The Economics and History of Cronyism

“When you leave the honey jar open, expect ants.”
—anonymous

When I speak of the benefits of economic freedom and free markets, many people in my audiences do not think of those terms the way I think of them. In the question-and-answer sessions that follow my talks, it seems people often think they are taking issue with free markets when they are actually rejecting cronyism—a term that encompasses government favoritism, special privileges, and special interests.

For example, people will object to the Wall Street bailouts carried out by the Bush and Obama administrations. As do I, because those bailouts violate free-market principles. They will object to government regulation that makes it difficult for small food producers to produce and sell food not inspected and approved by the U.S. Department of Agriculture. As do I.

As we shall see, cronyism has been around for a long time and is a bipartisan problem that has thrived under Democratic and Republican presidents and congresses. Cronyism not only picks winners based on political connections rather than on the extent to which they serve consumers, but also is destructive of wealth, sometimes highly so.

This is not a comprehensive overview of cronyism. No short study could be. Rather, it provides a perspective of cronyism: what it is, what’s wrong with it, some examples of it, why it happens, and how to reduce it.

WHAT IS CRONYISM?

What is the difference between free markets and cronyism? In free markets, buyers and sellers are free to agree on price; no government agency restricts who can buy or sell, and no one is told how or what to produce.[1] In contrast, under cronyism the government rigs the market for the benefit of government officials’ cronies. This takes various forms. Governments sometimes grant monopolies to one firm or limit the number of firms that can compete. For example, most U.S. municipalities allow only one cable company to operate in their area even though there is no technological reason more could not exist. The same is true for most other utilities.

Governments sometimes use quotas or tariffs to limit imports with the goal of protecting the wealth and jobs of domestic producers who compete with those imports. President George W. Bush did this in 2002, for example, when he imposed tariffs ranging from 8 to 30 percent on some types of imported steel.[2] Governments sometimes subsidize favored producers, as the Obama administration did with the politically connected solar-energy firm Solyndra. Governments may use antitrust laws to prevent companies from cutting prices so that other, less-efficient companies can prosper: For example, beginning in 1958, the U.S. government prevented Safeway from cutting prices for a quarter of a century.[3]

The entities governments help with special regulations or subsidies are not always businesses; sometimes they are unions. The federal government’s National Labor Relations Board’s (NLRB) complained against Boeing in April 2011, for example. In response to a complaint from the International Association of Machinists and Aerospace Workers (IAM), the NLRB sought to require Boeing to produce its 787 Dreamliner in Washington State rather than in Boeing’s chosen location of South Carolina. According to the NLRB, by saying that “it would remove or had removed work from the [Puget Sound and Portland] Unit because employees had struck” and by threatening that “the Unit would lose additional work in the event of future strikes,”[4] Boeing was making “coercive” statements to its employees. As a matter of fact, it was not. Boeing was simply telling the employees some likely consequences of the union’s actions.

The Boeing-IAM case is not as simple as most of the press implied. It turns out there was a prior case of cronyism. The government of South Carolina promised Boeing “$900 million in tax relief and other incentives” in exchange for moving production to South Carolina.[5] Such is the tangled world of cronyism.

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