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“Cronyism Causes The Worst Kind Of Inequality”: Friends Of The Rulers Appropriating Wealth For Themselves

Economic inequality has skyrocketed in the U.S. during the past few decades. That has prompted many calls for government policies to reverse that trend. Defenders of the status quo argue that rising inequality is a necessary byproduct of economic growth — if we don’t allow people the chance to become extremely rich, the thinking goes, they will stop working, investing, saving and starting businesses. A receding tide will then cause all boats to sink.

Critics of the status quo have responded with the claim that inequality doesn’t help growth, but instead hurts it. This view was given ammunition by a number of recent studies, which have found a negative relationship between how much income inequality a country has and how fast it grows. One example is an International Monetary Fund study from 2015:

[W]e find an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth.

A similar 2014 study from the Organization for Economic Cooperation and Development concluded the same thing. Interestingly, the negative correlation between inequality and growth is found even when controlling for a country’s income level. This isn’t simply a case of wealthier countries growing more slowly and also being more unequal.

So the evidence is pretty clear: Higher inequality has been associated with lower growth. But as with all correlations, we should be very careful about interpreting this as causation. It might be that countries whose growth slows for any reason tend to experience an increase in inequality, as politically powerful groups stop focusing on expanding the pie and start trying to appropriate more of the pie for themselves.

The IMF and OECD list some channels by which inequality might actually be causing lower growth. The most important one has to do with investment. When poor people have more money, they can afford to invest more in human capital (education and skills) and nutrition. Because these investments have diminishing marginal returns — the first year of schooling matters a lot more than the 20th — every dollar invested by the poor raises national productivity by more than if it gets invested by the rich. In other words, the more resources shoring up a nation’s weak links, the better off that nation will be.

That’s a plausible hypothesis. But there might also be other factors contributing to the correlation between inequality and growth. It could be that there is something out there that causes both high inequality and low growth at the same time.

The obvious candidate for this dark force is crony capitalism. When a country succumbs to cronyism, friends of the rulers are able to appropriate large amounts of wealth for themselves — for example, by being awarded government-protected monopolies over certain markets, as in Russia after the fall of communism. That will obviously lead to inequality of income and wealth. It will also make the economy inefficient, since money is flowing to unproductive cronies. Cronyism may also reduce growth by allowing the wealthy to exert greater influence on political policy, creating inefficient subsidies for themselves and unfair penalties for their rivals.

Economists Sutirtha Bagchi of the University of Michigan and Jan Svejnar of Columbia recently set out to test the cronyism hypothesis. They focused not on income inequality, but on wealth inequality — a different, though probably related, measure. Concentrating on billionaires — the upper strata of the wealth distribution — they evaluated the political connections of each billionaire. They used the proportion of politically connected billionaires in a country as their measure of cronyism.

What they discovered was very interesting. The relationship between wealth inequality and growth was negative, as the IMF and others had found for income inequality. But only one kind of inequality was associated with low growth — the kind that came from cronyism. From the abstract of the paper:

[W]hen we control for the fact that some billionaires acquired wealth through political connections, the effect of politically connected wealth inequality is negative, while politically unconnected wealth inequality, income inequality, and initial poverty have no significant effect.

In other words, when billionaires make their money through means other than political connections, the resulting inequality isn’t bad for growth.

That’s a heartening message for defenders of the rich-country status quo. If cronyism is the real danger, it means that a lot of the inequality we’ve seen in recent decades is benign. Eliminate corrupt connections between politicians and businesspeople, and you’ll be safe.

But Bagchi and Svejnar’s finding cuts two ways. It also means that plain old inequality isn’t beneficial for growth, as its defenders have claimed. That removes one of the big objections government policy makers face in talking steps to reduce inequality — and that doing so is unlikely to hurt economic growth.

