
Here’s Larry Summers on the recent Carrier fiasco:
Market economies can operate anywhere along a continuum between two poles.
I have always thought of American capitalism as dominantly rule and law based. Courts enforce contracts and property rights in ways that are largely independent of just who it is who is before them. Taxes are calculable on the basis of an arithmetic algorithm. Companies and governments buy from the cheapest bidder. Regulation follows previously promulgated rules. In the economic arena, the state’s monopoly on the use of force is used to enforce contract and property rights and to enforce previously promulgated laws.
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: Economic actors assume that they have to protect their property and do their own contract enforcement. Tax collectors use discretion in assessing taxes. Companies and governments buy from their friends rather than seek low-cost bids. Regulators abuse their power. The state’s monopoly on the use of force is used to enrich and satisfy the desires of those who control the apparatus of the state.
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 here is Kevin Williamson:
A tax cut and spending are different things, even if the budgetary effects are exactly the same.
But in the matter of industry-specific or firm-specific tax benefits of the sort extended to Carrier in Indiana, they do not have a leg to stand on. These are straight-up corporate welfare, ethically and fiscally indistinguishable from shipping containers full of $100 bills.
Those who take the opposite view work very hard to make a case that there is some kind of important ethical distinction between giving somebody something and declining to take something away from them. But relieving someone of an ordinary expense incurred in the normal course of affairs — as opposed to changing general tax law — is a gift. This is true both as a matter of law and of our ordinary experience. If I am, for example, a car dealer trying to win influence with a politician, and I sell him a new car at $50,000 under the price that I charge other customers, then I have paid him a $50,000 bribe. People go to jail for that. You’ll recall that part of the Barack Obama-Tony Rezko scandal was the accusation that Rezko had arranged for the promising young politician to buy a house at $300,000 under its asking price. Rezko didn’t give Obama $300,000 in this scenario — he just saw to it that Obama didn’t have to spend that $300,000. That is why bribery laws generally specify “any pecuniary benefit” rather than a duffel bag full of cash. . . .
Carrier . . . is a company that has competitors — competitors who employ Americans and pay taxes, just as Carrier does. These firms and their employees are put at an economic disadvantage by the subsidies paid to Carrier thanks to Trump and Pence. That means that some of these companies probably will be less profitable, and that they will not hire people they otherwise would have hired. But you’ll see no Trump press conference celebrating that. This is a case of Frédéric Bastiat’s problem of the seen vs. the unseen. The benefits are easy to see, all those sympathetic workers in Indiana. The costs are born by sympathetic workers, too, around the country, and by their families and by their neighbors. But those are widely dispersed, so they are harder to see and do not hit with the same dramatic impact.
January 20, 2017, will be a momentous day for me. For the first time in my life, the US President will no longer be the de facto leader of the free world. (I suppose Angela Merkel will take over that role.)
PS. This caught my eye:
President-elect Donald Trump told Philippines President Rodrigo Duterte that he is going about his controversial fight against drugs “the right way,” Duterte said.
Duterte says he was greatly pleased with the “rapport” he had with the newly elected U.S. president.
Duterte made the comments to reporters in Davao City on Saturday after a brief phone call last night with President-elect Donald Trump. Government officials earlier passed along snippets of their conversation.
“He was quite sensitive to our war on drugs and he wishes me well in my campaign and said that we are doing, as he so put it, ‘the right way,’ ” the President said.
Duterte’s “policy” is mass murder.
HT: David Levey
READER COMMENTS
Jeff
Dec 5 2016 at 12:03pm
Wow. Scott, I don’t remember you, Kevin Williamson, or Larry Summers writing much about Solyndra. But perhaps I am mistaken.
It’s not that I think the State of Indiana (note, not the federal government) should be treating Carrier differently from other companies in the state. It’s just that the outrage over this seems pretty selective. Politicians from both parties do this kind of stuff all the time. Doesn’t make it right, but like I said, the outrage seems pretty selective.
Market Fiscalist
Dec 5 2016 at 12:08pm
Scott,
What do you make of claims such as these (http://consultingbyrpm.com/blog/2016/12/on-my-anti-anti-trumpism-i-regret-nothing.html) that Summers is being hypocritical in condemning Carrier when the auto bailouts (with which he was heavily involved) were just as arbitrary and (worse) involved illegally underpaying GM and Chrysler creditors ?
Philo
Dec 5 2016 at 12:36pm
I thought you were reserving this sort of post for TheMoneyIllusion.
Scott Sumner
Dec 5 2016 at 12:47pm
Market, I agree that he’s being a hypocrite. Then he was wrong, now he is right.
(I suppose Summers would defend himself by saying the auto bailout was a macro policy during a national emergency, and this is not. But I don’t really buy that argument.)
I think what makes this worse is that it doesn’t seem to be done reluctantly, rather they seem to think it’s actually a good policy as a general rule, not just an exception in an emergency.
Philo, Generally I do, but this is an exception. Bastiat is someone highly respected by many readers of this blog.
bill
Dec 5 2016 at 12:51pm
I was not a fan of the auto bailout. Note though that I heard something different about creditors, at least suppliers. I heard that in the weeks preceding the bankruptcy declaration that GM and Chrysler went out of their way to pay outstanding receivables to suppliers – receivables that would have been cancelled during a bankruptcy that would have then led those suppliers having to declare BK too. I never researched those claims but it does make sense. GM and Chrysler knew the bailout was coming so they no longer had any reason to conserve cash flow.
