Crony Capitalism

Crony Capitalists and Special Interests Dragging Down U.S. Economic Growth

Washington Post columnist Robert Samuelson makes the case.

|

CronyCapitalism
sgpolitics.net

Unemployment is now at 5.1 percent, yet American wages and incomes are stagnant. Why is this happening? In an insightful column in today's Washington Post, Robert Samuelson suggests an explanation based on the work of economist Mancur Olson, As I have explained earlier public choice theorist, Mancur Olson, argued in The Rise and Decline of Nations (1982) that economic stagnation and even decline set in when powerful special-interest lobbies—crony capitalists if you will—capture a country's regulatory system and use it to block competitors, making the economy ever less efficient. The growing burden of regulation could some day even turn economic growth negative.

Samuelson notes that wage increases have histroically tracked increases in economic productivity. Last year productivity increased by only 0.5 percent. This contrasts with a late 20th century rate averaging about 2 percent per year. Samuelson then turns to Olson for a possible explanation for the slow-down in productivity: the proliferation of regulations adopted to protect special interests. From Samuelson:

Although an economist, Olson revolutionized thinking about the political power of interest groups. Until Olson, conventional wisdom held that large groups were more powerful than small groups in pursuing their self-interest — say, a government subsidy, tax preference or a protective tariff. Bigness conveyed power.

Just the opposite, Olson said in his 1965 book "The Logic of Collective Action." With so many people in the large group, the benefits of collective action were often spread so thinly that no individual had much of an incentive to become politically active. The tendency was to "let George do it," but George had no incentive either. By contrast, the members of smaller groups often could see the benefits of their collective action directly. They were motivated to organize and to pursue their self-interest aggressively.

Here's an example: A company and its workers lobby for import protection, which saves jobs and raises prices and profits. But consumers — who pay the higher prices — don't create a counter-lobby, because it's too much trouble and the higher prices are diluted among many individual consumers. Gains are concentrated, losses dispersed.

The dilemma for democracies is clear. Voters expect governments to cater to their needs and wants — and one person's special interest is another's way of life or moral crusade. But if governments cater too aggressively to interest groups, they may undermine (or have already done so) the gains in productivity and economic growth that voters also expect.

So this is another possible explanation for the productivity slowdown, which afflicts many advanced countries. These societies are riddled with programs and policies promoted by various interest groups that "can increase the income [of the groups' members] while reducing society's." If he were alive today, Olson might well add that higher psychic income — the feeling of "doing good" — also motivates many interest groups.

It may be even worse than Samuelson thinks. The burden of regulation may have so reduced economic growth over the past 7 decades that Americans are 75 percent poorer than they would otherwise have been, according to economists John Dawson of Appalachian State University and John Seater of North Carolina State.

For a somewhat more hopeful analysis see my article, "Is U.S. Economic Growth OVer?"

Advertisement

NEXT: Feminist Porn Producer and Free-Speech Advocate Candida Royalle Dies

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Sure, this is all true but a far greater reason is globalization. Listen. Everyone wanted to help the poor, the starving in, say, Bangladesh. Now there are factories worldwide in places where the cost of living is so low a good wage is a fraction of what it would have to be here. Either tariff walls to prevent capital flight will have to go up (and the 3rd world starve again) or the pace has to quicken big time to create wealth worldwide, an explosion of consumption and therefore demand, a spurt of inflation, increased COL before labor costs rise to a level that jobs can return. In the meantime, innovation is key and the 1st world has to lead that to maintain its head above water til the globalisation process is complete and there’s more or less even rates and costs of living.

    1. Globalization and free trade is to our benefit, not detriment. Even when its unilateral.

    2. Or the “first world” can stop pretending that they can legislate prosperity. Running a factory in Bangladesh and other “third world” countries is dangerous and unreliable. There is more than the bottom-line cost difference to consider. If they could employ people in the US or other first world countries without having to pay minimum wage, unemployment insurance, SS/Medicare “matching” contributions, etc. nor complying with EPA, OSHA, and labor law bullshit, then you would likely see a lot of those jobs return.

