Cronyism, American Style

This is a good piece by economist Luigi Zingales about cronyism– the practice of using government to deliver favors to your friends in the business world — in Italy and what Americans can learn from it. From his account it sounds like cronyism is the driving force behind the Italian job market:

In Italy today, even emergency-room doctors gain promotions on the basis of political affiliation. Instead of being told to study, young people are urged to “carry the bag” for powerful people in the hope of winning favors. Mothers push their daughters into the arms of the rich and powerful, seeing it as the only avenue of social promotion. The nation’s talent-selection process is broken: One routinely finds highly intelligent people employed in menial jobs while mediocre people often hold distinguished positions.

Once an incompetent appointee finds himself in a powerful position, he tends to hire only subordinates of equal or lower quality, since more talented people pose a threat to him. After a few years, a firm’s human capital will become so eroded that it won’t be able to compete without some form of protection. The more protection it can gain from government, the greater the scope of the cronyism, which in turn makes protection even more necessary. Crony capitalism creates a vicious circle.

While cronyism and corruption aren’t yet driving the US economy and government to the same degree as they do Italy’s economy, it is a prevailing force nonetheless. Cronyism dominates most of the bills currently going through Congress. The defense bill caters to defense contractors; the farm bills to rich farmers; the financial-service appropriations bill caters to small businesses who shouldn’t be getting loans and to the bankers that extend the loan guarantees; the energy bill favors well-connected companies; the Ex-Im re-authorization bill provides treats to large exporters like Boeing and so on and so forth. #more#Zingales notes:

Seven out of the 10 richest counties in the U.S. are in the suburbs of Washington, D.C., which produces little except rules and regulations. Even worse, the slow growth and decreased social mobility of the last decade have damaged the free market’s reputation as a creator of prosperity. The hundreds of millions of dollars awarded for disastrous economic performance—from Robert Rubin’s salary as chairman of almost-bankrupt Citigroup to government loans for the actually bankrupt solar company Solyndra—have in turn weakened public belief in the system’s fairness.

Unfortunately, the rest of us pay for this croynism. When companies such as Solyndra and many of the businesses who get government guaranteed loans default on their payments, we pay for it in the form of higher debts or higher taxes. We pay for it at the grocery store in the form of higher sugar product prices resulting from Congress’s protection of the sugar lobby. Actually, we pay for it in the form of higher prices for all the goods produced in protected markets. We pay for it in the form of real-estate bubbles (or any other government-induced bubbles) and the financial crises that often follow. We pay for it in the form of a shrinking private sector as a result of the increased government spending, including bailouts to banks and the automobile industry. We pay for it with lower economic growth because of the economic uncertainty introduced by government interventions into our lives. More importantly, we pay for it because, over time, cronyism destroys the trust we have in both the public and private sector.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. Her primary research interests include the U.S. economy, the federal budget, homeland security, taxation, ...

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