Wednesday, November 23, 2016

Trump carrots beat Obama sticks

To paraphrase Peter Thiel, Trump's supporters take him seriously, but not literally, while Trump detractors take him literally, but not seriously. There's a lot of truth in that observation, because the more we know about Trump the more we realize that his bark is worse than his bite. He's not an inflexible ideologue; he's a businessman who wants to win. Maybe, just maybe, Trump is NOT going to start a trade war with tariffs (sticks); what if he wants instead to use carrots to boost trade and thus the economy?

Trump's interview with the New York Times yesterday is quite revealing in this regard, and very encouraging. Here's the money quote from Trump:

I got a call from Tim Cook at Apple, and I said, ‘Tim, you know one of the things that will be a real achievement for me is when I get Apple to build a big plant in the United States, or many big plants in the United States, where instead of going to China, and going to Vietnam, and going to the places that you go to, you’re making your product right here.’ He said, ‘I understand that.’ I said: ‘I think we’ll create the incentives for you, and I think you’re going to do it. We’re going for a very large tax cut for corporations, which you’ll be happy about.’ But we’re going for big tax cuts, we have to get rid of regulations, regulations are making it impossible. Whether you’re liberal or conservative, I mean I could sit down and show you regulations that anybody would agree are ridiculous. It’s gotten to be a free-for-all. And companies can’t, they can’t even start up, they can’t expand, they’re choking.

This is extremely encouraging. Obama's approach to keeping jobs in the U.S. was to penalize corporations for doing inversions. Trump's approach is to create incentives—lower taxes and reduced regulatory burdens—for corporations to relocate here, to bring jobs back. Obama preferred the stick approach, while Trump appears to favor the carrot approach. Guess which one works better? It's like with capital controls: if a country won't allow capital to leave, it will never come in the first place. The best way to attract capital is to assure the owners of capital that they can take their money out whenever they want, with no penalty, and with no losses from devaluations and/or inflation in the meantime.

Trump is a businessman, and he understands how businesses work. He understands that incentives are important. Obama never understood this, and that's one big reason why the economy has been so weak for the past 8 years. I'm starting to get very optimistic about the future.

UPDATE: Matt Ridley, always worth reading, weighs in with similar thoughts here.


Frozen in the North said...

You know the problem with being president of the USA is not the black and white issues, its all the gray stuff. usually, the easy stuff doesn't make it onto the President's desk. Talking to the CEO of apple and saying it would be great to have a factory in the US is an easy one, making viable for Apple to have a factory in the US is another issue entirely, and well outside of the President's purview. Its true that you can scare the crap out of the whole planet to get what you want, that will work until some guy calls your bluff.

The issue for Trump is how he deals with the difficult stuff.

As an example, Trump decides to really piss off the Mexican -- because he can after all they are all thieves and murderer. It would be easy for Mexico to declare that all drugs that transit via Mexico is no longer a crime, bring to America the drug problem it created in Mexico. Of course this will never happen, but then no one believed in a Trump presidency either!

Benjamin Cole said...

Cook's reply was also interesting. He said there is no longer the talent pool in America to allow manufacturing of smartphones.

Cook's response casts a harsh light on the promises of free trade (actually negotiated trade, but let that go), when such a policy results in demolition of manufacturing ability.

Cook says game over, no physical or intellectual infrastructure left in U.S.

That said, the Trump approach is better than the Obama method.

Scott Grannis said...

If the U.S. economy became a far more attractive place to manufacture stuff (because of lower tax rates and fewer regulatory hurdles), and if the only barrier was the lack of educated and trained workers, I suspect business would find a way to overcome that barrier. For that matter, American businesses for years have been sponsoring research at American universities, hoping to grow talent that, once graduated, can become employed. Business is loathe to pass up profitable opportunities for lack of factories or trained workers. I'm sure Cook would agree.

John said...

Looking forward to more specifics on regulatory reform.

pgrommit said...

Here's another big reason for the slow growth economy, 70% of which is consumer spending. The average worker hasn't been rewarded for helping create those record profits anywhere near the way he/she was after the Kennedy/Reagan tax cuts kicked in. If more money HAD been put in more peoples' pay checks the spending/centric economy would be ripping now. Is it really more complicated than that?

Scott Grannis said...

pgrommit: Actually, it is a bit more complicated. From my supply-side perspective, consumer spending does not drive growth. Growth only results from an increase in the economy's productive capacity. Supply creates its own demand; demand does not create supply. We can only spend what we've produced.

The problem of slow growth stems in part from the reluctance of companies to invest, for whatever reasons. Without investment there can be no productivity gains, and productivity gains are what's needed for growth.

