Living in California, as Schumpeter does, you would think licence plates called it the Red Tape State, not the golden one. Last August it led the world in announcing a ban on new gasoline-fuelled cars by 2035. In December its petrol prices soared higher than anywhere else in America, leading to an onerous cap on refiners’ profit margins. Early this year you could barely find an egg to fry, partly because of an animal-welfare measure from 2018 that keeps eggs off its shop shelves if they are laid in cages.
California has the privilege of being a colossal market irresistible to manufacturers, so some of its rules become standards well beyond its borders. But it is not unique in wanting to go its own way. Across America, a mishmash of regulations from state to state differ on everything from how to manufacture lifts and how to produce liquor to how to run a bank. In theory that is all well and good. Regulatory experimentation can be healthy. In practice it creates a minefield. Every American state border is festooned with so much red tape that it costs businesses an arm and a leg.
For a columnist from Britain, this is strange. Having grown so accustomed to hearing about the shortcomings of the European Union’s single market, it is a shock to realise that America’s interstate equivalent is no paradise, despite being bigger, constitutionally protected and far more rooted in history than the EU’s.
And if anything, it is in danger of fraying further. A combination of local one-party supermajorities, populism and the culture wars are making states—led by chest-thumping attorneys-general—only too eager to get into the ring with business. Companies have long feared the Democratic sucker punch. Now Republicans are threatening business, too, their free-market instincts overtaken by their desire to assert state interests over federal regulatory authority. This political polarisation raises two big questions. Does it affect the ability of American firms to do business at home? And what are they doing about it?
Companies face several challenges. The first is legal, exemplified by moves to ban abortions. Take Walgreens, America’s second-biggest pharmacy chain, which this year found itself in a Catch-22. In February it received a letter from 20 Republican attorneys-general warning it that it might be breaking federal and state laws if it mailed mifepristone, an abortion pill, to their states. It then made the seemingly unobjectionable point that it would only supply the medication to states where it was legally permissible. In response, California’s Democratic governor, Gavin Newsom, scuttled a state contract with Walgreens and threatened a boycott. Walgreens’ rivals, such as CVS, wisely kept quiet. Yet they, too, may find themselves in a similar legal quagmire if the issue becomes politicised even further.
The second headache is cultural. Among blue states, California has passed laws (later struck down in court) encouraging racial diversity on company boards. Among Republican-leaning states, Florida, via the “Stop WOKE Act”, has sought to outlaw discrimination by race, even in pursuit of diversity, equity and inclusion. Such inconsistencies make it hard for firms to apply a one-size-fits-all policy. Different state governments have different views as to what kinds of diversity ought to be promoted. This month 19 Republican attorneys-general attacked JPMorgan Chase, America’s biggest bank, for a “double standard” on inclusiveness. They noted that the lender had affirmed its “unwavering commitment” to LGBT+ Americans. The same commitment had not been extended to religious or conservative groups, they said.
The third pitfall has to do with greenery. According to Ropes & Gray, a law firm that tracks environmental, social and governance (ESG) legislation, states are introducing contradictory regulations about oil, gas and coal investments. In 2021 Maine, a blue state, got the ball rolling with legislation prohibiting its public pension fund from investing in big fossil-fuel producers, and set out a timetable for divestment. The same year Texas banned state funds from having relationships with financial firms that boycott energy companies. More than a dozen blue and red states have followed their respective leads. These initiatives are linked to Democratic support for ESG and Republican hostility to anything that smacks of “non-pecuniary” investment considerations. Compounding the problem, says Joshua Lichtenstein of Ropes & Gray, is that doing business in the EU may require sustainability reporting, which is anathema in parts of America.
Firms may be accused of sleepwalking into their predicament. During Donald Trump’s presidency they stuck their necks out on hot-button issues, for instance opposing North Carolina’s “bathroom bill” that would bar transgender women from ladies’ toilets. They embraced ESG-infused stakeholder capitalism, hoping to attract consumers and workers. Then came the “wokelash”. Florida’s war on Disney, after the firm opposed a bill barring talk of sexual and gender identity in some primary-school year groups, marked “a fork in the road”, says Maggie Mick of MultiState, a consultancy.
Since then, companies have had a rethink. One way they have done so is by making political donations more bipartisan. Another is to go quiet on their climate commitments, a tactic known as “green-hushing”. Equally quietly, some asset managers are lobbying state governments to reverse their ESG prohibitions. As yet, no one is throwing in the towel on the United States.
From Brexit to Texit
Craig Parsons of the University of Oregon notes that, for all its frailties, America’s single market has some resounding strengths, such as use of a common language and a shared culture. That heritage is delicate, though, especially in the context of the culture wars and political schisms. If the trend of state supermajorities persists after the 2024 elections, things could get worse. America should be careful. Its coast-to-coast marketplace is far too important to take for granted. Take that on trust from a Brit. ■
Read more from Schumpeter, our columnist on global business:
Writers on strike beware: Hollywood has changed for ever (May 10th)
America needs a jab in its corporate backside (May 3rd)
Is mining set for a new wave of mega-mergers? (Apr 27th)
Also: If you want to write directly to Schumpeter, email him at [email protected]. And here is an explanation of how the Schumpeter column got its name.
Source: Business - economist.com
