Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

10 December 2016

Corporate Takeover


[For a recent post on how Trump thinks, click here. For a recently popular page on the coming transition in free-world leadership, click here. For a recent post on saving federalism in the EU and US, click here. For a regularly updated page on Trump’s transition, click here.]

In May 2015, before Donald Trump even began to run for president, I wrote an essay with an ironic title: “Embracing ‘Corporate Governance’ and the TPP.” The term “corporate governance” was in quotes because of its “delicious ambiguity.”

To people in business and law schools, the term means the offices, rules and procedures through which shareholders and directors are supposed to govern corporations. But history and current events are giving the term a far more ominous meaning: the extent to which big business corporations are coming to govern the world, supplanting or taking over “traditional” government by nation-states.

Nowhere is this transition more “advanced” than in our own country. Two political scientists from Princeton and Northwestern Universities have developed “a single statistical model . . . . that includes measures of the key variables for 1,779 policy issues.” They concluded:
”Multivariate analysis [of these variables] indicates that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence. The results provide substantial support for [governance] theories of Economic-Elite Domination and for theories of Biased Pluralism, but not for theories of Majoritarian Electoral Democracy or Majoritarian Pluralism.”
This conclusion is consistent with my own analysis of the structure of American government, in which minority rule, and occasionally rule by single senators, has replaced simple majority rule.

The online BBC, reporting the results of the Princeton-Northwestern study in April 2014, was direct in describing it. Its headline read, “Study: US is an oligarchy, not a democracy.” Online versions of the study itself are now available in two places, here and here.

It bears repeating that all this happened before President-Elect Donald Trump ever threw his hat in the ring to campaign for president. Conventional wisdom suggests that many “average citizens,” especially skilled workers languishing in the Rust Belt and the South, voted for him in November’s election. They hoped he would stop or reverse the trend toward oligarchy. At very least, they wanted him to retard the globalization that has been exporting their jobs, their futures and their vanishing “American dreams” abroad.

Trump has indeed promised to halt or reverse the dire effects of globalization on millions of skilled workers. He proposed two means. First, he promised to renegotiate trade treaties like NAFTA and the WTO to American workers’ advantage. Second, he promised to use tariffs as high as 35% to stop and perhaps reverse the drain of good manufacturing jobs. While blunt protectionist tariffs would not work and would likely make things much worse, his recent idea of imposing a 35% tariff on goods produced by American factories newly moved abroad might work.

But even if Trump is successful in getting other oligarchs to build and keep more factories onshore, there’s something more fundamental he won’t do. He never even promised to slow down or stop the trend toward corporate oligarchy in the United States. On the contrary, he will strengthen and expedite it. Why would he do otherwise? He’s one of the oligarchs himself, or at least he aspires to be.

This truth was not patent until recently, when Trump almost filled out his dance card with names of proposed Cabinet members and key advisers. Virtually all of them have one or more of three characteristics. First, they utterly lack political or government experience. Second, most of them—especially those few with government experience—support a radical agenda of tearing down, not just streamlining, the regulatory and welfare state that protects the people from the oligarchs.

Among the most radical are EPA-Administrator-nominee Scott Pruitt, who denies global warming and wants to abolish the EPA or most of its rules. Similarly, HUD-Secretary-nominee Ben Carson reportedly doesn’t support housing subsidies for poor or homeless people or fair-housing rules. And, if her private and political work in Michigan is any guide, Education-Secretary-nominee Betsy DeVos wants to replace public schools with unaccountable private schools funded by vouchers.

The third salient characteristic of Trump’s team members is little noticed so far. Yet it might be the most important. Many of them are oligarchs in training but are not quite there. Although a few have served name-brand businesses and some have started their own companies, none of them (including Trump) has ever served as CEO of a major American multinational, let alone for any substantial period of time.