In any event, what you propose (that companies pay higher wages out of their record earnings) has already happened in a sense. The federal government has essentially borrowed all the record corporate profits and used the proceeds to fund increased spending, most of which took the form of transfer payments. The government has already done, in a sense, what you are proposing the businesses do. After all, we know that the federal government has borrowed more than corporations' record profits, and we know that transfer payments are at record levels. All of the income redistribution you propose has already occurred. And we are left with the weakest recovery on record.

Think about this: corporate profits have to be spent by someone; they are never just put under the mattress. Corporations can lend their profits to individuals, other corporations, or the government. Or they can invest them. Investment has been very weak however, so we know that most of the record level of corporate profits has been lent to someone. We know also that the federal deficit has more than doubled in the past 8 years, and the net increase of the federal debt is of about the same size as the record level of corporate profits over the past 8 years.

pgrommit said...

"If you work hard, you'll get rewarded" was one of the basic tenets of free market capitalism and our society through most of the 20th century, and helped create the great middle class. It is no coincidence that during that time avg. workers did get rewarded. Since when did it become "income redistribution", with all the negative connotations(communism/socialism)? If average/lower level workers aren't necessary and essential to creating the profits, they would NOT even be on the payrolls, would they? Who, in your view, SHOULD get rewarded?

NormanB said...

The Socialist and government controlled economies pump up their system with money and debt because the economies aren't strong enough (ever!!) to fund the promises of these governments. Then comes the time when the money they used to pay for everything says, 'Wait a minute it'll be worthless' and so they want to take the cash somewhere else. And this is what causes money to leave Venezuela, China, etc and concurrently what makes these countries put on 'capital controls'. It never works and the central controls just make the whole thing worse. Thus, in Venezuela the black market value of the Bolivar has dropped by half in less than four months with more to come.

Johnny Bee Dawg said...

Most excited I've been about the future of America in MANY years.
I think we are in for a historic period of reform and growth to rival Reagan.
Reagan was the pioneer, and he had a DEM Congress.
We already have the blueprint now. We can GO.

God Bless America and the US Constitution!

Thinking Hard said...

Scott - I have read reports recently that John Allison is being considered for Secretary of the Treasury. What effect do you see from that type of appointment? I have read his book and his proposed solutions...we could be in for quite a shake-up if he gets his way. Mostly positive changes for long term growth but with some potential short term negative consequences.

Scott Grannis said...

Re John Allison: I have met John several times (at Cato functions) and read his books, and I think he would make a terrific Treasury Secretary. He undoubtedly would shake things up—there's a lot that needs shaking up—but I think the result would be very positive for the markets and for the economy. For the moment I'm at a loss to come up with anything negative.

I've mentioned John several times over the years, and I recommend three posts for more insights: John Allison as the John Galt of Ayn Rand's "Atlas Shrugged;" John Allison on opportunity costs, and John Allison vs David Stockman.

The Cliff Claven of Finance said...

If Trump doesn't really mean what he said (during the campaign),
that's not good news -- it's bad news.

Industrial production in the US is higher than it's ever been.

Claims that we don't manufacture "stuff" are false.

We manufacture lots of stuff with fewer and fewer people required to make the stuff.

Goods with high labor content tend to be manufactured abroad at much lower wage rates.

Trump can't change that -- the trend of high labor content manufacturing moving offshore has been in progress in the US and Europe since the 1960s.

It's also a myth that trillions of dollars from overseas profits are held overseas (just waiting for ultra low tax rates to come back to the US and make the US economy explode.)

The money is not hidden under a mattress in Europe.

It has been deposited in banks -- at least half in US banks ...
who make loans to businesses, individuals and government
-- often US businesses, individuals and our Treasury bonds.

The businesses and governments can be anywhere, and are often in the US.

The "offshore profits" may not be taxable, but they are already being used by someone.

Lots of the "offshore profits" have been deposited in US banks in Manhattan.

Scott Grannis said...

Cliff: you are correct that industrial production is at all-time highs, even though industrial employment has been declining for decades. We are exporting lots of stuff. Unfortunately international trade is Trump's major weakness. That's why I'm encouraged that he has people like David Malpass and Steve Moore advising him on economic policy, because they understand how things work.

You are correct that the trillions in corporate profits held overseas are not lost to the U.S. economy. Those dollars are most likely invested here already, via a number of different avenues. But as I've pointed out, the increase in federal borrowing has effectively absorbed all of corporate profits in the past 8 years. If taxes are cut on profits that are repatriated, that has the potential to generate a significant increase in federal revenues. Right now the government is collecting 35% on nothing. 15% of a few trillion dollars would be a huge improvement from the perspective of the federal budget.

Furthermore, the knowledge that profits are no longer going to be taxed at onerous rates would almost certainly result in increased investment, higher profits, higher employment, and higher wages, and all of that would boost federal revenues.