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.
READER COMMENTS
nobody.really
Jul 24 2018 at 4:38pm
I generally disapprove of Trump’s trade policies.
But if we are going to adopt such policies, I can’t object to efforts to shield private citizens from the consequences of those policies, or at least mitigate the harms. In effect, our trade policies area kin to condemnation: Something government does (presumably) for the public good, but which imposes costs on some private individuals. As with condemnation, government should compensate those individuals. And if that means raising revenues from the rest of us, so be it. But we should not confuse our opposition to the trade policies with opposition to the allocation of costs for these policies.
If anything, I’ll echo the objection of Sen. Lisa Murkowski: The remediation measure doesn’t go far enough, in that it fails to provide relief for all the other people being hurt by Trump’s policies. If we’re going to have a trade war, let’s finance it in the same manner we finance other wars: By raising general revenues, not commandeering.
Hazel Meade
Jul 26 2018 at 3:12pm
You’re essentially arguing that the costs of Trumps policies should be socialized, while the benefits – for instance to steel and aluminum producers – remain concentrated.
How is that supposed to be more “fair” than the costs being concentrated on farmers? I fail to see one as being more fair than the other, given that the benefits are not being dispersed. Or would you say that maybe we should tax steel and aluminum producers more to make up for the benefits they get from the tariffs?
nobody.really
Jul 26 2018 at 4:43pm
Yes, I would–based on my current understandings. Allegedly Trump imposed tariffs on aluminum/steel as national security measure, not to remedy specific harm to those industries, so no reason aluminum/steel firms should get a windfall from government policies. This is the converse of my views for the farmers.
Moreover, just as others objected that the opportunity to compensate farmers smacks of political pay-off, so did the imposition of tariffs that benefit domestic aluminum/steel producers. Taxing away those windfall benefits would remove the taint that this policy was adopted solely to benefit some favored constituency. (Or, if it WAS adopted for that purpose, it would lead to prompter abandonment of the policy.)
Scott Sumner
Jul 24 2018 at 9:15pm
nobody, But where does it stop? Who compensates those who compensate those hurt by Trump’s trade war? I say don’t throw good money after bad, and just cut our losses.
nobody.really
Jul 25 2018 at 12:14am
ON THE ONE HAND: If YOU were the one being hurt by government policies, would you have the same view? I thought that the Iraq War was a boondoggle. Should I have argued for withholding payment to the troops, or withholding armor for the HumVees, in order to make the policy less popular? Suffice it to say, while I see the strategic advantage, I don’t embrace the strategy; the ends do not justify the means.
The US collectively elected Trump as our agent. We collectively enjoy the benefits and bear the liabilities of the actions he takes with the authority we have given him. Given a choice between sticking the bill with farmers, or with US taxpayers (a group that includes farmers along with the rest of us), the latter seems fairer to me. Taxpayers seem better able to bear the cost. And the responsible party is US voters, and US taxpayers are a better proxy for that group than are US farmers. (That said, which group is a better proxy for TRUMP voters? Hmmmm…)
If we conclude that TRUMP has acted in excess of his authority, perhaps we can extract a measure of indemnification from him. But otherwise, we’ve made our bed, and we must lie in it for another few years.
ON THE OTHER HAND: Yeah, there are tricky questions about when people should be compensating for the consequences of government actions. Conceptually, we identify some framework of autonomy, and compensate people when government takes actions that intrude upon that autonomy. But there are a lot of devils in the details.
Legally, I don’t expect that Trump’s tariffs would trigger the need for compensating farmers for “taking property without due process of law” under the 5th Amendment.
Moreover, it’s not as if the US had NO tariffs before Trump took office. Presumably our existing tariffs have generated winners and losers; should we be taxing/compensating those people as well? Perhaps so.
As I say, it’s tricky–so you raise a fair objection.
Scott Sumner
Jul 24 2018 at 9:16pm
I’d add that compensation makes these bad policies less unpopular, the last thing we should be trying to do.
bill
Jul 24 2018 at 9:24pm
Juan and Evita for the 21st Century. My recollection is that Argentinian per capita GDP was near US levels 70 or 100 years ago?
EB
Jul 25 2018 at 8:07pm
Tomorrow, as always I will remember Evita. She was 33 when she died on 7/26/1952. In a few years (mid1946-mid1951) she took advantage of the opportunity of spending a lot of government money without enriching herself. She helped many people, including the poor kids of my neighborhood.
I have never remembered Perón, however. Although I know very well the history of my country (I used to teach Historia Económica Argentina), in particular the history since the end of WWII, I don’t blame him for the country’s problems. I blame him for failing to engage and negotiate with his enemies first in 1952 and then in early 1962, a negotiation that could have changed history (he did it in late 1973 but he was already sick and died on July 1, 1974). Since the re-election of Perón in 1952, just after the first fiscal crisis post-WWII, the country has been divided between “Peronistas” and “Anti-Peronistas”, a division that is still very much alive and will continue for a long time. The political problem is that as long as the “Peronistas” are united, they will gain the presidential election with a clear absolute majority, a prize too large to keep the coalition united, before and after a presidential election. Since the first fiscal crisis in 1951, there have been several similar crises in which the expected level of public expenditure for the current or next year (including the service of the stock of debt) could not be financed by increasing taxes, by the inflation tax, or by borrowing.
