Crony Capitalism

Crony Capitalism to Blame for Sluggish Job Growth

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Crony capitalism
Economist

The Washington Post has a terrific article today, "The great start-up slowdown" detailing how the rise of crony capitalism is retarding economic growth and job creation in the United States. The subheadline gets right to the point: "Some economists see a link between the scarcity of start-ups and the rise of influence-peddling."

The Post article mirrors a column I wrote a couple of years ago in which I reported data showing that startups are the source of practically all new jobs:

A July 2010 study, "The Importance of Startups in Job Creation and Job Destruction," by Kauffman Foundation senior fellow Tim Kane found that since the 1980s, new startups "create an average of 3 million new jobs annually. All other ages of firms, including companies in their first full years of existence up to firms established two centuries ago, are net job destroyers, losing 1 million jobs net combined per year." Kane came to the astonishing conclusion, "Startups aren't everything when it comes to job growth. They are the only thing."

The Post article focuses on a distinction between productive entrepreneurship (company creation) versus unproductive entrepreneurship (lobbying and rent-seeking). The first involves improving products and services and creating new ones. Startups are an essential part of that process and the Post reports that the startup rate since the 1980s has dropped by 25 percent. In addition, the average age of companies is now 16 years, a 50 percent increase from 1992. What's going on? Crony capitalism.

The Post depressingly reports:

Those older firms appear to be growing more interested in what economist William Baumol called "unproductive entre­pre­neur­ship."

Put simply, that means companies are ramping up their efforts to win favors from the government — tax breaks, spending contracts or industry regulations that favor their firm over potential competitors. Many economists, such as Luigi Zingales of the University of Chicago, contend those efforts divert resources that could be boosting the economy and sparking more job creation.

From 1998 to the peak of the influence boom in 2010, after adjusting for inflation, American companies nearly doubled the money they spent lobbying federal lawmakers, according to the nonprofit Sunlight Foundation. There's an index that tracks stock performance of the 50 companies that lobby the most, and in 2012, it outperformed the market as a whole by 30 percent.

A recent study for George Mason University's Mercatus Center by economists Russell Sobel and Rachel Graefe-Anderson found that for companies, deep political connections (including high lobbying spending) and higher revenues go together. But instead of banking those extra revenues as profits, the firms appear to pass them on to their chief executives. The paper finds "a robust and significant positive relationship between political activity and executive compensation."

Some economists see a link between the nation's two entre­pre­neur­ship problems — the scarcity of start-ups and the rise in influence-peddling. By bending tax laws and new regulations to benefit them, those economists theorize, existing companies make it harder for anyone new to challenge for market share.

And let's not forget the substantial barriers to entry for new firms that regulations raise. One study in 2006 calculated that each dollar in US federal government regulatory spending contributed about $21 in compliance cost burdens for businesses. That implies that the annual $50 billion in federal regulatory agency spending imposes more than $1 trillion in compliance costs on companies. Such costs are particularly burdensome on startups. 

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  1. The Washington Post has a terrific article today, “The great start-up slowdown” detailing how the rise of crony capitalism is retarding economic growth and job creation in the United States.

    Hey, Washington’s unemployment is back up to 6.2%! Recovery… summ… win… decade.

    In other news… get those rich… regular people.

    Inslee proposes capital-gains tax to help fund budget
    Gov. Jay Inslee proposed a $39 billion, two-year budget plan Thursday that would raise taxes and other revenues by $1.5 billion, with more than half coming from a new capital-gains tax on the sale of stocks and bonds.

    http://seattletimes.com/html/l…..alxml.html

    I’m guessing governor douchebag is feeling his power after a couple of $15 minimum wage hikes and real, honest-to-god National Socialists being elected to the Seattle City Council.

    “Let them have their way so people can see their failures in real time” is not always a good strategy.

    1. Yeah, this is bad. I hope that the state pension fund is not exempt from the capital gains tax.
      If this goes into place, I will be forced to move. There is no fucking way I’m letting my hard-saved dollars get a lesser return so that Seattle can have another light rail line, or whatever boondoggle he’s got planned.

