Obama Nationalizes General Electric
2011-08-06 · Guest: Luigi Zingales (University of Chicago Booth School of Business) · 50:11
Crony capitalism and government interference in markets
Bob Zadek and Luigi Zingales discuss the pervasive issue of crony capitalism in America, defining it as a system where businesses use government power to stifle competition and pick winners. They explore various examples, including light bulb regulations, the housing crisis, and corporate lobbying for mandates that harm small businesses. The conversation emphasizes the distinction between being “pro-business” and “pro-market,” arguing that true capitalism requires a neutral government referee rather than a participant in the economy.
Topics: Crony Capitalism, Free Markets, Government Regulation, Corporate Lobbying, Federalism, Bipartisanship, Economic Policy
Speakers:
- Bob Zadek – Host
- Luigi Zingales – Professor of Economics at the University of Chicago Booth School of Business
- Marie – Caller
- Michael – Caller
Introduction to Crony Capitalism [00:00]
Bob Zadek: Welcome to the Bob Zadek Show, Sundays at noon on 910 AM Fox News Radio. Thanks so much for tuning in. We are the leading libertarian talk radio show in the Bay Area and around the country. One hour of a dose of freedom to make your Sundays more pleasurable. I’m your host, Bob Zadek. Thanks so much for listening.
Today we discuss crony capitalism. There’s a catchy phrase: crony capitalism. Crony capitalism is socialism on steroids. Anybody can be a socialist—have government acquire all the means of production, have it owned by the government, have the government run it. It’s a system that, of course, has been discredited, never been successful on this planet. Nobody worth their salt would admit to being a socialist.
Crony capitalism is the next best thing. Crony capitalism, as you will see, allows the government to run all the sources of production, all the wealth-creating machinery of the country—American business. Government can run it through a command-and-control mechanism without actually owning it. It is insidious, pervasive. It is the modus operandi of President Obama and his Democratic colleagues.
Defining the Problem with Luigi Zingales [01:40]
Bob Zadek: To help me sort out the venal, insidious, stealth issue of crony capitalism, I’m delighted to welcome Professor Luigi Zingales. Professor Zingales teaches at the University of Chicago, the Booth School of Business, and has co-authored a bestselling book entitled—and the title will tell you all—Saving Capitalism from the Capitalists. Luigi, welcome to the show.
Luigi Zingales: I’m very happy to be there.
Bob Zadek: Luigi, crony capitalism. Crony capitalism allows governments to control and to run the American businesses they favor to the detriment of American businesses and industries they don’t favor, without actually owning those businesses. How does it work?
Luigi Zingales: I think that it’s sort of a pervasive occupation of power by, I think, by companies. In socialism, it is the government controlling companies, and crony capitalists are companies controlling the government. The result is the same. It is that there is no freedom, there is no entrepreneurship. The market cannot search for the best solutions, but the solutions are tried to be imposed from above.
Bob Zadek: Well, and you have governments with the ability to allocate all kinds of economic favors, be they tax credits, tax benefits, cheap loans, regulations that keep out competition—all of the tools that government has to select winners and losers. We have government making those decisions rather than the marketplace itself. Basically, we have a few people, most of whom have never worked anywhere except in government, making economic, profound economic decisions that affect everybody who buys goods and services, rather than the marketplace voting with dollars and selecting winners and losers. So we have the government using all of its tools to favor its friends and harm those people who walk to the beat of a different drummer.
Luigi Zingales: Absolutely. I think that’s a very accurate description.
Bipartisanship and Systemic Issues [04:30]
Bob Zadek: And I guess you don’t have to look very hard to find examples of that. But an example that I have spoken about on this show, only because it’s been in the news so much—and Luigi, I know you have followed this issue—the issue of, of all things, Thomas Edison’s light bulbs. The issue of incandescent light bulbs is a classic example of government interfering with the market and, as Luigi says, business using government to do so to the detriment of us poor consumers who simply want to buy a cheap source of light. Luigi, have you followed the story of the light bulbs and crony capitalism?
