Cronyism, The American Way

In their new book Why Nations Fail, economists Daron Acemoglu and James Robinson explain a country’s institutions’ impact on its wealth and economic growth. They, for instance, argue “that the ultimate cause for economic success or failure is rooted within each countries’ institutions, and that understanding how those institutions evolve is crucial for development.”

In a recent interview, which I already mentioned this morning, Acemoglu warned us about how in most countries, including the United States, the biggest rent seekers and moochers today are politicians themselves.

But nowadays in most countries, the most extractive elite is the politicians themselves. Think of Greece. You cannot understand the last three decades without understanding corrupt political system. But the same is true even for the United States. The US political system has become dominated by the political elite and the lobbying industry funneling money to them. We are seeing the costs of this at this moment.

Whether America’s institutions have now become more exclusive than inclusive is obviously an empirical question. But there is plenty of extraction going on right now. In this piece, for instance, the Washington Examiner’s Tim Carney reports on how companies like Microsoft were given very strong signals that hard work isn’t enough to do business in this country and that the right to produce and sell goods and services also requires, political contributions and lobbying capabilities.

If you want to get involved in business,” Sen. Orrin Hatch warned technology companies at a conference in 2000, “you should get involved in politics.”

Hatch was referring to the shortcomings of then-software king Microsoft, which he had spent most of the previous decade harassing from his perch as Judiciary Committee chairman. The message was clear: If you become successful, you must hire lobbyists, you must start a political action committee, and you must donate to politicians. Otherwise Washington will make your life very difficult.

Hatch’s crusade against Microsoft was a formative moment in the cozy relationship between K Street and Capitol Hill.

You should really read the whole thing here.

This is one side of cronyism (even though in this case it looks more like extortion).  The other side of cronyism can be found in many “pro-business” policies. They are often  implemented in the name of job creation, but in reality they are nothing more than government officials’ using public funds to support a number of handpicked politically connected firms or industries. And it’s not restricted to the federal government.

Take the Ohio’s state government, for example. Writer Tony Newmyer over at CNN Money explains:

An iconoclastic, even populist, leader often confused for a conservative hardliner, [Ohio governor John] Kasich is pushing as the centerpiece of his governorship a recovery plan that calls for aggressive government intervention in the market. The idea is to use public funds to support a handpicked list of tradable industries that already have a foothold in the state. It’s an approach Kasich has been developing since his 2010 campaign for the office. Through loans, targeted tax breaks, and investments in workforce training and infrastructure, Kasich and his team hope to accelerate the so-called reshoring trend that is already bringing manufacturing jobs back to the U.S. If it sounds like industrial policy — in which the state chooses private-sector winners and losers, an approach conservative economists deride as anti-free market — that’s largely because it is. [...]

But pinning Kasich down on his personal philosophy can nevertheless be tricky. He remains publicly agnostic about the auto bailouts that his Republican colleague to the north, Michigan Governor Rick Snyder, credits with saving the industry. “I don’t know about think tanks, I know about the real world,” Kasich tells me on the way to Findlay, Ohio, for the opening of a Danish-based Hamlet Protein plant that got a $2 million loan from the state. “I believe that government doesn’t create jobs, but there’s a legitimate goal for this state to help companies be successful… And I wouldn’t say we’re partnering with business. I would say we’re assisting them.”

Does the governor really believe that he is assisting companies in a productive way? And if he does, how does he justify the fact that the “help” is restricted to some companies in Ohio and not others? Also, since the policies do not benefit all companies, what’s the standard for picking the winners? And if the idea is to help private companies, why not create a tax and regulation environment in the state that allows all companies a chance at success, no matter their size and industry? There is a lot to do on that front since, according to the Tax Foundation, Ohio’sbusiness tax climate ranks 39th in the country (with income taxes ranking 42nd, corporate income taxes ranking 22nd, and property taxes ranking 33th)

The truth is that under the “pro-business” veneer, the governor is engaging in yet more cronyism. He is not the only Republican who ignores the crucial distinctionbetween “pro-market” and “pro-business” policies, and this is just more evidencethat cronyism is a bipartisan disease.

Unfortunately, cronyism has real economic consequences at the state and federal level. In my congressional testimony last week, for instance, I explained how loan-guarantee programs are harmful to the economy as a whole, even when the projects are low risk and taxpayers’ exposure to losses is small. These loans, among other things, distort important market signals and redirect private capital toward “government supported” projects regardless of their merits. In other words, through these loan programs, the government pick winners that will benefit from much better financing terms than they would be able to get on their own, which also makes it harder for the companies who didn’t get government support.

Thankfully, Acemoglu seems to believe that there is still time for the United States to rein in these behaviors before it turns into a country that only benefits extractive elites. In my opinion, the first step is to end all forms of cronyism at the state and federal levels. That means that we end all subsidies, loan guarantees, or other government-provided special treatment for private companies.