      1. ^^ this. I work for a multi-national. Making shit in China sounds great, until you have the first quality issue and you try to manage a stop-ship in your now-two-week-long supply chain that was caused because the Chinese worker who has been shown just enough to do his/her job – and no more – misbuilds a part and doesn’t recognize it because they’ve literally never seen a [pick whatever you’re making] so a misbuild is not immediately obvious to them.

        We’ve brought back a bunch of stuff from esp Asia for these reasons. The economics ebb and flow about whether or not it’s advantageous to build in the US versus overseas. The government adding uncertainty to it doesn’t help. And idiots who think tariffs help don’t remember that other nations can and do add them. That’s one of the only reasons we bother to manufacture in South America – it’s a pain in the FUCKING ass due to all the instability and shitty currencies, but we can’t ship from Mexico due to tariffs, and from the US due to cost.

        So…we build locally in SA. For now…

      2. Yeah, there are a lot of things that increase labor costs in industrialized countries and make labor less competitive.

        Those things were designed to benefit workers and have to some degree, but on net, in a competitive global economy, it’s not at all clear they are a win.

        Good luck getting rid of them, though. If you think it’s hard to motivate people to take collective action when the costs and gains are highly dispersed, just try motivating them to give up guaranteed current benefits for the possibility of improved economic growth down the road.

        1. Those things were designed to benefit workers and have to some degree, but on net, in a competitive global economy, it’s not at all clear they are a win.

          Those things were designed to benefit a specific set of workers. The archetypical “American factory worker” is a surprisingly rare animal when law after law is passed to “benefit” him. People have wholly discounted the generations of would-be workers who never had access to those jobs because of the “generosity” of the previous generations. The world may not be all roses and sunshine without “worker’s rights” but TANSTAAFL doesn’t take a vacation because of good intentions.

          1. You are economically illiterate, an economic dunce, if you think globalization depresses the American economy, or if you think trade of any sort depresses any economy.

            You may as well start out by praising the minimum wage. Your economic incompetency shines through the minute you raise such bogus spectres.

            1. “You are economically illiterate” does not strike me as an appropriate response to “kbolino”.

              I suggest you reread the comment and apply your reading comprehension skills, if you have any.

    3. Specialization of labor, how does it work?

      1. Like magnets?

        *scratches head*

        /Juggalo

    4. “” Everyone wanted to help the poor, the starving in, say, Bangladesh””

      No.

      Companies wanted to manufacture textiles at a lower cost to keep prices low and competitive for American consumers.

      Fuck off, slaver.

      1. Look at outcomes and infer motives. A classic fallacy for left and right!

        1. No, look at basic economic theory and practice. You obviously haven’t.

    5. Tariffs only help politically favored industries and firms at the expense of consumers and non-favored industries and firms. They, in essence, compel those employed in non-favored firms to subsidize the higher wages of those employed in favored firms.

    6. I do think globalization is the main reason wage growth has slowed here, but… what? I’m not sure what else you’re saying, other than innovation is important. Accepting the dampened wages from globalization, the next thing that needs to happen is for the government to get out of the way of domestic businesses.

    7. Drive by troll.

    8. pxfragonard|9.14.15 @ 10:41AM|#
      “Sure, this is all true but a far greater reason is globalization….”

      Gotta be sarc.

  2. And this is why nothing can be done. You aren’t going to get a big enough group that cares about cutting these things enough to go up against all the people that would fight back.

    1. Have we gotten rid of the sugar tariff yet? If we can’t even get enough people to understand that monstrosity there’s not much hope. And now that we’re normalizing relations with Cuba the Fanjuls and the Bacardis will be pushing to get their plantations back and allow Cuban sugar produced by US-based companies to be imported duty-free – for “humanitarian” reasons of one sort or another, of course.

      1. But that latter development would be good, wouldn’t it? It would make more people aware of the cost of the sugar tariff & put the issue in play. Then even if it results in nothing else, if they succeed in getting an exemption from the tariff, that’s more sugar that’s not subject to tariff.

        1. BTW, that’s how liberty usually advances: not as an end in itself, but as a byproduct of other desires. I’ll take a win any way I can get it.

