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:

Huge New Report Further Crushes Protectionist Myths about Trade, Jobs & Outsourcing

The OECD recently concluded a giant new report on the effects of open markets on employment, and the consensus conclusion couldn't be any clearer: free trade is awesome.  In the process of coming to that (admittedly broad and obvious) conclusion, the authors of the myriad studies included in the final OECD Report also debunk a whole host of protectionist myths still floating around out there about imports, jobs and outsourcing (President Obama, please take note).  Here's the press release announcing the new Report (emphasis mine):

Governments that foster open markets and resist protectionism have the best chance of stimulating inclusive economic growth and creating high-value jobs, according to a new study from 10 international organisations presented in Paris.

Policy Priorities for International Trade and Jobs, launched by OECD Secretary General Angel Gurria during the annual OECD Forum, shows that protectionist and discriminatory trade measures do not protect or preserve jobs. On the contrary, closing markets is actually more likely to stifle growth and put additional pressure on labour markets.

The report, a product of the International Collaborative Initiative on Trade and Employment (ICITE)*, analyses the complex interactions between globalisation, trade and labour markets. Drawing on numerous studies covering different parts of the globe and countries at very different levels of development, the report highlights the powerful role trade can play in driving growth and improving employment.

Of the 14 main studies undertaken since 2000 reviewed in the report, all 14 have concluded that trade plays an independent and positive role in raising incomes.
Through its impact on productivity, trade also raises average wages. Over the 1970-2000 period, manufacturing workers in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region. In Chile, workers in the most open sectors earned on average 25% more in 2008 than those in low-openness sectors.

Fears of the impact of offshoring may be exaggerated. Studies for the United Kingdom, United States, Germany and Italy demonstrate that off-shoring of intermediate goods has either no impact or, if any, a positive effect on both employment and wages.

The report also shows, however, that openness to trade is not enough. Complementary policies – such as sound macroeconomic policies, a positive investment climate, flexible labour markets and adequate social safety nets – are needed to realise the full benefits of trade....

The ICITE report debunks the principal argument against freeing up trade – the supposed impact of imports on jobs. The report says that there is no systematic link between imports and unemployment. Instead, evidence shows that in country after country, both exports and imports push productivity growth upward while helping create better skilled and higher paying jobs.

Offshoring and outsourcing by developed countries – two commonly-cited negative aspects of globalisation – often complement, rather than replace domestic jobs, while creating new, higher-wage opportunities in developing countries, according to the report.

There is enough in this report to keep even the nerdiest of trade nerds busy for a long while.  I especially like the part about the necessity of "complementary policies" to realize the full benefits of free trade.  That's something I've been arguing here for a while now - open markets are awesome, but their benefits are seriously undermined unless they're accompanied by sound fiscal policies (especially tax policies), a streamlined, predictable regulatory environment and a dynamic labor market.  Without these things, all the trade in the world won't fix what ails the US and other struggling economies.

But all the trade stuff's important too, particularly during yet-another-election-season featuring scores of US politicians spewing populist nonsense about the allegedly horrible effects of imports and outsourcing on American jobs.  At the risk of sounding like a broken record, isn't it about time we stopped listening to these people?

Tuesday Quick Hits: Scholarship Edition

The nerdery has been busy over the last week cranking out great stuff:

• Scholars further debunk currency hawks' assertions that China's currency causes the bilateral trade balance.  Over at VoxEU, Fudan University's Zheng Song, the Minneapolis Fed's Kjetil Storesletten and the University of Zurich's Fabrizio Zilibotti argue that "it is wrong, and even dangerous, to blame [China's holdings of US debt] on a manipulation of the exchange rate." Instead they propose a "structural theory emphasising that credit market imperfections require private firms to build up internal savings which have been channelled into foreign bonds."  The elaborate: "Due to legal and financial market imperfections, private firms are financing themselves out of internal savings. The rapid growth of these self-financed firms and corresponding down-sizing of bank-financed firms creates and artificial lack of domestic investment opportunities for Chinese banks. As a consequence, a growing share of domestic savings is invested abroad and this generates a capital account deficit and matching current account surplus."  These findings are consistent with some of the things I've been saying here for a while.  Be sure to read the whole thing here.

