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American-style Crony Capitalism: What Happens When Government Sorts Things Out
When President-elect Trump intervened to stop jobs at a Carrier air conditioner plant in Indianapolis from moving to Mexico, Vice President-elect Pence offered this justification: “The free market has been sorting it out, and America’s been losing.” (Not that the president’s intervention was a big win, turns out.)
Of course, one shouldn’t expect only winners when markets are sorting things out. Markets aren’t magic. Yet it’s hard to conclude that American-style capitalism hasn’t overall sorted things out pretty well for Americans. Since 1980, the US has added nearly 60 million jobs. And the CBO says middle-class incomes are up significantly, either by 28 percent or 42 percent (in real terms) depending if you are looking at income before transfers and taxes vs. after. Oh, and the United States continues to push the technological frontier. Europe would sure love to have its own tech titans such as Google and Amazon, not to mention all those tech unicorns. (By one measure, the US has nearly 100. Europe? Just 12.)
Then there’s the alternative to markets sorting things out. That would be government sorting things out. Some call that “central planning,” while others term it “picking winners and losers.” Maybe add “crony capitalism,” too, since that can be the result when government engages in “business friendly” policies such as “targeted exemptions from legislation, advantageous rules by regulatory agencies, direct subsidies, preferential tariffs, tax breaks, preferred access to credit, and protections from prosecution,” according to the 2014 working paper “Crony Capitalism, American Style.”
But those terms, definitions, and descriptions don’t really do justice to the idea of government sorting it out as does this, via The New York Times: “Two of America’s biggest steel manufacturers — both with deep ties to administration officials — have successfully objected to hundreds of requests by American companies that buy foreign steel to exempt themselves from President Trump’s stiff metal tariffs.”
Already that, and America’s trade wars may just be getting started. According to The Wall Street Journal, White House trade hawks “want Beijing to scrap the industrial policy schemes it has used to build up its economy. Skeptical that China would actually make such changes, this group believes that tariffs should be kept in place for years.” Which syncs with what my AEI colleague Derek Scissors has been writing: “American policymakers demanding the PRC abandon much of its industrial policy can seem naïve. It’s more likely they have come to accept a painful trade conflict because they don’t believe China is truly willing to become a good partner.”
One can easily imagine that the Long Trade War will create numerous opportunities for rent-seeking, which tries to take more of the pie than expand the pie. Bigger profits through innovative lobbying rather than innovative products and services. Hard to see how America will be better off for that.
Published in Economics
Beautiful
You could call it American-style “crony capitalism, which seems to be the popular rant of the week among the new American socialists, but crony capitalism is giving Americans jobs, and the president is tackling the kick the can problem of world trade imbalances. Oh the horror….
China has been the bad kid stealing from the cookie jar, and Europe has been happy with the US watching its back against the Russians, while bemoaning the cost of protection. Tariffs on goods sold through Europe, Canada and China have been skewed for some time, and past presidents have done nothing to correct the problems – not to mention, China, a communist country, has been enriching itself with producing cheap, inferior goods and stealing collateral for decades.
A swamp cleaning president was elected to restore balance through jobs, money owed the US, and more fair trade negotiations – it’s not perfect, but its working in many respects.
Fair point, he was elected to manage the economy….. just don’t pretend it’s in any way conservative.
How is it swamp cleaning to allow big business to use government contacts to profit while heaping increased costs into smaller businesses? That’s just…the definition of swampiness.
In America, private sector jobs are voluntary economic transactions between citizens.
Jobs are created by markets.
It is a common misconception that cronyism and other government interventions “create jobs” in any meaningful and beneficial sense.
Crony capitalism gives government and politicians power. Even if it results in jobs, this is a bad thing.
Jobs, schmobs. Couple/2 million jobs are in the federal government, right now. Is that a good thing? Because jobs?
It’s not the government’s job to pick winners and losers. It’s to ensure rights not granted to the people by them are protected by them. Everything else trends toward aggrandizing power for their own self-betterment.
Ask Bernie, if you can find him in one of his 3 houses.
The government does not and will never have the capacity to sort things out. Moreover, it is past government attempts to sort things out, protect us from ourselves, each other and foreigners, are the problem. Those of us who want us to compete successfully globally and internally must come to grips with the problems caused by past government attempts to protect us from ” the worst aspects of free markets” Mixed systems do not work, no wealth comes from top down and eventually such approaches corrupt everything as power and wealth accumulate among those with leverage, connections, perch.
Does anyone know here what the price of gasoline is in China for corporations that move there?
True this. As long as we are “imagining” however, one could also imagine that by using the tariffs as a pressure point, the non free trade, but status quo trade, gets broken up and a new, much fairer and more balanced system emerges. Right now steel markets are scrambling. There are lots of competing interests to sort out. Soy beans, otoh, just might be breaking for the positive. China enacted serious punitive tariffs on our soy beans in reaction to our tariffs on their market dumping products. That is possibly proving to be a mistake on China’s part. They may have to buy our beans after all, as they cannot find adequate substitute sources on the world market. I have asked many times for alternatives to tariffs as a tool to break the unacceptable status quo. I am still waiting for an answer.
