The Dealmaking State

Steven Davidoff Solomon is Professor of Law at the UC Berkeley School of Law and David T. Zaring is Associate Professor at the Wharton School at the University of Pennsylvania. The following post is based on a recent paper by Professor Davidoff Solomon and Professor Zaring. Additional posts addressing legal and financial implications of the Trump administration are available here.

In The Dealmaking State, we consider the consequences if deals became a principal mechanism for the promulgation of government policy, overseen by an executive who promises to be the dealmaker in chief. We also recommend that some useful constraints on the practice be adopted.

We do so because with a deal-making president in the White House—an entrepreneur who co-wrote a book titled The Art Of The Deal, who uses the language of deals to describe his approach to policy, and who has identified a number of ways the private sector can be utilized to meet his goals—the state looks set for an expansion of dealmaking as an ordinary governance strategy.

The administration has announced that it will use deals to pursue its policy objectives in two principal ways, and acted through other mechanisms that imply that its governing ethos will be transactional.

First, the dealmaking executive will pursue economic policy though deals with particular manufacturers, conditioned on the onshoring of jobs. One of the first economic announcements made by then President-Elect Trump was a deal made to keep Carrier, an air conditioning firm, from moving jobs to Mexico. Local tax breaks were exchanged for a promise not to move the jobs—the effort was characterized in the press “a deal he brokered to keep American jobs in the U.S.” Such dealmaking might encompass broader measures, such as promises not to retaliate against certain companies in exchange for steps taken to keep or locate jobs in the United States.

Second, the deal-making approach to governance will implement programs through shared ownership contracts with private parties rather than through government operations. The new president has indicated his support for this method of policymaking with his infrastructure initiative. Under this approach, the government, to meet a public goal, such as stimulating the economy, would act as a partner of private developers who pitch and ultimately win infrastructure projects that they then fund with access to government financing along with private financing. In the end, the private investors receive an ownership stake in the asset. In the case of the Trump administration, $200 billion in tax credits is meant to be leveraged into $1 trillion of infrastructure spending, suggesting that the private ownership stake in the resulting projects will be large.

This sort of public private partnership creates institutions that provide public services but that are owned, operated, or both, by the private sector, a rare thing in the United States. Airports might belong to a company who would make money by charging airlines for gate access, customers for the use of the airport, and vendors for the right to sell products to those customers while they wait for their flights. Road building programs would be reoriented away from freeways and towards toll roads owned and operated by a private party, and financed through toll revenues and the ancillary services provided on the tollway. Other government services can be privatized in this way; already public universities and state internet access programs have looked to these partnerships to meet their missions.

Finally, approaching the task of governing through a dealmaking lens could affect even those government programs that can be implemented without deals with the private sector. Using deals to do the work of government can become a state of mind—one where foreign policy, for example, is conceived as a set of deals—the “Iran Deal” the “China Deal,” and a free trade deal with Mexico that the president has characterized as the “worst deal ever.” The government could be staffed with dealmakers, and dealmaking experience might be deemed a plus for questions of agency leadership. Dealmaking could even be deployed to reduce the deficit—the president has mused about renegotiating the terms of the country’s sovereign debt which would also represent a deal—a negotiated workout with creditors, instead of the more arm’s length transactions represented by the selling of government debt on licensed exchanges.

If a president is going to make deals an important mechanism of policymaking, there is little doubt that he can do so. But governance through dealmaking outside a financial crisis ought to be constrained. We identify some basic steps that should be taken to balance the desire to privatize some functions that could be provided by the government and some technocratic values that we expect from government.

The complete paper is available for download here.

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