Monday, July 9, 2012

Great News: Cronyism Under Attack (UPDATED)

The last two days have seen a flurry of great writing on crony capitalism and its immense harms to the US economy.  Anti-cronyism watchdog Tim Carney - whose Washington Examiner page is an impressively depressing library of crony capitalist excess - kicks things off with a good summary of the recent conservative/libertarian uprising against the unseemly marriage of Big Business and Big Government:
The most dangerous enemies of capitalism today are capitalists. This is becoming clearer every day to people committed to free markets.

The conservative and libertarian grassroots came to deeply distrust big business after the Wall Street bailouts and Obama's stimulus and health care bills, both of which had big-business backing. Tea Party ire focused on subsidy-suckling businesses as much as at big-spending politicians.

Beltway conservatives have also joined in the fight against corporatism. Last spring, the Club for Growth, FreedomWorks and the lobbying arm of the Heritage Foundation all lined up against the Chamber of Commerce and pressed GOP congressmen to vote to kill the Export-Import Bank, which nonetheless was reauthorized by an overwhelming margin.

Republican politicians, despite being lobbied hard by their big-business donors and K Street advisers, are nevertheless moving slowly away from corporate welfare and toward free-market populism. House Budget Committee Chairman Paul Ryan wrote an op-ed in Forbes in 2009 titled "Down with Big Business" (a headline he borrowed from a 1979 Wall Street Journal op-ed).

And now academia's free-market players are getting in on the game, beginning to rebuild the intellectual infrastructure to argue against corporatism. George Mason University's Mercatus Center this week is kicking off a series of papers on cronyism and business-government collusion.
The first of those papers, "The Pathology of Privilege: The Economic Consequences of Government Favoritism" by Matthew Mitchell, was published yesterday.  Carney describes it as follows:
Mitchell's paper, drawing on the scholarly work of Milton Friedman, James Buchanan, Gordon Tullock, Joseph Schumpeter, Mancur Olson, George Stigler, Luigi Zingales and many others, outlines various types of privilege and lays out the evidence that these policies hurt the economy while benefiting the privileged.

Politically favored businesses of course benefit from direct subsidies (think agribusiness) and government loan guarantees (think Solyndra and Boeing), but Mitchell makes the important point that regulation itself creates a privileged class.

Regulation often acts directly or indirectly as a barrier to entry. The conservative and libertarian media have documented this anecdotally -- Philip Morris supported and is benefiting from Obama's tobacco regulation, for instance, because the rules allow it to lock in its dominant market share. Mitchell assembles scholarly work broadly showing regulation's anti-competitive and pro-big-business effects....

In the Obama era, as Democrats and the media try to paint deregulation as some sort of dangerous sop to big business, Mitchell's notion of "regulatory privilege" is a crucial tool for dismantling the old narrative that regulation protects the public....

The research Mitchell brings together helps show why government-granted privilege is so important to big business and so costly to the rest of society. In one key finding, he highlights research indicating that free markets, with fewer barriers to entry and fewer bailouts to prop up failed giants, make it harder for dominant businesses to maintain dominance.

Mitchell cites a 2008 study in the Journal of Financial Economics that found "big business turnover ... correlates with smaller government, common law, less bank-dependence, stronger shareholder rights, and greater openness [to trade]."

Further, in Mitchell's words, "those nations with more turnover among their top firms tended to experience faster per capita economic growth, greater productivity growth, and faster capital growth."

Big business wants safety, but big-business safety hurts the rest of the economy.
Mitchell follows up his paper with a great interactive graphic on all the forms that cronyism can take, several of which are routinely discussed on this blog:

I've long argued that protectionism is just another form of cronyism - a way that well-connected businesses and workers lobby the government to force US consumers to subsidize - via higher prices - their business activities, so it's great to see it included here.  My only quibble with Mitchell's description of protectionism in the graphic above is that, while tariffs have certainly decreased over the last several decades, trade remedies measures, regulatory protectionism (like the Lacey Act or Dodd-Frank's "conflict minerals" provisions) and other non-tariff barriers to trade have increased significantly, particularly in recent months.  Mitchell isn't blind to such measures and even mentions that they "may" have become more important over the last few years, but this troubling trend deserves more than passing mention.

