Even if President Trump’s industrial-policy-by-Twitter-post fails over the long run to create jobs or prevent companies from moving offshore, there’s a good chance that it will appear, at first, to be a success.
But this is a dangerous illusion, the result of companies responding strategically to the new president’s threats. And it could lead to more bad policy if voters or policy makers draw the wrong conclusions.
That’s why it’s important to understand precisely how these new policies are likely to shape the numbers over the next few years. Some simple economics can help.
Mr. Trump has taken to Twitter to name and shame manufacturing firms planning to relocate some of their production lines overseas. His attacks on Carrier, on Toyota, on General Motors have made their chief executives squirm and, in some cases, have produced what appear to be results. Carrier, for instance, has promised to keep some of the jobs it had planned to send offshore in the United States. Other companies have recycled old announcements of their domestic expansion plans.
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The Upshot
Even if President Trump’s industrial-policy-by-Twitter-post fails over the long run to create jobs or prevent companies from moving offshore, there’s a good chance that it will appear, at first, to be a success.
But this is a dangerous illusion, the result of companies responding strategically to the new president’s threats. And it could lead to more bad policy if voters or policy makers draw the wrong conclusions.
That’s why it’s important to understand precisely how these new policies are likely to shape the numbers over the next few years. Some simple economics can help.
Mr. Trump has taken to Twitter to name and shame manufacturing firms planning to relocate some of their production lines overseas. His attacks on Carrier, on Toyota, on General Motors have made their chief executives squirm and, in some cases, have produced what appear to be results. Carrier, for instance, has promised to keep some of the jobs it had planned to send offshore in the United States. Other companies have recycled old announcements of their domestic expansion plans.
At first glance, pressuring a handful of companies seems unlikely to have much impact in an economy as large as that of the United States. Imagine that you are a chief executive of a company that has not been a Trump target; there are so many companies in the country that the risk of yours being denounced by the president is tiny. At least that’s what the math shows.
But the psychological reality is very different. Research has shown that people often overreact to insignificant risks, especially when the risks are so vivid. Just as it is almost certain that you won’t get eaten by a shark this summer, it is a near certainty that the vast majority of companies won’t end up in Mr. Trump’s cross hairs. Yet the fears persist, and people take greater precautionary measures than the actual threat warrants.
Moreover, Mr. Trump is targeting the asset that corporate bosses tend to protect most jealously: their personal reputation. Which makes them edgy.
So far, the evidence bears this out. There are plenty of anecdotes suggesting that Mr. Trump has executives running scared. Some are hiring communications and crisis managers. Few have been willing to announce the sort of plant closings that might put them in the harsh glare of the president’s spotlight.
But this doesn’t mean that Mr. Trump’s tweets have saved jobs. At least not in a lasting sense.
To see why not, put yourself in the shoes of a C.E.O. You’re not just deciding whether to send production offshore; you also need to decide when to act. This gives you a relatively cheap way to avoid the president’s ire: Mothball your blueprints for the new overseas factory, but don’t burn them. When the political threat passes — and, eventually, it will — just dust them off and move.
If enough companies follow this script over the next couple of years, the number of factory jobs in the United States should stabilize, or even rise. Mr. Trump’s eventual successor may well inherit a manufacturing sector that is superficially stronger, though it will hide an underlying weakness: thousands of C.E.O.s ready to move production offshore. As soon as Mr. Trump leaves the stage, several years worth of pent-up demand for offshoring may erupt, and as these plans are followed and factory jobs return to more normal levels, expect a sharp drop in manufacturing employment.
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Now imagine what all this will look like to a future policy wonk. Manufacturing jobs seemed to be scarce before Mr. Trump’s tenure, improved while he was at the helm, and then shrank sharply as soon as he left office. It might seem as though his angry tweets actually caused manufacturing to thrive.
But it would be a mistake to infer that businesses really perform better when threatened. Rather, the fluctuating jobs numbers reflect the ease with which cuts can be delayed, not prevented. Sure, a delay is, in itself, good news for factory workers who keep their jobs a little longer, but it doesn’t address their longer-term problems.
Indeed, manyeconomists, both Democrat and Republican, fear that Mr. Trump’s policy of naming and shaming will hurt the manufacturing sector in the long run. After all, the point of the exercise is to allocate workers and machines based on presidential diktat, not market forces. He is pushing corporate leaders to please the White House, rather than their customers and shareholders.
The cost of hiring crisis managers to deal with Mr. Trump raises the cost of doing business just as surely as a tax hike would. By making it more expensive to leave the market, he also creates a disincentive for foreign companies thinking of building plants in the United States.
The difficulty with trying to use the bully pulpit to create a lasting change in corporate behavior is that words — even a president’s — don’t much alter a company’s bottom line. Corporate decisions are driven by the balance of costs and benefits, and the benefits of offshoring are typically large and enduring.
Still, for short periods, even relatively minor incentive shifts can cause large reactions when what is involved is merely a delay, not fundamental change. For example, imagine two people who love Cancún and have decided to vacation there; if the cost of a flight rises by $100, they will go anyway, because the cost isn’t enough to deter them. But if the airfare rises by $100 on Sunday, the day they had planned to go, but was to remain at the original price on Monday, the travelers may well decide to wait a day. So fewer people may fly to Mexico on the weekend, when it’s more expensive, yet there will be no long-term impact on travel. Temporary policies often look as though they have disproportionately large effects, but they aren’t meaningful.
That is the odd truth here: Mr. Trump’s approach may appear to have had a big effect precisely because it’s not viewed as a permanent solution. In fact, the more temporary his threat-based industrial policy is thought to be, the more likely it is that chief executives will delay job cuts until the climate changes. Perhaps corporate bosses are currently pliant because they expect that this storm will pass.
But bad economics can be good politics. We may see some spectacular short-run effects, even if Mr. Trump undermines the long-run competitiveness of America’s factories. The political upside will be obvious in the monthly employment numbers, while the economic downside will be difficult to disentangle from the decades-long trend of declining factory jobs. Yet we shouldn’t be deluded. C.E.O.s will ultimately move jobs abroad if that’s what it takes to churn out profits.
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