Luigi Zingales: No, I’ve not followed that closely, but I’m not surprised of what you’re saying. I think that it’s typical that businesses try to influence the government. And the places where this is most dangerous is where they can give a good image to this deal. So, we know that the disaster that Fannie and Freddie created, and they were created basically by businesses with the support of the government and under the rubric of helping every American own a house. So this is such a good idea that it’s very difficult to fight against, and behind these ideas we had a dramatic crony capitalism. So I’m not surprised that when you talk about green power and making the environment better, we observe many of the same kind of deals.
Bob Zadek: Fannie and Freddie is, of course, a perfect example. And it’s perfect because it is so huge and because many people believe Fannie and Freddie were the cause of the recent economic downturn, or at least a major contributing factor. There, what happened was we had at one time in this country a market for mortgage home mortgage insurance, which was all private. We had companies who simply offered insurance to banks to insure mortgages. The government decided to create its own player, Fannie and then Freddie, and we then had this somewhat quasi-public entity which competed, ultimately crowded out private business. And it then was getting money from the government and, of course, it did the government’s bidding. And it gave mortgages or insured mortgages to people who didn’t deserve it. The rest is history. But that was, in the extreme, crony capitalism. And the reason that Fannie and Freddie existed for so long and made so many mistakes is they funneled back their money to the very elected officials who regulated it. So it was this incestuous, not independent free market test, but rather it was government and business where the lines are all blurred.
And another recent example—and there are so many which we’ll cover on this show—is we have Warren Buffett. Warren Buffett is, of course, everybody believes, the quintessential American capitalist success story. Well, among the companies which his company Berkshire Hathaway owns is Burlington Northern and Santa Fe Railroad, the largest railroad in the country. Warren Buffett, through Burlington Northern, has been lobbying Congress for what? To increase the federal gasoline tax. He says let’s do it because it’s good for the country, let’s reduce reliance upon automobiles. Why is he really doing it? To make trucking more expensive so that people ship by railroad and further his companies. There is the classic example of a business, the railroad, running to its friends in Congress to seek protection from competition. It is the most insidious form of market interference because it happens below the radar screen. We don’t know that it’s happening; we just know that our choices become limited and the government makes these imperfect decisions on who the winners and the losers are rather than the marketplace. So it has the potential to destroy capitalism in the sense that we have the appearance of capitalism, the appearance of free markets, but if you look under the hood, it’s all a charade.
The Concentration of Power in Washington [07:10]
Bob Zadek: Marie in the Bay Area, welcome to the show, Marie.
Caller (Marie): Hi. This is such a great topic. I love this topic. I have a comment and then a question for you and your guest. My comment is that at the beginning of the show you said crony capitalism was the modus operandi of Obama and the Democrats. But the way I see it is it has been the modus operandi of all parties for as long as I can remember. And it makes me really disillusioned about politics in this country. When I look at the TARP bailout, when I look at the automobile bailouts, those were not just Democrats or not just Republicans. They were every politician. And so I think my question is, because it seems to me crony capitalism goes way, way, way back in our history, is there something fundamentally built into our democratic system that encourages this or supports this? Because to me it’s a threat to our democratic system.
Bob Zadek: You’re exactly right. Thanks so much for the call. And you’re exactly right that this is not a Democrat or Republican issue. And yes, there is something, in my opinion, there is something at the core of our economic system that creates crony capitalism. Luigi, take a shot at the answer. Do you agree? What is there about our economic system that invites crony capitalism?
Luigi Zingales: Oh, I think that it’s intrinsic and essential to capitalism, the desire to try to gain market power. And if I have a business, I try to create barriers to entry so that I can have some market power and charge above marginal cost. So I think this is intrinsic. The problem is how easy it is for me to do so. And I think that traditionally the United States have been quite unique in trying to limit this power. I think that, for example, anti-trust was invented in this country and it’s been extremely useful in trying to limit this power. I think that unfortunately the United States have lost some of these antibodies and we see business becoming more and more powerful in enshrining this bias to entry into laws with the support of the politicians. So I think that yes, it is intrinsic to the system, but it is much worse today than it used to be.
