it in the subtitle of my new book, “left behind by the global economy,” having lost their once middle-class jobs to the rapid pace of technological change and trade competition.

Some 6 million manufacturing jobs, about one-third of all such jobs, disappeared during the 2000s, and few have come back.

With Trump, this group seems finally to have a leader fighting for them. He followed up the Carrier deal by blasting another Indiana manufacturer, Rexnord, which plans to move about 300 jobs to Mexico, and then told Time magazine: “I want to get a list of companies that have announced they’re leaving. I can call them myself five minutes apiece, they won’t be leaving.”

The question now is whether Trump’s Twitter rants and promises to jawbone companies one by one can amount to a coherent economic vision that might transcend the partisan divides that have long paralyzed economic policy in Washington. Even before taking office, Trump has reshuffled the ideological deck. His challenge now is to move beyond bluster and enact real policies that strengthen America’s economic competitiveness.

If he succeeds, in a few years he will be roundly and rightly cheered. If he fails, he will sorely disappoint those who elected him.

The field is wide open for someone to champion the long-suffering American worker. New research from a team led by economist Raj Chetty at Stanford, for example, has concluded that the American Dream has stalled for many. In 1970, 92% of 30-year-olds earned more than their parents had at the same age; today barely half do.

Yet in the face of this erosion, Republicans since Ronald Reagan have advanced a version of free-market capitalism in which government should cut taxes, slash regulations and get out of the way of corporate decision-makers, believing this would create a dynamic capitalism that would help most Americans. The GOP slammed President Obama’s bailout of the auto industry, for example, which saved far more jobs than the Carrier deal at no cost to taxpayers, as unnecessary government intrusion in the market.

Democrats, meantime, have used government regulations to soften the edges of competition, but still genuflected before the global ambitions of corporations. President Clinton bucked the labor unions and a majority in his own party to back the North American Free Trade Agreement (NAFTA) with Mexico and Canada, while Barack Obama—who ran in 2008 as a NAFTA opponent—came to embrace the Trans-Pacific Partnership (TPP) deal with Asia.

In the end, both parties came out in a similar place, supporting trade rules that opened up global markets to American corporations, and lowered prices for U.S. consumers. They then let the chips fall where they might for those American workers harmed by import competition and outsourcing.

What Trump has recognized, and ridden to power, is that this notion of pure free-market competition was always a bit of a sham. While the United States was championing Marquess of Queensbury rules for trade and investment, many other governments were behaving more aggressively.

China uses the full array of government powers—subsidies, cheap land, regulatory preferences, technology theft and discrimination against foreign competitors—to propel its steel, auto, solar, semiconductor and aerospace industries. The Mexican government proudly boasts that in the 1970s and 80s, it “granted large incentive packages to entice foreign manufacturing” and that today, after a lull in the 2000s, “once again, valuable incentive packages are on the table.” Germany and France put pressure on their large companies to invest and create jobs at home.

Even in the United States, while Washington has long been hands-off on investment, the states have been far more aggressive. Reliably Republican Texas hands out nearly $20 billion to corporations each year in investment incentives, mostly tax breaks. Massachusetts and city of Boston coughed up $145 million—$181,000 per job—to lure General Electric to move its headquarters from Fairfield, Connecticut. New Jersey under Gov. Chris Christie has offered some $4 billion in incentives, including millions to JP Morgan Chase to move more than 2,000 jobs from Manhattan to Jersey City.

The hand-wringing over the $7 million offered to Carrier seems rather overblown by comparison.

So having a President who jumps in the trenches and fights for investment, and for good jobs for American workers, is long overdue.

The problem is that battling deal by deal, which seems to be Trump’s preferred approach, will do little to address America’s bigger competitive challenges. That will require working with both parties in Congress on policies that change the competitive landscape from the ground up.

The easiest piece to fix may be corporate taxes. While U.S. corporate taxes used to be low by global standards, the competition for investment has seen every other major country cut its tax rates, so that the top U.S. rate of 35% is now the highest in the developed world. Reducing it—while simultaneously tightening rules that allow large tax breaks for foreign investments—would help level the playing field.

With Republicans in charge in Congress, regulations will be another target. This one is trickier. While the United States is not over-regulated compared to most European economies, it suffers from regulatory creep, in which new rules pile on top of old ones, creating mountains of paperwork for smaller companies in particular.

Trump’s “one in, two out” proposal, in which two old regulations must be axed for every new one created, was used successfully in the UK.

While these measures would reduce the costs of investing in the U.S., they are far from sufficient. Successful U.S. manufacturers have a hard time finding the skilled workers they need, yet Trump has been silent on worker retraining. The United States spends far less on worker retraining than its economic competitors do.

Trump has promised a much-needed rebuild of aging U.S. infrastructure, which would also create good construction jobs, but his preferred mechanism—tax credits—would only help on projects that promise investor returns, such as toll roads in urban areas. No private investor is going to pay to fix the water supply for Flint, Michigan.

That means Trump must take on the tax-cutters in his own party to preserve funds for these initiatives. House Speaker Paul Ryan’s tax plan is heavily skewed to the wealthy, as was Trump’s own campaign plan. It was encouraging to hear the nominee for Treasury Secretary, Steve Mnuchin, say that only the middle class, which actually needs the money, would see tax reductions under his preferred plan.

And Trump quite sensibly wants to win more in global markets. The U.S. share of global exports, for example, has fallen sharply over the past decade while China’s has soared and Germany has held its ground. Yet it was the Republican Party that in 2015 shut down the U.S. Export-Import Bank, which gives a significant boost to U.S. exports at no taxpayer cost, claiming it was a tool of “crony capitalism” because it helps big U.S. exporters like Boeing and Caterpillar.

And will Trump embrace Obama’s network of manufacturing innovation centers to help the U.S. lead in new manufacturing technologies like 3-D printing and next-generation semiconductors? Congressional Republicans oppose those as needless government interference in the market.

Trump’s shot across the bow to Carrier, Ford and other companies was refreshing. He is using the bully pulpit to try to persuade American companies to do what they used to do, which is to take some responsibility for the communities in which they have invested. Michael Porter, the Harvard Business School competitiveness guru, has called this the “business commons”—training a local workforce and supporting local suppliers, for example. If Trump has forced U.S. companies to think twice before they pull up the stakes, that will be a positive outcome.

But the threats carry dangers as well. If Trump were to slap tariffs indiscriminately on imports, as he has warned, it would trigger a downward spiral of trade retaliation that would harm American companies and workers. His decision to pull out of the TPP—which could give the U.S. a real edge in the competition for investment with China—rather than renegotiate to improve the deal, was short-sighted. And his tough talk has already led to a sharp decline in the Mexican peso, furthering Mexico’s cost advantage over the United States.

Trump has a chance to break the ideological gridlock that for too long has prevented the United States from developing a strategy for competing in global markets, and he has rightly insisted that American companies be part of that solution rather than part of the problem. But he will need to carry through and champion a real set of pro-competitive policies to turn his rhetoric into reality.