State capitalism, part 2
By Scott Sumner
The Trump administration seems determined to implement the sort of state capitalist regime that was popular throughout much of the world, until the neoliberal revolution of 1975-95. This philosophy is based on the false idea that it’s possible to subsidize industry as a whole—that there is no opportunity cost of protecting a given sector. Six months ago the administration imposed tariffs on imported washing machines. Whirlpool executives were thrilled. Now the company is reeling:
“After nearly a decade of litigation, we are thankful that the U.S. government has announced an effective remedy,” CEO Marc Bitzer told analysts on the company’s earnings call in January. “This decision is a victory for American workers and will enable new manufacturing jobs here in the United States, including the 200 new jobs we have announced at our Clyde, Ohio manufacturing plant. At this point, however, it is too early to quantify the financial impact on 2018, but this is without any doubt a positive catalyst for Whirlpool.”
Fast-forward to July, the company is already singing a different tune as the 25% tariffs imposed on imported steel from China have made the cost of raw materials used in building appliances more expensive.
On Monday, the maker of KitchenAid and Maytag appliance missed second-quarter earnings estimates, sending shares lower. The stock was last trading down just over 13%. Year-to-date, shares are 23% lower.
American farmers voted overwhelmingly for Trump. Unfortunately, the farm sector is a net exporter and is being hurt by Trump’s trade war. So what’s the next step? Under state capitalism, the distortions caused by one government intervention lead to new regulations, new trade barriers, and new government spending programs. Here’s the Financial Times:
The Trump administration on Tuesday readied billions of dollars in new aid to placate farmers and offset any economic impact from his trade wars, even as the president hailed his growing list of tariffs as “the greatest”.
The new aid plan was aimed at soyabean, pork and other farmers who have been hit by retaliatory tariffs imposed by US trading partners such as China, according to people familiar with the proposal.
Up to $12bn in aid will be offered for farmers in part through the New Deal-era Commodity Credit Corporation, which has the authority to either lend money to farmers or buy their crops in economic emergencies, according to US media reports.
Recall that fiscal policy was already set at an extraordinarily expansionary level. Never before in American history has an administration decided to dramatically increase the budget deficit when we are late in an economic expansion and not at war. We’ve never seen anything like this.
Unfortunately, in first order terms it’s all a zero sum game. Money used to subsidize one industry must come from another industry. It’s impossible to subsidize all industries at the same time. Tariffs that help some firms are a barrier to other firms, even if there is no explicit retaliation.
And when you bring in second order effects things get even worse. Economic activity is redirected away from our most productive industries toward less productive industries, such as making steel and washing machines. This sort of state capitalism was the model used after WWII in countries such as Argentina. It did not end well.
As Adam Smith noted, there is a great deal of ruin in a nation. The washing machine and steel industries are a trivial part of GDP. Maybe this is all a negotiating tactic and there will be a face saving deal that leaves the basic neoliberal regime in place. I still think that is the most likely outcome. But in a small way we are beginning to see the sort of moves that led to the widespread adoption of state capitalism in the middle of the 20th century. This is something that we need to watch closely.
PS. Free market fans like me should never lose sight of the fact that many of our business leaders are evil. They put their own company’s well being ahead of the well being of America. You can argue that that’s their job, but it does not make their lobbying efforts morally justifiable. And I’m not even sure it is “their job”. More and more stocks are held in either index funds, or in the portfolios of large financial institutions. If you want to do what’s best for your stockholders, you need to think about more than the impact of your actions on the price of your company’s stock. You need to think about the impact on a broad portfolio of stocks. Trade wars are not good for the overall stock market.