Capitalism for Cronies or the Public Good?
In the past couple of weeks, I wrote one post arguing for more government-driven angel investing and another suggesting that the U.S. consider a new export promotion strategy. Both of these posts received considerable pushback from people on Twitter and elsewhere, who were very upset about the idea of the government helping certain companies at the expense of others. This is part of a general antipathy toward what some call corporatism, or crony capitalism. A number of conservative thinkers, such as the American Enterprise Institute’s T.P. Carney and James Pethokoukis, have made this a cause celebre.
Now, crony capitalism is a bad thing, and I’ve railed against it in the context of Japan. When well-connected companies are able to use the government as a tool to protect themselves from competition, it’s good for those companies but bad for the economy as a whole. In the U.S. there is too much of this as well.
But some of the ideas that are getting slammed as crony capitalism are really something else. People need to realize that anything the government does, whether good or bad, will create winners and losers. That doesn’t mean any and all government intervention in the economy is crony capitalism.
Let me give an example. Private companies usually don’t build interstate highways because they can’t purchase the necessary land, marshal the necessary resources or capture all of the value of the roadways through tolls. In this case, highways are a public good -- something that we need the government to provide for in order to promote an efficient economy.
So suppose the government levies taxes and builds the interstate. Plenty of private companies will be helped by this. Trucking companies will be able to profit by moving goods across the highway. Construction companies that build towns along the highway exits will also benefit. Logistics companies, carmakers -- the list of beneficiaries is long. By the same token, some companies will lose out. Railroads will suffer from the increased competition from truckers. Airlines may lose out, since more people can now drive from city to city. Towns that are bypassed by the new roads might wither.
Is this crony capitalism? Is it corporatism? Not at all. In this example -- which is what happened in the U.S. in the mid-20th century -- the government built the interstate system because it wanted to boost the economy, not because it wanted to help well-connected companies at the expense of other companies. The gains and losses to different sections of corporate America are a side effect of the policy, not the main effect. That’s a crucial difference.
Now, an Econ 101 teacher might say that in this sort of situation, the government can compensate the losers by taxing the winners, and the economy will still benefit. For example, the government can levy taxes on the trucking industry to compensate the railroad industry. But any serious economist would tell you that this is hopeless in practice. First, it’s impossible to measure exactly how much each winner benefits from the new policy, and how much each loser is hurt. Second, taxes distort the economy.
So we’re left with an uncomfortable truth -- to boost the economy, the government must often do things that help some companies and hurt others. That will often lead opponents of the policies to cry “corporatism,” but it isn’t corporatism. It’s simply good economic policy.
If you think about it, a huge number of government policies fit into this category to some extent. If the government pays scientists to discover better ways of storing electricity, it will help electric car makers and battery companies, while hurting oil producers. If the government provides police and courts and jails that discourage theft, it will help companies that own warehouses and hurt companies that provide warehouse security.
In some cases, true crony-capitalist policy looks like government nonintervention. For example, when coal-burning power plants blow pollution into the air, the government should tax them in order to make up for the social harm they cause. If the government doesn’t tax them because of the strength of the coal lobby, that’s true crony capitalism, even though it looks like the government is doing nothing.
So what about government angel investing? Surely that’s corporatism, since the government is giving money to specific companies? Well, I don’t think so. Startups have essentially no lobbying clout whatsoever -- they are, almost by definition, not well-connected. And they often disrupt well-connected industries. Government angel investing can help venture capital firms, but so will government-funded basic research. So the accusation of crony capitalism doesn’t really stick in these cases.
We need to accept that there are some government interventions that boost the economy, and these interventions won’t necessarily be fair. That doesn’t make them crony capitalism. Even as we try to root out crony capitalism, let’s remember what it is -- and what it isn’t.
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Noah Smith at firstname.lastname@example.org
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