There's No Trickle Down From Corporate Welfare
At Real Clear Markets, Matthew Mitchell writes that it's a misconception that crony capitalist welfare -- when governments privilege and bail out a handful of favored firms -- that the rest of the economy somehow benefits:
This is how the Bush Administration sold the bank bailouts. It's how the current Administration sold the auto bailouts. And it's how the U.S. Chamber of Commerce is trying to sell the Export-Import Bank.Mounting evidence, however, suggests the opposite is true: economies whose firms sink or swim based on political patronage grow slower and are less stable than those in which firm success depends on an ability to meet the market test.
Economists know that when governments privilege particular firms, the broader economy suffers. Important work in the 1960s and '70s by Gordon Tullock and Anne Krueger showed that when governments dispense privileges, firms expend resources chasing those privileges. They lobby, donate to political campaigns, and employ expensive government-relations operatives. This activity expends real resources even though it fails to create net value for the economy.
In 1990, New York University economist William Baumol extended this work, showing that when governments dispense favors, entrepreneurs spend time brainstorming new ways to obtain privilege rather than new ways to create value. Baumol and the research he spawned shows that this vein of "unproductive entrepreneurship" doesn't just cost the economy at a particular point in time (as Tullock and Krueger showed); it also retards the rate of economic growth, doing damage for years to come.
The fair market -- and the healthiest market -- is the free market.
The market is never going to be completely free. It never has been and never will be.
Once you recognize that fact, it is just a matter of figuring out which industries and businesses deserve some protection from competition, in exchange for guaranteed prices, and which should be allowed to operate freely.
Electric utilities come to mind. The government hamstrings them with onerous environmental requirements, effectively rendering any real competition moot.
Only General Dynamics can build a reliable nuclear submarine, last I checked.
Throwing open the procurement process to "joe's submarines" looks good on paper, but like an Obamacare policy, has no real value.
Isab at July 7, 2014 3:54 AM
Those things are point exceptions, though, Isab. People like you and I have to keep in mind sometimes that the vast majority of the private sector does not consist of transactions with the government. Yes, we know that the government has trouble maintaining capability, much less competition, in certain sectors of the defense base, but compared to the overall economy, that's a tempest in a teapot.
As for the utilities, I'm still not convinced that competition in electricity generation can't be made to work -- my claim is that a true free market hasn't been tried. After all, no one thought before the AT&T breakup that competition in phone service would work either. Unfortunately it is traditional in the electric utilities that rate-payers finance capital improvements, and getting from point A to point B is going to be a problem. And as you point out, the government will resist it because having them as regulated utilities makes it easy to impose burdensome regulations.
Cousin Dave at July 7, 2014 6:18 AM
While 100% uncorrupt is a pipe dream, there are variations in between 0% and 100%. And they aren't that hard to recognize.
To go even further, districts who's congress critters bring home the most bacon do the worst economically. And if you track this over time, as the size of the bacon increases the worse the local economy does. And the inverse is also true.
Government largess helps a select few at the expense of the many.
Ben at July 7, 2014 5:21 PM
To go even further, districts who's congress critters bring home the most bacon do the worst economically. And if you track this over time, as the size of the bacon increases the worse the local economy does. And the inverse is also true.
Government largess helps a select few at the expense of the many.
Posted by: Ben at July 7, 2014 5:21 PM
The federal government is not the only one that has a very cozy relationship with certain industries. States and cities regulate utilities, transportation, mines etc, and reap the rewards for doing so.
I am sure there is a real relationship between federal pork, and failing industry, but it can be a chicken and the egg kind of thing.
Isab at July 7, 2014 5:52 PM
Yes Isab, there is state cronyism as well as federal. And in both cases increased cronyism leads to lower total economic activity.
That is not to say cronyism is the sole cause of lowered economic activity.
Also, to take this a step further optimum economic activity is not always the goal. The military is not a money maker. And it should not be.
Some industries have such a high barrier to entry that government monopoly is the only reasonable option. Power distribution (all though not generation) is one. I don't need 30 power lines going to my house. Or 20 water mains.
Ben at July 8, 2014 3:20 PM
a) "The fair market -- and the healthiest market -- is the free market"
b) "Pretty Soon, There Will Be No One In New York But The Homeless And The Billionaires"
(b) is a function of the free market, but somehow, the article did not seem very happy at the prospect of (b) happening. You either embrace something wholly or you abhor it completely, not pick and choose which aspect of it you accept and which aspect you reject
redrajesh at July 9, 2014 10:07 AM
redrajesh: How is the situation in NYC the result of a free market? It's one of the most over-regulated cities on Earth.
There is no free market in housing, for instance - older apartments are often rent controlled, government approval is required for new buildings, favored projects are subsidized, and disfavored ones will never get approval. One thing developers are now doing to become favored is to reserve a percentage of the apartments for low income tenants. To pay for that, they must jack up the rents on the rest - which wouldn't fly in a free market, but since zoning and building permits artificially restrict the available housing, they'll be able to find rich tenants. You wind up with buildings populated 80% by quite wealthy people to whom an extra one or two thousand a month in the rent is no big problem, 20% by people poor enough to qualify for assistance, and no middle class.
Or take transportation. There is a public transportation system of subways and buses; even with massive subsidies from taxpayers (mostly the middle class), it's still dirty, crime-ridden, and rather poor at getting you where you need to go in a reasonable time. It's barely adequate for the poor, but less than adequate for middle-class workers who need to get to work on time, and well-dressed in clean clothes. But driving to work is often impossible due to traffic and the lack of parking. (And that's one thing you can't blame on regulation or the free market - there are just too many people crammed into that city.) So what the middle class needs for transportation are taxis - but you can't count on catching one when you need it. The demand exceeds the supply because the government has restricted the number of taxis, to the point that a taxi medallion is worth close to a million dollars. The rich don't have to worry about catching a cab or a bus; they can afford parking space, and a chauffeur to drop them off and take the car back to their parking garage. The middle class either deals with difficult and sometimes dangerous alternatives, or looks for a job in Texas...
This is how the leftists that misappropriated the word "liberal" work: they pass regulations that create or aggravate problems, and then claim that _more_ government is needed to fix them.
markm at July 11, 2014 9:34 PM
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