Bob Zadek: And I agree, Luigi. I would add that in answer to the caller’s question about what is there about our system that invites it, I think what has happened has been—and this has been a constant theme on my show—there is this growing concentration of power in Washington. When Washington didn’t accumulate so much economic power, it was a lot harder for a business to use Washington to gain favor. If power was dispersed throughout the 50 states and throughout the cities around the country, if economic power were not concentrated, it would be a lot harder to buy protection. But now we have sort of one-stop shopping, where if you need economic protection, there’s only one place you have to go to: Washington. You don’t have to bother with the states because states have become, in effect, agencies of the federal government rather than, as the founders would have preferred, independent governing bodies. So it just becomes easier. It’s like you go to a Walmart superstore and you can take care of all your shopping instead of having to go to a lot of different stores all around the city to buy your goods. It’s just so much easier.
Picking Winners: Serious Materials and the NFL Analogy [10:30]
Bob Zadek: And to give you just one example, we need to look no further than—well, when you were selecting a president and a vice president, I wonder if you knew you were voting for an insulated window salesman. I bet you thought the president had a real important job to do and he probably wouldn’t spend much time selling insulated windows. If you thought that, you would have been wrong. And the case of Serious Materials is the classic example of crony capitalism at work, and it is so blatant that it makes a wonderful, as Obama has said, teaching moment.
Serious Materials is a window manufacturer which makes insulated windows. Kathy Zoi, who is an Obama apparatchik who works in Washington giving out contracts for tens and hundreds of millions of dollars for weatherization of low-income housing—her husband is Robin Roy, who is the vice president of policy for Serious Materials. Now, Serious Materials is simply one of many companies that manufacture windows. And you would think, well, let the marketplace decide which window manufacturer you’re going to shop with. Well, it’s a little hard to have a level playing field when you have the president and vice president chalking up airtime selling windows. Just listen to this.
Joe Biden (Clip): You’re not just churning out windows. You’re making some of the most energy-efficient windows in the world. I would argue the most energy-efficient windows in the world.
Barack Obama (Clip): Serious Materials just reopened, as he mentioned, a manufacturing plant outside of Pittsburgh. These workers will now have a new mission: producing some of the most energy-efficient windows in the world.
Bob Zadek: Not a bad salesman, don’t you think? President Obama, window salesman in chief. Well, there is a nice juicy example of crony capitalism at work. Obama and Biden have made the decision for us which insulated window to buy. It’s crony capitalism at its worst.
Now, in our system, we need a government controlling the marketplace to some degree. The government’s role is to be a referee, to keep the game honest. A referee as in professional sports. Now, just imagine the NFL making a decision: it would be nice to have a football team in Portland, Maine. I pick that city totally at random. And in order to encourage a football team to use Portland, Maine as its home field, because that’s what the government wants, even though the people in Portland and NFL viewers may not care, the government says, okay, to encourage a team to go to Portland, Maine, every time the Portland, Maine football team plays a game, they start off 14 points ahead, just to encourage a football team there. Now, that wouldn’t make the NFL a meritocracy. It wouldn’t mean the best team won. The team that won more likely would be the team that chose to play in the city the NFL picked. Now, we would still have football games. The football games would have the appearance of being competitive, but it would not be competition. The winner of the Super Bowl, if that policy was pervasive, would not be the best team. That’s the difference between the government being a mere referee and participating and influencing the outcome. The government should be a referee only and not influence the outcome. Luigi, the government tries to influence the outcome, doesn’t it, in the market?
Luigi Zingales: Yeah, the government tries to influence the outcome all the time. But I think that even more dangerous than that are the businesses themselves that use the government to influence the outcome in their favor. And this is pervasive and is very difficult to monitor in a democracy because they do it through very sort of indirect ways, in commissions, in very small norms that are not easy to detect. You can cite some of the most outrageous examples, but these examples take place every day.
