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How Much of US Corporate Profits Comes from Cronyism?
It’s one thing when a company generates profits from creating value. That’s a beautiful thing. But how about when the profit comes from manipulating the political system? If that latter situation is commonplace, then rising profits might show something is deeply wrong with an economy.
Such a situation could, as James Bessen writes in Harvard Business Review, “represent a decline in competition and, with that, a decline in economic dynamism. While a dynamic, competitive economy rewards innovative firms with high profits and punishes poor performers with low profits, sustained aggregate profits suggest, instead, that firms are able to get away with higher prices because competition is limited. Firms engage in political ‘rent seeking’—lobbying for regulations that provide them sheltered markets—rather than competing on innovation. If so, then high profits portend diminished productivity growth.”
Innovation or manipulation? What’s driving profit growth in the US? (If you have already noticed the above chart, you have been spoiled.) Bessen:
In a new research paper, I tease apart the factors associated with the growth in corporate valuations relative to assets (Tobin’s Q) and the growth in operating margins. I account for the roles of R&D, spending on advertising and marketing, and on administrative costs, including IT. I also consider investments in lobbying, political campaign spending, and regulation; and I look for links between rising profits and industry concentration and stock volatility. I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.
Bessen goes on to note how regulation can help incumbent firms by raising entry barriers for prospective competitors. Indeed, he notes that over “the last 15 years, political campaign spending by firm PACs has increased more than thirty-fold and the Regdata index of regulation has increased by nearly 50% for public firms.” That is hardly a recipe for economic dynamism, a subject I am much concerned about.
This is just one analysis, but it certainly provides reason to ponder to what extent the US economy is suffering calcification by cronyism. On a similar note, check out this recent chart from a Peterson Institute study on how the super-wealthy got that way:
Note the light blue part. A greater share of wealth is self-made. Encouraging, I think. But the green bit — representing political connections — is pretty small but getting bigger.
Published in Economics
The first chart explains the recent productivity news. Regulatory and Lobbying spending is more profitable than R&D? Sigh.
How come this is viewed as news suddenly revealed? How come I already knew this and I didn’t need to go to college for it? Isn’t it very obvious how the business and government corporatists co-operate?
Impossible to measure political connections. Better to just correlate budget spent on lobbying and R and D with relative profits. There are no surprises here for those who pay attention, or reason from a variety of theories, but don’t expect progressives to connect any of the dots because it is not in their interest to understand. The question is, why haven’t Republicans been pointing this out as has Cato and conservatives and Austrian school economists and people who suffer from common sense? They are also part of the problem it would seem.
A better question would be, “How much of our socialistic welfare-police state would fall away if we got rid of welfare for business corporations?”
Nearly all of medicine. Big Hospital. Big slimy Pharma. Big AMA. Big slimy Insurance . Some Tech. Big Tort.
So almost all that profit is a complete joke of cronyism. It’s going under in our lifetimes too. Enjoy the ride.
The methodology seems to focus on large manufacturing businesses. In my experience, though, this misses the biggest impact of crony capitalism, which comes in the form of protection of monopolies in service businesses. DocJay points out the impact on medical costs. But you don’t have to look any further than the cost of a medallion to operate a taxi in New York. Over $500,000, and that’s only a portion of the economic rents generated by this government-created monopoly. Government licensing requirements create monopoly power in everything from hairstyling to florists. Whatever number this study came up with, it is almost certainly far too low.
Language matters. I object to the relatively bland terms “rent seeking” and “crony capitalism.” Call it what it is, crony profiteering. The Langauge used should connote the immorality of the behavior.
To attack the practice, we need to fix the language used. <End of rant.>
Yes, language matters. That is why we should call this what it is. Racketeering. The US government is a criminal organization or would be if they were not the ones that define the law and thus are lawfully legal. The GOP and Democrats are criminal cartels bent on the purpose of controlling as much of the government as they can for purposes of theft from the citizens for the benefit of their cartel members and associates.
This highlights why I have little patience harping on Trump’s mistaken views regarding foreign trade. If we can’t do something about our domestic market disaster, why worry about dealing with others? This crony profiteering and protection of monopolies in service businesses is killing small business entry and entrepreneurship.
I think the big guys want more focus on global trade issues to benefit them and that, in turn, just enlarges the domestic problem that will cause our demise as a free representative democracy.
We we cannot call it racketeering (unmodified), because racketeering is illegal. Crony profiteering is legal is is about creating legal but immoral advantages for the profiteer.
Yes, I am well aware of the “it can’t be illegal if the government does it” argument. Which is valid since the should be criminal organization called the government in its present form defines everything from legalities, moralities and even reality. But if you use the pre government redefined definition that racketeering is the act of offering of a dishonest service (a “racket”) to solve a problem that wouldn’t otherwise exist without the enterprise offering the service. Then the term describes most of what the government does.
The proper term for this kind of economic system is fascism. We’re not there yet, but we seem to be sliding in that direction.
As far as terminology goes, I prefer the technical term for those seeking rents, as “rent-seeking weasels.”
Yeah, cronyism that keeps the littlest fish from entering the market to begin with is, I think, too often overlooked. In part, probably, because it’s hard to measure economic activity that didn’t happen. There are clever ways of getting around that, of course. But measurements of “what would have could have and should have happened but didn’t” are understandably treated as more speculative – because they are.
To be a little fish, say, a member of the underclass, and to find whatever productive impetus you’ve actually managed to cultivate shot down because some bigger fish allied with the government whale to shut you out has got to be demoralizing. The whole concept of work ethic and the rewards of virtue can begin to seem like a joke… Cronyism hardly explains all the erosion of work ethic and delayed gratification among the underclasses, but it sure isn’t helping!
I don’t disagree entirely, but as a needed language change, it fails, because it has denotations that do not fit. I contend that economists need to change the language they use. “Crony profiteering” does not have any secondary meanings to confuse the listener. Racketeering has too much of mafia connotation.
Can’t like this enough …
“Crony profiteering” may work for the moment then they will redefine it to mean something different, something wholesome. That is how it works. Redefine and redefine till words have no meaning and definitions have no purpose.
It’s all “for the moment.” We have to keep up. Yes, they will try to redefine but it’s going to be a lot of work for the left to make “profiteering” sound good, given the work they’ve done so far.
I think the phrase is a good one, for the reasons given. Use their cliches against them. I also have other phrases I’ll use in my own conversations, but this one is good for general use.
One huge problem with conservatives in general, and those on Ricochet in particular, is that they spend an inordinate amount of time trying to convince themselves, when what they need to be doing is skewering the bad guys and destroying the bad guys’ confidence in themselves. Alinsky tactics, but used for good instead of evil.