Obama’s crony capitalism is a global problem

| May 30 2012
Christopher Cook

Remember back in the late 1980s, when people were looking at Japan as an economic powerhouse that was going to eat us all for lunch and still have room for a delicious meal of katsudon and edamame? (Yum!) Then, after an economic downturn and a series of ten attempts to end their recession with Keynesian stimulus, we started referring to Japan’s “lost decade.”

As with all economic questions, there are a lot of competing explanations as to what happened. Right now, I am reading an article at Mises.org called Explaining Japan’s Recession. The piece compares the relative merits of three explanations: Keynesian, Monetarist, and Austrian. (It’s Mises, so I think I know how this one is going to turn out!)

I am only halfway through, but a section I just read deserves brief illumination:

The Keynesian policy solution when the economy is in a liquidity trap is to have the government lend directly to businesses instead of creating liquidity in the banking system. Japan has the Fiscal Investment and Loan Programme (FILP), an off-budget branch of the Japanese government worth about 70 percent of the spending in the general-account budget. FILP gets most of its money from the post office savings accounts. Once they collect the money, the funds are allocated to borrowers through the Ministry of Finance Trust Fund Bureau and the bureau’s various agencies. Much of this money is not allocated to the most efficient projects.

Politicians in the Liberal Democratic Party (LDP) run most of these government agencies. The Economist Intelligence Unit profile states that “FILP money is channeled toward traditional supporters of the LDP, such as those in the construction industry, and without proper consideration of the costs and benefits of specific projects” (EIU 2001, p. 30). Although this Keynesian approach of government direct-lending does avoid the reluctance of banks to lend, it does not aid economy recovery. Funds are not allocated according to market-based consumer preferences, but to the most politically connected businessmen. This leads to a higher cost of borrowing for those seeking private funds, further distorting the economy. Also, because the loans are often highly risky, Japan’s fiscal condition deteriorates further. Once FILP and other “off-budget” debts are included, Japan’s debt is estimated to exceed 200 percent of GDP (EIU 2001).

I titled this short post “Obama’s crony capitalism is a global problem,” but it could just as easily be titled “With Keynesianism, cronyism is inevitable.” I think that’s the real lesson here.

Look, no political system changes the fundamental nature of humans. Moral and religious systems can do a good job of mitigating negative human tendencies and encouraging good ones. Decent political systems help. But no political system gets rid of basic human nature—there will always be some corruption, personal favoritism, and self-interested unfairness. The question is, what system works better at preventing these sorts of things and mitigating the effects when they do occur?

I’ll tell you what the answer ISN’T. It isn’t to give government a bunch of money to invest in projects that it deems worthy. That’s a recipe for disaster, for a very simple reason: temptation + human nature.

Imagine the following scenario:

You win the lottery. (Woo hoo! Free money!)

All told, you have $247 million to spend. Not only are you set for life (unless you’re a lunatic or an inveterate gambler), but you can set up a bunch of other people as well. Grandma’s new hip operation? Done. Pay off your parents’ house? Done. Pay off your sister’s massive student loan debt? Heck yes. With that much money, you’re probably going to be even more generous than that with your friends and family.

(**Add echo effect**) With your friends and family . . . With your friends and family . . . With your friends and family . . .

You’re not going to give 50K to some stranger to expand his used car lot. You’re going to give it to your uncle to expand his. You’re certainly not going to think, “Hmm, Bob Jones’ Honda is a lot more solvent and market-viable than Uncle Joe’s Subaru.” You’re going to ignore the more efficient company and give the money to your uncle . . . because he’s your uncle.

Honestly, the only people who believe it’s going to be magically different if you give government a huge wad of cash to spend are starry-eyed idealists, militant statists, and Paul Krugman.

If you give government a lot of money to “invest” and give it a lot of discretion as to how to spend it, you’re going to get crony capitalism. You’re going to see money given to friends and family. You are going to see money given to campaign contributors. It doesn’t matter whether it’s Barack Obama’s Democrats or the Liberal Democratic Party in Japan. It’s free money, after all—created with the stroke of a pen. Sure, it adds to an unsustainable debt, but that’s . . . later.

Right now, they’ve got cash to blow, and they’re going to blow it just like anyone else would.

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