How Cronyism is Hurting the Economy

EXPERT COMMENTARY

How Cronyism is Hurting the Economy

By Matthew Mitchell |
Aug 10, 2012

LearnLiberty.org has a great new video by Georgetown University professor of philosophy, Jason Brennan. He makes the case that the “simple” solution to cronyism–giving government more power to regulate industries–may actually make matters worse since the rich and well-connected are more likely to game the political system than the relatively weak and unknown.

In the Pathology of Privilege, I note (p. 25-6) that “objective criteria for dispensing privilege are hard to come by. Without objective standards, politicians may end up picking winners and losers on the basis of personal connections and political expediency.”

The data suggest these suspicions are well-founded. For example, the previously cited study by Faccio, Masulis, and McConnell found that politically connected firms were far more likely to be bailed out than similar firms without political connections. A new study by Utah State University professors Benjamin Blau, Tyler Brough, and Diana Thomas offers further confirmation. They studied the lobbying expenditures and political activities of the 237 firms that received TARP funds. Controlling for other factors, they found that more intense lobbying and political activity made firms more likely to receive TARP funding, likely to receive a larger amount of it, and more likely to receive it sooner. To be precise, they found that “for every dollar spent on lobbying during the five years before the TARP bailout, firms received between $485.77 and $585.65 in TARP support.” The problem of cronyism is compounded by the phenomenon of the “revolving door,” or the tendency for ex-government officials to find jobs in the industries they once oversaw and for industry insiders to find regulatory jobs overseeing their former colleagues. According to data from the Center for Responsive Politics, among those federal legislators who left office in 2010 and found new employment, nearly 33 percent went to work for lobbying firms and another 20 percent went to work for a major client of a lobbying firm. Former Speaker of the House Newt Gingrich famously did some work for Freddie Mac after he left office in 1999. Between 1999 and 2007, Gingrich’s firm received $1.6 million from the mortgage giant. According to the nonpartisan Congressional Budget Office, annual federal subsidies to the firm were about $4.6 billion during this time period. The former speaker maintains that he was paid for his expertise and not for his connections. But it is hard to believe that an equally knowledgeable person without his connections could command such a salary.

 

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