Is “crony capitalism” undermining the health of the US economy and society? This is the topic of the book A Capitalism for the People by University of Chicago economist Luigi Zingales. By “crony capitalism,” Zingales means the cozy relationship that has developed between US politicians, Wall Street and big business. Zingales argues that what we have now is a corruption of the “free market,” as Wall Street and big businesses collude with politicians, producing laws and regulations that build up and protect the already dominant.
Zingales cites many examples of rising crony capitalism in the US, which builds on arrangements that have been a fabric of our system for generations: massive farm subsidies (for the likes of ADM), financial subsidies (Fannie Mae, Freddie Mac, etc.) and corporate tax loopholes. Even the regulatory response to the 2008 crisis – the Dodd-Frank Act (2010) – Zingales thinks has fallen short in terms of benefiting US consumers and de-leveraging the banks.
We are not as pessimistic as Zingales when it comes to the overall positive impact of Dodd-Frank and other regulations since the 2008 crisis. New regulations have made a difference in deleveraging our financial system. But we tend to agree with Zingales that cronyism is on the rise and that culturally we are becoming immune to this. As cronyism becomes widely accepted in the US, reversal becomes increasingly difficult.
Curbing Crony Capitalism
So what can we do? While Zingales has some interesting suggestions, we think their implementation would be difficult and effectiveness limited: tax on lobbying, stronger anti-trust laws and reigning in corporate subsidies. We actually think Zingales’ final proposal makes the most sense: widespread acknowledgment that cronyism in the US is at corrosive levels. To us, it seems we are currently on a path of ignorance and denial. Zingales’ book serves to raise awareness during a very apt time – the US presidential election.
Regardless of who the new US President is, we’re likely to see more focus on fiscal efforts (government spending and tax policy) to stimulate the economy. That’s because low interest rates and other types of monetary stimulus by the Federal Reserve are seeing diminishing returns. Given how the current system works, however, we’re concerned that cronyism could derail the development of effective fiscal policy.
Zingales, as we do, thinks that the success of the US economy (and our society) is based on competition, which results in new ideas and better ways of implementing those ideas. Cronyism squelches not just competition but also the opportunity to compete. And the economic results are not good.