The Abuse of Presidential Power-Becker

"Power tends to corrupt, and absolute power corrupts absolutely”. This famous dictum of Lord Acton is as relevant today as it was when stated in 1887. It applies to the private sector, such as private monopolies, as well as the public sector, but this insight has become much more important in the public sector since he wrote because of the large expansion of governmental powers during the past 70 years.

I would only add to Acton’s dictum that discretionary power is even more corrupting than the power embodied in regulations. The most dangerous trend in presidential power has been the growth in presidential willingness to take many discretionary actions that not only have little basis in law, but also frequently cause great harm to the economy and the society at large. The harm consists of both the direct damages from the actions, and the often large but indirect cost from the increased uncertainty and fear about the political environment faced by business, unions, and other groups.

Consider two examples mentioned by Posner. In 1962 President Kennedy used various threats to pressure steel companies to rescind a price increase in response to a very generous wage settlement that the industry made with the United Steelworkers union. Even many economists then believed that steel prices and steel output had a huge effect on the economy because it was claimed that steel was an important raw material in automobile production and many other goods. Yet the value added by the steel industry-the most important measure of its importance-was less than a few percent of US GDP.

Moreover, forcing the steel industry to suppress the price increase slowed down the substitution of aluminum and plastics for steel in the production of cars and other products. Prices provide important signals to an economy of the relative costs of producing different goods, which lead businesses and consumers to respond by substituting away from inputs and goods rising in price relative to other inputs and goods. The replacement of steel by other materials would have been faster if President Kennedy had stayed out of the negotiations, so that the disciplining of the United Steelworkers union and the companies could have occurred earlier.

As it was, it took only another decade for the steel industry to be turning to Washington for help through higher tariffs on steel imports, and direct subsidies. If the steel workers union and steel companies had been allowed to bargain without government interference and help, the adjustment by the industry to growing competition from other materials and steel from other countries would have been faster and more efficient. Probably too, the survival of the industry without a government lifeline would have become easier.

A more recent example is the BP oil spill in the Gulf of Mexico that is still not fully contained.  Whatever the degree of carelessness by BP, they will be fined billions of dollars as various cases brought by injured parties make their way through the courts. Such tort-based liability is justified, but there was no good economic reason for President Obama to interfere by requiring BP to create a $20 billion escrow account, and to defer its dividend payments. These were simply politically motivated acts to offset the public impression (not obviously correct) that he was too slow to act once the spill was discovered. The British have been claiming that his acts reflect a protectionist attitude of the US that is anti-foreign business.  In any case BP is strong enough to repay sizable damages without any presidential interference since its shares still have a market value of over $100 billion, even after a large decline in their value following the spill and the president’s threats.

It is still too early to evaluate the long-term harm from the president’s use of excessive authority against BP. However, the general anti-business tone of the current Congress and presidency that is reflected not only in various discretionary acts by the president, but also in proposed and actual legislation, such as the health care law, controls over executive pay, and the Dodd-Frank bill, are already slowing down the recovery from the financial crisis and recession. I have argued elsewhere (see, for example, the article by Steven Davis, Kevin Murphy, and myself in the January 4^th issue of the Wall Street Journal) that the anti-business legislation, and the uncertainty about subsequent legislation, has contributed to the slowness of this recovery compared to recoveries from prior severe recessions. Unemployment has remained sluggishly high in part because both small and large companies have been reluctant to take on additional employees in an uncertain and threatening environment. Perhaps that is good politics, but the use of presidential and congressional powers against business is surely not good economics.

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Moreover, forcing the steel industry to suppress the price increase slowed down the substitution of aluminum and plastics for steel in the production of cars and other products. Prices provide important signals to an economy of the relative costs of producing different goods, which lead businesses and consumers to respond by substituting away from inputs and goods rising in price relative to other inputs and goods. The replacement of steel by other materials would have been faster if President Kennedy had stayed out of the negotiations, so that the disciplining of the United Steelworkers union and the companies could have occurred earlier.

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