But I'm clearly nit-picking.  The paper is great and well worth your time, so be sure to check it out.

Carney follows up his Sunday article with long list of recent examples of crony capitalism over the last few years.  Cato's David Boaz today hits on one such example that Carney misses, Countrywide home loans:
I was struck by this point in a Bloomberg report, about Countrywide CEO Angelo Mozilo’s close relationship with Fannie Mae chief executive Jim Johnson, former top aide to Vice President Walter Mondale and chairman of both the Brookings Institution and the Kennedy Center. Instructing his staff to give a discount mortgage loan to Johnson, Mozilo wrote in an email: "Jim Johnson continues to be a source of many loans for our company and this is just a small token of appreciation for the business that he sends to us."

Note that Jim Johnson didn’t favor Countrywide with his personal business. He didn’t invest in Countrywide. He didn’t sell houses and send the buyers to Countrywide. No, he sent loans backed by taxpayers’ money to Countrywide, and was rewarded with personal benefits. That’s crony capitalism....

Given his credit report, Countrywide underwriters didn’t want to sign off on a loan to Johnson. But Mozilo, who knew the business Countrywide was really in, told them not only to approve the loan but to give Johnson a discounted rate.

And that, kiddies, is how being involved with a highly respected politician can get you a job in Washington that pays $100 million, backed by the full faith and credit of the American taxpayers, as well as extra perks from other companies tied into the crony corporatist state.
Pretty awful stuff, and yet (as Carney's list highlights) such cronyism remains pretty widespread in DC on both sides of the aisle.

Speaking of, Heritage's Lachlan Markay gets in on the anti-cronyism action today by highlighting one of the most ridiculous aspects of the poster-child for bi-partisan trough-filling, farm subsidies:
The U.S. Department of Agriculture has doled out millions of dollars in subsidies to farms on which farming isn’t actually taking place, according a new report from government watchdogs. Billions more have gone towards supporting farms that don’t grow the crops for which they’re being subsidized.
Nice.  The latest version of the Farm Bill passed the Senate by a ridiculously large margin, and House votes begin this week.  Easy passage is expected there too... naturally.  Lord only knows what kinds of absurdities are buried in these things.

Citing the farm bill, AEI's Arthur Brooks argues in a new WSJ op-ed that the resurgence of crony capitalism is one of the main indications that the United States is heading down the inevitably-disastrous road of European social democracy:
The second force leading us down the social-democratic road is cronyism. America possesses a full-time bipartisan political apparatus dedicated to government growth and special deals for favored individuals and sectors. For example, the farm bill that just passed the Senate contains around $100 billion in subsidies, mostly for large, corporate farms that do nothing to improve nutrition or food security. Or witness the recently reauthorized Export-Import Bank, which doles out about $20 billion annually in corporate welfare.
Brooks concludes, however, that all is not lost for the country:
What is the answer? We caught a glimpse of it in 2010, when a movement of ethical populism—the tea party—mobilized millions of Americans to read the United States Constitution and demand politics that reflect the majority's values. And while woefully misguided in its diagnoses and policy solutions, the Occupy Wall Street movement was at least right to protest the malignant cronyism in our economy. That energy must re-emerge in 2012 and become a permanent part of our political landscape.

In 1787, Benjamin Franklin was asked what sort of government our new nation would have. His famous answer was, "A Republic, if you can keep it." When he said this he was envisioning a monarchist alternative, not today's noxious brew of leftism, cronyism and general inattention to public policy. But Franklin's maxim is still valid today.
Indeed it is. Fortunately, the recent attacks on crony capitalism from the grassroots, academia and, yes, even a few sitting politicians are most definitely a good sign that a growing number of us intend to fight to keep our Republic.

UPDATE: GMU today puts out a new primer on How Cronyism Is Hurting the Economy:

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