Hit & Run

Crony Capitalism to Blame for Sluggish Job Growth


Crony capitalism

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.