Crony capitalism: Why the tea party and Occupy movements should be friends

Published: Monday, July 9 2012 7:00 a.m. MDT

J. Bradford DeLong, a professor of economics at the University of California at Berkeley, says he sees some signs of increasing crony capitalism — such as fewer people getting into Ivy League schools on merit. For example, DeLong says the University of California at Berkeley educates more people coming from families with incomes under $50,000 a year than the entire Ivy League. "Forty years ago a lot of smart people whose parents weren't rich would have a relatively easy time — if they were smart and willing to work hard — in going to elite colleges and getting connections and forming social networks and so forth," he says. "The impression is it is quite hard right now."

But finding the similarity between the tea party and Occupy? "I wouldn't say they are both sides of the same coin," DeLong says. "Neither of the two critiques (tea party or Occupy) seem to be completely and clearly well founded. And both seem to pick on some things that are good and some things that are bad. But neither group's diagnosis seems to be complete, in large part, because neither group's message is incredibly coherent or incredibly well explained."

But Zingales still sees a commonality in the movements. "What I want to do is try to beautify this spirit of revolt in two opposite movements," he says, "and identify the common element that you can use to try to make the system a better place."

Zingales wants the "revolt" to be channeled to complain to Congress about specific things — things he thinks will prevent America from becoming another Italy. "I am also trying to design a system that is simple enough that it can be monitored by ordinary people who are not experts in economics," he says, "but who understand when something is presented properly whether it sounds right or wrong."


Zingales says there are three ways the government likes to intervene in the economy with some social goal in mind:

1 — Use heavy regulation

2 — Buy goods and services

3 — Give money in the form of subsidies

"And this system is basically designed to fail," he says. "Why? Because the benefits of the intervention, be it subsidy, be it purchase, be it regulated, is very concentrated. And the cost is very defused. So you are destined to do too much of it."

Instead, Zingales would like government to limit itself to two forms of intervention:

1 — Extremely simple regulation ("Regulation that even a congressman could understand")

2 — Targeted taxes

The best way to understand what Zingales means is to look at a possible social goal such as increasing home ownership. Traditionally, the government would give a subsidy to people who want to buy a home. But subsidizing home ownership is really just "taxing" people who rent. "However, taxing people who rent, is much less politically appealing," he says. "So there is going to be a lot of resistance to intervene."

The same thing goes for regulations. Using a tax to regulate can achieve the same goals often. "A tax is something that is very simple," Zingales says. "It can be debated by the public at large. We can pressure a congressman to vote in one particular way or another. But if we get into regulation that is 2,000 pages long, we have lost and the lobbyists have won."

DeLong also likes using taxes. "Actually shifting from regulation to taxation is something every economist wants to do," he says, "but it turns out to be much harder than it looks. Precisely because it seems somehow to be easier to persuade voters to vote for representatives who will impose an average fuel economy requirement on GM, rather than raise the gasoline tax."

The way it usually works now, for example, is Congress will require that General Motors produce a fleet of cars that attain at least a 25 mile-per-gallon city average. GM then has to cut the price of these gas efficient cars to get people to buy them and it makes up the price cuts by raising the cost of its gas-guzzlers. And so it becomes a "tax" anyway with virtually the same effect a gas tax would have had. GM becomes the intermediary to present the "tax." "And it is a hidden tax because people blame GM rather than the government — even though GM is only doing this because the government is providing incentives that force it to do so," DeLong says.

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