The Light Bulb Mandate: Market vs. Mandate [14:00]
Bob Zadek: Luigi, the light bulb example that I referred to earlier is a perfect example of the point you’re making, which is you would say the problem is, to a large degree, Luigi, it’s caused by business, not caused by government. We’re going to have a conversation about that, Luigi, because I’m not so sure I 100% agree with you. But just to give you support, Luigi, the light bulb story is the perfect example which proves your point.
We have Americans for about 100 years have been buying Thomas Edison’s incandescent light bulb. It’s cheap, it provides light, it’s easy to read by, it’s attractive, and Americans like it. It’s very, very cheap. Well, the light bulb manufacturers were disturbed by the fact that they couldn’t increase their sales. They would manufacture far more expensive light bulbs, but the darn Americans didn’t want to buy them, even though there were some advantages. So the industry got the bright idea: rather than struggle through market mechanisms and try to persuade Americans to buy these better, albeit more expensive light bulbs, they went to Washington. And they got Washington to outlaw the purchase of 100-watt incandescent bulbs. So, not leaving it up to the market, they got Washington to put in the political fix and to mandate that Americans could no longer buy 100-watt bulbs. There is the classic example of Luigi’s point of businesses realizing they could not accomplish what they wanted to in the free market. So rather than do that, they got government to mandate that their more expensive product, which is toxic, which produces ugly light and doesn’t perform so well and costs 10 times as much—now we are forced to buy this product nobody wants. There is no better example I can think of which proves Luigi’s point that business has learned how to use the tools of government to mandate the result they can’t achieve in the marketplace.
The light bulb manufacturers, I believe it was Philips, got the government to mandate that Americans had to buy the product that Americans wouldn’t choose to buy if they had a choice. What’s really weird is when compact discs were developed instead of vinyl records, the compact disc manufacturers didn’t have to go to Washington to mandate nobody’s allowed to buy vinyl, we now have to buy compact discs. They did that through the marketplace. The same with Apple computers, the same with all of the products that make our life wonderful. We, millions and millions of market participants, will decide with our dollars who wins and who loses. That is the capitalist, the free market way, rather than having government tell you what’s best for you.
The Role of Government: Referee or Participant? [17:45]
Bob Zadek: Michael in San Francisco, welcome to the show.
Caller (Michael): Oh, hi Bob. I wanted to try to answer the question that the earlier caller asked: how come the government in working hand-in-hand with crony capitalism has been expanding? And I think that the two of you have been dancing on the solution but haven’t stated it outright. As you said, Bob, we want the free market way. So what’s impeding the free market way? That’s government. And what’s the system of government we have? Democracy. Democracy is majoritarianism. So as you illustrated with the light bulb, businesses work with the government to regulate light bulbs and to tax us. So the solution is get rid of the majoritarianism, get rid of the government. And state rights doesn’t work because states are government and they have tyrannies also. Some small governments could be more tyrannical than federal governments. And Thomas Jefferson said it’s the nature of things for governments to gain and liberty to yield. So we don’t want government; we want individuals working on the free market, interacting freely and voluntarily to live their own life and not the government to tell them how to run their life. So get rid of democracy and just have people living their life the way they want.
Bob Zadek: Well, what’s interesting is you said a whole lot of stuff there, Michael. You said about four hours’ worth of radio in your one point. I’ll try to speak to some of them, as will Luigi. First of all, democracy doesn’t necessarily mean majority rule. And indeed, I did a show about 18 months ago where the topic was “What’s so special about majority rule?” and I wondered why so many things are decided by a 51-49 vote. What’s wrong with supermajorities of two-thirds and three-quarters? And our democratic system itself doesn’t embrace majority rule. There are plenty of—the founders feared majority rule. They called it the tyranny of the majority, and they were deathly afraid of the majority stepping on the rights of the minority. And to some degree, the majority cannot affect the minority; things are just too important. And in many areas, there are supermajority requirements. So we have to be careful about equating democracy with majority rule.