      2. Jerryskids|9.14.15 @ 12:15PM|#
        “Have we gotten rid of the sugar tariff yet?”

        Pretty sure the mohair subsidies were killed and then snuck back in a year or two later.

  3. Surely the solution is to keep giving the government more and more power until the special interests can’t afford to buy that power!

    1. Clearly. All this is the fault of Citizens United. Things were great before that. Special Interests had no power to influence legislators.

      1. It really is an interesting conundrum for them isn’t it? It Citizens United was the only thing keeping them from influencing the government, then how were “they” able to influence the government to get rid of Citizens United?

        1. Apatheist ?_??|9.14.15 @ 11:02AM|#
          “It really is an interesting conundrum for them isn’t it?…”

          Nope. Ignoring evidence is the proggies’ greatest skill.

      2. The lack of logical coherence on Citizens United is stunning:

        Corporations/evil rich people attempt to sway elections by contributing to political campaigns, thereby gaining undue sway with corrupt/corruptible politicians. To solve this, we give more power to those politicians who, by the very nature of this problem, are corrupt and can’t be trusted with power.

        Yeah, that’ll work.

        1. Better solution: Take away the power of politicians so that they aren’t worthy buying.

          1. I agree, but how do you prevent them from taking that power back later on? That’s the part I haven’t figured out, other than relying on voters to really care. And that hasn’t worked out so well.

            I’ve come to accept any gains are going to be transient. And hopefully the losses will be, too.

            1. I agree, but how do you prevent them from taking that power back later on?

              Jefferson, one of our Founding Fathers and the author of the Declaration of Independence, couldn’t come up with much better than “the tree of liberty must be refreshed from time to time with the blood of patriots & tyrants” – do you think we are wiser now than he was then?

              1. The problem with the tree watering is that there is no certainty that it would move things in the right direction. In fact, it is probably most likely that it would move things in a much worse direction. Very few revolutions work out as well as the American one of 1776, particularly from a liberty perspective.

            2. I’ve come to the conclusion that the best you can do is pretend to be surprised when the inevitable happens.

            3. Unless/until the people become unwilling, generally, to give up the excess fruits of their labor, this problem will exist. Because, when part of the surplus they produce is surrendered, it produces a vacuum of power which would otherwise not exist, but which attracts to it those most suited to grasping it (as opposed to those most people would characterize as being most fit to govern), for so long as it does.

              People abhor the existence of monopoly in all but one case; the solution to the problem of the state lies in expanding their intolerance to include this case, as well. The problem with this is that “there ought to be a law” is just such an easy thought to have, without realizing that it ends up being the source of the very problem you had hoped to eliminate.

            4. How do you prevent them from taking that power back?! Heck, how do you get it away from them in the 1st place?? Sure, bell the cat.

            5. All politicians get shipped to Canada when their term is over?

          2. But the PE opp or who complain about Citizens zunited do not want the politicians to be powerless. They want the politicians to be powerful enough to punish the people they hate while giving goodies to them.

  4. Yep. Whenever I wade into a derpbook conflagration on one of those “EVIL KKKOCHTERATIONSAPUS” memes, I always mention that the only reason that companies lobby the state for goodies is that the state has goodies to offer.

    1. That fact never seems to sink in, though. Instead, they push for regulating lobbying, as well.

      1. We’re always just one more regulation away from perfection

        1. It’s weird. Most of the proggies at the other site I hang out at all the time manage to completely disregard the argument Frankelson makes while managing to not be so blatantly stupid as what Alamanian says (though some do). They often rely on a melange of semi-related arguments, often featuring huge word salads that then end up in a parsing war, thereby derailing the topic.

          It’s irritating.

          1. Glad that never happens here.

      2. So long as their intentions are as pure as the driven snow…

        1. There’s some famous saying about the road to hell and what it’s paved with…asphalt, maybe…?

          I don’t know.

          1. Pretty sure it was yellow bricks. The Federal Reserve and Treasury told me so.

          2. I hope it ?clairs. Please let it be ?clairs.

    2. The comments under the WP story are little better. Lots of bellyaching about Republicans, lots of thinly veiled apologias for the administrative state, lots of paeans to the wonders of redistribution, and very little apprehension of exactly what the author wrote.

