cronyism history, costs, case studies & solutions
TRANSCRIPT
Cronyism: History, Costs, Case Studies & Solutions
Adam Thierer Senior Research Fellow Mercatus Center at George Mason University November 2012
Purpose of This Presenta0on
1. Clearly define cronyism 2. Discuss its historical / academic underpinnings 3. Develop a taxonomy of types of cronyism 4. Explain the dangers / costs of cronyism 5. Iden0fy notable case studies 6. Consider possible solu3ons 7. Offer addi3onal resources
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What is Cronyism? • Cronyism generally refers to an unnatural and unhealthy closeness between government and special interests
• cronyism is a by-‐product, or subset of, a much bigger problem: government-‐granted privileges or government favori3sm – Simply stated, someone is ge)ng special treatment at the expense of others thanks to poli4cal connec4ons
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Historical / Academic Underpinnings Cronyism is a rela0vely new term • Tradi0onally, corrup4on was the primary form of cronyism
that concerned poli0cal scien0sts, economists, and journalists • But corrup0on is merely one extreme variant (or by-‐product)
of cronyism • We tried to address on type of cronyism in the 19th century
where government jobs were given to family members and friends through the Pendleton Act.
• Poli0cal scien0sts and economists have a long history of cri0quing cronyism by other names…
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Poly Sci & Econ Influences • Poli3cal science cri0ques
– “interest group poli0cs” – “client poli0cs” (James Q. Wilson) – “iron triangles” (Theodore Lowi) – “revolving doors”
• Economic cri0ques = “Economic theory of regula0on” (which countered the “public interest theory” of regula0on) – Chicago school: “capture theory” – Public choice school: “Rent seeking” (seeking of favors) & “rent extrac3on” (gran0ng of favors)
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Common Themes from Cri0ques • First, when benefits are concentrated and costs are
dispersed (across all taxpayers, for example), we can expect groups to form to take advantage of those benefits.
• Those bearing the dispersed costs will have less of an incen0ve to form groups to counter those receiving the benefits.
• This explains why some government programs and regula0ons become so entrenched and why rent-‐seeking self-‐perpetuates.
• (These insights flow from Mancur Olson’s 1965 book, The Logic of Collec4ve Ac4on)
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• Second, the “public interest theory” of policymaking and regula3on is highly flawed.
• The no0on that lawmakers and regulators are always enlightened and benevolent actors who would intervene to correct supposed market failures and “serve the broad social goal of maximizing social welfare” or other “public interest” objec0ves, is at odds with empirical reality.
• Quite ohen, the opposite is true: They ohen act to sa0sfy the private interest of poli0cally favored players at the expense of the public.
Common Themes (cont.)
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A Taxonomy of Cronyism 1. Monopoly Privileges (ex: franchising, barriers to entry, exclusionary
rights) 2. Regulatory Privileges (ex: licensing, limits on entry, price / rate
guarantees) 3. Subsidies 4. Loan Guarantees 5. Tax Privileges 6. Bailouts 7. Expected Bailouts 8. Tariffs and Quotas on Foreign Compe33on 9. Noncompe33ve Bidding 10. Mul3ple Privileges
Source: Mai Mitchell, “The Pathology of Privilege: The Economic Consequences of Government Favori0sm” (Mercatus Center Working Paper, July 2012)
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Dangers / Costs of Cronyism Specific Costs ü Monopoly Costs: “Deadweight loss” from lack of compe00ve rivalry. ü Produc3ve Inefficiencies: When shielded from compe00on, firms get lazy
and less efficient. ü Unproduc3ve entrepreneurship: Cronyism incen0vizes firms to excel at
poli0cal entrepreneurship over market entrepreneurship ü Ina\en3on to Consumer Desires: When shielded from compe00on,
organiza0ons worry more about pleasing policymakers than the consuming public.
ü Distribu3onal Effects: Consumers pay higher prices or get lower-‐quality goods and services.
ü Loss of Innova3on and Diminished Long-‐Run Economic Growth: More cronyism = less innova0on in general; can limit long-‐term growth poten0al.
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As economist Gordon Tullock has summed up: “Drawing the bulk of intelligent and energetic people in society into an activity that has no social product, or may have negative social product, is more important in explaining the stagnation of these societies than the direct social cost of the rent seeking... …lobbyists in Washington… are very intelligent and energetic people… They are the kind of people we would like to have driving forward in production. Most, however, are on the other side — seeking special privilege. Unfortunately this collection of highly intelligent and energetic people who could make real contributions to society are reducing its efficiency.”
Costs of Cronyism (cont.) Big Picture / Longer-‐Term Costs • Undermines the legi3macy of the private sector / capitalism
– True capitalism is an3-‐cronyist by nature – True capitalism hinges on mutually beneficially gains from voluntary
exchange – Cronyism, by contrast, skews that balance in someone’s favor at the
expense of others – It is important to note that cronyism exists in every economic form of
society, including socialism and communism
• Undermines the legi3macy of government / democracy – lost “social trust”
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Case Studies Agriculture • Sugar program • Ethanol program Energy • Tennessee Valley Authority • Synthe0c Fuels Corp. • Solyndra • Electric cars (Tesla) Financial sector • Fannie Mae & Freddie Mac • Wall Street bailouts
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Case Studies (cont.)