Secondly, Michael, I think we need government as, as I said before the break, as a referee. You have to have some—a football game or any sporting event, you can leave the players up to their honor and trust they will do the right thing. But as John Adams said, if all men were angels, we wouldn’t need laws. But men are not angels, and businesses need to have a referee. So you and I probably will agree on that—I don’t mean to speak for you. But I think the issue is where we do agree is how much should government be involved. And there we agree that is enough only to make the game be honest and not beyond that, not to affect the outcome.
Caller (Michael): Bob, I think you make some excellent points. I’ll just speak to one of them, and that is we need laws. In a free society without government, there would be laws, but libertarian laws, which basically would say that it’s wrong to violate individual rights. Now, this is called anarchy—sorry to mention the A-word—and there’s a rich literature on this, and I would recommend to you and your listeners one particularly excellent book called Anarchy and the Law by Ed Stringham.
Bob Zadek: Thank you very much for the suggestion, Michael. Luigi, any thoughts on Michael’s observation about the more we have government, the worse things are?
Luigi Zingales: I think that I agree with you, Bob, that we need a referee, and without a referee, I think there is a danger as well, which is the biggest guy in town will abuse his power. So I think that we need a referee, but we need to keep this referee in check. So that’s the reason why I love the American federalist system, because there is competition among states. And it’s easy enough to move from one state to the next that makes it keep the government in check because people can move. And so competition is the greatest source of protection for individuals.
Federalism and Energy Markets [21:00]
Bob Zadek: Competition is the only way. The free market and competition are the only way to be sure that we get the best products at the cheapest prices. And you need to look no further than what’s going on in the field of energy. There will be a market shakeout, and we will end up having different sources of energy in 25 years from now than we have now. And that’ll be based upon market efficiencies, cost, and benefit. But for the government to make—and the government being really a few people sitting in these windowless offices without phones making decisions about what type of energy they project will be efficient and accomplish their goal—they can’t be smart enough. It’s just hubris for a few government workers to assume they can make a wiser decision than can millions of Americans voting with their dollars. And when you have crony capitalism, government picks on either a based on bad information or incomplete information or, even worse, based upon corrupt motivation. Government picks winners and losers rather than the marketplace. And it’s that substitution of the judgment of a few for the judgment of the many which, to me, is the most insidious of all.
Now, Luigi, in your book, you, after pointing out the serious nature of the problem—that we have, in effect, businesses corrupting government and influencing the market by buying favor from the government—you offer some observations on how the problem can be mitigated or solved.
Luigi Zingales: Yes, I think that one point that we push is for a political anti-trust. When we analyze sort of the benefits and the costs of concentration, we generally do it on purely economic basis, but we don’t factor in the influence, the greater influence that a larger company will have on government and the distortions that this influence generates. And if we recast the anti-trust analysis in term also of the minimizing the undue influence of business, then we will favor keeping sort of companies more fragmented because it’s not only good from an economic competitiveness but also from a political competitiveness. So I think that that’s one of our proposal. A second thing, I think, is there is a need for awareness. And so I really appreciate your show, because too many people still mix sort of a pro-market position for a pro-business position. And while very often the two things coincide, there are at least as many times where the two agenda are in conflict. And very often the pro-business agenda defends itself behind the flag of the pro-free market, but is really not pushing for free market. And I think that the more we teach people that there is a difference, the easier it is for people to recognize that.