      1. Why do you hate urban farming?

        1. I’m fine with urban farming; it’s the urban farmers I oppose.
          On another note, the direct ballot initiatives are getting fucking stupid. I was happy that we legalized weed and all, but now we are being forced to fund pre-K and reduce class sizes to an unrealistic size. If you let people put initiatives that sound like free shit on the ballot, they are going to vote for them. Ballot initiatives should be required to include tax or cost cutting measures in the language to keep them budget-neutral.
          This little gem passed by less than 1% spread (notice no mention of the costs):
          “Initiative Measure No. 1351 concerns K-12 education.
          This measure would direct the legislature to allocate funds to reduce class sizes and increase staffing support for students in all K-12 grades, with additional class-size reductions and staffing increases in high-poverty schools.

          Should this measure be enacted into law? Yes [ ] No [ ]”

          1. This measure would direct the legislature to allocate funds to reduce class sizes and increase staffing support for students in all K-12 grades, with additional class-size reductions and staffing increases in high-poverty schools.

            Easily done. Specify that funds already allocated to these schools (which funds will not be increased, as the referendum does not require that) must be spent on teachers, and that non-teaching staff and non-academic activities will be cut as necessary to accomplish this goal.

            Really, its like they’re not even trying.

    2. The politicians of this state and city seem absolutely determined to drive out all the millionaires and destroy the startup culture that has kept Seattle going even in a recession.

      There is nothing dumber than a parasite. There really isn’t.

      1. Except I buy and sell stocks (mostly at a loss, I admit) and I’m no millionaire. Hell, I’m hardly a ten-thousandaire.

        1. I’m a Micro-millionaire.

          Oops, I bought a drink, sorry, I lied.

        2. Your wrecker status has been downgraded to provisional pending further review.

          1. He should remain a wrecker – but he has definitely lost his kulak status.

    3. Ya’ll don’t have a capital gains tax along with your lack of income tax like us right now right? That fucking sucks.

  2. “And let’s not forget the substantial barriers to entry for new firms that regulations raise.”

    I think one of the most important “regulations” is the increasing minimum wage. Not only is it a job killer but it is detrimental to getting new young workers trained. Add to this the fact that it skews its harm to small businesses rather than older (larger) ones, and I think we’ll see its effects snowball for many, many years.

  3. Time to switch to crony communism.

    1. Hey, hey! Not so hasty – shouldn’t we go through crony socialism first?

      1. Germans already did that for us in the 30’s.

        1. Yeah, but they didn’t have the right cronies. We should give it a try with our cronies, just to be sure.

      2. Isn’t that sort of redundant?

  4. I don’t think we can properly comprehend the detrimental effect that government, regulation, taxation, etc have on business and entrepreneurship. It’s beyond our capacity to understand.

    1. I know personally, and just incidentally because this isn’t my work, of 4 budding entrepreneurs who just gave up because of red tape at City Hall and regulatory costs.

      1. “budding entrepreneurs”
        So…pot farmers?

      2. The startup I was in stopped hiring during a hiring spree because of Obamacare. We couldn’t go over 50 employees.

        1. Can they hire independent contractors instead?

  5. That implies that the annual $50 billion in federal regulatory agency spending imposes more than $1 trillion in compliance costs on companies. Such costs are particularly burdensome on startups.

    Don’t worry, Elizabeth Warren will get right on that!

    1. The answer to state-powered and state-entrenched corporations is more state interaction with corporations!

      1. We’re just onnnnneeee mmoooorrrrreeeee regulation away from PERFECTION!

        It’s like that South Park video game “Heroine Hero”….

  6. You know who else promoted certain kinds of crony capitalism…

    1. Mr. Burns?

    2. Every politician who ever had an opportunity to enact regulatory overkill?

  7. The problem is that the take-away most people will get from the article is that the problem is capitalism, not cronyism. If there were no evil corporations to corrupt the honest, hard working politicians, then everything would be sunshine and puppies.
    And good luck on getting the average Amurican to see the relationship between regulations and job loss.

    1. The regulation says that new mothers will be given paid maternity leave. It does not say that people will hire less women. If evil corporations respond to this regulation by hiring less women, we’ll just create a regulation that requires the workforce to be 50% women of child-bearing age. If there aren’t enough qualified women to make up 50% of the workforce we’ll create a regulation that requi…..

  8. It isn’t just that the new Crony era has decelerated Start Ups, it has also turned many of the Start Ups into fucking rent seekers.

    I spend a lot of time in Silicon Valley, and it is astonishing how many new companies are funded to target pet projects of government wonks. One of my friends worked at a solar startup and half of their 10 year business model was based on getting funding from the government. They ended up going in the dustbin because some other solar startups had better connections to government string-pullers- their subsidies were transferred to another company.

