The Alleged Problem of Crony Capitalism

This commenter is not buying it.

It exists in some industries but it’s swamped by other factors, which creates the high turnover among the Fortune 500. Name an industry outside of healthcare or utilities that is “crony capitalist.” Technology? Retail? It’s hard to name an industry. You could name banking but remember that the ROE at Citi and Bank of America is in single digits. Goldman Sachs isn’t doing much better. A good example of crony capitalism is the mutual fund industry, which benefits from the complexity and limited selection of corporate 401k and IRA plans. But even the asset management industry is being decimated by Vanguard. Overall, the ROE for most of corporate America is around 10-12%, and that’s been true for a long time. It’s been going up recently but mostly due to the effect of low-capital technology firms like Google and Apple, which are not crony capitalist. So my argument is, name a crony capitalist outside of healthcare. It’s hard to do.

My thoughts:

1. I am sympathetic to some of his other comments on the same post, where he argues that right-of-center groups are using the crusade against crony capitalism as a positioning tool. I have never bought into the idea of making that crusade a focal point.

2. It is possible that the forces of market competition tend to win out in the long run, in spite of attempts at government interference. Ray Kurzweil used to say that about government regulation of technology–that regulations were merely stones in the river and the river just rolled over them.

3. Citibank is a dubious example. Without cronyism, I don’t think Citi would have a single digit ROE. I think it would have gone under.

4. If Goldman Sachs is not doing well, it is not for lack of government help. GS was the main beneficiary of the AIG bailout intervention.

5. Although creative destruction still exists, there are many indicators that its pace has been slowing down. See Tyler Cowen’s The Complacent Class.

6. For me, the poster child of crony capitalism is cable TV. From its very inception, it was a corrupt bargain between local governments and the cable companies. A lot of telecom in general is crony capitalist, as can be seen by the large lobbying expenses of the main players. If your measure of competition is firms going under, then telecom seems more cronyist now than it did twenty years ago.

7. If your measure of croynism is lobbying expenses, then the big industries include health care, finance, and housing. Energy is up there. Education is surprisingly big, considering that we think of it as mostly non-profit.

8. If your measure of cronyism is absence of creative destruction among the industry leaders, then higher education should be top of the list.

19 thoughts on “The Alleged Problem of Crony Capitalism

  1. Higher education is not quite crony *capitalism*, but it certainly is crony *something*. You have touched on the moral hazards related to crony non-profits in the past.

    Government contacting — whether defense, infrastructure, or something else — has all the usual indicia of crony capitalism, plus a revolving door between the public and private sectors.

    Construction in general, and construction in big cities even more so, is probably dominated by crony capitalists.

    The legal prohibition of high-wattage incandescent light bulbs in favor of bulbs that are more energy efficient but more expensive up front was probably a result of crony capitalism.

    I kind of think people who don’t see much crony capitalism haven’t looked very hard.

  2. Total spending in the last election was about $7 billion. US GDP was about $17 trillion. If the economy was really dominated by political cronyism, wouldn’t spending on political campaigns exceed 0.04% of GDP?

    I don’t deny this stuff exists, but I think it’s awfully hard to turn “cronyism” (as opposed to plain old monopoly power) into an explanation of the entire economy, which a number of extremely irritating commentators seem intent on doing.

  3. When Walmart gets a free plot of land to build on through eminent domain abuse, that’s crony capitalism. Whether that shows up as above normal profits or not is irrelevant.

  4. In terms of calls against Crony Capitalism, simply being a large and powerful in the economy automatically make a company impact both government and society. If ~70% of the economy is the private sector, then big companies dominate that 70%! Take for instance how much conservatives complain about diversity and multiculturalism in large global companies.
    1) Aren’t a lot of cable and telecom crony capitalism because for time periods there was a good reason for single monopolies. A cost a bunch of money to install the lines and get up and working, that it was almost necessary to get a single local provider. Anyway the last ten years this model is collapsing and most Americans can choose the local phone or cable provider. I would say the local electric companies is better example here. Note the main reason why solar is so popular in California is our power companies prices during summer peak hours are so high.

    2) In terms of creative destruction, wasn’t there a lot of that in the 1930s? Still doesn’t change the fact 1932 unemployment hit 25% and The Grapes Of Wrath was reality. Creative Destruction does not always benefit the average family.

    3) Also is modern war the ultimate in Creative Destruction? The Nazis and Japanese Empire very creative in their destruction. (Or the US investment a definition of technology creative destruction.)

    4) Isn’t the biggest problem of 2008/2009 is the level of bank losses? Sure Goldman Sachs was probably insolvent without AIG for six months, but can imagine the impact of if they completely failed? It is really hard to discuss the advantages of creative destruction when there is 25% of unemployment like 1932. And yes Citibank should have been closed down.