MikeDC
Dec 5 2016 at 1:08pm
If something routinely happens under every president, it’s a non-story.
And this sort of thing routinely happens under every president. So going on about the latest instance as if it’s some kind of special case is credibility eroding. It makes the writer seem less trustworthy because they’re deliberately shaping events to suit their politics.
In practice anyway the auto bailouts were a Bush thing. The appropriate Obama-led economic boondoggles would be Solyndra and any of a dozens of other energy and transportation giveaways.
Andrew_FL
Dec 5 2016 at 1:16pm
Nonsense, by this standard the US President hasn’t been leader of the free world at any point in your lifetime.
bill
Dec 5 2016 at 1:24pm
The auto bailout reminds me of LTCM. The “bailout” that LTCM got included no money. They basically got an expedited bankruptcy. All creditors should have access to the courts for really speedy trials. That would strengthen our rule of law if everyone could get a faster, more certain process.
ColoComment
Dec 5 2016 at 2:24pm
Bill, “…in the weeks preceding the bankruptcy declaration that GM and Chrysler went out of their way to pay outstanding receivables to suppliers….”
I don’t understand how any of those payments made within 90 days of the bankruptcy filings would have not been avoided under the preference clawback provisions of the Bankruptcy Code.
…unless the administrator(s) of the auto companies’ bankrupt estates opted not to do so, which would be completely a-typical & suggestive of political influence or interference. The point of the Code is to put all creditors, secured and unsecured respectively, in an equal position with respect to claims on the debtor.
However, I’m always happy to be corrected or educated.
JK
Dec 5 2016 at 3:41pm
“rule and law based”
My hopes swelled only to be dashed by the end of the excerpt when Larry Summers came to misuse the term “rule of law”. Rule of law is a very significant concept, that no one is above the law. The law rules. It is not a equality under the enacted and published law, which is how the term is unfortunately being used in these discussion. Cue Ignio Montoya.
At the time rule of law rose to transform Anglo-Saxon society, the idea of equality under the law was still only true in the breach. And the soul destroying popular lawmaking, statute law, was rare. Common law was based on past custom and practice.
bill
Dec 5 2016 at 4:39pm
@ColoComment: I think you’re right on the law. I believe though that it was done. At the time, I was trying to buy some property in Pennsylvania from a Detroit company and they told me that’s what was happening. So I could definitely have the facts wrong as all I’ve got is essentially hearsay.
EB
Dec 5 2016 at 5:33pm
The Carrier “Scandal” vs. The Dakota Pipeline “Scandal”. I wonder why the many stories about the former have ignored the latter. I don’t know the details of either one but I bet that the waste involved in the second one is much larger.
Seth
Dec 5 2016 at 6:03pm
I was under the impression that Indiana had already offered Carrier the tax incentives and Carrier had turned them down.
The game changer was the threat from Trump that the government would have to look at the Carrier’s parent’s government contracting business.
At least, that’s what I got out of Cowen’s interview with NPR.
If that’s the case, does that change your view?
Scott Sumner
Dec 6 2016 at 8:12am
Seth, That’s quite plausible, but no, it doesn’t change my view of the situation. It was an abuse of power. Governments should not be threatening companies.
RPLong
Dec 6 2016 at 10:50am
So, this rather maudlin declaration that the United States is no longer the world’s freest country comes down not to a point of policy, but to the tone with which the policy was implemented?
I think it’s fair to disagree with all or most of Trump’s policies – I certainly do. But if we are to make effective arguments against his particular brand of politics, we ought to address those policies themselves, rather than finding new and inventive ways of saying, “I don’t like Trump’s tone.” If something is wrong, then it’s wrong – not because it was phrased poorly, but because it’s wrong.
BC
Dec 6 2016 at 12:51pm
It looks like Trump may have managed to ensure that American Carrier jobs are replaced by automation instead of Mexicans:
https://finance.yahoo.com/news/ceo-united-technologies-just-let-231538059.html
Also, these were not high-skill “jobs of tomorrow”, but “low-skilled jobs most people don’t find that attractive”.
Also, it seems that the defense contracts were a decisive factor, accounting for 10% of United Technologies revenue.
Brian Donohue
Dec 6 2016 at 5:36pm
I agree with the overall point you are making here, but I couldn’t help but think, when reading Summer’s excerpt, of this scene from Back to School:
https://www.youtube.com/watch?v=YlVDGmjz7eM
With Summer’s in the role as stuffy professor and Trump represented by Thornton Mellon.
TMC
Dec 6 2016 at 10:48pm
“January 20, 2017, will be a momentous day for me. For the first time in my life, the US President will no longer be the de facto leader of the free world. (I suppose Angela Merkel will take over that role.) ”
A bit of a hissy fit, here.
Obama gave up the role 8 years ago.
David R. Henderson
Dec 7 2016 at 9:21am
@TMC,
Obama gave up the role 8 years ago.
I disagree. I think it’s been slipping away for years and it’s hard to pin on any one President. But if you want to do so, George W. Bush is at least as good a candidate for that claim as Obama.
Comments are closed.