    I was at a talk recently with one of the founders of Sun Microsystems turned Venture Capitalist and he was touting a new insurance company he invested in that was using big data to drive better payment and coverage decisions (one example is that they found it is cheaper long run to pay for flu-shots than treat those who got the flu). I was quite jazzed about this until I found out their biggest customer base is people on the Obamacare Exchange receiving subsidies.

    Likewise, we can look at Solyndra and the other tits-up startups. Even Tesla, SpaceX, and Solar City- some success stories in innovation wouldn’t be around without the billions in rent they’ve sucked from the government.

    The opportunity cost for all these startups is huge. Not only have they taken resources from other disruptive startups, but they are not sustainable in the long term.

    1. “It isn’t just that the new Crony era has decelerated Start Ups, it has also turned many of the Start Ups into fucking rent seekers.”
      Uh…can you say “Uber”?

      1. Well, I don’t think Uber started out as cronies, and that is another chapter in the sad story of encroaching government.

        Originally Uber was a true disruptor. They were exactly what you want from a startup- finding new and innovative ways to serve the market. It was only once governments started throwing their weight around that Uber decided it needed to start walling off the enemies.

        Had Uber started off in their business plan with “We will create a company that goes out and secures contracts from the government to provide the only car service in town…” it would be similar to all these other startups I see whose sole business plan is to get the government to write them or their customer a check for their services.

        1. My point about Uber concedes your assessment of how they started. It’s the corrupting influence of government, through regulation and licensing, that turns true start-ups into rent seekers. This appears to be what is happening to Uber. It’s not easy to resist the lure of inhibiting or down right outlawing competition by sucking a little bureaucrat cock. (Pun intended)

          1. Also, they have to deal with the reality that Lyft, or some other competitor will co-opt government to hobble them, as well as other companies. Hate the game, not the playa.

    2. I had no idea of the scale of crony capitalism in the USA. Until now, I never thought it amounted to so much that it would be a serious concern to many & have such a measurable economic effect. I knew examples, but outside the fields where I looked, I never realized how it added up.

  9. Is it just me, or has the WaPo been attempting to engage in real, substantive journalism since Bezos took over?

    1. See the Doomsayers were right! We don’t need substantive journalism. That’s just code words for “airing the crackpot views of the Koch Brothers and Denialists”. We don’t need every discredited wrong-thinking cretin to have their views dispassionately reported on the same pages as luminaries like Krugman. We need journalists who are willing to educate people on the nuances of the progressive narrative. There is a difference, Kristen. A huge fucking Difference.

  10. Private enterprise doesn’t create jobs. That’s what government is for.

  11. The politicians of this state and city seem absolutely determined to drive out all the millionaires and destroy the startup culture that has kept Seattle going even in a recession.

    Isn’t there anybody out there who remembers what it was like when Boeing was the single gigantic egg in their basket? I thought diversification of the economy was their goal, at one time.

  12. Kelly `s st0rry is great, on thursday I got a top of the range Fiat Multipla from having made $5941 thiss month and-more than, 10k lass-month . it’s definitly my favourite work I’ve ever had . I started this three months/ago and pretty much immediately started bringin home minimum $70 per hour .
    hop over to here ========== http://www.jobsfish.com

  13. What “rise” in crony capitalism. I well remember all the government contracts and money being offered by the government when I worked at Hughes that were certainly related to military use but which also advanced the business of the companies commercial business – the rad hardening and Very High Speed Integrated circuit programs to just name two. Then we had a lot of money going into developing focal plane arrays, lasers, displays…..

    This “rise” is just pure BS. The reason why job growth is sluggish is because technology is killing semi-skilled jobs faster than at any time in the past and there is no next big thing like the PC and expansion of semiconductors into every industry in the 80s and the internet in the 90s.

    How many more useless Internet companies do we need now? How does Uber “create” jobs by taking rides away from taxi cabs and airport shuttle companies? At some point a hack can’t make enough to pay for the rent of the taxi and has to quit so 10 people can make an extra 50 bucks a week. Uber doesn’t create a need for more rides any more than opening up a new restaurant makes people need to eat more than 3 meals a day.

    Real jobs are created when something really new shows up on stage and technology hasn’t given us the physics yet that can be exploited for that next great new thing.

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