• Cato scholar Dan Ikenson cranks out some scholarly China scholarship.  In a new briefing paper, Ikenson writes: "Although it may be fashionable to think of China as the country to which the U.S. manufacturing sector was offshored in exchange for tainted products and a mountain of mortgage debt, the fact is that the bilateral relationship has produced enormous benefits for people in both countries. Despite those benefits, Americans are more likely to be familiar with the sources of friction....
     This paper examines the economic relationship and some of its high-profile sources of friction, distills the substance from the hype, and concludes that although some policy tweaks would be beneficial, a more aggressive U.S. policy tack is unnecessary and unwanted. Much more can be done to cultivate our areas of agreement using carrots before seriously considering the use of sticks."

• PIIE scholar: raising taxes on "companies that ship jobs overseas" is stupid.  The Peterson Institute's Gary Hufbauer podcasts: "Obama's proposal to punish firms that ship jobs overseas would hurt the very firms that export products made in America."  Sounds familiar, no?

Scoring the Great Trade Debate

A couple weeks ago, I did a quick blog entry directing readers to the “Great Trade Debate” between Cato’s Dan Griswold and Ian Fletcher of the US Business and Industry Council and hosted by the good folks over at WorldTradeLaw.net’s International Economic Law and Policy Blog.  Being the complete trade-nerd that I am, I eagerly awaited reading the clash between an immensely knowledgeable and unabashed free trader like Griswold and an admitted, ideological (as opposed to political) “proud protectionist” like Fletcher. 

Unfortunately, the debate didn’t turn out as I had hoped.  Don’t get me wrong: the exchange was interesting and produced a lot of good argument, but for the most part, the two debaters either talked past each other or simply spent their allotted space debunking the other’s prior stats and assertions.  Thus, the casual reader probably finished the debate just as he had begun it: confused about whom to believe and about which side he should support.

For my purposes, however, the debate was still immensely valuable because it provided a perfect example of how protectionists and free traders currently advance their arguments, and thus how free traders must revise their approach to the debate if they are ever to win the day.

Over the last year or so, I have attempted to show that for free traders to win the “great trade debate,” they must rethink their current, data-driven approach.  This means that before getting into all of the fancy charts and historical lessons, free traders first must demonstrate that trade is foremost a moral issue, and that free traders, not protectionists, are on the “right side.”  This is done simply by showing how anti-traders seek to forcibly thwart voluntary, mutually-beneficial cross-border transactions in order to transfer wealth from politically-underrepresented groups (i.e., individual consumers, service-providers, and downstream manufacturers) to other, politically-favored classes (typically heavy manufacturers or agribusiness).  It is reinforced by showing how protectionism is an invisible and regressive tax that disproportionately punishes low-income American families by forcing them to expend more of their paychecks to buy protected (and more expensive) food, clothing and shelter.  In short, protectionism is classic beltway politics, where special tax breaks, sweetheart deals and secretive earmarks rule the day.

Fletcher’s case is no different, even though he’s calling for an “across the board” tariff on all imported goods.  His tax on all US import consumption would be a massive wealth transfer from those consumers in non-manufacturing/farming jobs (engineers, lawyers, IT professionals, waitresses, nurses, doctors, marine biologists, etc. etc.) to the US manufacturing sector (which he just so happens to represent) and domestic farmers.  And oh by the way, a vast majority of all Americans work in jobs other than manufacturing or farming, so Fletcher’s “fair” tariff remains a giant, invisible, regressive tax on the many to line the pockets of the very few.  And of, course, it’s only achieved through government coercion.

The “unfairness” of this tax, and any other tariff like it, is clear, and once the free trader establishes these essential facts and the morality of his free trade position, he places the burden on the protectionist to prove why the coercive government intervention that he advocates is justified.  (We lawyers like to call this “burden shifting,” and it’s critically important in any debate.)  In short, the free trader can and should demand that the protectionist demonstrate why the common many should support the privileged few.