To be sure, several have enriched themselves and are billionaires. Treasury nominee Steve Mnuchin worked for Goldman Sachs for seventeen years. That was long enough to become a partner and serve as Chief Information Officer for an unspecified time. After that, his resume reads like one of a restless youth who can’t hold a job. He founded and served temporarily as CEO of several obscure financial and investment firms, and he’s had several corporate directorships. During his recent career in film finance, he also funded some creative blockbusters, including “American Sniper,” “Gravity,” “Avatar” and “Life of Pi.”

All these jobs, apparently, boosted Mnuchin’s net worth. But nothing in his resume suggests that he has the ability, perseverance or interest to lead, patiently manage or even to stick with a large organization through good times and bad. Isn’t that what a Treasury Secretaries do?

Commerce-Secretary-nominee Wilbur Ross is similar. He has never founded or built an industrial company from scratch, but he has brought a number out of bankruptcy to new life. Like Mnuchin, he got his start in New York finance: he worked 24 years at the New York office of Rothschild, Inc., where he eventually “[r]an Rothschild’s bankruptcy-restructuring advisory practice.” After advising others how to save bankrupt firms, he started his own rescue banking enterprise, first with Rothschild and then independently.

One of Ross’ biggest coups was buying a bankrupt steel company in Cleveland a few weeks before Dubya, as president, slapped 30% tariffs on some foreign steel. Of course Ross made a killing, as he did again with another bankrupt steel company a bit later. There he netted over $4 billion profit in less than two years. Not all of his gains were due to government action: he also apparently anticipated rising demand and steel prices as a result of China’s early-2000s infrastructure-building boom.

Ross later did a similar thing with the moribund textile industry, introducing new fabrics when no tariff aid or China boom assisted him. But in both cases—steel and textiles—part of the juice for revival came out of workers’ pockets, with pension downsizing, new work rules and defined-benefit pensions converted to 401(k)s.

Don’t get me wrong. There’s nothing wrong with what Ross did. Rescuing going concerns from bankruptcy, making them viable again, and putting at least some of the laid off back to work is a good thing. But is this the future of America—making clever moves, cleverly timed, just to slow or avoid a steady decline? Is America’s future in Rust-Belt industries undergoing inevitable declines, or in new industries now rising or still under development?

The thing that scares me most about Trump’s team is not what they’ve done, but what they haven’t done, and what they cannot see. Not once have I read about any of them recognizing the tremendous industrial and economic opportunity that the inevitable worldwide energy transformation offers. We Yanks need to jump into wind, solar, biofuels and safe nuclear power with both feet, before Germany and China corner the export market and we are left to import and install the products they make.

But Pruitt and other Trumpets want essentially to abandon the first three. And instead of spending the money needed to make nuclear power safe, they want to extend the operating lifetimes of forty- and fifty-year-old plants based on obsolete, unsafe designs, thereby vastly increasing the risk of a Chernobyl or Fukushima happening here.

Nowhere have I heard anyone even mention CRISPR-Cas9, the gene-editing technology that we Yanks recently invented. That technology is likely to revolutionize not just medicine, but agriculture, animal husbandry, chemical production and maybe even materials development. It could, in a few decades, have as big an effect on human life as cars, airplanes, radio, electric appliances and computers in the last century, combined. And nowhere have I heard anyone from Trump’s team praise Elon Musk and his Tesla luxury electric cars, his “Gigafactory” for batteries, or his low-cost Space-X rockets that, along with Richard Branson’s, might some day privatize space travel and enable extraterrestrial colonization. Aren’t Musk and Branson businessmen, too?

No, Trump’s team consists of corporate takeover and turnaround specialists, plus people like Betsy DeVos and Scott Pruitt, who have lots of ideological zeal and radical abstract ideas but no real experience running anything, let alone anything big and successful.

So what we have is a team of people skilled in taking over failing firms in failing nineteenth-century industries and, with the help of gimmicks like tariffs and fortuities like China’s now-finished infrastructure boom, keeping them alive for a while. With the help of a system that is already an oligarchy, that plan of action might insure a successful corporate takeover of America. But what then?

