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

Published: Monday, July 9 2012 7:40 a.m. MDT

CHICAGO — When Luigi Zingales first came to the United States in 1988, he felt fear.

Back in Italy, Zingales lived under a system that didn't reward merit and considered competition a sin. "I like to say I come from a country that invented nepotism and lives by it," Zingales says, "where even emergency room doctors are chosen by political affiliation, and where what is really important is who you know, not what you know. I think that distorts society at large because people invest in relationships rather than invest in knowledge."

And so, Zingales came to the United States to study economics at MIT.

And he was afraid. "There is a sense of protection in the system of relationships because if you fail, you can blame your failure on something else," he says. "Sometimes that is not true, but it makes you feel better to say, 'I didn't succeed because I didn't work hard enough, I failed because the system is corrupt.' I realized that this was not the case here. If you fail, it is mostly your own fault."

Years later, Zingales is a respected professor at the University of Chicago and an economics star. U.S. Congressman Paul Ryan, R-Wis. — the leading Republican voice on the U.S. Budget and a possible Mitt Romney running-mate — quotes Zingales often on fiscal policy and budget decisions (Ryan once answered a financial regulations question from the Washington Post by saying, "I’d do the Luigi Zingales stuff.")

But despite his success in his chosen field and his chosen country, Zingales is again fearful.

To him, the Tea Party movement and the Occupy Wall Street movement are reactions to the rise of the same thing he saw in Italy. And as the economy becomes the central debate in the presidential campaign, how America chooses to respond to its challenges will determine if it becomes more like the system he left behind.

Missing the point

Zingales thinks most people, however, are missing the central point behind dissatisfaction in the United States. People sensed an increasing income inequality, with a large portion of the population losing, both in relative and even absolute terms, their status. There was a growing feeling that the elites played by different rules.

To Zingales, it seemed normal that people would become disaffected. And different segments of society expressed their revolt in different ways. "The Tea Party movement focuses more on what is wrong with the government," he says. "And the Occupy movement focuses more on what is wrong with large corporations. And what I am saying is those are two sides of the same coin, to some extent, because part of the problem of government is it is too much in the pockets of large corporations, and part of the problem of large corporations is they are subsidized by the government. So, unless you see this common element you are only bound to not get the full picture."

And what frightened Zingales is the connection between government and business — the rise of crony capitalism, didn't seem to be a part of the conversation. It was like watching the creation of the Italian systems that he had left behind.

So he wrote a book, "A Capitalism for the People: Recapturing the Lost Genius of American Prosperity."

"Part of the reason I wrote 'A Capitalism for the People' was I felt this populism was getting more and more widespread," Zingales says. "And I want to make sure it is channeled in a direction that does not destroy the goose that lays the golden eggs — the system that has created so much wealth for America and the rest of the world. On the other hand, this spirit of disaffection or revolt, if properly channeled, can be very good in cleaning up the system."

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."

Solutions

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.

So rather than use subsidies or regulations to hide taxes, Zingales wants to bind the government to intervene only by using taxes. "So it either does not intervene, or it intervenes through taxes," he says. "That changes the dynamics, because if you intervene with a subsidy you have a lot of people who are going to ask for the subsidy. If you intervene with a tax, not a lot of people are in line to get taxed, right? So there would be huge resistance. So the government would intervene less, which is good to begin with."

DeLong, however, isn't convinced taxes would get the job done in all cases. "It's not so easy to tax lobbyists or to tax polluters," he says. He pointed to the two-generation long struggle to tax cigarettes, "The public health and moral impact of taxing tobacco — especially for teens — have been clear for two generations. And yet it is still a very active and contested political issue."

Increasing competition

Zingales thinks part of the cause of inequality today is that we have too little competition, or competition that doesn't start from an equal place. He compares it to having a handicap when playing golf. "If you were not given a handicap, it would be very difficult and no fun to play with somebody who is better than you," he says. "Probably, you would give up and not play. The same is true, I think, in the economy overall."

Another thing to lessen the sense that the game of life is rigged is to look at education and healthcare. "If you look at part of the reason why the middle class feels so squeezed," Zingales says, "it is not just because wages have not gone up that much, it is also because the cost of healthcare and the cost of education have gone up so tremendously. And those are two sectors that are not exposed to foreign competition. They are not even exposed, in a lot of cases, to internal competition. And they are two sectors that are heavily subsidized by the government. So we need to generate more competition in those sectors in order to contain those costs and make people feel and enjoy a larger share of what they make."

But it is the lack of competition historically in healthcare and education (and the financial sector as well) that gives DeLong pause. "I find myself very worried about the healthcare, the education and the financial sectors of the economy," he says. "There seems to be something strange about finance, education and healthcare. Which means we need to move very cautiously in terms of getting rid of the regulations over them that we currently have."

Hope

When Zingales came to the United States 24 years ago, he left behind what he thought was an unfair and corrupt system that awarded the privileged, elite and connected. That contrast shaped his view of economics and made him sensitive to trends that seem similar in the United States. "I'm not a politician," he says. "I do not want to run for any office. I just want to try to push some ideas that I think are important and, hopefully, will stick."

DeLong isn't a politician either. Like Zingales he is an economist — sometimes agreeing with Zingales, sometimes not.

"I'm somewhat more hopeful about politics and our ability to make good political decisions than Luigi is," DeLong says. "Luigi's view of your average politician is either the incredibly corrupt Italian Christian Democratic Party or the absolutely criminal Italian Socialist Party or the kind of government … that Italy had under Silvio Berlusconi. Our politicians are not that bad. Or at least are not that bad yet."

EMAIL: mdegroote@desnews.com TWITTER: @degroote FACEBOOK: facebook.com/madegroote

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