Donald Trump has refused to divest himself of his business interests before being inaugurated as president and has instead said he would hand control over to his sons. However, as the director of the Office of Government Ethics, Walter Shaub, Jr., said in a letter last December, a point he reiterated after Trump announced his plan to turn control over to his sons last week, “Transferring operational control of a company to one's children would not constitute the establishment of a qualified blind trust, nor would it eliminate conflicts of interest."
In response, Trump argues that his numerous conflicts of interest won’t affect his decisions as president. But there have already been instances where meetings with foreign leaders had a clear connection to his business pursuits, his nominations for important government positions show a strong bias toward favoring business interests, and his proposed legislative agenda, while touted as a populist, contains the standard Republican pro-business slate of policies. The stage is set for those coming into power to use their government offices to enrich themselves, and if they do, it has the potential to undermine US competitiveness and reduce long-term economic growth.
Economists use the term “principal-agent problem” to describe one important way in which conflicts of interest can be harmful. The principal-agent problem describes a situation where the person who is making important decisions (e.g. a manager in business) is not the same as the person or people whose interests are being served (e.g. shareholders). If the manager pursues his or her own interests, for example taking what amount to lavish vacations and charging it to the company instead of maximizing profit on behalf of shareholders, then in effect money that should have gone to shareholders goes to the manager instead – it is taken from them.
There are many, many instances where principal-agent type conflicts of interest exist, parents making decisions for their children, elected officials representing the interests of constituents, investment fund managers operating on behalf of investors, and so on. Economists have spent considerable effort figuring out how to design institutions and contracts to minimize the chance that those with decision-making power promote their personal interests over the interests of those they represent (for example by making mangers’ salaries depend upon the long-term profitability of the company), and the solutions economists have proposed for the conflict of interest problem can be effective in many cases.
But when it comes to politicians representing the interests of constituents, adjusting institutions to prevent unethical behavior is difficult if not impossible, and we cannot write contracts between politicians and constituents the way we can between, say, the managers and owners of firms. We have to rely upon politicians’ honor in upholding their oath to represent their constituent’s best interests and the checks and balances such as Senate confirmation for those they appoint to key government positions. In Trump’s case, I have little faith that Congress will stand in the way when potential conflicts of interest arise for his nominees, and even less faith that his choices as president will be independent of his business interests.
For an individual business, the harm that conflicts of interest can cause goes beyond, for example, taking money out of shareholders pockets and giving it to managers. It also undermines the efficiency and competitiveness of the firm. The same is true for the nation as a whole. Just like managers taking from shareholders, politicians and government officials can manipulate taxes, the regulatory environment, the provision of government services, and so on to enrich themselves at the expense of others. But this is harmful to the economy.
Policies such as removing regulations that address important market failures, favoring one business over another (picking winners and losers as Trump has already shown a tendency to do), and imposing tariffs on imported goods have the effect of insulating firms from the foreign and domestic competitive forces that compel them to innovate and operate efficiently, both of which are keys to maximizing long-run economic growth. To make matters worse, the political system itself can be manipulated by those in power to perpetuate their hold on government leading to even more looting of the economy, and even more long-run damage to our economic potential.
The Republicans are fond of calling low-income households “takers.” But it’s abundantly clear that the real takers are those who use their wealth, influence, and government positions to enrich themselves and their cronies at the expense of others without seeming to care how much damage it does to the economy, or how many people might be harmed by the large cuts to essential social services that will be needed to finance tax cuts for the wealthy.
Trump is not president yet. So I can’t say for sure if he will continue or even expand upon the recent Republican tradition of favoring the interests of the wealthy and powerful over the interests of the working class while disregarding long-standing government ethics and norms along the way. But the signs are anything but encouraging.