1. Cronyism:
History, Costs, Case Studies & Solutions
Adam Thierer
Senior Research Fellow
Mercatus Center at George Mason University
November 2012

2. Purpose
of
This
Presenta0on
1. Clearly
define
cronyism
2. Discuss
its
historical
/
academic
underpinnings
3. Develop
a
taxonomy
of
types
of
cronyism
4. Explain
the
dangers
/
costs
of
cronyism
5. Iden0fy
notable
case
studies
6. Consider
possible
solu3ons
7. Offer
addi3onal
resources
2

3. What
is
Cronyism?
• Cronyism
generally
refers
to
an
unnatural
and
unhealthy
closeness
between
government
and
special
interests
– “Cronyism
is
the
subs0tu0on
of
poli0cal
influence
for
free
markets”
-­‐
David
R.
Henderson
• cronyism
is
a
by-­‐product,
or
subset
of,
a
much
bigger
problem:
government-­‐granted
privileges
or
government
favori3sm
– Simply
stated,
someone
is
ge)ng
special
treatment
at
the
expense
of
others
thanks
to
poli4cal
connec4ons
3

4. Historical
/
Academic
Underpinnings
Cronyism
is
a
rela0vely
new
term
• Tradi0onally,
corrup4on
was
the
primary
form
of
cronyism
that
concerned
poli0cal
scien0sts,
economists,
and
journalists
• But
corrup0on
is
merely
one
extreme
variant
(or
by-­‐product)
of
cronyism
• We
tried
to
address
on
type
of
cronyism
in
the
19th
century
where
government
jobs
were
given
to
family
members
and
friends
through
the
Pendleton
Act.
• Poli0cal
scien0sts
and
economists
have
a
long
history
of
cri0quing
cronyism
by
other
names…
4

5. Poly
Sci
&
Econ
Influences
• Poli3cal
science
cri0ques
– “interest
group
poli0cs”
– “client
poli0cs”
(James
Q.
Wilson)
– “iron
triangles”
(Theodore
Lowi)
– “revolving
doors”
• Economic
cri0ques
=
“Economic
theory
of
regula0on”
(which
countered
the
“public
interest
theory”
of
regula0on)
– Chicago
school:
“capture
theory”
(S0gler)
&
corpora3sm
(Friedman)
– Public
choice
school:
“Rent
seeking”
(seeking
of
favors)
&
“rent
extrac3on”
(gran0ng
of
favors)
5

6. Common
Themes
from
Cri0ques
• First,
when
benefits
are
concentrated
and
costs
are
dispersed
(across
all
taxpayers,
for
example),
we
can
expect
groups
to
form
to
take
advantage
of
those
benefits.
• Those
bearing
the
dispersed
costs
will
have
less
of
an
incen0ve
to
form
groups
to
counter
those
receiving
the
benefits.
• This
explains
why
some
government
programs
and
regula0ons
become
so
entrenched
and
why
rent-­‐seeking
self-­‐
perpetuates.
• (These
insights
flow
from
Mancur
Olson’s
1965
book,
The
Logic
of
Collec4ve
Ac4on)
6

7. Common
Themes
(cont.)
• Second,
the
“public
interest
theory”
of
policymaking
and
regula3on
is
highly
flawed.
• The
no0on
that
lawmakers
and
regulators
are
always
enlightened
and
benevolent
actors
who
would
intervene
to
correct
supposed
market
failures
and
“serve
the
broad
social
goal
of
maximizing
social
welfare”
or
other
“public
interest”
objec0ves,
is
at
odds
with
empirical
reality.
• Quite
oien,
the
opposite
is
true:
They
oien
act
to
sa0sfy
the
private
interest
of
poli0cally
favored
players
at
the
expense
of
the
public.
7

8. A
Taxonomy
of
Cronyism
1. Monopoly
Privileges
(ex:
franchising,
barriers
to
entry,
exclusionary
rights)
2. Regulatory
Privileges
(ex:
licensing,
limits
on
entry,
price
/
rate
guarantees)
3. Subsidies
4. Loan
Guarantees
5. Tax
Privileges
6. Bailouts
7. Expected
Bailouts
8. Tariffs
and
Quotas
on
Foreign
Compe33on
9. Noncompe33ve
Bidding
10.
Mul3ple
Privileges
Source:
Maj
Mitchell,
“The
Pathology
of
Privilege:
The
Economic
Consequences
of
Government
Favori0sm”
(Mercatus
Center
Working
Paper,
July
2012)
8