Defense • numerous “military-‐industrial complex” case studies Infrastructure • Highway / construc0on programs • Stadium & conven0on center deals Industrial / Manufacturing / Trade • Auto bailouts • Steel tariffs (Bush) / Harley-‐Davidson protec0onism (Reagan) • State-‐level economic development offices
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Case Studies (cont.) Network Industries • Transporta8on
– Railroads – Airlines (protected cartels prior to deregula0on) – Taxis (medallions; Uber restric0ons)
• Telecom & Media – Telecom monopoly cronyist origins & “universal service” programs
– Broadcas0ng special treatment for over 80 years – Cable TV franchising laws
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Emerging High-‐Tech Case Studies • Apple receiving tens of millions in subsidies and tax credits from Texas to
open a facility outside of Aus0n • Facebook is also geqng tax favors from Texas and property tax
exemp0ons in Oregon • Twi\er recently secured massive tax breaks from San Francisco to stay
there • LivingSocial recently cut a deal for approximately $32 million in corporate
and property tax exemp0ons in Washington, D.C. • Groupon received $3.5 million in an incen0ve package from Illinois • Motorola secured over $100 million in tax credits and incen0ves from
Illinois in exchange for a promise to keep its headquarters there • Movie & video game produc3on incen3ves: hundreds of millions in tax
breaks and inducements now flowing to movie and game studios from states across the U.S.
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Solu0ons (Part 1)
The Meta-‐Solu3on – The cronyism problem is inexorably 0ed up with the size and growth of government
– We will never completely constrain cronyism as long as Big Government exists
– So, the easy solu0on = cut the size & power of gov’t whenever possible!
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Solu0ons (Part 2) Targeted Reforms • Defunding or depriving those who received special treatment • Sunsets on programs and policies • Deregula0on / end licensing & franchising rights • “BRAC”-‐like solu0ons when possible • Limits on congressional delega0on of power to less accountable
regulatory agencies • Clear property rights & cons0tu0onal protec0ons • “MFN clause”-‐like solu0ons & mul0lateral accords • Greater transparency / disclosure measures • Moral pressure & press aien0on to change social / market norms
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Solu0ons (Part 3) Tell the Story! • Get the word out about the costs of cronyism and these case studies
• Again, moral pressure & press aien0on can help change social / market norms and lead to reforms
• We need to create a social s0gma about cronyism – Make it uncomfortable for companies to engage in rent-‐seeking
– Make it uncomfortable for policymakers to engage in rent-‐extrac0on
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Mercatus Center Resources • “
The Pathology of Privilege: The Economic Consequences of Government Favori0sm: -‐ Maihew Mitchell (July 08, 2012)
• “Crony Capitalism: By-‐Product of Big Government” -‐ Randall G. Holcombe (Oct 24, 2012)
• “The Economics and History of Cronyism” -‐ David R. Henderson (July 26, 2012)
• “Gauging the Percep0on of Cronyism in the United States” -‐ Daniel Suier (Oct 17, 2012)
• “Government Cronyism and the Erosion of the Public’s Trust” -‐ John Garen (Oct 11, 2012)
• “Cronyism & Capture in the Informa0on Technology Sector” – Adam Thierer & Brent Skorup (forthcoming, 2013)
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Addi0onal Resources (Pt. 1)
• Gordon Tullock, Arthur Seldon, and Gordon L. Brady, Government Failure: A Primer in Public Choice (Washington, DC: Cato Ins0tute, 2002).
• Mancur Olson, The Logic of Collec8ve Ac8on: Public Goods and the Theory of Groups (Cambridge, MA: Harvard University Press, 1965).
• Randy T. Simmons, Beyond Poli8cs: The Roots of Government Failure (Oakland, CA: The Independent Ins0tute, 2011).
• Fred S. McChesney, Money for Nothing: Poli8cians, Rent Extrac8on, and Poli8cal Extor8on (Cambridge, MA: Harvard University Press, 1997).
• James M. Buchanan, “Poli3cs without Romance,” Policy 19, no. 3, (Spring 2003), 13-‐18.
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Addi0onal Resources (Pt. 2)
• George S0gler, “The Theory of Economic Regula3on,” Bell Journal of Economics and Management Science 2, no. 1 (1971).
• Sam Peltzman, “Toward a More General Theory of Regula3on,” 19 Journal of Law and Economics (August 1976), 211-‐40.
• Mark Green and Ralph Nader, “Economic Regula3on vs. Compe33on: Uncle Sam the Monopoly Man,” Yale Law Journal 82, no. 5, (April 1973).
• Theodore J. Lowi, The End of Liberalism: The Second Republic of the United States (New York: Norton: 2nd Ed., 1969, 1979).
• Adam Thierer, “Regulatory Capture: What the Experts Have Found,” Technology Libera4on Front, December 19, 2010.
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