Mark Perry has a punchy photo on his blog contrasting the waiting lines that appear in different economic systems. It hits on at a reason that cronyism is harmful for society: free markets allocate food better than bureaucrats and politicians.
For instance, high-fructose corn syrup often replaces sugar in American foods because the government is prohibiting the importation of inexpensive foreign sugar by means of a tariff and quota system. What if the government put price controls on bread or imposed costly regulations on the farming of wheat? How well would American consumers fare?
Cronyism harms Americans by putting the whims of government officials above the needs of consumers.
CNN has an interesting piece on cronyism – the former president of Shell Oil USA describes his experience with political donations as feeling extorted.
“I feel extorted,” John Hofmeister told CNN’s Drew Griffin. “Every time I wrote a check I felt that it was a form of extortion, the price of entry, because of the reception that you got when you contributed versus the reception when you did not contribute.”
It appears that our Anglosphere brethren in Australia are trying to get their act together when it comes to doling out taxpayer dollars to private corporations. Prime Minister Tony Abbott has warned companies to get their respective houses in order because subsidies aren’t coming down the chimney:
Prime Minister Tony Abbott warned struggling Australian companies Wednesday to get their house in order, refusing to indulge in “corporate welfare” subsidies despite car giant Holden’s decision to shut local plants.
The recent Atlanta Braves stadium deal has garnered much publicity for its move to neighboring Cobb County and the expected “contribution” that will come from taxpayers — to the tune of $600mm over the next 30 years. In this CNBC interview, Debbie Dooley voices her frustrations over the deal:
A $672 million proposal to move the Atlanta Braves from their downtown home to a brand new stadium in nearby Cobb County has drawn heat from the local Atlanta tea party chapter, led by co-founder Debbie Dooley, also the national coordinator for the Tea Party Patriots.
According to the Washington Examiner‘s Tim Carney, inequality is a big problem if it’s due to cronyism. While many studies contradict each other on inequality and its effects on an economy, there is no doubt in Carney’s mind that it is bad if it’s due to political connections:
The answer: “It depends.” It depends on how governments react to inequality, it depends on how developed the country is, it depends on whether it’s wealth inequality or income inequality.
Scott Beaulier describes cronyism and why it’s a problem for society. He also lists a few examples of cronyism in the Southeast. For instance:
Our neighbors in Mississippi have famously made use of non-tariff barriers to protect their catfish industry from competition. Back in 2008, lawmakers passed a Catfish Marketing Law that required suppliers to provide country of origin and production method of catfish to consumers. The law was ostensibly aimed at protecting consumers, but it’s real purpose was to protect Mississippi fishermen from competition from the Vietnamese swai, which is a catfish by any other name.
In this rather nuanced form of cronyism, we have yet another example of the government and private sector joining forces to promote exports. It remains to be seen whether this modern-day version of mercantilism can be profitable for the consumer but, judging by history, it’s very unlikely:
The Export-Import Bank of The United States (Ex-Im Bank) and FedEx have announced an innovative new alliance that will help U.S. small and medium-sized businesses (SMEs) reach the 95% of the world’s customers who live overseas.
The National Legal and Policy Center describes how one company is benefiting from the government ban on incandescent light bulbs… and how politicians are benefiting from the company.
Besides the federal and state governments’ coercive tactics in shaping citizens’ lighting practices, it shouldn’t surprise that Cree also is heavily invested in the same behavior that much of the rest of the “green” energy industry depends on: crony capitalism. In March 2010 Vice President Joe Biden, as he toured companies that had secured stimulus grants and loans, visited Cree along with then-Energy Secretary Steven Chu. Cree had received a $39-million tax credit through the Recovery Act, as well as $1.8 million in stimulus money for research and development. This coincided nicely with a visit by Swoboda to the White House the previous July, as well as a timely 2009 increase in Cree’s lobbying expenditures of 137 percent over the previous year.
The entire piece is an engrossing read, and portends a dark future for the light bulb.
Authors Kevin Murphy, Andrei Shleifer, and Robert W. Vishny published a paper that looks at the impacts of rent seeking (an economic term essentially meaning cronyism) on economic growth. They find that rent seeking is more rewarding to talented individuals than entrepreneurship, leading to slower economic growth.
The paper is fairly complex, but here’s the abstact, emphasis added:
A country’s most talented people typically organize production by others, so they can spread their ability advantage over a larger scale. When they start firms, the innovate and foster growth, but when they become rent seekers, they only redistribute wealth and reduce growth. Occupational choice depends on returns to ability and to scale in each sector, on market size, and on compensation contracts. In most countries, rent seeking rewards talent more than entrepreneurship does, leading to stagnation. Our evidence shows that countries with a higher proportion of engineering college majors grow faster; whereas countries with a higher proportion of law concentrators grow more slowly.