One of the great truisms about economics is that people assume CEOs have a deep understanding of economics when in fact most evidence suggests they don’t. This isn’t just the general and often true fact that people think captains of industry type CEOs are smarter than they really are. It’s more specific: what’s good for an economy isn’t just not identical to what is good for a company. Often they’re precisely opposite. You really don’t need to do anything more than actually read Adam Smith to know this. (You could actually argue it’s one of his central points.) And the point I’m making here is one that is almost a commonplace in policy circles if not on TV stock market news. I note it here because it’s possible, frighteningly possible, that we’re in the midst of a real world illustration of this reality, maybe one of the biggest or even the first.
Let’s start with a pretty uncontroversial observation: what Elon Musk and Donald Trump are in the midst of doing is pretty clearly the standard private equity playbook applied to the federal government. People refer to the example of what Musk did at Twitter. But really that’s an example of the PE turnaround model I just referred to, even though that didn’t actually make a lot of sense in the context of Musk’s purchase. Cut all the contracts, use strong arm tactics to settle those breaches on favorable terms, institute draconian layoffs – probably more than you think will eventually be necessary. Then add people back where things break. As I said, this is not a terribly controversial assertion. Musk and Co would likely themselves agree. Yesterday I watched Shark Tank’s Kevin O’Leary, a big Trumper, make exactly this argument on an appearance on CNN. It’s exactly what he does when he takes over a company in crisis, he explained.
Now, a couple points. For the purposes of this conversation, the human consequences of these disruptions are not the issue. The point is that sometimes companies come out of this more profitable, at least in the short run, which is often all the private equity firm needs. But again, a government is not a business, a national economy, which is closely intertwined with its national government, is not a business. And not just in the obvious sense that it’s not designed to make a profit, or the mostly obvious way in which often a national government should spend aggressively in bad economic times whereas that’s precisely the opposite of what a company should do. It’s also not in a zero sum competition with peer entities – so if I cut my costs relative to my competitors I sell more and win. In economic terms – and obviously that’s not the only terms governments operate in – governments main role is to foster economic growth and kinds of growth that benefit the population as a whole. That means creating a climate of predictability and rules that foster economic activity. It also means certain kinds of public investment that drive economic activity – basic research, etc., infrastructure. Obviously the specifics depend on your theories of economics. But most people would agree on the broad outlines. One of the most basic things the White House is doing right now is abruptly pulling a lot of money out of the economy. And while that might sometimes be necessary it’s always going to have at least a dampening effect on the economy.
Tariffs present a similar picture: Trump-style businessmen often try to terrorize adjacent companies into more favorable terms. And this is again, a basic part of the PE model, though Trump’s and Musk’s business history show an extreme form of it. (I know there’s more than one private equity model. But this is certainly one of them.) But Canada and Europe aren’t suppliers from whom we’re trying to pressure more generous terms. I think there’s a decent chance we’re still going to see some late night calls and bogus “deals” that call off the tariffs that are supposed to go into effect tomorrow. But a lot of damage will already have happened. Uncertainty and fears are the biggest killers of economic activity.
I should note of course that everything I’ve said above is based on the assumption that the motives are as advertised. And mostly, or to a great degree, I don’t think that’s true. But a lot of people on the outside do think so.
What Trump has done globally – in both senses of the word – is create a climate of extreme uncertainty around the US and global economies. If you have a business that is in any way exposed to global trade you almost certainly are being very wary of the current environment and probably putting on hold any new ventures until things calm down. Certainly there are a couple million civil servants in the federal government who are probably not planning any new spending for the foreseeable future. That’s not that many people relative to the whole national population, though it’s a big, big deal in certain regions. But universities and research institutions are doing the same things. Those are the most obvious examples. But it applies in less obvious ways throughout the economy. Right now everything seems very uncertain and up-in-the-air, both for a lot of businesses and consumers. If everyone decides they’re going to step back and not make any big purchases at the same time that gets you a sharp recession. And that’s pretty much the kind of economic moment Donald Trump has created.
