President-elect Donald Trump is trying to remake the American economy one business at a time. The strategy? Cajole and scold until companies everywhere decide to make more things in America.
In just the past week, Trump used some of his newfound political capital — and some taxpayer dollars — to keep Carrier Corp. from moving manufacturing jobs to Mexico from Indiana, then over the weekend he threatened to apply a 35 percent tax to every US company that shifts operations overseas.
Can it work? Well, a targeted, tough-minded approach like this raises two big concerns.
One is that it can’t actually accomplish much. Trump saved about 800 at the Indiana plant. But Indiana has lost 7,000 manufacturing jobs in the past year, and the United States lost 4,000 in the past month.
Perhaps the bigger concern, though, is that when you try to improve the situation in one place, you sometimes make things worse elsewhere. Unintended consequences are everywhere in an economy as large and complex as ours. And when you’re focused narrowly on this or that business, you risk setting off a cascade of perverse effects.
Stay with the Indiana plant for a second. How long until other companies follow suit, threatening to leave the United States as a ploy to attract attention and get a similar package of tax breaks?
Or consider Trump’s threat of tariffs, where the risk may be even greater.
Across a series of weekend tweets, Trump said that he would impose a 35 percent tax on “any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its products back into the U.S.”
Now imagine you’re a company that’s thinking of building a plant in China or Vietnam. The last thing you want to do is pay a 35 percent tax to bring your goods back home. So maybe you’ll give up your plans. That’s not necessarily a good thing, if it means some other foreign firm will get to swoop in and pick up your discarded business opportunity.
Or how’s this for a workaround: why not start a totally new company, headquartered overseas? The new company won’t have to pay tariffs, because it didn’t break any of the rules about outsourcing. That’s a serious problem, because it gives American entrepreneurs and American business a reason to recast themselves as foreign entities.
Of course, the Trump administration could close this loophole, say if it decided to apply the tariff uniformly, to any company eager to ship goods to America, foreign or domestic.
Except then you might set off a trade war, where China or Europe responds to these far-reaching US tariffs with its own tariff regime, sapping global trade and ultimately making everyone poorer.
And even if Trump’s tariffs don’t start a trade war, they might still prove self-defeating. Why is that? Think of it this way. The goal of these tariffs is to stoke domestic production, which gives investors a reason to shift their money into the United States — rather than keep it in countries likely to be hurt by the new rules, such as China and Mexico. But with investor money flowing into the United States, the value of the dollar will tend to go up, which (you guessed it) ultimately hurts American manufacturers by making imports cheaper.
What’s particularly revealing about this last example is that it’s not intuitive in any way. Even for the most thoughtful non-economists, it’s virtually impossible to anticipate the backfiring chain of cause-and-effect that reaches from the pro-manufacturing ideals of Trump’s tariff to the anti-manufacturing effects of a rising dollar.
This kind of counterintuitive result happens all the time in economics. In fact, it is one of the most basic insights of the discipline: the forest is not just the sum of all trees. Macro doesn’t work like micro. And there is no straight path from “what’s good for this business” to “what’s good for the economy.”
There are parts of Trump’s platform that make room for this way of thinking, including his tax cuts, which are designed to set off a chain reaction of investment and hiring that turbo-charges the economy as a whole.
But the evidence of last week suggests that Trump’s vision is still very much grounded in a business by business, job by job, negotiation by negotiation approach to making things better for American workers.
That may benefit certain industries, or certain regions, but it doesn’t necessarily add up to a cohesive economic policy.
Already, congressional Republicans have started pushing back against Trump’s plans. But as president, he will have the power to enact certain kinds of tariffs on his own, not to mention a lot of sway over the legislative agenda.
And if you’re hoping that Trump’s vision will be expanded by far-seeing advisers, note that so far his team includes a lot of people with Wall Street credentials and real expertise in how to make individual businesses profitable — but a dearth of professional economists.Evan Horowitz digs through data to find information that illuminates the policy issues. He can be reached at email@example.com. Follow him on Twitter @GlobeHorowitz.