Trump's attempts to pick industry winners and losers will ultimately fail
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President-elect Donald TrumpDonald John TrumpThe Hill's Morning Report - White House, Congress: Urgency of now around budget GOP presses Trump to make a deal on spending Democrats wary of handing Trump a win on infrastructure MORE’s intervention in the recent Carrier decision to keep more of its jobs within the United States does not signal an unprecedented break from past administrations. We need to look no further than the Obama administration’s support of Solyndra to find an example of an executive actively picking favorites in the market.

Similar examples of direct executive interference in the market include John F. Kennedy pressuring the steel industry to reduce prices and Herbert Hoover encouraging large manufacturers to keep wages high despite the economic depression. Such actions are, on their face, not inherently wrong, but motivated by poor economic thinking or unethical favoritism. They can send wrong signals to the market and lead to severe unintended consequences.

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Deeper historical context shows that 20th-century presidents were not innovators in picking and choosing businesses to succeed either. In fact, if we go all the way back to the beginning of the American republic, we find that the policies of Alexander Hamilton, the first Secretary of the Treasury, were remarkably similar to those proposed by Donald Trump.

Hamilton and Trump would agree on a general protective tariff, as well as industry-specific tariffs (or penalties, as Trump calls them) and subsidies to encourage particular businesses. Both New Yorkers with a background in finance, Hamilton and Trump would agree that the United States should have a strong national government, a positive balance of trade, and a tight immigration policy. 

Trump's short-run gain, and its appeal as a patriotic endeavor, faces severe unintended consequences. For example, it sets a precedent for companies to lobby directly with the president and to strike what are essentially extra-legal deals.

Similar to the tariffs of Hamilton and the later Whigs, Trump’s policy picks winners and losers. Rather than competing for advantage in the marketplace, companies can now threaten outsourcing in an attempt to gain better protections.

In the long run, this policy is obviously unsustainable. There are far too many large American companies for a president to personally oversee, and there is no calculus for when precisely a deal should be struck.

This sends a message of uncertainty and fear in the business climate. What is unseen is the reaction of competing industries that feel slighted. What is forgotten is the complexity of multinationals operating in our transnational world. 

The founding generation warned about faction, and many hoped that there would be no political parties, lobbying, or favoritism. Indeed, our liberal experiment is all about applying laws equally. 

In the late Colonial period, corruption was an assumed part of politics. Provincial governors would reward their family and friends with jobs and contracts as simply the course of the matter.

Things were supposed to be different in the new nation, but nevertheless, faction and corruption emerged as a major theme of American 19th-century politics. The Whigs inherited Hamilton's love of a national bank, tariffs, and government aid to specific industries.

The Democratic Party, while ostensibly in support of free trade and the common man, often sought to reward regional supporters with their own set of government gifts and transfers. 

When faction and corruption crept back into American politics, Americans threatened populist uprisings to reset the rules of the game. Presidents like Andrew Jackson and Grover Cleveland led the charge against government corruption in their generations.

Trump now comes marching into Washington like the uncouth Jackson, with the support of the common man, but carrying the policies of the opposing Whigs -- the policies of a latter-day Hamiltonian. It is a strange sight to behold. 

Trump says the rules of the game are rigged, that China is devaluing its currency and throwing off the balance of trade, so it is necessary to make deals to keep manufacturers in the United States. For Hamilton, the game was rigged because foreign manufacturers prevented domestic industries from even getting a start. But President-elect Trump should recognize that changing the rules mid-game is not fair either.

Unless Trump can implement policy that sets consistent expectations, or is established in law so that it treats all companies the same, his attempts to reward and punish companies on personal whim will only contribute to the erosion of justice in the market and a further loss of faith in government, if such is indeed possible. 

 

Michael J. Douma is an Assistant Research Professor and the Director of the Georgetown Institute for the Study of Markets at Ethics in the McDonough School of Business at Georgetown University.


 

The views expressed by contributors are their own and not the views of The Hill.