Tags: Cronyism | liberalism | big | system

CATO Compares Liberalism and Cronyism

By    |   Wednesday, 23 October 2013 02:57 PM

The CATO Institute held a presentation Sept. 27 on the book Liberalism and Cronyism: Two Rival Political and Economic Systems, authored by Randall Holcombe, an economics professor at Florida State University, and Andrea Castillo, program associate at the Mercatus Center at George Mason University.

CATO's Daliber Rohac introduced the program by observing that the soviet-style communism and planned economy created cronyism by establishing two classes: those who were party members, who had connections, access to specialty shops, the ability to travel easily and they were satisfied with the society; and everyone else, who spent a third of their waking time in line.

The book argues that this is not just a feature of planned economies, but a fairly general one around the world arising from extensive government interventions in the economy. Thus, whenever force is employed over voluntary transactions to allocate resources, under a general system of rules, some people will be able to take advantage.

Holcombe argued that since the 2008 episode of the ongoing financial crisis, capitalism has been under attack for cronyism by critics like the Occupy, as managers of the financial sector have foreclosed on homeowners and Solyndra exemplified the ability of favored companies to obtain government aid.

The authors contend that the government is to blame. They define liberalism as the system of voluntary commerce, as opposed to cronyism, and they define that any system that departs from free markets entails cronyism, where the profitability of business depends on government policy.

A common element of this policy is the correction of perceived faults in the market. They also point to Japan and Korea as countries where the government chooses to direct government support to successful enterprises in order to help them become even more dominant.

Castillo made an overall observation that policy agendas talk about goals rather than outcomes. She proceeded to discuss four variations of systems that involve cronyism. The first is state socialism, practiced in the USSR, Cuba, North Korea and China, where price signals are replaced by political edicts and survival depends on access to informal fixers.

Next is communism as practiced in the agricultural economy. She cited secular communes in China, which were reformed by Deng when he instituted incentives for farmers to produce that allowed them to keep some of the fruits of their labor. She characterized the kibbutzim in Israel as religious in nature, perhaps erroneously, and she said they tended to become dependent on government support. (This probably depends on the degree of influence of labor in the governing coalition at any given time, which has declined along with the influence of immigrants from socialist countries.)

Strangely, she neglected to mention the United States, where communes and cooperatives were established to mimic institutions that immigrants knew from the old country.

This is the environmental and social justice movement, which Castillo called Baptists-to-bootleggers, which justified a host of redistributive programs as benefiting favored groups.

Finally, fascism and corporatism were established first in Italy, 21 or 22 companies were granted favored status. (Here American parallels can be found in "national champion" companies, government-sponsored enterprises such as Fannie Mae and Freddie Mac and "too big to fail" banks propped up by the government.) She found a parallel in the formation of the U.S. Chamber of Commerce at the suggestion of Herbert Hoover. Even the Reconstruction Finance Corporation, sometimes associated with the New Deal, was a Republican initiative of Hoover's.

The highlight of the event was the concluding commentary by Timothy Carney, who runs the Culture of Competition Project at the American Enterprise Institute and writes for the Washington Examiner. He posited a relationship between big business and big government that promotes selected enterprises, such as Solyndra and years ago, the Southern Company utility. The relationship embodies a philosophy that the government will steer the economy while the free market rows.

According to Carney, the beneficiaries of this arrangement are the biggest players, who are able to employ the "overhead smash," by supporting regulatory burdens that the large companies can readily manage, but which create barriers that smaller competitors cannot negotiate, so they will sell out to the biggest companies on favorable terms. He said he learned from his own neighborhood that regulators like to work with big entities, because they can address a lot of issues with a single phone call.

Moreover, the biggest companies have the means to hire the people who write the laws and administer the regulations. People are bound to become rent seekers as a means of survival in such an environment, and over time, the regulators are captured by the enterprises. Ironically, Carney spoke highly of former Treasury Secretary Tim Geithner, and he came to believe that Geithner helped to lead the Wall Street bailout because he saw a lot of good things that the industry does, such as provide liquidity to the economy, not to help his Wall Street friends.

I am reminded of a statement by Geithner that helping Wall Street was the last thing he wanted to do. From a cynical point of view, this would lead to a different conclusion, that if it really was the last thing Geithner wanted to do, he wouldn't have done it.

The dessert portion of this event was Carney's rendition of a speech by Jeffrey Immelt, CEO of General Electric, to the Export-Import Bank. Carney noted that GE is one of the largest customers of Eximbank, but not the largest, which by far is Boeing at 80 percent, with Caterpillar and Westinghouse also among the largest beneficiaries of this export finance agency and the top 10 customers accounting for 92 percent of the loans Eximbank guarantees in the name of promoting exports and creating jobs. (Detractors sometimes refer to Eximbank as the "Boeing Bank.")

Carney reported that Immelt called for a "reset" of capitalism, with the government acting as the industrial policy champion and financial partner of industry. He called Germany the model and quoted Prime Minister Angela Merkel as saying, "Let's kick some rear." Companies should "roam as a pack," promoting exports with the support of the government. Carney recognized GE as the largest employer of lobbyists in Washington and Immelt as the official Job Czar of the Obama administration.

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The CATO Institute held a presentation Sept. 27 on the book Liberalism and Cronyism: Two Rival Political and Economic Systems, authored by Randall Holcombe, an economics professor at Florida State University, and Andrea Castillo of the Mercatus Center at George Mason University.
Wednesday, 23 October 2013 02:57 PM
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