Crony Capitalism


Bailout City

For those interested in the economics of Piketty’s new book on Capitalism, there is a critical review in Barrons this week (link below). But I believe this addendum to the review by Gene Epstein included here is by far more politically relevant than Piketty’s questionable assumptions and interpretations of historical data. Today it’s all about cronyism and Piketty’s prescriptions just make the cronies that much more powerful and untouchable.

THE CORE PROBLEMS OF Thomas Piketty’s magnum opus, Capital in the Twenty-First Century, are covered in the review in Balancing the Books. One key point should be added. A work that radically indicts our current economic system is well worth writing. Capital in the Twenty-First Century is not that book.

That’s because Piketty makes no mention of crony capitalism—the unholy alliance between government and business—which badly distorts the economy and leads to unjust inequalities of wealth and income, because they are outcomes of an unjust process. While capitalism is a system of profit and loss, businesses under crony capitalism are shielded from losses; the 2008-09 bailouts of Chrysler and GM are notorious examples.

Hunter Lewis, author of the excellent Crony Capitalism in America: 2008-2012, also points out that Piketty’s charting of the ups and downs of income returns to the top 10% correlates with central-bank-induced bubbles. These bubbles, Lewis explains, constituted “an explosion of crony capitalism as some rich people exploited all the new money, both on Wall Street and through connections with the government in Washington.”

Piketty conjures up the naive image of capitalist businesses generating virtually risk-free income to their owners. Under crony capitalism, however, with government flooding the bond markets with low-risk IOUs, while expanding the list of businesses too big to fail, there is indeed greatly enhanced potential to turn capitalist winnings into steady streams of income for the cronies. And to the extent that Piketty is right to say that capitalist riches provide the wealthy with disproportionate power in politics, one obvious solution is to shrink government influence, thus reducing the capitalists to their classically humble role of having to sell us goods and services we choose to buy. But Piketty would march us in the opposite direction, expanding government’s reach.

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