Scott Sumner  

The Carrier scandal

On the Italian referendum... The Dumbest Thing Batman Ever ...

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

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Comments and Sharing

COMMENTS (19 to date)
Jeff writes:

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 writes:


What do you make of claims such as these ( 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 writes:

I thought you were reserving this sort of post for TheMoneyIllusion.

Scott Sumner writes:

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 writes:

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 writes:

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 writes:
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.)

Nonsense, by this standard the US President hasn't been leader of the free world at any point in your lifetime.

bill writes:

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 writes:

Bill, " 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 writes:

"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.

How many of us have ever formulated in our minds what law means? I am inclined to think that the most would give a meaning that was never the meaning of the word law, at least until a very few years ago; that is, the meaning which alone is the subject of this book, statute law. The notion of law as a statute, a thing passed by a legislature, a thing enacted, made new by representative assembly, is perfectly modem, and yet it has so thoroughly taken possession of our minds, and particularly of the American mind (owing to the forty-eight legislatures that we have at work, besides the National Congress, every year, and to the fact that they try to do a great deal to deserve their pay in the way of enacting laws), that statutes have assumed in our minds the main bulk of the concept of law as we formulate it to ourselves. I guess that the ordinary newspaper reader, when he talks about ‘laws" or reads about "law," thinks of statutes; but that is a perfectly modem concept; and the thing itself, even as we now understand it, is perfectly modem. There were no statutes within the present meaning of the word more than a very few centuries ago


Thus at first the American people got the notion of law-making; of the making of new law, by legislatures, frequently elected; and in that most radical period of all, from about 1830 to 1860, the time of “isms” and reforms — full of people who wanted to legislate and make the world good by law, with a chance to work in thirty different States — the result has been that the bulk of legislation in this country, in the first half of the last century, is probably one thousandfold the entire law-making of England for the five centuries preceding. And we have by no means got over it yet; probably the output of legislation in this country to-day is as great as it ever was. If any citizen thinks that anything is wrong, he, or she (as it is almost more likely to be), rushes to some legislature to get a new law passed. Absolutely different is this idea from the old English notion of law as something already existing. They have forgotten that completely, and have the modern American notion of law, as a ready-made thing, a thing made to-day to meet the emergency of to-morrow.

Popular Law-making: A Study of the Origin, History, and Present Tendencies of Law-making by Statute
by Frederic Jesup Stimson (1910)

bill writes:

@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 writes:

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 writes:

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 writes:

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 writes:
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.
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 writes:

It looks like Trump may have managed to ensure that American Carrier jobs are replaced by automation instead of Mexicans:

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 writes:

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:

With Summer's in the role as stuffy professor and Trump represented by Thornton Mellon.

TMC writes:

"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 writes:

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.

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