      And one guy who insists the economy is a system for distributing all the goodies to all the people of the world, and because our system doesn’t distribute goodies fairly it must not be an economy. I guess?

  5. The economy was booming when Eisenhower was President, and tax rates were high.

    Raise taxes for prosperity!
    QED

  6. If TEH CORPORATIONZ control the government, the obvious solution is to give that government more power. Duh.

    1. ” the obvious solution is to give that government more power”

      Demand accountability of those who allow government business to fall into the control of others seems even more obvious.

  7. I’m beginning to wonder if the solution is to not allow government so much control over economic winners and losers.

    1. Look at Mister Crazy Talk here!!!

      *gestures toward Fist*

    2. NO!!! It needs more control!!!! ALWAYS MORE!!!

    3. This is a dangerous idea held only by crackpots and charlatans. Obviously what we need is moar TOP MEN

    4. “not allow government so much control over economic winners and losers.”

      Maybe you should read the article again. The problem identified here is this little quote:

      “decline set in when powerful special-interest lobbies?crony capitalists if you will?capture a country’s regulatory system and use it to block competitors”

      It’s unnamed ‘powerful special-interest lobbies’ that control the economy by capturing a regulatory system. It’s specifically government loss of control to others who’ve appropriated it that’s identified as the problem.

      1. Of course, we will glide right over the prevalence of regulatory capture, and pretend that we can create a world where the wealthy and the powerful never conspire against the poor and powerless.

        Hint: Government power will tend to be used for the benefit of the government, the members of that government, and those that can enrich the members of that government.

        Counterexamples of governments that wield economic power free of any capture or self-interest are eagerly awaited.

        1. “Hint: Government power will tend to be used for the benefit of the government, the members of that government, and those that can enrich the members of that government.”

          Maybe you should read the article and my comment again. The problem identified here is this little quote:

          “decline set in when powerful special-interest lobbies?crony capitalists if you will?capture a country’s regulatory system and use it to block competitors”

          You see it’s not government power that is identified as the problem. It’s unnamed ‘powerful special-interest lobbies’ that control the economy by capturing a regulatory system. It’s specifically government loss of control to others who’ve appropriated it that’s identified as the problem.

          1. Actually the money part of that quote is regulatory system. You know, the thing the government controls and runs.

            1. “Actually the money part of that quote is regulatory system. You know, the thing the government controls and runs.”

              What does the word ‘capture’ mean to you? Ron doesn’t provide us with a definition but I will take a stab at it. If A captures B from C, then C does not control B. A does.

              1. If a goverment is expansive it will be controleld by special intrests you leftist twat

      2. “It’s specifically government loss of control to others’

        ?

        You seem to be under the impression that legislators never need to be re-elected?

        That the favors they grant to the “Especial Interests” can never be repealed?

        Is this the dreaded “TOO MUCH MONEY IN POLITICS” i’ve heard about….where suddenly voters lose any ability to determine right from wrong, because someone ran a commercial touting Farm Subsidies?

        1. “You seem to be under the impression that legislators never need to be re-elected?”

          The article doesn’t mention elections or legislators. What makes you bring them up?

      3. “decline set in when powerful special-interest lobbies?crony capitalists if you will?capture a country’s regulatory system and use it to block competitors”

        Why are the people who make the regulatory system so susceptible to corporations and lobbyists? What might make them better able to resist the siren song of corporations trying to capture the regulatory system?

        What’s the final solution here?

        1. “What’s the final solution here?”

          I don’t see the need for anything exotic here. We could punish regulators and lobbyists who make the capture possible, and reward those who resist it. Isn’t it already illegal to bribe a judge? Why not apply the same principle to bribing a regulator?

  8. The world economy is not capitalist, nor crony capitalist nor socialist, nor crony socialist. The results of all of our ills are not really caused by globalization. The world economic system is ruled by mercantilism, which means the only investment that makes sense is one you control and which you can get a return back quickly before the bankers steal your money. This system has been in place since the time of Columbus. So right now, if you’re not a Vegas flipper or an insider ‘made’ rentier man, your investments are going up in smoke.

