Trump’s transaction cost presidency

America’s deal-maker-in-chief

Kris Hartley

Economics and finance, Government and governance | The World

16 March 2017

Leading is about listening and serving, and the concept of service is a tragic omission in Trump’s presidency, Kris Hartley writes.

America’s new presidency is not the “fine-tuned machine” that Donald Trump claims. Republicans are defecting, appointments are lagging, and the cavalcade of executive orders is a veneer of progress that masks a lack of presidential collaboration with Congress.

Beyond governance, Trump continues to lash out at perceived enemies (the media and celebrities, among others). The volatile candidate Americans saw during the campaign failed to miraculously evolve into a dignified statesman after assuming the presidency, and commentators are scrambling to keep pace with the drama.

Given that the administration’s behaviour so far is unprecedented in the modern era, if not in American history, how does logic apply in describing the chaos? One method is to interpret the administration’s behaviour as a series of calculated two-party “deals.” In its totality, this presidency may be no more than an aggregation of negotiations that reduces leadership to transactional games.

If there were any doubt about what motivates Trump, the answer can be found in his 1987 book The Art of the Deal, and in the language of his speeches and tweets. For Trump, business and politics are a universe of “winners” and “losers,” “weak” and “tough.” According to this market-based worldview, players have only themselves to blame for losing; competition rewards the tough and punishes the weak. This harsh judgment applies not only to Trump’s personal interactions but also to his views about society’s less fortunate, including people with disabilities and prisoners of war.

Trump claims that “bad deals” are compromising American competitiveness, and that America is “losing.” Trump called the agreement to take refugees from Australia a “dumb deal” and the Trans-Pacific Partnership a “ridiculous” deal. Conversely, he promised to make the renegotiated NAFTA a “great deal,” a term he also used to brag about his Carrier negotiation. The implications of extending this transactional view to politics are that Trump, as “deal-maker,” must win to maintain political legitimacy.

More on this: Donald Trump: The Paranoid-Jacksonian

But what happens when Trump loses? The explanation, according to him, would not be his own deficient capabilities but the unfair rules of the game. The president has accused the media, judiciary, national retailers, protesters and members of his own political party of being “unfair.” Their breach of the rules invalidates transactions, specifically the outcomes of interactions a president would have with nearly every facet of society. In anticipation of a possible loss in the general election, Trump pre-emptively cited unfairness in the electoral system, insisting that it would be “rigged” to favour Clinton. Despite his victory in the electoral college, Trump’s loss in the popular vote is his persistent bugbear, and he maintains without proof that millions of people voted illegally.

Trump’s transactional language invites an analysis using the frame of transaction cost economics, a scholarly concept that describes the costs borne while engaging in market-based transactions; two players make an exchange under a set of rules, with payoffs depending on the relative strength of positions and bargaining abilities. Transaction costs are generally divided into three types: information costs, bargaining costs and enforcement costs. Each type can explain the behaviours of the Trump administration, as they respectively embody the concepts of secrecy, fiat, and intimidation.

A crucial assumption of efficient market exchange is the equal availability of information. When one player has more information than the other, the result is an “information asymmetry” that undercuts bargaining equivalence.

Presidential elections can be seen as a transaction between citizens and the political leadership, and it is customary that presidential candidates release their tax returns to help voters make informed voting decisions. However, Trump was the first major party candidate in 40 years not to release his tax returns, and he continues to baulk even as president; many wonder what information he is so unwilling to share, particularly anything pertaining to business interests that could conflict with his duties as president.

Trump’s famously hostile relationship with the media is also an indication that this will not be among history’s most transparent presidencies. The administration may win this game through information asymmetries, not only in tax records but also in open data, scientific research and corporate disclosure. Voters must now make decisions within a narrower frame of “bounded rationality” – acting on diminishing levels of information.

More on this: How Trump will test international relations theory

A second type of transaction cost relates to bargaining. So far the Trump administration has minimised bargaining costs, avoiding any expenditure of political capital on Congressional negotiations. A flurry of executive orders has effectively excluded lawmakers from the policy-making process, helping Trump avoid delays and minimising payback obligations that accrue through Washington’s infamous quid-pro-quo political system.

Trump also seems to cherish the supposed gravitas his name brings to economic and political negotiations. His appetite for visibility – negative or otherwise – shows that he recognises the value of any exposure at all. The use of his name brand, which now includes “president,” as a bargaining chip is one concern behind calls for investigations into possible conflicts of interest.

Finally, Trump has strived to minimise enforcement costs, in part through intimidation. According to a Trump senior policy advisor, the administration’s “opponents” will eventually see that Trump’s powers as president “will not be questioned.” A combative style, exhibited on his reality television show and in his book chapter titled “Fight back,” is now being tested in the Oval Office to poor effect. His travel ban was met with loud resistance from the public and from many mayors who insist that their staffs will not cooperate. Despite being rebuffed twice in court on the same issue, Trump continues to press forward with the spirit of his failed executive order.

Using aggressive language about presidential authority is an effort to delegitimise the checks and balances Trump sees as political tools abused by his opponents. However, Trump may find that the enforcement costs of his controversial orders go beyond policing and equipment (e.g. the “great wall on our southern border”). Costs will include the further erosion of his political legitimacy, particularly as he is drawn into extended rivalries with judges, local governments and members of his own party.

Trump might believe that he can advance his agenda without widespread political support, as is evident from his narrow and uncompromising stance on most issues. Everything public the president does – from executive order signing ceremonies to continuing “campaign appearances” – aims to strengthen his legitimacy only within his base.

More on this: Trump’s missteps in opening negotiations with China

It is working; despite a decline in approval ratings among all voters, those who supported Trump seem satisfied. To understand the character traits valued by these supporters is to know Trump’s blueprint for governance. Apologies are a sign of weakness – a fatal flaw in a negotiator. Trump famously refuses to apologise for almost anything, and has even denied that he needs religious “forgiveness” from his god. The aura of the untouchable leader grows.

With protesters, scientists, academics, most media, and much of the outside world stridently opposing America’s re-emergent right-wing extremism, Trump supporters may be in a cognitive loss frame and simply do not care about his arrogance or his negative image. They finally have their long-awaited political messiah: a “winner,” “deal-maker,” and unrepentant bully.

Trump’s language, and the strength it supposedly implies, is understood and embraced by his most ardent supporters, many of whom view the world in simplistic dualities. Crudely transactional behaviours are no threat to Trump’s base support, as they portray a strong bargaining position that some believe America has surrendered. Trump has no incentive to change.

However, leading is about more than negotiating and winning; it is about listening and serving, a point supported by any management book. The notion of service, cited by nearly every American president, is a tragic omission of Trump’s transaction cost leadership.

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