Capitalism for Cronies or the Public Good?bloombergview.com /articles/2015-07-15/capitalism-that-helps-cronies-or-the-public-good-

By Noah Smith

In the past couple of weeks, I wrote one post arguing for more government-driven angel investing andanother suggesting that the U.S. consider a new export promotion strategy. Both of these posts receivedconsiderable pushback from people on Twitter and elsewhere, who were very upset about the idea of thegovernment helping certain companies at the expense of others. This is part of a general antipathy towardwhat some call corporatism, or crony capitalism. A number of conservative thinkers, such as the AmericanEnterprise Institutes T.P. Carney and James Pethokoukis, have made this a cause celebre.

Now, crony capitalism is a bad thing, and Ive railed against it in the context of Japan. When well-connected companies are able to use the government as a tool to protect themselves from competition, itsgood for those companies but bad for the economy as a whole. In the U.S. there is too much of this aswell.

But some of the ideas that are getting slammed as crony capitalism are really something else. Peopleneed to realize that anything the government does, whether good or bad, will create winners and losers.That doesnt mean any and all government intervention in the economy is crony capitalism.

Let me give an example. Private companies usually dont build interstate highways because they cantpurchase the necessary land, marshal the necessary resources or capture all of the value of the roadwaysthrough tolls. In this case, highways are a public good -- something that we need the government toprovide for in order to promote an efficient economy.

So suppose the government levies taxes and builds the interstate. Plenty of private companies will behelped by this. Trucking companies will be able to profit by moving goods across the highway. Constructioncompanies that build towns along the highway exits will also benefit. Logistics companies, carmakers -- thelist of beneficiaries is long. By the same token, some companies will lose out. Railroads will suffer from theincreased competition from truckers. Airlines may lose out, since more people can now drive from city tocity. Towns that are bypassed by the new roads might wither.

Is this crony capitalism? Is it corporatism? Not at all. In this example -- which is what happened in the U.S.in the mid-20th century -- the government built the interstate system because it wanted to boost theeconomy, not because it wanted to help well-connected companies at the expense of other companies.The gains and losses to different sections of corporate America are a side effect of the policy, not the maineffect. Thats a crucial difference.

Now, an Econ 101 teacher might say that in this sort of situation, the government can compensate thelosers by taxing the winners, and the economy will still benefit. For example, the government can levytaxes on the trucking industry to compensate the railroad industry. But any serious economist would tellyou that this is hopeless in practice. First, its impossible to measure exactly how much each winnerbenefits from the new policy, and how much each loser is hurt. Second, taxes distort the economy.

So were left with an uncomfortable truth -- to boost the economy, the government must often do things thathelp some companies and hurt others. That will often lead opponents of the policies to cry corporatism,but it isnt corporatism. Its simply good economic policy.

If you think about it, a huge number of government policies fit into this category to some extent. If the

government pays scientists to discover better ways of storing electricity, it will help electric car makers andbattery companies, while hurting oil producers. If the government provides police and courts and jails thatdiscourage theft, it will help companies that own warehouses and hurt companies that provide warehousesecurity.

In some cases, true crony-capitalist policy looks like government nonintervention. For example, whencoal-burning power plants blow pollution into the air, the government should tax them in order to make upfor the social harm they cause. If the government doesnt tax them because of the strength of the coallobby, thats true crony capitalism, even though it looks like the government is doing nothing.

So what about government angel investing? Surely thats corporatism, since the government is givingmoney to specific companies? Well, I dont think so. Startups have essentially no lobbying cloutwhatsoever -- they are, almost by definition, not well-connected. And they often disrupt well-connectedindustries. Government angel investing can help venture capital firms, but so will government-funded basicresearch. So the accusation of crony capitalism doesnt really stick in these cases.

We need to accept that there are some government interventions that boost the economy, and theseinterventions wont necessarily be fair. That doesnt make them crony capitalism. Even as we try to root outcrony capitalism, lets remember what it is -- and what it isnt.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:

James Greiff at jgreiff@bloomberg.net

Capitalism for Cronies or the Public Good?