Friday, April 28, 2017
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Trump Offering a New Social Contract and Industrial Policy

The scope of the vision of America presented by President-elect Trump yesterday is breathtaking. In both social and industrial policy he is changing direction and challenging the consensus fashioned and maintained by business, financial, academic and political elites.  He is rewriting the social contract binding Americans, and challenging trade and industrial policy orthodoxy head-on.

Charles Krauthammer of Fox News now gets it about Trump, after over a year of dismissing him as unserious. Kudos to the good doctor for discovering that facts invalidated his conceptual framework and then fundamentally re-thinking how he understands Trump and the political phenomenon he has created, or taken advantage of.  Yesterday on Special Report, he explained Trump’s new social contract concisely:

But what is emerging as the Trump industrial policy may find a way to minimize or even eliminate the economic cost of this new deal (sooner or later, Trump will come up with his own catch-phrase, because FDR already appropriated “new deal”).  He has announced that, reigning globalist economic theory to the contrary notwithstanding, the United States must maintain a manufacturing sector. The shift of manufacturing to low wage countries is not a law of nature, not an inevitability, and not a path that America will take in the future. We cannot abandon the regions of our country that have devoted themselves to manufacturing.  He has not mentioned the national security dimension of such a policy, but it is obvious to all but a few theorists that you cannot maintain a strong nation if you depend on others to do your manufacturing.

While the Rust Belt is the heart of this phenomenon, in fact manufacturing has been devastated nationwide. California used to be a major manufacturer of automobiles with multiple assembly plants in Northern and Southern California, but all that’s left now is heavily subsidized Tesla, occupying a small portion of the former General Motors Assembly Plant in Fremont, California that once employed over 5000 highly paid workers who needed only a high school diploma or GED to support a middle class life.  That lifestyle has all but vanished all over America, not just in the Rust Belt.

The combination of information technology, robotics, new materials, and many other advances (including management advances such as lean manufacturing and continuous improvement organizational disciplines) has squeezed low value labor out of manufacturing.  Global companies that locate within their most important market are able to create serious competitive advantages over companies assembling products in low wage companies through flexibility and rapid response time.

There are many factors that affect the attractiveness of such strategies to companies. Too many to enumerate here completely. But two near the top of the list are already changing thanks to policy changes President-elect Trump has announced.

The cost of capital

Depending on the cost of capital, investment decisions change.  There is well over a trillion dollars in corporate wealth sequestered from the American economy by our highest-in-the-world corporate profits tax that will be enthusiastically repatriated under the new tax regime being promised.

Regulatory obstacles

Starting with environmental impact statements that delay projects – a serious negative factor, aside from the cost of the consultants and executive manpower consumed – American environmental regulations are serious obstacles. But there are many other regulatory burdens that are expensive and unnecessary. Trump has promised sweeping reform, and yesterday emphasize how he had learned from executives at Carrier that regulations are even more expensive than the wage differential, in costing out the option of the Monterrey factory versus investing in next-gen manufacturing in the USA.