In this presentation, I offer a definition of cronyism, explain its origins, discuss how various academics have traditionally thought about it, outline a variety of case studies, and then propose a range of solutions.

1. Cronyism:
History, Costs, Case Studies & Solutions
Adam Thierer
Senior Research Fellow
Mercatus Center at George Mason University
November 2012

2. Purpose of This Presentation
1. Clearly define cronyism
2. Discuss its historical / academic underpinnings
3. Develop a taxonomy of types of cronyism
4. Explain the dangers / costs of cronyism
5. Identify notable case studies
6. Consider possible solutions
7. Offer additional resources
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3. What is Cronyism?
• Cronyism generally refers to an unnatural and
unhealthy closeness between government and
special interests
– “Cronyism is the substitution of political influence for free
markets” - David R. Henderson
• cronyism is a by-product, or subset of, a much bigger
problem: government-granted privileges or
government favoritism
– Simply stated, someone is getting special treatment at the
expense of others thanks to political connections
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4. Historical / Academic Underpinnings
Cronyism is a relatively new term
• Traditionally, corruption was the primary form of cronyism
that concerned political scientists, economists, and journalists
• But corruption is merely one extreme variant (or by-product)
of cronyism
• We tried to address on type of cronyism in the 19th century
where government jobs were given to family members and
friends through the Pendleton Act.
• Political scientists and economists have a long history of
critiquing cronyism by other names…
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5. Poly Sci & Econ Influences
• Political science critiques
– “interest group politics”
– “client politics” (James Q. Wilson)
– “iron triangles” (Theodore Lowi)
– “revolving doors”
• Economic critiques = “Economic theory of regulation” (which
countered the “public interest theory” of regulation)
– Chicago school: “capture theory” (Stigler) & corporatism
(Friedman)
– Public choice school: “Rent seeking” (seeking of favors) &
“rent extraction” (granting of favors)
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6. Common Themes from Critiques
• First, when benefits are concentrated and costs are
dispersed (across all taxpayers, for example), we can expect
groups to form to take advantage of those benefits.
• Those bearing the dispersed costs will have less of an
incentive to form groups to counter those receiving the
benefits.
• This explains why some government programs and regulations
become so entrenched and why rent-seeking self-
perpetuates.
• (These insights flow from Mancur Olson’s 1965 book, The
Logic of Collective Action)
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7. Common Themes (cont.)
• Second, the “public interest theory” of policymaking and
regulation is highly flawed.
• The notion that lawmakers and regulators are always
enlightened and benevolent actors who would intervene to
correct supposed market failures and “serve the broad social
goal of maximizing social welfare” or other “public interest”
objectives, is at odds with empirical reality.
• Quite often, the opposite is true: They often act to satisfy the
private interest of politically favored players at the expense of
the public.
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8. A Taxonomy of Cronyism
1. Monopoly Privileges (ex: franchising, barriers to entry, exclusionary
rights)
2. Regulatory Privileges (ex: licensing, limits on entry, price / rate
guarantees)
3. Subsidies
4. Loan Guarantees
5. Tax Privileges
6. Bailouts
7. Expected Bailouts
8. Tariffs and Quotas on Foreign Competition
9. Noncompetitive Bidding
10. Multiple Privileges
Source: Matt Mitchell, “The Pathology of Privilege: The Economic
Consequences of Government Favoritism” (Mercatus Center Working
Paper, July 2012)
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9. Dangers / Costs of Cronyism
Specific Costs
 Monopoly Costs: “Deadweight loss” from lack of competitive rivalry.
 Productive Inefficiencies: When shielded from competition, firms get lazy
and less efficient.
 Unproductive entrepreneurship: Cronyism incentivizes firms to excel at
political entrepreneurship over market entrepreneurship
 Inattention to Consumer Desires: When shielded from competition,
organizations worry more about pleasing policymakers than the
consuming public.
 Distributional Effects: Consumers pay higher prices or get lower-quality
goods and services.
 Loss of Innovation and Diminished Long-Run Economic Growth: More
cronyism = less innovation in general; can limit long-term growth
potential.
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10. As economist Gordon Tullock has summed up:
“Drawing the bulk of intelligent and energetic people in
society into an activity that has no social product, or may
have negative social product, is more important in
explaining the stagnation of these societies than the
direct social cost of the rent seeking...
…lobbyists in Washington… are very intelligent and
energetic people… They are the kind of people we would
like to have driving forward in production. Most, however,
are on the other side — seeking special privilege.
Unfortunately this collection of highly intelligent and
energetic people who could make real contributions to
society are reducing its efficiency.”

