Showing posts with label Crony Capitalism. Show all posts
Showing posts with label Crony Capitalism. Show all posts

Friday, April 25, 2014

Crony Capitalism Breeds Inequality

That is a main theme in a tremendous essay by Sam Gregg appearing in the American Spectator. As Gregg notes, income inequality seems to be the theme for 2014. In fact, increased income inequality is no mystery once we understand the continuing transformation of our economy from a free market to an interventionist play ground for cronies. As Gregg explains, Cronyism promotes economic inequality because:
Crony capitalist arrangements create distinct groups of insiders and outsiders that have nothing to do with classic criteria of justice such as need, merit, and willingness to take on risk and responsibility. All that matters in a crony capitalist world is closeness to state power. . .
There is a price to be paid for all this collusion. By injecting extra-regulatory costs into the economy, undermining the workings of free prices, and shifting economic incentives towards cultivating politicians and regulators, the process of wealth-creation is severely compromised. The result is the type of slow-motion decline that characterizes countries like Italy, Greece, Portugal, and France.
That’s bad news for everyone, but especially the poor. The wealthy and the powerful — especially those who rotate between the political, lobbying, and business worlds — can always take care of themselves in a crony capitalist economy. They are crony capitalism’s nomenklatura. But those without power and money are at a distinct disadvantage.

Wednesday, May 29, 2013

Is the Tesla Debt Payback Vindication for Crony Energy Capitalism?

K. Lloyd Billingsley says no. He notes that anyone who sees a company merely doing what is normal for borrowers--paying off their debt--as validation of the economic efficacy of government subsidies for "green" companies cannot see the forest for the solitary tree.

As he says,
The real news on the clean-energy front is the number of stimulus recipients who have gone bankrupt. In 2009 Flabeg Solar U.S. Corp. got $10 million in stimulus funds and another $9 million in job creation money. By April 2013 Flabeg had shut down its plant, laid off workers and will likely seek Chapter 11 bankruptcy protection from workers suing over severance pay. Flabeg is hardly alone.
Solyndra got $535 million in federal loan guarantees but went bankrupt in 2011. Stimulus recipients Evergreen Solar and SpectraWatt, both in the alternative energy business, also went bankrupt. And of course, Fisker Automotive Inc, is heading south despite $529 in federal loans to produce luxury cars built in Finland and selling for nearly $100,000. Tesla did better and paid back its loan but on balance the $800 billion American Reinvestment and Recovery Act, also known as the stimulus, remains more of a bust than a boost.

In fact the entire "green job stimulus" is one more example why, if we want to promote economic prosperity, government spending is less desirable than entrepreneurial investment.

The main economic problem with bureaucratic spending is that it is not predicated on economic profit-and-loss calculation. This was regularly illustrated by the two most-heard phrases during my years at the U.S. Bureau of Labor Statistics: 1) “Good enough for government work;” and 2) “That’s okay. We don’t have to make a profit.” Both of which are true. Because the government does not have to make a profit, it has little if any incentive to direct investment toward those areas that are sustainably productive.

Additionally, government spending creates a distribution process separate from production. In the market economy, wealth and income is not redistributed, because it is not distributed in the first place. Income is earned by providing productive services. It is earned by serving other people. Government spending, however, wastes scarce resources. It distorts the allocation of income away from efficient service to customers, because subsidies prolong the life of inefficient firms at the expense of efficient ones. Government spending, therefore, hampers the flow of factors of production to uses more in demand by consumers.

The bottom line is that, whenever the state gets into the business act, we get more of whatever government bureaucrats subsidize and less of what people value the most. Scarce resources are wasted. Capital is consumed. We become less productive. Our standard of living declines. Prosperity? I think not.

Sunday, August 12, 2012

The Price of Income Inequality?

Nobel Prize laurette Joseph Stiglitz is out with the new book The Price of Inequality. In it he argues that much of our current economic trouble is due to income inequality. According to Matthew Craft of the Associated Press,
In his new book, "The Price of Inequality," he connects surging student loan debt, the real-estate bubble and many of the country's other problems to greater inequality.

When the rich keep getting richer, he says, the costs pile up. For instance, it's easier to climb up from poverty in Britain and Canada than in the U.S.

