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Cronyism: History, Costs, Case Studies & Solutions



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  • 1. Cronyism:History, Costs, Case Studies & Solutions Adam Thierer Senior Research Fellow Mercatus Center at George Mason University November 2012
  • 2. 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   2  
  • 3. What  is  Cronyism?  •  Cronyism  generally  refers  to  an  unnatural  and   unhealthy  closeness  between  government  and   special  interests   –  “Cronyism  is  the  subs0tu0on  of  poli0cal  influence  for  free   markets”  -­‐  David  R.  Henderson  •  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   3  
  • 4. 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…   4  
  • 5. 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”  (S0gler)  &  corpora3sm   (Friedman)   –  Public  choice  school:  “Rent  seeking”  (seeking  of  favors)  &   “rent  extrac3on”  (gran0ng  of  favors)   5  
  • 6. 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)   6  
  • 7. Common  Themes  (cont.)  •  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  oien,  the  opposite  is  true:  They  oien  act  to  sa0sfy  the   private  interest  of  poli0cally  favored  players  at  the  expense  of   the  public.     7  
  • 8. 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:  Maj  Mitchell,  “The  Pathology  of  Privilege:  The  Economic  Consequences  of  Government  Favori0sm”  (Mercatus  Center  Working  Paper,  July  2012)   8  
  • 9. 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  Inaen3on  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.     9  
  • 10. As economist Gordon Tullock has summed up:“Drawing the bulk of intelligent and energetic people insociety into an activity that has no social product, or mayhave negative social product, is more important inexplaining the stagnation of these societies than thedirect social cost of the rent seeking... …lobbyists in Washington… are very intelligent andenergetic people… They are the kind of people we wouldlike to have driving forward in production. Most, however,are on the other side — seeking special privilege.Unfortunately this collection of highly intelligent andenergetic people who could make real contributions tosociety are reducing its efficiency.”
  • 11. 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”  •  Moral  hazard  (reducing  self-­‐reliance  /  personal  responsibility)   11  
  • 12. 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   12  
  • 13. 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)  •  Ex-­‐Im  Bank    •  State-­‐level  economic  development  offices   13  
  • 14. 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   14  
  • 15. 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  •  Twier  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.     15  
  • 16. 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  &  discre0onary   power  of  gov’t  whenever  possible!   16  
  • 17. 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  ajen0on  to  change  social  /  market  norms   17  
  • 18. Solu0ons  (Part  3)  Tell  the  Story!    •  Get  the  word  out  about  the  costs  of  cronyism  and   these  case  studies    •  Again,  moral  pressure  &  press  ajen0on  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   18  
  • 19. Mercatus  Center  Resources  •  “ The  Pathology  of  Privilege:  The  Economic  Consequences  of   Government  Favori0sm:  -­‐  Majhew  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   Sujer  (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)   19  
  • 20. 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.   20  
  • 21. 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.   21