    Mancur Olson was one of the greatest economists of our times, and in time, I think he would have reached the realization of our dilemma, unfortunately he died before its’ full effects have been felt on the world economy. His book POWER and PROSPERITY describes the evolution of modern order perfectly.

    1. before the bankers steal your money

      Bankers don’t steal your money. When you put your money into a bank, or invest it in some other fashion, you are not placing it into a vault. You can’t simultaneously collect interest and yet have your entire balance accessible for withdrawal at any time. More generally, there is no such thing as a “safe investment”. There are a lot of fraudsters out there, but fraud and theft are not the same thing. The more accurate analysis is to note that governments and central banks have strongly incentivized spending and risk taking, which has unsurprisingly only compounded the instability that seems to be inherent to human activity.

      1. “You can’t simultaneously collect interest”

        Stop right there.

        No one collects interest from a bank. With most retail chains if you do not have substantial amounts of money in your account you pay fees well above any interest you get and if you somehow have enough money the interest rate is below inflation.

  9. When I looked at the headline, I expected a post about the Export Import Bank.
    Fooled again.

    1. The Who warned us about that…

      1. Who did?

        1. He’s the team manager.
          *doesnt get joke*

  10. “Samuelson notes that wage increases have histroically tracked increases in economic productivity. Last year productivity increased by only 0.5 percent. This contrasts with a late 20th century rate averaging about 2 percent per year. Samuelson then turns to Olson for a possible explanation for the slow-down in productivity: the proliferation of regulations adopted to protect special interests.”

    I won’t take issue with that, but there are other factors that may be bigger.

    The government has been squandering the benefits from our productive capacity on taxes, spending and debt, and the debt side of that equation has been particularly bad.

    That 700 billion they spent on TARP and was re-spent as stimulus (rather than used to pay down debt), that money mostly comes at the expense of some important growth engines–like investment and consumer discretionary spending. Taxation comes at the expense of those things, and debt eventually has to be covered by taxation.

    You could say the same thing about the spending on Iraq. That’s $3 trillion in spending and debt. That’s still including future costs for healthcare of veterans, etc, and, of course, we have a moral obligation to take care of our veterans, but there’s little in the way of productivity enhancement to the economy for that spending and debt.

    That’s $3 trillion in spending and debt that would go to investment and consumer discretionary spending–things that do ultimately drive productivity.

    1. We should also look at the amount of money states are squandering on the bloated costs of the state employees’ retirement systems. That’s coming at the expense of productive capacity, as well. Take a look at these charts:

      http://www.usgovernmentspendin….._brief.php

      In the last 20 years of the 20th Century, our debt was about 45-70% of our GDP. In 2014, our debt was 120% of our GDP.

      People invest and spend on productivity enhancing things depending on what they see looking forward, and you’d have to be an idiot not to assume that the government is coming after more of the fruits of our labor in the future. When’s the last time you heard about the Laffer curve?

  11. This is the kind of thing that really doesn’t turn around without some kind of revolution. The only question is, can it be done peacefully?

    1. Probably not. Governments don’t ungrow.

  12. one guy who insists the economy is a system for distributing all the goodies to all the people of the world

    Fucking wealth creation- how does it work?

    1. Hey, with a mere 5 cent raise on billionaires, we could finally feed the entire world!

    2. The basic notion of incentives seems anathema to these people. If everybody is guaranteed the same share of the “goodies”, then who is going to want to produce them? None of these fuckers ever toils away for the good of his fellow man (see: Tony’s cognitive dissonance), what on Earth makes them think anyone else will?

  13. Oh, and Venezuela’s economic system is just peachy, it’s those pesky low oil prices causing all the havok.

    1. It’s a wrecker plot!

  14. “I told you once before that there were two times for making big money, one in the up-building of a country and the other in its destruction. Slow money on the up-building, fast money in the crack-up. Remember my words. Perhaps they may be of use to you some day.”

