It’s not just Rubin’s swift turn through Washington’s revolving door that troubles Zingales: More important, he indicts Rubin for being, in his role as economic adviser to Bill Clinton and later Clinton’s secretary of the Treasury, “the person who may have done the most to make bailouts the prevailing doctrine in the United States.” In the mid- and late 1990s, a series of economic crises threatened developing countries in Latin America and Asia. Following the “Rubin doctrine,” Mexico was bailed out in 1994. This was followed by South Korea, Thailand, and Indonesia in 1997. Brazil received a bailout in 1998. These bailouts helped the receiving nations, of course, but helped the banks that lent money to them even more.
The examples Zingales cites of crony capitalism and bailouts in the 1990s were followed by still others in the next decade. These include the imposition of steel tariffs by President Bush in 2002 to protect sensitive constituencies, and the Bush administration’s offer to corporations of “special rates to repatriate their profits.” Zingales does not mention it, but he could have included the unfunded prescription-drug mandate, a giveaway that was pushed by health-care interests.
It wasn’t just Bush 43–era Republicans. “At the time,” he notes, “Democrats were becoming cozier with big-business interests, launching ‘public-private partnerships,’ a way to suck money from the government while pretending to do good.”
The most egregious examples of crony capitalism and bailouts occurred, of course, with the 2008 financial panic, the subsequent recession, and the federal government’s ham-handed response: the interventions to address problems at Bear Stearns, AIG, General Motors, Chrysler, Rubin’s Citigroup, and more.
Zingales is not ideologically opposed to government interventions to stem a panic. His critique is different, and it has two parts: First, he’d like to see greater recognition on the part of policymakers that it was earlier government meddling that paved the way for excessive risk-taking in the financial system. Second, he’d like to see recognition that there is a right way and a wrong way for governments to respond to panics.
“I am not opposed to the idea of a government intervention in such extreme circumstances, but I do object to the way it was done,” he writes. “When a drug addict is undergoing a withdrawal crisis, one certainly should not stand by and do nothing — but one also should not give the addict a full year’s supply of drugs, which is roughly equivalent to what the U.S. government opted for with TARP. The program was a pillage of defenseless taxpayers that benefited powerful lobbies: not just the triumph of Wall Street over Main Street, but the triumph of K Street over the rest of America.”
Zingales is rightly outraged by the behavior of his adopted country’s political and financial elites over the last two decades. Their actions have eroded the exceptional character of the nation’s free-enterprise system and put the nation on a path toward the crony capitalism and corruption he fled when he left Europe.
Fifty years ago, the great Italian liberal thinker Bruno Leoni remarked that “it seems to be the destiny of individual freedom at the present time to be defended mainly by economists.” Half a century later, we are fortunate to have an Italian-born economist so powerfully and persuasively defending America’s once exceptional free-enterprise system.
– Mr. Schulz is the DeWitt Wallace Fellow at the American Enterprise Institute and the editor of American.com.