Outside the Box: CEOs pandering to Trump risks dangerous ‘caudillo capitalism’

Assessing Donald Trump’s proposed economic policies in a recent article for the Weekly Standard magazine, economist Irwin Stelzer defended protectionism, but criticized displays of what he called the “Caudillo Capitalism” often seen in authoritarian regimes.

Protectionism has always been part of capitalist theory and practice. Adam Smith, arguably the founder of free trade, clearly defended retaliation against countries that imposed tariffs. Stelzer quotes Smith on lifting tariffs after a period of successfully imposing them: “The recovery of a great foreign market will generally more than compensate the transitory inconvenience of paying dearer during a short time for some sorts of goods.”

If theory allows for tariffs, the real world justifies them. Chinese factories, for example, are heavily subsidized with capital from highly subsidized state banks. Those factories sell goods at prices made even lower by the manipulation of currency. Moreover, the Chinese-made goods Americans buy at Wal-Mart and elsewhere are manufactured by a labor force that works under conditions we find intolerable for U.S. workers.

We also live in a world, Stelzer wrote, where “the price of capital is determined by central banks, and the price of labor is set in an unequal bargain between the workman/seller of labor and the buyer, especially now that the power of trade unions in industries manufacturing tradable goods is not what it once was.”

Moreover, politicians cannot ignore a public sense that the trading system is working against the middle class. But if some form of protectionism is tolerable under the theory of capitalism, the type of “Caudillo Capitalism” that President-elect Donald Trump may instill is not.

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Imposing tariffs results from a formal political process, after all. But executives of companies seeking deals like the one Trump gave to the Carrier Corporation UTX, -0.84%  are already saying they will stay at Trump’s hotel in Washington, D.C. CEO’s may also pander to an interventionist president rather than make the most efficient use of capital. Therein, Stelzer says, “lies the basis of Maduro’s Venezuela, the Castro’s Cuba, Putin’s Russia, and other failed economies.”

Indeed, such pay-to-play behavior is presumably what distressed many voters about the Clinton Foundation, which contributed to Hillary Clinton’s defeat.

Columnist Felix Salmon puts America’s possible direction plainly when he writes that “what we’re experiencing now is a dizzying move to a Russia-style capitalism where, more than ever, success in business is associated with being close to the government and to the family of the president.” The tech summit in December, where technology business leaders gathered at Trump Tower, was a good example, Salmon says, of CEOs knowing how to voice support for the new administration because this type of capitalism is “depressingly common in other parts of the world.”

Salmon predicts that the World Economic Forum in Davos later this month will bring “capitulation” and resignation among business and economic leaders to the realities of Trump’s election and the “rise of isolationism and nativism around the world.” Global elites, Salmon adds, have always succeeded by working with governments, not via principled stances against them.

The transition to a Trump administration is progressing, and yet there is a legitimate sense of unease that the U.S. is entering into a political phase that represents a momentous break with its past. Presidents have not traditionally told CEOs how to run their businesses in the U.S. — that’s one reason why the U.S. is one of the least-corrupt countries in the world.

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