 

By: Noah Smith, Bloomberg View, Bloomberg Politics, December 24, 2015

December 28, 2015 Posted by | Crony Capitalism, Economic Growth, Economic Inequality | , , , , , , , , | 2 Comments

“Barons Of Broadband”: Extracting Tolls From All Who Pass

Last week’s big business news was the announcement that Comcast, a gigantic provider of cable TV and high-speed Internet service, has reached a deal to acquire Time Warner, which is merely huge. If regulators approve the deal, Comcast will be an overwhelmingly dominant player in the business, with around 30 million subscribers.

So let me ask two questions about the proposed deal. First, why would we even think about letting it go through? Second, when and why did we stop worrying about monopoly power?

On the first question, broadband Internet and cable TV are already highly concentrated industries, with a handful of corporations accounting for most of the customers. Once upon a time antitrust authorities, looking at this situation, would probably have been trying to cut Comcast down to size. Letting it expand would have been unthinkable.

Comcast’s chief executive says not to worry: “It will not reduce competition in any relevant market because our companies do not overlap or compete with each other. In fact, we do not operate in any of the same ZIP codes.” This is, however, transparently disingenuous. The big concern about making Comcast even bigger isn’t reduced competition for customers in local markets — for one thing, there’s hardly any effective competition at that level anyway. It is that Comcast would have even more power than it already does to dictate terms to the providers of content for its digital pipes — and that its ability to drive tough deals upstream would make it even harder for potential downstream rivals to challenge its local monopolies.

The point is that Comcast perfectly fits the old notion of monopolists as robber barons, so-called by analogy with medieval warlords who perched in their castles overlooking the Rhine, extracting tolls from all who passed. The Time Warner deal would in effect let Comcast strengthen its fortifications, which has to be a bad idea.

Interestingly, one cliché seems to be missing from the boilerplate arguments being deployed on behalf of this deal: I haven’t seen anyone arguing that the deal would promote innovation. Maybe that’s because anyone trying to make that argument would be met with snorts of derision. In fact, a number of experts — like Susan Crawford of Benjamin N. Cardozo School of Law, whose recent book “Captive Audience” bears directly on this case — have argued that the power of giant telecommunication companies has stifled innovation, putting the United States increasingly behind other advanced countries.

And there are good reasons to believe that this isn’t a story about just telecommunications, that monopoly power has become a significant drag on the U.S. economy as a whole.

There used to be a bipartisan consensus in favor of tough antitrust enforcement. During the Reagan years, however, antitrust policy went into eclipse, and ever since measures of monopoly power, like the extent to which sales in any given industry are concentrated in the hands of a few big companies, have been rising fast.

At first, arguments against policing monopoly power pointed to the alleged benefits of mergers in terms of economic efficiency. Later, it became common to assert that the world had changed in ways that made all those old-fashioned concerns about monopoly irrelevant. Aren’t we living in an era of global competition? Doesn’t the creative destruction of new technology constantly tear down old industry giants and create new ones?

The truth, however, is that many goods and especially services aren’t subject to international competition: New Jersey families can’t subscribe to Korean broadband. Meanwhile, creative destruction has been oversold: Microsoft may be an empire in decline, but it’s still enormously profitable thanks to the monopoly position it established decades ago.

Moreover, there’s good reason to believe that monopoly is itself a barrier to innovation. Ms. Crawford argues persuasively that the unchecked power of telecom giants has removed incentives for progress: why upgrade your network or provide better services when your customers have nowhere to go?

And the same phenomenon may be playing an important role in holding back the economy as a whole. One puzzle about recent U.S. experience has been the disconnect between profits and investment. Profits are at a record high as a share of G.D.P., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.

It’s time, in other words, to go back to worrying about monopoly power, which we should have been doing all along. And the first step on the road back from our grand detour on this issue is obvious: Say no to Comcast.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, February 16, 2014

February 18, 2014 Posted by | Cable Companies, Telecommunications | , , , , , , , | Leave a comment

   

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