Politics is not like business. Large companies are essentially autocracies, and governments cannot externalise costs, as Trump has done throughout his career.
It is arguably difficult to find the logic behind Donald Trump’s actions as president. The first few weeks of his presidency have bee marked by turmoil and conflicts with both the media and the courts, notably when it came to the implementation of his executive order on immigration. The language he and his advisors have been using are reminiscent of the authoritarianism and paranoia displayed by Nixon.
Why is his administration in such turmoil, while he was supposed to get things done? There is probably a way to understand Trump’s authoritarian tendencies and his threat to the courts and the media by looking at where he comes from and the environment in which he came to prominence: a large corporate organisation in an extractive market which essentially works like a dictatorship. While Donald Trump sold his presidential bid on the idea that, as a successful businessman, he would be able to make better deals than traditional politicians, he also seemed to assume that politics and business operate with similar rules. However, there are major differences, especially with the kind of rent-seeking business in which Trump gained prominence. First, politics operates with many checks and balances, which makes it difficult for a command-and-control type of governing as you see in large companies. Second, governments can’t externalise costs on a superior actor. Third, governments cannot choose a line of business and abandon others.
Companies are dictatorships
There are arguably many differences in the way business is governed around the world, but nowhere does it operate like a democracy. As this article makes clear, large companies are governed like more or less “enlightened dictatorships”. This is especially the case of the United States where mechanisms of employee participation in the strategic decisions of companies is not developed at all. This is very different in Germany, for instance, where the law mandates companies above a certain size to involve employees in decisions affecting not only their employment, but the fate of the company as a whole. In the United States, in contrast, business leaders expect a clear vertical line of command and compliance at all levels. Cisco CEO John Chambers, cited in the New York Times, said that
I’m a command-and-control person. I like being able to say turn right, and we truly have 67,000 people turn right.
Things are very different in government. First, the principle of accountability and division of power are cornerstones of the functioning of government, precisely to prevent the concentration of power in the hands of a single person, as is the rule in companies. Hence, while Donald Trump can fire whoever he wants in his company if they don’t comply with orders, it clearly cannot do so with elected representatives in Congress or judges formally independent from the executive branch. If you want to think of a political form that most resembles the Trump organisation, this would probably be a kingdom where kinship is the primary mechanism of allocation of power. Trump inherited the company from his father, appointed his children to head the company, and appointed his son-in-law to a major advisory post in the White House. It is not surprising that he now feels frustrated with an environment that is governed by so different rules and limits on one’s power.
Companies can be bailed out, governments less so
There is an excellent article in the New York Time by Adam Davidson explaining how the economic vision of Donald Trump is entirely shaped by his experience as a real estate magnate in New York. Manhattan real estate is a good example of what Acemoglu and Robinson would call an extractive market. Making money in this environment is not really about producing innovative products which are better or cheaper than the competition, but about securing rents inherited from one’s family or extracted from government via political connections. As Davidson writes
When trying to explain the idea of rent-seeking, I have always used one quintessential example from the United States — a sector in which markets don’t function, in which excess profits are held by a few. That world is Manhattan real estate development. Twenty-three square miles in area, Manhattan contains roughly 854,000 housing units. But there are many more people than that who want to own property there (…) Manhattan real estate development is about as far as it is possible to get, within the United States, from that Econ 101 notion of mutually beneficial transactions. This is not a marketplace characterized by competition and dynamism; instead, Manhattan real estate looks an awful lot more like a Middle Eastern rentier economy. It is a hereditary system. We talk about families, not entrepreneurs. A handful of families have dominated the city’s real estate development for decades: Speyer, Tishman, Durst, Fisher, Malkin, Milstein, Resnick, LeFrak, Rose, Zeckendorf.
One of the defining features of Donald Trump’s business career, the key of his success, has been his ability to secure rents obtained from politicians for his business ventures, and his ability to externalise costs on public entities. This started with a 40 year tax break granted by New York City for the renovation of his first hotel, which has cost $360 million to taxpayers to date. Trump’s endeavours have so far benefitted from $885 million in tax breaks, grants and other subsidies for luxury apartments, hotels and office buildings in New York. From the little we know about this tax filings, thanks to the intricacies of US tax rules, he was able to file a $900 million loss in the 1990s, and avoid paying taxes for up to 18 years. Hence Trump’s business has been to extract political favours for profit, and externalise risk and costs either to the state, or to creditors.
It is very difficult to do something like that in government because there is no superior entity to which costs can be externalised. Arguably, Trump tried to reproduce this logic by saying that Mexico would pay for the wall that he would build at the border, a demand that Mexico flat-out refused. Basically, Trump has evolved in an environment where somebody else can foot the bill for one’s screw ups. In government, beside cases of developing countries under structural adjustment programs or Eurozone countries in fiscal distress, governments generally have to foot the bill themselves for their own actions.
Governments deal in areas that nobody wants to deal with
Trump’s business career has been marked by constant expansion into new markets to reap new profits, and abandoning old ones. From Queens to Manhattan, to Atlantic City casinos, to Trump University and other ventures. In business, you can close down factories to move them where production is cheaper, and declare bankruptcy on the activity of your casinos. The major difference in government is that it has to do the things that business doesn’t want to do, or cannot do. Barack Obama explained this very well in a speech in October 2016:
Part of government’s job, by the way, is dealing with problems that nobody else wants to deal with. So sometimes I talk to CEOs, they come in and they start telling me about leadership, and here’s how we do things. And I say, well, if all I was doing was making a widget or producing an app, and I didn’t have to worry about whether poor people could afford the widget, or I didn’t have to worry about whether the app had some unintended consequences — setting aside my Syria and Yemen portfolio — then I think those suggestions are terrific. That’s not, by the way, to say that there aren’t huge efficiencies and improvements that have to be made. (Government) is not inherently wrecked; it’s just government has to care for, for example, veterans who come home. That’s not on your balance sheet, that’s on our collective balance sheet, because we have a sacred duty to take care of those veterans
Judging from his first weeks, Trump seems to think that the federal government can be operated with the same authoritarian style as the Trump organisation, without regard for checks and balances – which don’t really exist in the corporate world – and that the costs of his decisions can be borne by some other actor, most notably other countries. Trump thinks perhaps that he can do with Mexico or China what he did with public entities throughout his career. He may be up for some hu(uu)ge disappointments.