Not one of the people yet named to Trump’s cabinet even rises to the level of Robert S. McNamara. For about two decades in the postwar period, he and his fellow “whiz kids” rejuvenated Ford Motor Company successfully, ultimately making McNamara the first non-Ford-family CEO. By all accounts, he was skilled with numbers; he may have been the first “quant” to lead a major American multinational. Yet as Secretary of Defense, McNamara brought us the War in Vietnam, our first losing war and still our most disastrous blunder in foreign policy ever.

What does this sad history mean? It means that skill in industry or business, even at the highest levels, does not easily translate to government, let alone to foreign policy and military matters. And it bears repeating that no one in Trump’s entourage so far comes close to matching McNamara’s industrial record or skills. (Maybe Trump will cure this particular deficit in his team if, as recent reports suggest, he nominates and secures the confirmation of Rex Tillerson, CEO of Exxon Mobil, as his Secretary of State. But State is an odd position for leader like that; he might do a better job as Energy Secretary.)

Nevertheless, Trump and his team are preparing a corporate takeover of America. They want to do with our nation what Wilbur Ross did with his steel and textile takeovers. But the firms they represent and favor are America’s past. At best, they support stolid incumbents like the fossil fuel behemoths, which are making lots of fuel and lots of money while reserves of fuels last. At worst, they support makers of things like steel or textiles, which transportation costs, labor costs, and common sense will eventually transition to rapidly growing emerging markets.

Trump’s radical ideologues, like Pruitt, not only have little or no experience running any industries. They also threaten action and policies that may be even more disastrous in favoring industries of previous centuries. For example, Pruitt may be considering downsizing or abandoning ARPA-E, the part of the Advanced Research Projects Agency that funds basic research in energy.

As a whole, ARPA and its defense counterpart DARPA are among the most successful funders of new technologies in human history. Among many other things (some of which are classified) they funded development of the protocols and networks for the Internet. The initial idea was to develop a communication network capable of surviving a nuclear war. But when the network’s vast potential for business and commerce became apparent, Bill Clinton, on Al Gore’s advice, released it for worldwide commercial use, for free. The result is the Internet and the World Wide Web that we know today, which would not exist without ARPA’s and DARPA’s funding and initiative.

Today, the value of corporations that built on this advance—firms like Amazon, Apple, Cisco, Facebook, Google, Microsoft and Twitter—dwarfs by orders of magnitude the value of all the steel, textile and other firms that Wilbur Ross saved in his entire career. Yet Pruitt, who is neither a businessman nor a technologist, appears to be thinking about applying a budgetary knife to basic research on the energy transformation that everyone knows is inevitable, if only because the stores of fossil fuels in the Earth’s crust are finite.

There are two main reasons why we Yanks have made many of the greatest industrial advances in the last century, including lasers, transistors, integrated circuits, personal computers, high-altitude flight, atomic energy, atomic weapons, and the Internet. First, we recognize that private capital can’t always fund basic research in science and technology sufficiently, because by definition basic research has no fixed goals, often meanders, and has no set timeline and no guarantee of success. So to do what private capital won’t do, we fund much of our basic research through government entities like the DARPA, ARPA, NASA, NSF, and (for medical matters) CDC and NIH.

Second, regardless of the initial objective of the research, such as the rudimentary Internet’s military objective, when basic research discovers something with commercial potential, we put it out for private bids, or (as for the Internet) offer it to business for free. The notion that ARPA-E might be killed or downsized because it hasn’t yet produced results, or because its results might compete with century-old fossil industries, reflects a breathtaking absence of vision for both business and government.

Indeed, that’s what’s most sorely lacking in Trump’s Team so far: a vision of America’s future besides a corporate takeover and downsizing. We cannot “make America great again” by returning to the past and protecting incumbent industries like cable TV and fossil fuels. That’s why, in all of Silicon Valley, only one notable investor, Peter Thiel, supports Trump.

Maybe the ones who don’t support him should bull their way into Trump Tower and give him a piece of their mind and their vision. For it’s not just Trump’s corporate takeover or his hardening of our oligarchical arteries that will kill us as a nation. It’s his catastrophic lack of vision beyond immediate profit and protecting the old industries that rule America now.

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