Saturday, December 3, 2016

Rule Based Capitalism Versus Deal Based Capitalism

Larry Summers describes the virtues of "rule based capitalism" which has been prevalent in the US and in most large developed nations.  Donald Trump struck a deal with Carrier in Indiana that caused it to reverse a decision about relocating a small plant to Mexico.  Carrier decided to retain around half of the jobs in Indiana, and to move the other half to Mexico.  In return,  Indiana gave Carrier a tax break that deferred some of the higher cost of production in Indiana.  More importantly, Carrier is a division of United Technologies which is a large federal contractor.  It certainly did not want to get on the bad side of a president who can influence federal purchasing decisions.  This was a very small deal that retained around 800 jobs in Indiana.  However, Donald Trump turned it into a big deal by claiming that the deal was part of his promise to "Make America Great Again".  Larry Summers refers to this as "deal based capitalism" and he describes how that commonly works to the disadvantage of citizens in more autocratic nations.  Corruption, and crony capitalism, become more common when politicians abuse their power to curry favor with the public by rewarding or punishing business entities who defer to them. 

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