    5) I believe there is a lot of creative destruction in the global economy right now but it is happening internally within large companies. So it is hard to measure and I do believe the major impact of slowing down the economy is the AS curve which is held back by falling worker populations. The modern economy is almost following the 1950s US economy which had medium growth but little actual job creation due to working population limitations. If you don’t believe the net job created during Obama (1.13% per year) was slightly higher than Eisenhower (1.11% per year)

    6) I think the biggest problem with crony capitalism is when governments and private business are working well together it is Boom times (Japan Inc. 1980s). You hear complaints during down cycles.

    • One reason I don’t complain much about diversity is that it is mostly rainbow washing. I know companies don’t REALLY care. I complain when they actually trick people into thinking they really care. We can’t let the nonsense actually impact the busineds.

    • Whoa! For your items 2) and 3) above, I think you should look up the definition of the term “creative destruction”. I’m afraid you are substituting “destruction” for “creative destruction”. The term was coined by Schumpeter in the 1940’s. Investopedia says this: ‘”process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” This occurs when innovation deconstructs long-standing arrangements and frees resources to be deployed elsewhere.’ So, where’s the economic innovation transforming industries from within in the 1930’s? Or in WWII? Let’s all work from common, agreed-upon definitions. If you want to define ‘creative destruction’ differently than the rest of us, then please be explicit about it and justify your reasoning. Or if you really think that the term fits for the 1930’s and WWII, then maybe explain it in more detail for those of us who are a bit slower… :^)

  5. Isn’t this trying to measure the unseen? What firms simply can’t exist because of barriers to entry? Which entire industries would look different?

    • An intrepid economist could probably estimate it. What industries lobby heavily. How many pages of the federal register. Compare to return on equity and business birth and death rate. But I don’t know.

  6. Return on equity might not be great at Goldman Sachs, but return to management is doing fine.

    • +1

      My friend just retired at 34 after working for Goldman. I’d say they are doing just fine.

  7. “Education is surprisingly big, considering that we think of it as mostly non-profit.”

    That’s how they get you.

  8. I would look at government spending and regulation to find crony capitalism. Here in Boston development and even retail (keeping big retail out in favor local businesses that make campaign donations). Defense at the national level, same with college. I would add in pharma, there is a reason they don’t like trump’s vision of the FDA.

  9. Taxi and hotel industries are obvious ones: there are cities that have banned Uber and AirBnB and more are trying. All the industries with occupational licensing (~30 pct of workers). Restaurant industry (re: battles with food trucks). Bars: liquor licenses are like taxi medallions. Liquor stores: in Massachusetts at least, they oppose every effort to allow alcohol to be sold at grocery stores and other places. Car dealers: laws that prevent direct sale of cars.

    Here is the algorithm for finding crony capitalist industries. Step 1: pick a regulation and identify the industry to which it applies. Done.

  10. LOL, arguing over whether crony capitalism exists or not (as opposed to assuming it’s a given) is a First World problem.

  11. Someone, please try to buy a new car directly from the manufacturer without going through a dealership. (Or Tesla, try to sell your cars without a dealership). Crony capitalism.

    Or, try to open a barber shop or beauty salon without having the proper training licenses. Crony capitalism.

    Or how about the cost of sugar? Do you miss the cane sugar in your Coke? Crony capitalism.

    Would you like to buy gas for your car that doesn’t have engine-damaging ethanol in it? Crony capitalism. (I’m surprised you didn’t put agriculture subsidies and lobbying on the list. Notice how Gov. Perdue got through the nomination process without a hitch, because both Republicans and Democrats on the committee are all about that crony capitalism for big ag.)

    I’m sure there’s more. Maybe these are like stones thrown in the river, but you put in enough, and you eventually get a dam.

  12. Carried interest taxation for hedge funds and private equity funds managers. I work for one and it’s frankly ridiculous to argue that those should be treated as capital gains as opposed to professional income.

  13. This is an example of how statistics or “facts” provided in a dubious, incentive-to-lie kind of way (combined possibly with some kind of ideology or will to believe) can create a massive blindspot.

    The ROI they report – that has very little to do with their actual profits and nothing to do with the level of cronyism, which can be connected to all sorts of perks, from tax evasion to political connections that pay off down the road. Bailouts usually mean writing off of certain losses and the ability to stay in business, but the losses mean a low official ROI for the industry, while individual corporate elite make off with millions or even billions in their “pockets” — and subsidies are often used the same way. The business can say that it is “healthy” and mildly profitable, while the benefit goes to a few owners and investors, and the books say what they are supposed to say. The closer one works with government the more the books say just what the government wants to hear – regardless of the truth. Cronies are just about as good as Soviet planned economy managers at this.

    Crony capitalism pervades the military industrial complex – which includes many industries, a lot of them invisible to consumers, since they provide for business-to-business, wholesale raw materials and intermediate goods. It is also pervasive in the energy industry (both with oil and other old school forms and green energy), farming (agrobusiness), insurance – health mainly but other forms including banking and legal insurances, banking of all types from home mortgages to the various repackaging and insurance scamming that we saw during recent crises (and yes, there is a correlation), but there are so many other industries bloated by cronyism.

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