How Cronyism is Hurting the Economy

Uploaded by LearnLiberty on 10.07.2012

Wall Street occupiers complain that corporate power is out of control in America. They say
corporations are in bed with the federal government. America suffers from rampant runaway corporatism
and crony capitalism. So how can we fix this problem? How can we make the economic playing
field more fair? Well, it's tempting to think there's an easy solution: all we need
to do is increase government's power to control and police corporations and the economy.
The thinking is that government, unlike corporations, is accountable to the people, but that solution
might be the very thing causing the problem.
When you give government the power to pick winners and losers in the economy, the rich
and well connected will be the winners. Here are two reasons why. First, the power to regulate
the economy is the same thing as the power to distribute favors. This is because when
government agencies have the power to regulate industries, grant subsidies, or otherwise
control the rules of the economic game, their decisions have huge financial repercussions
on the groups involved. So corporations have a massive incentive to try to influence how
that power gets used. The more the corporation has at stake, the more it will spend to gain
control through lobbying, campaign contributions, political appointments, and other means. Pick
any sector: finance, agriculture, health care, automotive manufacturing, or countless others.
You can bet that the regulations currently in place were influenced by, sometimes even
partially written by, one or more of the corporations they regulate.
Second, regulations hurt small businesses more than they hurt big businesses. So more
regulations means we end up with more big businesses. And this isn't just because
of the lobbying big businesses do. Simply reading and understanding the regulations
that apply to your industry, let alone completing the complicated paperwork, reports, new equipment
purchases, and infrastructure updates takes a lot of staff time and money. Large, established
companies can more easily hire staff to focus solely on compliance and pay for necessary
upgrades and other costs, while many small businesses can't afford to do any of these
things, meaning they have to close, they limit expansion, or they never start up in the first
place. The Small Business Administration, a government agency, estimates that it costs
a small business with 20 or fewer employees around 40 percent more to comply with government
regulations than it costs a large company with 500 or more employees. So extensive government
regulation, by its very nature, encourages the success of larger and larger companies
while hurting existing small businesses and discouraging the start of new ones. These
are just a couple of the ways in which the current collusion between corporations and
government is a result of government power. It may seem paradoxical, but if we reduce
government power over the economy, then corporations will have less power to compete for, fewer
privileges to seek, fewer subsidies to enjoy, and no agencies to capture. There will be
a more level playing field for large and small firms alike.
Cronyism and corporatism are like runaway fires. In important ways, government power
over the market just throws more fuel on the fire. If you want to kill the fire, we need
to cut the fuel.
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