Scott’s reference to Argentina is wrong. Only under President Frondizi (May 1958-March 1962) who signed the firm agreement with the IMF in late 1958, one may argue that a weak but clear version of state capitalism was attempted (between 1930 and 1958, there were many changes in policies, most involving new responses first to the rejection of Argentina as a special member of the UK’s Commonwealth and second to the various changes in domestic politics).
Scott Sumner
Jul 25 2018 at 1:04am
Nobody, You said:
“Taxpayers seem better able to bear the cost.”
I’d say the opposite—farmers tend to be richer than average, at least the farmers who would be getting these subsidies.
And don’t forget that the compensation makes the deadweight loss even larger.
Bill, Yes, I believe about 20% below, like many other advanced countries are today.
nobody.really
Jul 25 2018 at 9:30am
I wonder if that’s accurate. I have not heard which farmers will get the subsidies. And <a href=”http://www.pewresearch.org/fact-tank/2017/10/06/a-closer-look-at-who-does-and-doesnt-pay-u-s-income-tax/”>according to the Pew Research Center</a>, the person paying the median tax dollar had an adjusted gross income of between $200K-$500K (in 2015).
Then, of course, there’s the challenge that the US isn’t actually paying its bills today, so we’re really trying to guess the characteristics of FUTURE taxpayers who will, presumably, be facing higher tax rates to pay for their own bills as well as ours.
In any event, your critique is fair: It’s hard to know the relative positions of subsidized farmers and taxpayers in general.
EB
Jul 25 2018 at 5:17am
Yesterday afternoon Trump repeated his offer:
“The European Union is coming to Washington tomorrow to negotiate a deal on Trade. I have an idea for them. Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies! That would finally be called Free Market and Fair Trade! Hope they do it, we are ready – but they won’t!”
He is calling Europeans’ bluff. American Libertarians should be happy, and I wonder why they are not.
bill
Jul 25 2018 at 9:24am
EB, From what I’ve read, Trump includes VAT taxes in that but few economists do.
nobody.really
Jul 25 2018 at 9:40am
Trump has been quite inconsistent in what he recognizes as “fair trade.” He often suggests that the existence of a bilateral trade deficit demonstrates a lack of fairness (at least, unless he’s complaining about a nation with which the US has a trade surplus–and sometimes even then).
Mark Bahner
Jul 29 2018 at 9:37am
Perhaps it’s because there’s essentially zero evidence that Donald Trump will:
His interference in the U.S. electrical generation market (supporting coal and nuclear plants) demonstrates that he wants to interfere where results are not coming out in favor of his supporters.
Alan Goldhammer
Jul 25 2018 at 8:32am
Good post Scott. The other key thing is that the Trump administration is ‘bailing out’ only one segment of the economy. What about all the rest of the companies that are being harmed by higher raw material costs AND a higher dollar (which is a a type of ‘tariff’ against exports if one only considers costs). the other day one of my equity holdings dropped 10% in one day when the 2nd quarter financials were reported. They barely missed the earnings projection and lowered their estimate for the whole year because of both of the factors I’ve noted (I really wish corporate America would cease making such projections as they are for the most part useless other than sparking short term trading in one direction or the other).
I know it’s only been a couple of days but I’ve not seen any reassurance from the Trump Administration that they will step up and help out large manufacturers who rely on exports.
Scott Sumner
Jul 25 2018 at 11:59am
Nobody, Good point about median tax dollar. Is that just income taxes, or all taxes?
EB. Trump is not serious. He changes his mind every few days, and the Europeans are too smart to fall for his bait and switch.
Alan, Next we may have to bail out the auto industry, which is being hurt by the steel tariffs.
Michael Sandifer
Jul 25 2018 at 3:39pm
I’m not as optimistic about Trump reaching a deal with our trading partners. Even if he reaches a 100% free trade deal, he may keep looking at trade deficits and accuse other countries of manipulating their currencies. His criteria for “winning” is largely about trade deficits.
Also, why would other countries even want to negotiate with Trump at this point? Agreements seem to mean nothing to him.
Mark Bahner
Jul 28 2018 at 9:08pm
Yes, I don’t know why anyone would negotiate with Donald Trump. Who would trust him?
Michael Sandifer
Jul 25 2018 at 3:41pm
Perhaps my above reason is part of the reason Congress is considering new legislation to allow for tax breaks for savers. That’s one way to change the balance of trade, not that it should be something we care about.
Steve ware
Jul 26 2018 at 3:44pm
“Unfortunately, the farm sector is a next exporter and is being hurt by Trump’s trade war. So what’s the next step?…” “net exporter” is perhaps what was intended?
Amy Willis
Jul 27 2018 at 9:08am
Thanks for catching that! It’s now fixed.
Comments are closed.