What does today's GOP have to offer small-government conservatives?
Trump's crony capitalism is a greater intrusion into free markets than the left's industrial policy.
Of all the disturbing developments in Donald Trump’s serially disturbing second term, the following hit me particularly hard.
In a lengthy social media diatribe about mail ballots, Trump wrote: “Remember, the States are merely an ‘agent’ for the Federal Government in counting and tabulating the votes. They must do what the Federal Government, as represented by the President of the United States, tells them, FOR THE GOOD OF OUR COUNTRY, to do.”
There is a constitutional provision directly on point and directly in contradiction. Article I, section 4 says: “The Times, Places and Manner of holding Elections for Senators and Representatives, shall be prescribed in each State by the Legislature thereof; but the Congress may at any time by Law make or alter such Regulations, except as to the Place of Chusing Senators.”
During the ratification debate, the controversial part of this section wasn’t the authority over congressional elections given to the states. It was the power of Congress to override what the state legislatures decide. Hamilton devoted Federalist No. 59 to defending this ultimate authority for Congress, not the president. If the Constitution had been understood to say what Trump asserts, it never would have been ratified.
I suppose this exercise of either Trump’s constitutional ignorance or contempt hit me particularly hard because, as a small-government conservative, the principles of dual sovereignty and separation of powers are fundamental bulwarks against an overweening national government. Trump’s social media diatribe abandons both and threatens to vitiate them.
Under our constitutional order, far from being “merely an agent” of the national government, states have dual sovereignty with it, the ability to act independently and exercise independent judgment over matters not expressly granted exclusively to the national government. There is an extensive body of jurisprudence over what the national government can and cannot do to induce states to abide by federal preferences or assist in the implementation of federal programs.
In the case of congressional elections, the Constitution does give the ultimate authority to the national government. But to Congress, not the president. If Trump actually attempts to prohibit mail ballots – which should be the end of the Republican Party in Arizona, where three-quarters of voters use them – he undoubtedly will manufacture some fig leaf of statutory authority, as he has chronically in his second term. Trump’s contempt for the separation of powers is unbounded.
Small-government conservatives are almost always also economic conservatives, believing that markets are the best way to allocate investment capital and the production of goods and services. The role of government is to optimize the conditions for markets to do this work, through non-distortive tax policies and regulation that is reasonable, predictable, and applied equally to all economic actors.
One of the fundamental ways government optimizes market productivity is by creating and maintaining a strong and stable currency. Trump is a weak dollar advocate and threatens currency stability, and much more, by his efforts to erode the independence of the Fed.
Trump’s shakedown of Intel for 10% of the company has sparked broad discussion about industrial policy and state capitalism. But what Trump is concocting isn’t industrial policy or state capitalism, both of which have some ideological rationale and consistency to them. Instead, Trump is instituting crony capitalism.
Under industrial policy, the government attempts to guide the private sector economy by identifying strategic sectors and to direct investment capital to them through tax preferences, regulatory preferences, and subsidies. In state capitalism, the government also attempts to guide the private sector economy, but through actual ownership of companies deemed to be in strategic sectors.
Both are characterized by what Hayek called the “fatal conceit”. That is the belief that politicians and bureaucrats can discern the strategic sectors for the future and more productively deploy or direct investment capital than a free market, driven by the free, independent decisions of investors, business owners and managers, and consumers. Experience repeatedly demonstrates Hayek to be correct.
Trump’s erratic tariffs are, in part, an element of an industrial policy, attempting to bolster domestic manufacturing beyond what a free market would produce. However, the Intel shakedown, and other similar exactions, isn’t really an element of industrial policy. The only thing the conversion of federal grants into equity did for Intel was dilute existing shareholder ownership.
Economic conservatives believe that the relationship between government and private enterprise should be at arm’s-length. Government should be a regulator and taxer, but otherwise separate and apart from private enterprise.
Trump regards the national government as a commercial enterprise itself. It should leverage its power and authority to make money for itself, beyond the usual ambit of taxes and fees, in addition to gaining a say over the internal operations of private businesses.
Hence, if Nippon Steel wants to buy U.S. Steel, which requires government approval, the national government is to get a golden share that gives it authority over the acquired entity’s internal operations.
If Nvidia and AMD want an export license to sell computer chips to China, Uncle Sam gets 15% of gross revenues.
And if Intel wants the president of the United States to stop badmouthing its CEO in public, the price is 10% of the company.
The Trump administration says this is only the beginning. It is looking at creating some sort of quasi-equity stake in the granting of patents, a specific constitutional responsibility for the national government. Another shakedown target is defense contractors.
An industrial policy is usually limited to what is thought to be strategic sectors. The left wants to subsidize green energy and, albeit with less consensus, manufacturing.
There is no limit to Trump’s crony capitalism. As the patent scheme illustrates, all of private enterprise is a potential target. The number of businesses that need some sort of approval or action by the national government is vast. No business can feel immune from the threat of the national government, in exchange for performing a governmental task, demanding a share of revenues, equity, or control over internal operations.
The subsidies of the left’s industrial policy are far less of an intrusion on free markets than Trump’s crony capitalism of demanding parts of companies or their sales. The intrusion into the internal operations of private businesses from the Biden administration’s industrial policies, such as providing day care, pale into insignificance to what Trump demanded from Nippon Steel through the golden share. Or what Trump is positioned to do with the Intel share.
Additionally, the industrial policy subsidies of the left can be undone, as was partially executed in the budget reconciliation bill for the green energy subsidies. Trump’s crony capitalism, which embeds government in private businesses, will be more difficult to undo.
The Republican Party has never been truly a small-government party or an economic conservative party. However, since the Reagan revolution, it has been a party through which small-government and economic conservatives could hope to advance their ideas and principles, and even sometimes succeed. Under Trump, that hope and opportunity has been extinguished.
I don’t know what the political consequences of this will be. But the economic consequence will be more stagnation and uncertainty.
Reach Robb at robtrobb@gmail.com.