11. Costs of Cronyism (cont.)
Big Picture / Longer-Term Costs
• Undermines the legitimacy of the private sector / capitalism
– True capitalism is anti-cronyist by nature
– True capitalism hinges on mutually beneficially gains from voluntary
exchange
– Cronyism, by contrast, skews that balance in someone’s favor at the
expense of others
– It is important to note that cronyism exists in every economic form of
society, including socialism and communism
• Undermines the legitimacy of government / democracy
– lost “social trust”
• Moral hazard (reducing self-reliance / personal responsibility)
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12. Case Studies
Agriculture
• Sugar program
• Ethanol program
Energy
• Tennessee Valley Authority
• Synthetic Fuels Corp.
• Solyndra
• Electric cars (Tesla)
Financial sector
• Fannie Mae & Freddie Mac
• Wall Street bailouts
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13. Case Studies (cont.)
Defense
• numerous “military-industrial complex” case studies
Infrastructure
• Highway / construction programs
• Stadium & convention center deals
Industrial / Manufacturing / Trade
• Auto bailouts
• Steel tariffs (Bush) / Harley-Davidson protectionism (Reagan)
• Ex-Im Bank
• State-level economic development offices
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14. Case Studies (cont.)
Network Industries
• Transportation
– Railroads
– Airlines (protected cartels prior to deregulation)
– Taxis (medallions; Uber restrictions)
• Telecom & Media
– Telecom monopoly cronyist origins & “universal service”
programs
– Broadcasting special treatment for over 80 years
– Cable TV franchising laws
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15. Emerging High-Tech Case Studies
• Apple receiving tens of millions in subsidies and tax credits from Texas to
open a facility outside of Austin
• Facebook is also getting tax favors from Texas and property tax
exemptions in Oregon
• Twitter recently secured massive tax breaks from San Francisco to stay
there
• LivingSocial recently cut a deal for approximately $32 million in corporate
and property tax exemptions in Washington, D.C.
• Groupon received $3.5 million in an incentive package from Illinois
• Motorola secured over $100 million in tax credits and incentives from
Illinois in exchange for a promise to keep its headquarters there
• Movie & video game production incentives: hundreds of millions in tax
breaks and inducements now flowing to movie and game studios from
states across the U.S.
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16. Solutions (Part 1)
The Meta-Solution
– The cronyism problem is inexorably tied up with
the size and growth of government
– We will never completely constrain cronyism as
long as Big Government exists
– So, the easy solution = cut the size & discretionary
power of gov’t whenever possible!
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17. Solutions (Part 2)
Targeted Reforms
• Defunding or depriving those who received special treatment
• Sunsets on programs and policies
• Deregulation / end licensing & franchising rights
• “BRAC”-like solutions when possible
• Limits on congressional delegation of power to less accountable regulatory
agencies
• Clear property rights & constitutional protections
• “MFN clause”-like solutions & multilateral accords
• Greater transparency / disclosure measures
• Moral pressure & press attention to change social / market norms
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18. Solutions (Part 3)
Tell the Story!
• Get the word out about the costs of cronyism and
these case studies
• Again, moral pressure & press attention can help
change social / market norms and lead to reforms
• We need to create a social stigma about cronyism
– Make it uncomfortable for companies to engage in rent-
seeking
– Make it uncomfortable for policymakers to engage in rent-
extraction
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19. Mercatus Center Resources
• “The Pathology of Privilege: The Economic Consequences of
Government Favoritism: - Matthew Mitchell (July 08, 2012)
• “Crony Capitalism: By-Product of Big Government” - Randall G.
Holcombe (Oct 24, 2012)
• “The Economics and History of Cronyism” - David R.
Henderson (July 26, 2012)
• “Gauging the Perception of Cronyism in the United States” - Daniel
Sutter (Oct 17, 2012)
• “Government Cronyism and the Erosion of the Public’s Trust” - John
Garen (Oct 11, 2012)
• “Cronyism & Capture in the Information Technology Sector” – Adam
Thierer & Brent Skorup (forthcoming, 2013)
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20. Additional Resources (Pt. 1)
• Gordon Tullock, Arthur Seldon, and Gordon L. Brady, Government Failure:
A Primer in Public Choice (Washington, DC: Cato Institute, 2002).
• Mancur Olson, The Logic of Collective Action: Public Goods and the
Theory of Groups (Cambridge, MA: Harvard University Press, 1965).
• Randy T. Simmons, Beyond Politics: The Roots of Government Failure
(Oakland, CA: The Independent Institute, 2011).
• Fred S. McChesney, Money for Nothing: Politicians, Rent Extraction, and
Political Extortion (Cambridge, MA: Harvard University Press, 1997).
• James M. Buchanan, “Politics without Romance,” Policy 19, no. 3, (Spring
2003), 13-18.
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21. Additional Resources (Pt. 2)
• George Stigler, “The Theory of Economic Regulation,” Bell Journal of
Economics and Management Science 2, no. 1 (1971).
• Sam Peltzman, “Toward a More General Theory of Regulation,” 19 Journal
of Law and Economics (August 1976), 211-40.
• Mark Green and Ralph Nader, “Economic Regulation vs. Competition:
Uncle Sam the Monopoly Man,” Yale Law Journal 82, no. 5, (April 1973).
• Theodore J. Lowi, The End of Liberalism: The Second Republic of the
United States (New York: Norton: 2nd Ed., 1969, 1979).
• Adam Thierer, “Regulatory Capture: What the Experts Have Found,”
Technology Liberation Front, December 19, 2010.
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