Although I think Stiglitz too suspicious with income inequality per se, in his interview with Craft, Stiglitz rightly implies at one point that the real culprit is the crony capitalism that has reached its zenith during and since the financial meltdown of 2008.

It is important not to miss this point. Capitalism and the market division of labor have not caused the magnitude of current income disparities. It is not that the rich got richer while the poor got poorer. It is that the politically connected got richer while those without access to power have to get along without any help from the state. In fact, it is worse than that. The productive have to bank roll the whole thing in the form of taxes and monetary debasement.

In a free society, people would still earn unequal incomes because of differences in skills, talents, environments, personal choices, and divine providence. Anne Bradley, Vice President of Economic Initiatives at the Institute for Faith, Work, and Economics, has just written an excellent monograph explaining "Why Does Income Equality Exist?" In answering the question, she draws upon both economic theory and the Bible to provide a comprehensive analysis of this timely topic.

Monday, July 23, 2012

Stockman on Our Looming Debt Disaster

David Stockman provides what rightly has been called scary debt analysis in this interview by Casey Research.

I have become increasingly impressed with Stockman's take on our economic mess since I heard him a year and a half ago deliver the Henry Hazlitt Lecture at the Austrian Scholar's Conference. What makes Stockman's analysis particularly good is that, not only is he sound on how we got here, but he does not sugar coat our situation, nor give us false hope that the piper will not have to be paid.

As Stockman says, "You can't live beyond your means because it's pleasant if it's not sustainable." He understands that the source of real sustainable prosperity is work, savings and sound money, and knows the difference between real wealth and GDP. He also recognizes that fiscal austerity is necessary one way or another. We can either cut spending to get our fiscal house in order voluntarily or have it thrust upon us when the house of debt cards come crashing down.

Wednesday, April 27, 2011

David Stockman is Right On Crony Capitalism and the Fed

David Stockman seems to just get better and better in his analysis of our current economic institutions. In a little over four minutes, he does an excellent job describing the shortcomings of our current economic system that stem from our faulty economic policies developed over decades.

He so gets the distinction between a free market and the crony capitalism rampant today.  He understands that the economic crisis is not a failure of the market, but that the market was not allowed to function because the "rules of the game" were changed.

One of the things that makes the free market work as an institution of social coordination is that it is a profit and loss system. It is the risk of loss that encourages entrepreneurs to invest only in supplying goods people demand. If they do not, but rather produce goods that they cannot sell at a price high enough to cover their costs, they reap losses. It is good that they do so, because this provides a very quick and real incentive not to waste scarce factors of production. If they persist in reaping losses, they eventually will run out of capital and will have to cease functioning as an entrepreneur. They will not be able to waste resources forever.

When the state intervenes, however, in such a way so that entrepreneurs think that certain investments cannot lose, because the government will cover any losses, this creates a tremendous moral hazard.  Entrepreneurs are encouraged  to invest in the more risky, but protected investments.

He is also extremely perceptive in understanding the Federal Reserve to be "the great enabler." The Fed bankrolls it all.

Tuesday, March 15, 2011

2011 Henry Hazlitt Memorial Lecture: Transcript

Yesterday I posted the video feed to David Stockman's Hazlitt Lecture, "The Forgotten Cause of Sound Money." For those of you who would rather read the lecture rather than watch it, the Mises Institute has generously made it available to all. As Stockman notes, the US Government's response to the financial crisis of 2008 was the quintessential act of crony capitalism.
The triumph of crony capitalism occurred on October 3rd, 2008. The event was the enactment of TARP — the single greatest economic-policy abomination since the 1930s, or perhaps ever.

Like most other quantum leaps in statist intervention, the Wall Street bailout was justified as a last-resort exercise in breaking the rules to save the system. In the immortal words of George W. Bush, our most economically befuddled President since FDR, "I've abandoned free market principles in order to save the free market system."

Based on the panicked advice of Paulson and Bernanke, of course, the president had the misapprehension that without a bailout "this sucker is going down." Yet 30 months after the fact, evidence that the American economy had been on the edge of a nuclear-style meltdown is nowhere to be found.

In fact, the only real difference with Iraq is that in the campaign against Saddam we found no weapons of mass destruction; by contrast, in the campaign to save the economy we actually used them — or at least their economic equivalent.