The Trump administration is attempting to reconcile two irreconcilable forces: a dynamic private market and an aggressive, interventionist state. The Trump administration has had no qualms about creating a “venture capitalist state,” taking ownership stakes in over 30 companies during President Donald Trump’s second term. Over time, this creeping state capitalism will produce the exact opposite of economic dynamism: distorted capital markets, entrenched cronyism, and long-term stagnation.
The promise that state-directed capital allocation can accelerate private-sector growth is a mirage. Government intervention in markets unleashes perverse incentives that will reduce competition and produce stagnation in the long run. Two recent high-profile initiatives illustrate the hazards of this model: the state-brokered Venezuelan oil venture and the launch of the Trump Accounts program.
The recent agreement granting North American Blue Energy Partners access to develop an estimated 65 billion barrels of proven Venezuelan oil reserves has been widely celebrated on the Right as a strategic triumph. Under the arrangement, the Department of War has secured a 35% equity stake in NABEP, while the State Department holds an option to purchase 20% of output at cost. Yet behind the triumphalist rhetoric there are many challenges with the economics of the deal itself and a dangerous precedent of entangling governments and private investment.
Impressive oil reserves do not automatically translate into cheaper gasoline because of the high cost of extracting and processing Venezuelan oil. On the extraction front, tens of billions of dollars must be invested just to get the oil out of the ground. This investment carries significant risk because of the historical instability and hostility of the Venezuelan government. While that appears to be less of an issue at the moment, who can say what the U.S. and Venezuelan governments will be like in five-10 years?
But putting aside the hefty initial investment, it’s also more expensive to process Venezuelan oil. It is heavy crude oil requiring more processing than lighter crude oil. This all means that these oil fields only make sense to develop and work when the price of a barrel of oil is higher than Trump or any consumers want it to be. When a deal only “works” because the state has agreed to guarantee a buyer, that’s not a market allocating capital efficiently, it’s politics allocating capital.
Ideal free markets have a strict firewall between political authority and private commerce. Without that barrier, regulatory capture, central planning, and compromised consumer choice inevitably seep into markets. A vivid display of this boundary eroding occurred on the 250th anniversary of the Declaration of Independence. Flanked by Sen. Ted Cruz (R-TX) as well as Michael and Susan Dell, Trump rang the stock exchange opening bell from the White House to announce “Trump Accounts” for young Americans. The spectacle was not merely celebratory theater; it was a brazen blurring of state power and corporate promotion.
On the surface, Trump Accounts are innocuous — maybe even beneficial. And the Dells’ pledge to distribute over $6.25 billion of their own wealth to millions of children is laudable. But Trump’s exhortation to Americans to buy Dell computers to boost the stock price, increase Michael Dell’s net worth, and lay the groundwork for another big donation in the future exposes how little the president really knows about wealth. It also reveals the implicit (and sometimes explicit) pressure politicians can exert on business people.
Wealth is not created by high stock prices or high crypto prices or big investment deals. Instead, high prices often represent wealth. But high prices can also be transitory if there is imperfect information or temporary exuberance in demand. The infamous “pump and dump” strategies of fly-by-night crypto token issuers burned many gullible investors. Unfortunately, the president’s remarks, and his own track record issuing a meme coin, follow the same pattern. Similarly, big investment commitments may or may not come to fruition.
When state ownership replaces consumer sovereignty, bureaucrats and politicians pick winners and losers based on political connections rather than economic value. Subsidies, fast-tracked approvals, and direct government equity tilt the playing field toward connected incumbents and discourage emergent competitors. Furthermore, the complexity of government programs also skews their benefits: While ordinary families receive few deductions under the Trump Accounts program, wealthy donors and corporations can gain special tax advantages. The system rewards connections over value creation.
Higher education and healthcare are key examples of this deleterious effect. The costs in those industries have outpaced inflation for decades, even as people complain about their shortcomings. These are also industries with extremely high levels of government funding, regulation, and subsidies.
The Trump administration may talk a good game about ownership, wealth, productivity, and economic growth, but its carefree wheeling and dealing in the economy and in markets has much more in common with progressivism and socialism than with the free markets that characterized the United States for most of its history.
On paper, the Department of War and the Department of State’s stakes in this Venezuelan oil deal may look savvy. The same can be said of Uncle Sam’s investments in Intel, Vulcan Elements, Trilogy Metals, or Westinghouse. Intel is instructive: After the federal government converted CHIPS Act grants into a roughly 10% equity stake in the company, the firm’s fortunes became partly a function of political favor rather than market success with customers alone. It creates uncertainty about whether Intel’s turnaround is real or simply subsidized.
Because government officials don’t have much skin in the game, they fall prey to knowledge and incentive problems identified by Austrian economists a century ago. Besides the risk that these investments won’t pan out, federal investment can chill new business formation. After all, who wants to compete with a government favorite, both in terms of funding and in terms of regulatory fast-tracking?
REPUBLICANS LOVED PROJECT 2025 UNTIL IT THREATENED BIG AG HANDOUTS
Trump Accounts have some merits, both as vehicles for investment and for philanthropy. But Trump shouldn’t insert himself and his administration into these and other economic matters so publicly. It raises the specter of state-run capitalism. You can’t have a free competitive market when the federal government actively participates and competes itself.
The mirage of market statism masks a corrosive and corrupting corporatism.
Paul Mueller is a senior research fellow at the American Institute for Economic Research.