With the burden on the protectionist to prove why protectionism is justified, the debate might as well end, because the free trader will always win the day.   As I’ve repeatedly shown when debunking myriad “protectionist myths” out there, the facts simply do not support protectionists’ claims that (a) free trade harms the American economy, or (b) protectionism helps it.  And with the burden of proof on protectionists, the key here is causation, not mere correlation.  They must prove that trade causes pain, or that protectionism causes prosperity.  Spurious correlation (e.g., the trade deficit and manufacturing jobs), is wholly insufficient. 

In the Great Trade debate, like a lot of modern political debates on free trade or protectionism, the burden of proof was never established.  Griswold’s opening salvo provided a lot of great data, but never challenged the morality of Fletcher’s underlying position.  Without this challenge – without loudly impugning the morality of Flecther’s protectionism and demanding that he justify his regressive, immoral tax policies, Griswold left Fletcher free to simply rebut certain facts without ever actually justifying his own assertions that free trade causes economic harm and that widespread protectionism would cause prosperity.  As such, the debate devolved into a series of point-counterpoints, whereby each person debunked the other’s data.  

Indeed, Fletcher’s opening statement provides a perfect example of the problem.  He states:

The most recent scholarship on the issue casts huge doubt on traditional theoretical justifications for free trade and makes clear why the mercantilism that is being practiced against us can be such an effective economic strategy.  It is gradually realigning theoretical economics with both economic history and the common-sense experience of ordinary Americans.

Fletcher does nothing to actually prove such bold assertions.  He simply moves on to other, similarly-unsupported stances.  And his follow-up posts attack Griswold's positions without ever justifying his own.  As demonstrated above, however, such justification is very, very necessary, given that Fletcher is arguing for a massive wealth transfer from American consumers to manufacturers and farmers.  He must prove why we should support such a scheme.  Yet he never does.

And that's why Fletcher should have lost the Great Trade Debate instead of just running out the clock.  Hopefully next time, he won't be so lucky.

Finally, A Trade Dispute I Fully Support

WorldTradeLaw.net is hosting a great online debate on Free Trade vs. Protectionism between the Cato Institute's Dan Griswold and Ian Fletcher of the US Business and Industry Council.  Griswold is the author of Mad About Trade: Why Main Street America Should Embrace Globalization, and Fletcher is the author of Free Trade Doesn't Work: What Should Replace it and Why.  Safe to say that it's pretty obvious who will be arguing what in this debate (and which side I intensely favor).

The guys' opening statements have been posted today.  Griswold's is here, and Fletcher's is here.  Unsurprisingly, I already have a few comments on each post, but I'll save them to the end.  (Wouldn't want to influence your reading!)

Do enjoy.

Why Do Developing Countries Want FTAs with the United States?

AEI's Phil Levy has written a very thoughtful and provocative new study on Peru's motivations behind entering into the US-Peru Trade Promotion Agreement (PTPA).  In it, Levy examines the evidence and interviews Peruvian business people and government officials to determine why they worked so hard to secure passage - at home and in the United States - and implementation of the PTPA when Peru was already enjoying duty-free access for more than 90% of its US-bound exports.  His findings will surprise most people:

Bilateral free trade agreements have generally been analyzed as instances of preferential reciprocal tariff liberalization. Viewed through this lens, such agreements raise concerns both about new competition and about trade diversion. The United States-Peru Trade Promotion Agreement, an example of a serious North-South accord, demonstrates that new market access was not a principal Peruvian goal in the trade negotiations. Instead, the agreement was intended to encourage investment by locking in Peru's economic reforms. This motivation has very different implications for the global trading system than a quest for preferential access.

Read the whole thing here (PDF). Given the limited scope of the the Peru case study, Levy's findings raise a lot of important questions that demand further research (as he fully admits). But if these conclusions hold, it could have significant implications for the future of US trade policy - for example, (i) how the US targets future developing country FTA partners; (ii) how free traders sell these FTAs to the general public once they're complete; and (iii) how bilateral FTAs fit into a multilateral free trade agenda (i.e., at the WTO).

Great food for thought.