9. Dangers
/
Costs
of
Cronyism
Specific
Costs
ü Monopoly
Costs:
“Deadweight
loss”
from
lack
of
compe00ve
rivalry.
ü Produc3ve
Inefficiencies:
When
shielded
from
compe00on,
firms
get
lazy
and
less
efficient.
ü Unproduc3ve
entrepreneurship:
Cronyism
incen0vizes
firms
to
excel
at
poli0cal
entrepreneurship
over
market
entrepreneurship
ü Inaen3on
to
Consumer
Desires:
When
shielded
from
compe00on,
organiza0ons
worry
more
about
pleasing
policymakers
than
the
consuming
public.
ü Distribu3onal
Effects:
Consumers
pay
higher
prices
or
get
lower-­‐quality
goods
and
services.
ü Loss
of
Innova3on
and
Diminished
Long-­‐Run
Economic
Growth:
More
cronyism
=
less
innova0on
in
general;
can
limit
long-­‐term
growth
poten0al.
9

10. As economist Gordon Tullock has summed up:
“Drawing the bulk of intelligent and energetic people in
society into an activity that has no social product, or may
have negative social product, is more important in
explaining the stagnation of these societies than the
direct social cost of the rent seeking...
…lobbyists in Washington… are very intelligent and
energetic people… They are the kind of people we would
like to have driving forward in production. Most, however,
are on the other side — seeking special privilege.
Unfortunately this collection of highly intelligent and
energetic people who could make real contributions to
society are reducing its efficiency.”

11. Costs
of
Cronyism
(cont.)
Big
Picture
/
Longer-­‐Term
Costs
• Undermines
the
legi3macy
of
the
private
sector
/
capitalism
– True
capitalism
is
an3-­‐cronyist
by
nature
– True
capitalism
hinges
on
mutually
beneficially
gains
from
voluntary
exchange
– Cronyism,
by
contrast,
skews
that
balance
in
someone’s
favor
at
the
expense
of
others
– It
is
important
to
note
that
cronyism
exists
in
every
economic
form
of
society,
including
socialism
and
communism
• Undermines
the
legi3macy
of
government
/
democracy
– lost
“social
trust”
• Moral
hazard
(reducing
self-­‐reliance
/
personal
responsibility)
11

12. Case
Studies
Agriculture
• Sugar
program
• Ethanol
program
Energy
• Tennessee
Valley
Authority
• Synthe0c
Fuels
Corp.
• Solyndra
• Electric
cars
(Tesla)
Financial
sector
• Fannie
Mae
&
Freddie
Mac
• Wall
Street
bailouts
12

13. Case
Studies
(cont.)
Defense
• numerous
“military-­‐industrial
complex”
case
studies
Infrastructure
• Highway
/
construc0on
programs
• Stadium
&
conven0on
center
deals
Industrial
/
Manufacturing
/
Trade
• Auto
bailouts
• Steel
tariffs
(Bush)
/
Harley-­‐Davidson
protec0onism
(Reagan)
• Ex-­‐Im
Bank
• State-­‐level
economic
development
offices
13

14. Case
Studies
(cont.)
Network
Industries
• Transporta8on
– Railroads
– Airlines
(protected
cartels
prior
to
deregula0on)
– Taxis
(medallions;
Uber
restric0ons)
• Telecom
&
Media
– Telecom
monopoly
cronyist
origins
&
“universal
service”
programs
– Broadcas0ng
special
treatment
for
over
80
years
– Cable
TV
franchising
laws
14

15. Emerging
High-­‐Tech
Case
Studies
• Apple
receiving
tens
of
millions
in
subsidies
and
tax
credits
from
Texas
to
open
a
facility
outside
of
Aus0n
• Facebook
is
also
geqng
tax
favors
from
Texas
and
property
tax
exemp0ons
in
Oregon
• Twier
recently
secured
massive
tax
breaks
from
San
Francisco
to
stay
there
• LivingSocial
recently
cut
a
deal
for
approximately
$32
million
in
corporate
and
property
tax
exemp0ons
in
Washington,
D.C.
• Groupon
received
$3.5
million
in
an
incen0ve
package
from
Illinois
• Motorola
secured
over
$100
million
in
tax
credits
and
incen0ves
from
Illinois
in
exchange
for
a
promise
to
keep
its
headquarters
there
• Movie
&
video
game
produc3on
incen3ves:
hundreds
of
millions
in
tax
breaks
and
inducements
now
flowing
to
movie
and
game
studios
from
states
across
the
U.S.
15

