Power tools

By Atul Bhatia, CFA

In recent months, the Trump administration has sought or executed on actions that leave the U.S. government more closely intertwined with private enterprises. These range from direct investment in select U.S. chipmakers and mining companies to revenue participation in exports of strategic assets. Less directly, the administration has sought to use tariffs to influence supply chain management across the entire private sector.

Decisions like these have been criticised as “unprecedented” and “government overreach” by commentators on both the left and right of the political spectrum.

In our view, those comments emphasise labels over reality, ignore important context, and – most importantly – focus too heavily on today’s concerns while ignoring the significant implications for future government action.

Unprecedented? Overreach?

Strictly speaking, we don’t see these actions as unprecedented.

The U.S. has taken stakes in private entities in the past, most recently in response to the global financial crisis, and has even directly operated private assets, such as President Harry S. Truman’s decision to take over steel mills during the Korean War.

There are fewer direct analogues for the Trump administration’s idea to take a cut of sales on newly licensed chip exports to China, but that’s largely a matter of form. For decades, the U.S. government has used overseas arms sales to bring down the per unit cost of key weapons systems used by the U.S. military. It’s a different structure from a revenue-sharing arrangement, but the bottom line for the U.S. Treasury is the same: more export licences, more cash in the bank.

The question of government overreach is more political than economic. Reasonable people can certainly come down on both sides of the economic and strategic tradeoffs involved with government ownership of productive assets in key sectors.

An owner without title

More broadly, however, we think the overreach question mischaracterises the existing relationship between the federal government and private enterprise in the U.S. In particular, it overlooks the many ways in which long-standing government powers are tantamount to partial U.S. ownership of many private endeavors.

Take individual investors who buy stocks. For those shareholders, the rights and privileges largely boil down to percentage participation in the company’s earnings, a right to vote on major corporate decisions, and a right to vote for the board of directors, which hires management and protects shareholder interests.

Is the U.S. government really in a very different position? Similarities abound:

• Economics: The U.S. gets a cut of earnings in the form of corporate taxes, and it gets that in cash. Private shareholders only receive dividends if the board of directors decides to pay them.
• Major decisions: Federal officials don’t directly vote on a merger or acquisition, but they have significant ability to reject or modify deals under antitrust rules.
• Policy influence: The government doesn’t currently appoint management, but we’d argue that the U.S. can use its regulatory and fiscal tools to heavily influence corporate strategy regardless of who is CEO. Set the rules of the game in a particular way, and you can dictate what the players will do.

Add it all up, and the U.S. may not have an explicit stake in private companies, but the set of rights and powers it does have at least puts the government in the ballpark of ownership.

The more things stay the same, the more they change

As a result, the practical difference between the Trump administration’s policies and the existing government framework is one of degree, not kind. But when it comes to process, that’s where we see what we believe is a radical change.

Prior administrations used relatively slow-moving tools with broad input. The current administration, however, has used broad interpretations of existing legislative authority to make unilateral policy moves. In many cases, we believe, this essentially boils down to the president choosing to exert control over a private company or contract. The moves are swift, so-called bureaucratic speed bumps are flattened out, and quick, decisive action is the hallmark.

The immediate impact of these moves may very well be a positive. When evaluating any individual move, it comes down to the quality of the idea. If it’s good, moving faster works. If it’s not good, faster implementation just means faster problems.

But this type of centralised ad hoc decision-making raises two major, related structural concerns.

First, they can’t all be winners. Even a sound decision-maker is going to have an occasional stumble, and without an institutional control, the bad decisions can flow just as easily as the good ones. Japan’s Ministry of International Trade and Industry achieved fame in the U.S. for its role in promoting Japan’s auto industry. Less appreciated is the agency’s attempt to block Sony from using transistor technology, raising the specter of a Walkman-less 1980s.

Second, even if one likes the current policy mix, the nature of democracy is changing political leadership. The next administration can use the same techniques to switch goals and promote contradictory policy.

Take the nearly completed wind farms that the administration effectively cancelled. Whatever one’s views on wind power, the nearly worst-case scenario for the economy is to make the investment but never reap the benefits. In a similar vein, future administrations could cancel pipeline or bridge permits. The only thing economically worse than a bridge to nowhere is half a bridge to nowhere.

Getting off the merry-go-round

We see four ways the economic policy framework can evolve from here:

• New business as usual: If this process becomes the new normal, we see headwinds to large-scale economic investment.
• SCOTUS “one and done”: It’s notable that many of the president’s actions have only proceeded based on the Supreme Court allowing him to act while legal challenges move through the lower court system. If the Court ultimately rules against the administration, this could largely foreclose future administrations using these tools.
• Return to Lochner: In the early 20th century, the Court was in its so-called Lochner era, where it intervened consistently in economic policy. The period is now widely viewed as judicial overreach, but the Court retains the power to return to that framework and pass through only economic decisions it agrees with.
• Congressional action to constrain executive power: While in many ways the most constitutionally robust, we think this outcome is effectively impossible given current political realities.

Where to next?

For investors, the issues raised by centralised decision-making are easy to ignore for now, in our opinion. There is uncertainty on how the Court will rule, and the long-term consequences will depend both on electoral results and how future presidents choose to exercise – or not – the authority the current administration claims. We remain concerned, however, on the sustainability and advisability of the current path, and believe the typical legislative and regulatory process offers important safeguards.