    ~Rhett Butler

  15. The burden of regulation may have so reduced economic growth over the past 7 decades that Americans are 75 percent poorer than they would otherwise have been…

    Americans as a whole might be better off, but it’s hard to point to any one particular person and say they would be better off and easy to point to ones who would be worse off. Union members and government employees, for example. People have that stubborn habit of refusing to see the truth when their paycheck depends on them not seeing the truth. And naturally, since you are a libertarian, your suggestion that maybe we should carefully weigh the costs and benefits of regulations rather than simply assuming the (seen) benefits are great and the (unseen) costs negligible is really just a thin smokescreen attempting to disguise the fact that you’re calling for the end of all regulation whatsoever so that the Koch brothers can freely poison and murder little babies as they are wont to do. Somalia!

    1. I was visiting some friends this weekend, good people. One of them said that he viewed it as a choice between having a very high ceiling but also a very low floor (less regulation, less social welfare spending, etc.) and having a lower ceiling but also a higher floor (higher social welfare spending, higher taxes, etc.).

      It sounds reasonable at first glance. The more you spend to take care of the poor, the better off they will be, right? Except empirically that is far from always the case. But it’s just taken as a given by so many people.

      I also pointed out that that *might* work if there are other places that are less regulated so they can be dynamic and innovative, but you can’t structure the whole world like the Netherlands (what got the discussion going). That’s a recipe for global stagnation, or worse.

      1. The problem with “higher floor, lower ceiling” is that the window between the floor and ceiling is not in a fixed position. Relatively speaking, with things like technological advancement, the window will appear to be sinking. Absolutely speaking, if the window is too narrow, then it will sink because the ceiling isn’t high enough to provide the means to support the floor. The problem is that people see the floor as a foundation, but in reality it is free-floating and the actual foundation, the utter poverty that is the natural state of mankind, is always waiting for you at the bottom.

        1. ” a very low floor”

          the problem with these people is that they only ever measure the floor by its distance from the ceiling.

          Never mind that the “poor” in America today have access to a wealth and prosperity that would have been unthinkable to Dust Bowl migrants of the 1930s. They would likely reviled at the idea of vast government benefits being doled out to people who don’t even look for work, or that their most significant problem is *obesity*.

          By any reasonable measure, the “Floor” has never been higher in human history.

          Yet these people would react to that statement in disbelief, saying, “INEQUALITY HAS NEVER BEEN HIGHER!!” …because somewhere out there are people with Billions! and they’re not ‘doing their share’ (whatever that means).

          Most people I meet who maintain these expansive ideas about “helping the poor” via government have little idea who these poor are or what they want or need.

          Many of these same people will speak feelingly about the minimum wage, yet have no idea that ~3% of the population receives it – and half of those are *kids* between the ages of 16-19. “Living wages!” they’ll insist. So let’s reduce the after-school jobs available to high-school Jimmy because some moron thinks he’s supporting a family of 3 w/ his pizza delivery gig. Let’s murder the small businesses that need these temp workers in the name of some Yuppie dipshit’s economic misconceptions.

          1. Perhaps an equivalent way to think about is that these people see a ceiling even when there is none. In nature, there is a floor (death, and besides that, poverty), but no ceiling save the laws of physics. Yet people claim to see ceilings where there are none. If the only useful thing you can do is shuffle around and complain, nobody put a ceiling over your head. You put it there yourself.

          2. that ~3% of the population receives it

            That’s impossible. The talking heads and retards on facebook assure me it’s like 50% of the workforce.

  16. One of them said that he viewed it as a choice between having a very high ceiling but also a very low floor (less regulation, less social welfare spending, etc.) and having a lower ceiling but also a higher floor (higher social welfare spending, higher taxes, etc.).

    The Diana Moon Glampers school of economics.
    Hobble the swift.
    Weigh down the strong.

  17. I realize the term “crony capitalism” is nicely alliterative and all, but the problem is cronies of every flavor. Capitalism isn’t the problem.

    1. You’d think for a news magazine with the tagline ‘Free Minds and Free Markets’…. *drink*.

      Anyway, good luck with that.

  18. Unemployment is now at 5.1 percent,

    Not by any rational definition of unemployment.

Please to post comments

Comments are closed.