16. Solu0ons
(Part
1)
The
Meta-­‐Solu3on
– The
cronyism
problem
is
inexorably
0ed
up
with
the
size
and
growth
of
government
– We
will
never
completely
constrain
cronyism
as
long
as
Big
Government
exists
– So,
the
easy
solu0on
=
cut
the
size
&
discre0onary
power
of
gov’t
whenever
possible!
16

17. Solu0ons
(Part
2)
Targeted
Reforms
• Defunding
or
depriving
those
who
received
special
treatment
• Sunsets
on
programs
and
policies
• Deregula0on
/
end
licensing
&
franchising
rights
• “BRAC”-­‐like
solu0ons
when
possible
• Limits
on
congressional
delega0on
of
power
to
less
accountable
regulatory
agencies
• Clear
property
rights
&
cons0tu0onal
protec0ons
• “MFN
clause”-­‐like
solu0ons
&
mul0lateral
accords
• Greater
transparency
/
disclosure
measures
• Moral
pressure
&
press
ajen0on
to
change
social
/
market
norms
17

18. Solu0ons
(Part
3)
Tell
the
Story!
• Get
the
word
out
about
the
costs
of
cronyism
and
these
case
studies
• Again,
moral
pressure
&
press
ajen0on
can
help
change
social
/
market
norms
and
lead
to
reforms
• We
need
to
create
a
social
s0gma
about
cronyism
– Make
it
uncomfortable
for
companies
to
engage
in
rent-­‐
seeking
– Make
it
uncomfortable
for
policymakers
to
engage
in
rent-­‐
extrac0on
18

19. Mercatus
Center
Resources
• “
The
Pathology
of
Privilege:
The
Economic
Consequences
of
Government
Favori0sm:
-­‐
Majhew
Mitchell
(July
08,
2012)
• “Crony
Capitalism:
By-­‐Product
of
Big
Government”
-­‐
Randall
G.
Holcombe
(Oct
24,
2012)
• “The
Economics
and
History
of
Cronyism”
-­‐
David
R.
Henderson
(July
26,
2012)
• “Gauging
the
Percep0on
of
Cronyism
in
the
United
States”
-­‐
Daniel
Sujer
(Oct
17,
2012)
• “Government
Cronyism
and
the
Erosion
of
the
Public’s
Trust”
-­‐
John
Garen
(Oct
11,
2012)
• “Cronyism
&
Capture
in
the
Informa0on
Technology
Sector”
–
Adam
Thierer
&
Brent
Skorup
(forthcoming,
2013)
19

20. Addi0onal
Resources
(Pt.
1)
• Gordon
Tullock,
Arthur
Seldon,
and
Gordon
L.
Brady,
Government
Failure:
A
Primer
in
Public
Choice
(Washington,
DC:
Cato
Ins0tute,
2002).
• Mancur
Olson,
The
Logic
of
Collec8ve
Ac8on:
Public
Goods
and
the
Theory
of
Groups
(Cambridge,
MA:
Harvard
University
Press,
1965).
• Randy
T.
Simmons,
Beyond
Poli8cs:
The
Roots
of
Government
Failure
(Oakland,
CA:
The
Independent
Ins0tute,
2011).
• Fred
S.
McChesney,
Money
for
Nothing:
Poli8cians,
Rent
Extrac8on,
and
Poli8cal
Extor8on
(Cambridge,
MA:
Harvard
University
Press,
1997).
• James
M.
Buchanan,
“Poli3cs
without
Romance,”
Policy
19,
no.
3,
(Spring
2003),
13-­‐18.
20

21. Addi0onal
Resources
(Pt.
2)
• George
S0gler,
“The
Theory
of
Economic
Regula3on,”
Bell
Journal
of
Economics
and
Management
Science
2,
no.
1
(1971).
• Sam
Peltzman,
“Toward
a
More
General
Theory
of
Regula3on,”
19
Journal
of
Law
and
Economics
(August
1976),
211-­‐40.
• Mark
Green
and
Ralph
Nader,
“Economic
Regula3on
vs.
Compe33on:
Uncle
Sam
the
Monopoly
Man,”
Yale
Law
Journal
82,
no.
5,
(April
1973).
• Theodore
J.
Lowi,
The
End
of
Liberalism:
The
Second
Republic
of
the
United
States
(New
York:
Norton:
2nd
Ed.,
1969,
1979).
• Adam
Thierer,
“Regulatory
Capture:
What
the
Experts
Have
Found,”
Technology
Libera4on
Front,
December
19,
2010.
21