Friday Interview: Financial Crisis Exposed U.S. Cronyism Problem | Eastern North Carolina Now

    Publisher's note: The author of this post is the CJ Staff, who is a contributor to the Carolina Journal, John Hood Publisher.

Economist Zingales responds with ‘A Capitalism For the People’

    RALEIGH     In the darkest days of the recent financial crisis, University of Chicago economist Luigi Zingales had a bad feeling. He had seen this story before, and the ending didn't turn out well. So Zingales wrote a book titled A Capitalism for the People. He discussed the book during the 2013 John W. Pope Lecture at N.C. State University. Zingales also discussed the book with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

    Kokai: What was it in the financial crisis that raised a red flag for you?

    Zingales: I think, most importantly, the fact that I saw the government acting much more in the interest of the financial industry than in the interest of the population at large, and people feeling this and resenting that tremendously. And this, in combination with an increase in inequality, makes support for a free-market system a serious risk.

    Kokai: This reminded you of your home country, Italy?

    Zingales: Absolutely. I think that historically in Italy there's always been more pressure toward equality, kind of more socialist pressure, but the manifestation of this socialist pressure was in a reduction of the incentives at the individual level, and a lot of control by the government that tended to be sort of corrupt and favor nepotism.

    Kokai: So as you saw what was happening in the U.S. and remembering what happened in Italy, what was your response?

    Zingales: My response is we need to act now before it's too late. There is a big hope because in the United States there is a tradition of support for free markets that doesn't exist in Italy. So I don't think that the case is lost. There is an opportunity, but we need to explore this opportunity now rather than sit and be complacent, in a sense.

    What irritated me the most about the response to the financial crisis is that there was a huge divide between this kind of Left and Right, and the Left was criticizing everything, and the Right was trying to save everything. And I'm saying no. I think that we should recognize what went wrong. We should improve what went wrong, without throwing away the baby with the bathwater. I think that it's very important to make this distinction, and I don't see very many commentators ... making that distinction. And I think that's why I felt I needed to speak up.

    Kokai: Some things need to preserved. Some need to be changed. What do you see that needs to happen in the U.S.?

    Zingales: First of all, I think it's very important to ensure that the playing field is level. Then, firms sort of should start and have as an objective to be profitable in the marketplace, not to achieve some preferential treatment in Washington. And, unfortunately, this seems to be less and less the case. I think that it's quite important that firms don't become so big to become too powerful in Washington.

    I think that the old tradition of antitrust back from the end of the 19th century, the beginning of the 20th century, was mostly a tradition of anti-bigness. And then later we economists sort of interpreted this as the inefficiency of monopolies and blah, blah, blah. But I think it's mostly an add-on rationalization because the real initial justification was people were concerned that being too big means being too powerful politically, and that distorts the system. And I think I would like to recover a bit of that.

    I call for what I call a political antitrust in the following sense, that when we do the analysis of should we allow this merger or not, the traditional way in which this is done is you compare sort of the efficiency of a merger with the increasing market power and then you see whether this is good for the consumer or not. What is completely ignored in this is the increased political power of being a larger firm.

    And coming from Europe, I'm all too familiar with so-called national champions. These are firms that are disproportionately big within the country, and they are in a cozy relationship with the government, which is very damaging on both sides. And that's what I would like to prevent in the United States ... the excess concentration of industry. And the financial industry, in that sense, is a very good example of what can go wrong.

    Kokai: What happens here in the United States if we do nothing and allow the cronyism to fester?

    Zingales: I think it's a slow and very painful decline with a lot of social tension and a sort of a reduction in the vibrancy and productivity of the economy, in a sense. What you have is, on the one hand, some populist pressure will force some equalities so that incentives will be dampened and people will be less attracted to come to the United States. On the other hand, you will have much more sort of government redistribution of resources with the cronyism that this brings, and with the slowdown in productivity growth, et cetera, that this brings.

    So the problem of this crisis is not immediate traumatic effect. It's a slow undermining of the expectations and beliefs of people, and by the time you realize this has happened, very often it's too late. And so that's the urgency, not because the problem will arise tomorrow, it is the urgency because if you don't start early enough, it's too late.

    Kokai: Some people might hear what you're saying and agree that we need to do something. What do we need to do to start addressing the problem?

    Zingales: ... The first point that you want to take is realize that there is a big distinction between a pro-market agenda and a pro-business agenda. Most people tend to identify the two, and often they are aligned, but often they're not. And this is the typical situation: A businessman or a businesswoman wants free markets when they enter a new industry, and once they're in they want to build barriers to entry so they'll make more profits.

    And this process of building barriers to entry is sort of natural and healthy if it is restricted to sort of a market, typical competitive strategies like building a technological lead, creating a brand name, a reputation, et cetera.

    When it comes to how you enroll the support of the government to erect this barrier to entry and make [a company] bigger, that's where the useful things break down. That's the danger. And businessmen are delighted to have those bigger barriers to entry, and a pro-market agenda is not in favor of that. So I think that ... understanding this is looking at the political spectrum in a different way. Because today, you have a discussion: Are you pro-business or anti-businesses? That's not the right discussion.

    So I hope that this will help contribute to the emergence of political figures that campaign on the basis of a truly pro-market agenda, and put pressure on representatives on those grounds. And that would be the beginning of a change.
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