Silly Little Country

Pro-Market or Pro-Business?

It is a constant source of dismay to me to notice that people (the great majority of people, it seems to me, and certainly a stunningly large number of journalists, almost all surely innocent of any education in economics) conflate the notion of supporting the application of market forces with support for business.
This has always seemed a comical error; for example, the whole job of Canada's CRTC is to protect local Canadian broadcasters (who happen to be business people who lobby hard to get regulations in place to protect their current positions, and avoid competition in anything resembling a fair market). Protectionism in general is also designed to support local businesses, and prevent competition in a worldwide market.
Luigi Zingales is worried about this conflation, and rightly worried that the current US Administration is responding to discontent in the population in exactly the wrong way.
He contrasts what he sees as the US historical view with a contrast:

In most of the world, the best way to make money is not to come up with brilliant ideas and work hard at implementing them, but to cultivate a government connection. Such cronyism is bound to shape public attitudes about a country's economic system. When asked in a recent study to name the most important determinants of financial success, Italian managers put "knowledge of influential people" in first place (80% considered it "important" or "very important"). "Competence and experience" ranked fifth, behind characteristics such as "loyalty and obedience."

He is deeply concerned that changes in the financial industry have increased the chances of regulatory capture.

The real effect of Gramm-Leach-Bliley was political, not directly economic. Under the old regime, commercial banks, investment banks, and insurance companies had different agendas, and so their lobbying efforts tended to offset one another. But after the restrictions were lifted, the interests of all the major players in the financial industry became aligned, giving the industry disproportionate power in shaping the political agenda. The concentration of the banking industry only added to this power.

He perceives in current events the worst populist behavior:

The pattern that has taken hold in the wake of the financial crisis thus threatens to initiate a vicious cycle. To avoid being linked in the public mind with the companies they are working to help, politicians take part in and encourage the assault on finance; this scares off legitimate investors, no longer certain they can count on contracts and the rule of law. And this, in turn, leaves little recourse for troubled businesses but to seek government assistance.
It is no coincidence that shortly after bashing Wall Street executives for their greed, the administration set up the most generous form of subsidy ever invented for Wall Street. The Public-Private Investment Program, announced in March by Treasury Secretary Timothy Geithner, provides $84 of government-subsidized loans and $7 of government equity for every $7 of private equity invested in the purchase of toxic assets. The terms are so generous that the private investors essentially receive a subsidy of $2 for every dollar they put in.

And has this administration been utterly captured? He seems to fear this.

The alternative path is to soothe the popular rage with measures like limits on executive bonuses while shoring up the position of the largest financial players, making them dependent on government and making the larger economy dependent on them. Such measures play to the crowd in the moment, but threaten the financial system and the public standing of American capitalism in the long run. They also reinforce the very practices that caused the crisis. This is the path to big-business capitalism: a path that blurs the distinction between pro-market and pro-business policies, and so imperils the unique faith the American people have long displayed in the legitimacy of democratic capitalism.
Unfortunately, it looks for now like the Obama administration has chosen this latter path. It is a choice that threatens to launch us on that vicious spiral of more public resentment and more corporatist crony capitalism so common abroad — trampling in the process the economic exceptionalism that has been so crucial for American prosperity. When the dust has cleared and the panic has abated, this may well turn out to be the most serious and damaging consequence of the financial crisis for American capitalism.

In sum, do we have a pro-business anti-market administration? Maybe. If so this is not just a disaster in the short run, it could be a disaster for a very long time.

posted by Alan Adamson @ 4:22 PM