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Monday, February 6, 2017

The Problem with Presidential Deal-Making

Friedrich Hayek has a warning for Mr. Trump.

If American conservatives have an intellectual hero, it might well be Friedrich Hayek – and rightly so. More clearly than anyone else, Hayek elaborated the case against government planning and collectivism, and mounted a vigorous argument for free markets. As it turns out, Hayek simultaneously identified a serious problem with the political creed of President Donald Trump.

Hayek distinguished between formal rules, which are indispensable, and mere “commands,” which create a world of trouble.

One of Hayek’s most important arguments in his great classic, The Road to Serfdom, involves the Rule of Law, which he defined to mean “that government in all its actions is bound by rules fixed and announced beforehand.” Because of the Rule of Law, “the government is prevented from stultifying individual efforts by ad hoc action.”

In The Road to Serfdom and (at greater length) in The Constitution of Liberty, Hayek distinguished between formal rules, which are indispensable, and mere “commands,” which create a world of trouble, because they are a recipe for arbitrariness. When formal rules are in place, “the coercive power of the state can be used only for cases defined in advance by law and in such a way that it can be foreseen how it will be used.

Like the rules of the road, formal rules do not name names. They are useful to people who are not and cannot be known by the rule-makers – and they apply in situations that public officials cannot foresee.

Commands are altogether different. They target particular people and tell them what to do. (Think Hitler’s Germany, Stalin’s Soviet Union, Mao’s China, Castro’s Cuba.) They require the exercise of discretion on the spot. As examples, Hayek pointed to official decisions about “how many buses are to be run, which coal mines are to operate, or at what prices shoes are to be sold.”

The Importance of the Rule of Law

Hayek offered two arguments on behalf of the Rule of Law. The first is economic: If the government’s actions are predictable, then people are able to plan. In his famous formulation, “the more the state ‘plans,’ the more difficult planning becomes for the individual.” If officials are issuing commands, it will become much harder for people to have the kind of security that is a precondition for economic development and growth.

Presidential deals, deliberately done on an ad-hoc basis, could turn out to be Hayekian commands.

Hayek’s second argument, moral in character, involves a specific value: impartiality. When the Rule of Law is intact, public officials act behind a veil of ignorance. If the government does not know who will be helped or hurt by what it does, it cannot play favorites or take sides. For Hayek, the state should never specify “how well off particular people shall be and what different people are to be allowed to have and to do.”

Many late 20th-century conservatives, including Ronald Reagan and Margaret Thatcher, have been drawn to Hayek’s arguments; the same is true of contemporary figures like Paul Ryan and Ted Cruz. In sharp contrast, President-elect Trump prides himself on his skills as a dealmaker, and he wants to use those skills to “make good deals” for the American people. There is a real risk that in practice, presidential deals, deliberately done on an ad-hoc basis, will turn out to be Hayekian commands.

Consider in this regard Trump’s participation in the highly publicized agreement with Carrier Corp., a manufacturer of air-conditioning and heating equipment, to keep operations in the US. in return for tax breaks. Or consider Trump’s negotiation with Boeing Co., which brought down the cost of the Air Force One program.

There is a legitimate argument (long pressed by Democrats) that Medicare should negotiate prescription drug prices with pharmaceutical companies. But Trump’s endorsement of that argument undoubtedly stems, in part, from his enthusiasm for the role of Dealmaker-in-Chief.

The Problem With Presidential Negotiation

In the abstract, of course, no one should object if the president is able to secure better deals for the American people. A successful negotiation is not a command. But unlike a candidate or a president-elect, a president has coercive power. Any negotiation is inevitably undertaken under the shadow of that awesome power.

In a world of presidential deals, companies are going to have horrible incentives.

A succession of “good deals” by the executive branch might garner impressive headlines, but Hayek’s analysis offers a serious warning. Exactly which companies will end up with favorable or unfavorable deals, and why? A dealmaking executive branch, interacting with those in the private sector along multiple fronts, will be tempted to reward its friends and punish its enemies – and it will have plenty of ways to do exactly that.

In a world of presidential deals, companies are going to have horrible incentives – to curry presidential favor in countless ways, to act strategically, and to make promises and threats of their own, so as to avoid unfavorable treatment from government and to obtain optimal concessions from it. That’s nothing to celebrate. On the contrary, it is a road to serfdom.

One of Hayek’s enduring achievements was to clarify the importance of government neutrality and forbearance, not through anything like laissez-faire, but by avoiding commands in favor of clear, general, stable, predictable rules on which the private sector can rely. A Dealmaker-in-Chief might turn out, in practice, to be a Commander-in-Chief in precisely the sense that Hayek deplored.

A version of this article was first published by Bloomberg.