Business vs. Free Markets: The Walmart Example [24:30]
Bob Zadek: You know, there’s a good example recently. One of the citadels, one of the American capitalist success stories, is, of course, Walmart. Walmart grew from a one store in Bentonville, Arkansas, to the largest retailer in the world. It is, of course, a profound, one would think, free market success story, and it is. One would expect Walmart to embrace the free market. We might remember that about a year ago, before Obamacare was passed, Walmart was very vocal in encouraging the government to impose minimum healthcare insurance or minimum health insurance requirements on all workers. And I said to myself, my God, why is Walmart such a cheerleader for government mandating this cost on business? And the answer was: Walmart was providing that coverage to its employees, and many of its competitors were not. So Walmart said, one way to force an expense upon our competitors that we already are voluntarily absorbing is to use the government. And so Walmart was very, very active in lobbying for mandatory health insurance. So there we have even a capitalist success story can’t help itself and can’t stop itself from running to the government to tilt the playing field in its favor. There is another classic example of Luigi’s point of a business rather than just competing on the merits in the free market, running to government and seeking to tilt the playing field. So as Luigi said, there is such a difference between business and free markets. We must fight to maintain free markets and keep businesses from using government, as Luigi has explained, to make the game unfair.
The Purpose of Business [28:30]
Bob Zadek: This subject of crony capitalism is about business, but the key is a distinction has to be made between business and free markets. Many—Obama and many presidents before him have often, to show they are quote “pro-business,” have surrounded themselves with business executives. And this sort of tries to build their business creds with the public. What’s important to keep in mind, I think, is that business and free markets are not co-extensive terms. They don’t mean the same thing. As Luigi has pointed out, many American businesses really would prefer there not be a free market. They just want to make lots of money. And if the way they make lots of money and gain market share is through eliminating competition, whether it’s through government tools or other tools, they are perfectly content to do that. To me, the bastion, the home of laissez-faire capitalism or free market resides for the most part in small business, which get up every day, go to work, and compete in the crucible of the free market and try to survive. Businesses—GE being an example, and we’ll discuss Jeffrey Immelt and GE perhaps a little bit later on this morning—would be perfectly content to have a totally unfree market so long as they prospered. And thus there is a difference between businessmen and free marketeers.
The lines get blurred between what’s the job of government and what’s the job of business. And when those lines get blurred, we Americans suffer. Because when I buy a product, I would hope that product would be as inexpensive as possible, and the cost that I pay for the product would be the cost of production and the profit in selling it. I don’t want to have built into the cost of the product saving lives in rural India. I don’t want to have the cost of the product include saving the whales or whatever. I want to just pay for the cost of the product. It is not the job of business to be per se doing good in the world, and government cannot take its role, which it is doing in effect, and force it upon American business. And business cannot take its role, which is to compete in the marketplace, and run to the government for help. That’s what distorts the marketplace. It produces more expensive products and the wrong products. It’s a distortion in the marketplace.
A recent quote by President Obama will show what I mean. Obama has said in speaking to the U.S. Chamber of Commerce, which is the trade association of American mostly big business, said—and pay attention to these words, these are Obama’s words to the Chamber of Commerce: “Ask yourself what you can do for America. Ask yourself what you can do to hire American workers, to support the American economy, and invest in this nation.” Oh my God, how is that ever the job of business? The job of American business is to create jobs, create wealth, use capital effectively, not to carry on some lofty social goals. Now Luigi, I have a feeling we may not agree on that 100%, am I right?
Luigi Zingales: No, I think we agree 100%. I think that the larger the role for government and the more scope there is for business to direct government resources in its favor. I think it’s sort of a marriage, as you said earlier, and the more scope you give for this marriage, the worse the situation is.
Bob Zadek: Gee, what happened to big powerful Xerox, big powerful IBM, and big powerful Microsoft when it controlled the software industry? Business’s power, or a business’s power in a marketplace, tends to be transitory. The railroads were all powerful till there were planes and trucks. So while business, private business will have temporary power, the power of government seems to be far more permanent, and we don’t have the tools to eliminate that as much as we do private business. Well, Luigi, that’s a topic for another day. Thanks so much for joining me. This is Bob Zadek. I’ve enjoyed the hour with Luigi Zingales. The subject has been crony capitalism, the distortion of the markets by the intermarriage of business and government. I’ll be back next Sunday. Hope to speak to you then.