Well <span class="atwho-inserted" contenteditable="false" data-atwho-at-query="@cdor“>@cdor surrender is always an option, and usually the one promulgated by the Free Traders.
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Moderator Note:
Image removed. Address the issues, please.“The shroud of the dark side has fallen. Begun the
CloneTrade Wars has.”-What Yoda meant to say
I’m sorry. That is what the study of economics is, i.e.the accumulation of evidence and arguments of why markets work and why non market systems don’t. Of course there are German economists, Marxist economists, and Keynesian economists who believe that a technocratic elite can make things better, but so far they have no examples to show for their theories. Perhaps you have evidence of how protected economies have been more successful than non protected economies, because there is an overwhelming body of evidence of why protectionism distorts and harms and free trade does not. There are mountains of evidence about markets, market theory, response to top down interventions, why socialism fails, why mixed systems corrupt and eventually also fail, why Keynesian planners never quite get it right.
Which status quo do you want to change? Our interventionist corrupt over regulated, over taxed system? I’m with you there. Or do you want our brilliant disinterested central planners/foreign area experts that have so helped our economy over the last 75 years come up with selective rewards and punishments that will force the rest of the world to change in ways that we have clear in our minds and can technically, politically and economically sustain until that stubborn rest of the world becomes like us? That is about as solidly insightful and realistic as Alexandria Osorio-Cortez would put forth.
Now as I’ve said here many times, there is an economic theory of second best that applies and answers your question positively, but nobody is proposing it and almost nobody even talks about it because it doesn’t enrich any powerful interest.
Yes. So @iwalton, how would you do that?
It’s the Chicken War all over again…
We have to fight the Trade Federation!
Mods you mean the mind reading and bad faith accusations this commenter hurled at Free Traders? I think I addressed it.
I absolutely agree that if retaliatory tariffs were to result in freer trade after a short period of innocent people losing their businesses, most people being poorer, and the nations productive structure being distorted in ways that can’t instantly or painlessly fixed, the net long-term benefit would be positive.
Purely from an economic point of view, it is a great idea, even though Trump when speaking to his core argues the exact opposite economic theory. (When speaking to his non-core, pro-freedom supporters, he switches to his “I’m actually a cunning negotiator who’s really for free trade. But please don’t tell my core!” spiel. )
Here’s a problem with that, and it is political.
Throughout the history of politicians using their powers to take from the weak and give to their favorite interests, those interests use the same power they had to get the favors to hang on to them, and later expand them when the spotlight is off of them.
In the rosy scenario, all the foreign mercantilists back off, and our government backs off, and the capital structure begins to heal itself, with a temporary contraction, focused on the previously privileged industries and cronies, perhaps spilling over into a general recession. Layoffs, bankruptcies, etc.
What happens at that point, in reality, before the long-term benefits kick in, is those interest groups come back with the same pleas for mercy. “I am a hard-working American who’s doing his patriotic duty by growing wheat that builds healthy bodies seven ways, or growing organic windmills, or whatever it is that I do, and I am being unfairly threatened with being laid off by the evil greedy Free-Traders”.
We can almost write the tweet. “I, the Hero who Creates American Jobs, shall come to your rescue! With new tariffs, or new subsidies, or new punitive taxes, or new interventionist regulations, or..”
That sentence has nothing to do with international trade it has to do with Federal power, so the first thing is don’t give it more power to pick and choose winners and losers as it must do with selective tariffs designed by our technical “elite” to move our trading partners in the right direction. My view is that we cannot do the latter because no nation can and the evidence is that none have succeeded. As to trade imbalances, make us competitive by continuing to deregulate, simplify, decentralized etc., dismantle the administrative state. I don’t worry about trade. I worry about adjustment, but if we must do something politically then that is why I mentioned the theory of second best. First best is completely free trade, second best isn’t a few tariffs here and there, but uniform tariffs on everything, then the effect is the same as a devaluation and since we can’t devalue, and run chronic current account deficits it makes sense. Then over many years we can negotiate to allow some countries inside our tariffs, or not.
So <span class="atwho-inserted" contenteditable="false" data-atwho-at-query="@iwalton“>@iwalton are we arguing or agreeing? It sounds more like the latter to me.
Also, what is this code stuff that keeps appearing? <span class= WHAT???
You asked what is the alternative to tariffs, and I guess I said either tariffs on everything or nothing, including, most importantly free trade internally meaning regulatory burdens must fall on all equally which as far as I can tell means no regulations. This is the only site in the world where that doesn’t stir up an argument.
OK, so is this tariffs on everything policy enacted by country or on the entire world? It seems that broad based tariffs on Chinese imports is pretty much where Trump is headed. He is phasing in that policy hoping he can get the Chinese to make some concessions, don’t you think? With the EU, Trump offered a no tariffs/no barriers policy. I didn’t see any strong support for that from the EU. It takes two to tango. That’s the problem with our current status quo, our partners aren’t dancing well. They are stepping on our toes.
With Europe Trump basically offered them the policy of the Clinton/Bush/Obama administrations. Two steps backwards one step forwards.
Ha! Whatever you say, Namie Tockett.
Oops, just a little typo. I meant Jamie Lockett.
Google TTIP.