Trump's Troubling Economic Turn

During the now-distant 2024 election campaign, Donald Trump articulated a program of growth through deregulation as the antidote to the go-slow Biden years. He has made good in part on that program through his tough-minded stance on subsidies to electric vehicles, which is evidenced by GM’s $6 billion write-off of its EV portfolio and the effective evisceration of the CAFE (Corporate Average Fuel Economy) standards for fleets that distort the major investment firms.

Sadly, however, for each of these deregulatory initiatives, there are other Trump interventions that make him look like the alter-ego of the May-December coalition of Zohran Mamdani and Bernie Sanders, with their misguided call for more affordable housing.

That comparison rings all too true, given that the first bombshell in this brave new world comes from his out-of-the-blue post on Truth Social that he will be “taking steps to ban institutional investors from buying more single-family homes.” His great insight is that “people live in homes, not corporations.” That point is true for everyone, including those who rent from large firms like Blackstone, whose stock has been heavily hit by the announcement, resulting in an initial loss, followed by an uncertain recovery. There is no reason to think that home ownership is superior to rental ownership, given that landlords may well have expertise that tenants do not have in managing collective action problems, which is why, as Yale Professor Henry Hansmann argued back in 1991, in a tax-free world, condominium ownership takes a back seat to the same rental arrangements that Trump wants to upset.

The question is what drives him to this peculiar result. It is certainly not the case that these firms have any kind of monopoly position in any segment of the market, for, as the Wall Street Journal has noted, the share of a very large market occupied by big players like Blackstone is about two percent, which in this huge market is big enough that its losses could run into billions of dollars. To make a good case for regulation, he has to show a reason why exiling these firms, and other smaller large firms, will improve the housing stock and lower rentals. Trump made no effort to demonstrate a proposition that is surely wrong. These large players bring a huge amount of expertise to their work in a specialized niche that smaller rental firms may well be unable to duplicate. Cutting out this group of buyers may reduce the price of some housing units, but it will surely reduce the supply of housing as well, which will reduce the size of the housing market, so that the likely outcomes of this madcap scheme of populism are the same destructive consequences on the right as on the left.

Worse still, the entire episode is a diversion from the real problem, which is the government's block on the construction of new family housing by all developers, both large and small. Zoning restrictions, environmental inspections, union blockages, and NIMBYism all delay new entry, on the one hand, and on the other, strengthen the market position of established firms when local, state, and national regulations block new construction, which is measured in months and years in such progressive strongholds as New York and California. Yet Trump ignores the fundamental theorem in this area: the only way to address unwise current restrictions is to remove them. The solution is never to put in place a second set of restrictions that compound the disadvantages of the first. Like rent control, Trump’s naïve populism may win votes, but it will wreck housing markets.

The second notable event comes from a recent Executive Order that Trump directed against military contractors that proposes, amongst other things, to limit buybacks and dividends, as well as limit executive compensation to $five million until the production of military goods and services improves to what he regards as an acceptable level. Talk about heavy-handed intervention! Right now, these military contracts are difficult to negotiate and to perform. And by no means can it be said that all the fault in any given case lies with the contractors, the government, or both combined in uncertain proportions.

These are not simple bilateral contracts where the seller delivers a finished product for which the buyer, here the military, pays a fixed fee. Instead, these contracts all involve multiple perils, of which one major cause is that a delay in performance by one party produces backlogs up and down the chain of production. But a priori, there is no way to determine where and why the loss of momentum occurs. The government is often responsible because it does not prepare a proper specification of what must be done or delays the performance of some key step that must be done correctly for the work to proceed. Or it could be that one subcontractor fails to meet its production deadline, preventing the other contractors from completing their work. If contractor A does not prepare an adequate delivery system, contractor B cannot properly perform its installations. Or it could be that no one is responsible for the delays that could be attributed to hurricanes or strikes in the transportation industry. The sheer conceit of Trump is that he has made a massive condemnation of an entire industry, which is business madness when sequential performance is a pervasive feature in these complex contracts. Thus, the only way to deal with these situations is through a dispute resolution process that involves standard contract provisions — think of payment and performance bonds, liquidated damages, exceptions, and arbitration — that must be tailored both by industry and by project. Trump’s blanket condemnation is thus utterly unsupportable.

His supposed remedy is, if anything, worse than the supposed industry misdeeds. There is no way any outsider can have information about the optimal capital structure for a given firm. Thus, his proposal could lead to the departure of key executives necessary to control a given deal, and it will make recruiting first-class talent harder because of the wage controls he wants to put in place. Similarly, it is just ignorant to insist that distributions are not possible. The apparent rationale is that distributions will lead to some form of lazy consumption, detracting from sensible investment. But in most cases the distribution of funds from one venture is put to use by savvy investors in some other deal that promises a higher rate of return than the previous deal, so that the ideal response would shield this deal from taxation so long as the gains are reinvested in a similar venture. Trump shows his utter lack of deal sophistication with his heavy-handed approach.

The same verdict applies to Trump’s effort to force American oil company executives to invest $100 billion to return dirty Venezuelan crude oil to the marketplace after folks like Hugo Chavez and Nicolas Maduro wrecked production. Trump’s first mistake was one of international politics. Let us assume that he was right to bring Maduro to justice in New York. But his only ground for entry was to return the party of María Corina Machado, from whom Maduro stole the election, to power, and then to let the aggrieved companies work through the established negotiation process to determine their compensation by either settlement or award. Remember, it was not federal money that Venezuela took, so the United States has no claim to it. Notwithstanding his want of title, Trump struck a corrupt deal with Maduro’s successor, Delcy Rodriguez, to keep the old regime in power by squeezing out the legitimate government headed by the opposition leaders María Corina Machado and the winner of the last election, Edmundo González, both of whom enjoy powerful support inside the country. But for the moment, that is the last thing that Trump wants because their assumption of power would prevent him from running the country and cutting a deal and taking the oil for the government instead of its rightful owners, the oil companies who are now in arbitration over these claims.

Trump’s efforts to browbeat major American oil companies into committing a cool $100 billion seem to have stalled. Such a deal looks from top to bottom like a fool’s errand, only to be told by experts in the field that Venezuela is “uninvestable” in its current state. There was, at one time, an unwritten rule that said that the government should be wary about commandeering private firms for particular deals. On the one hand, that abuse leads, in some cases, to efforts to curry favor with the President to secure an inside position. On the other hand, it leads to massive government abuse because the firm that refuses to play ball can be subject to regulatory and tax harassment across all its activities. It is notable that Argentina's decline was attributable to the statist policies of Juan Perón, who used political clout to implement similarly disastrous economic policies.

So, at this point, it is hard to know where Trump will go with his combination of militarism and economic domination. Trump’s erratic behavior on these and so many other issues, e.g., tariffs, increases the uncertainty at home and abroad. One wonders just how far current trends will go in the Trump White House.

Richard A. Epstein is a senior research fellow at the Civitas Institute. He is also the inaugural Laurence A. Tisch Professor of Law at NYU School of Law, where he serves as a Director of the Classical Liberal Institute, which he helped found in 2013. Epstein is also the James Parker Hall Distinguished Service Professor of Law Emeritus and a senior lecturer at the University of Chicago.