Nobel Laureate Vernon Smith nails the Bush/Obama economic crisis response & De Rugy hammers “Boeing’s Bank” Cronyism

Posted on July 24, 2014 by

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The heart of Crony Capitalism is privatizing the gains while socializing the losses.  Both Republican and Democratic administrations, whether they intend to or not, routinely support such cronyism.  They usually only differ in who their cronies are, and how much cronyism they like, and the rationale for supporting cronyism.  For the most visible current example of cronyism–which ought to be an easy kill intellectually, but is a very difficult kill politically–is the Import-Export bank, also known as “Boeing’s Bank.”  Boeing doesn’t need U.S. subsidies, but it gets them year in and year out.  For a great summary of this outrage, watch Veronique De Rugy’s testimony to Congress:  HT to Pete Boettke @ Coordination Problem

In today’s WSJ, Vernon Smith alludes to why our current recovery is so anemic.  Smith asserts that we have slow growth because our current cronyism is, in effect, supporting failed investments via the Bush/Obama bailouts, which directs scarce capital away from new investments to fund the old failed investments. Capitalism only works when it is a system that allocates capital to those firms which most successfully serve consumers.  Crony Capitalism does just the opposite, it takes capital from successful individuals and firms, and rewards failed firms.  The results are what you see now in the U.S.–significantly slower growth than any previous recovery (especially as compared to the depth of the fall; usually steep downturns are followed by robust growth).  Smith ably describes why this happens:

The political process will always favor prominent incumbent investors. They are visible; they contribute to election campaigns; they assist in the choice of secretaries of Treasury and advisers and they suffer badly from balance-sheet crises like the Great Recession and the Great Depression. Invisible are the investors whose capital will flow into the new economic activity that constitutes the recovery.

Both Smith and De Rugy are pointing back to the Bastiat/Hazlitt principle of looking past the seen to the unseen.  It is the job of the economist to not just look at the seen effects–everybody can see those and it needs no specific expertise.  It is the necessity of tracing out the unseen effects through economic logic that is needed.  The “unseen” effects from Crony Capitalism and the bailouts (past and continuing) are allocation of capital away from promising ventures and to failed enterprises, resulting in a poor economy and lower employment prospects.

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Posted in: Crony Capitalism