Decrying “crony capitalism”

Usually I don’t pay a lot of attention to those who teach the “dismal science”, but this morning’s testimony provided by Russell Roberts, a Professor of Economics at George Mason University, at a House hearing on executive compensation makes for interesting reading.

For example, check this passage out:

The executives at General Motors and Chrysler don’t deserve to make a lot of money. They made bad products that people didn’t want to buy.

The executives on Wall Street don’t deserve to make a lot of money. They were reckless with other people’s money. They made bad bets that didn’t pay off. And they wasted trillions of dollars of precious capital, funneling it into housing instead of health innovation or high mileage cars or a thousand investments more valuable than bigger houses.

Everyday folks who are out of work through no fault of their own want to know why people who made bad decisions not only have a job but a big salary to go with it.

But before you think he’s busting out the populism, Roberts moves the blame to where I think it belongs too:

(W)hat we do here in Washington is rescue big companies and rich people from the consequences of their mistakes. When mistakes don’t cost you anything, you do more of them.

When your teenager drives drunk and wrecks the car, and you keep giving him a do-over— repairing the car and handing him back the keys—he’s going to keep driving drunk. Washington keeps giving the bad banks and Wall Street firms a do-over. Here are the keys. Keep driving. The story always ends with a crash.

Capitalism is a profit and loss system. The profits encourage risk-taking. The losses encourage prudence. Is it a surprise that when the government takes the losses, instead of the investors, that investing gets less prudent? If you always bail out lenders, is it surprising that firms can borrow enormous amounts of money living on the edge of insolvency?

Right on the money, my friend. I don’t know economics like a doctoral candidate in the field, but common sense tells me too that privatizing profit and subsiding loss is going to lead to a lot of bad decisions in the marketplace. The government operates many of its enterprises at a loss, sometimes taking over for private enterprise in the process.

In the health care debate, common sense tells us that placing the government in competition with private enterprise (as in the “public option” – or, as Nancy Pelosi is trying to bill it, the “consumer option”) will eventually drive out the private side. Any entity who is free to operate at a loss in perpetuity can outlast someone who’s acting responsibly to shareholders who expect some sort of return on investment.

All this insight from me, a guy who majored in environmental design. If that argument makes sense to me, why doesn’t it make sense to those people Roberts testfied to – people who are supposed to be the smartest people in the room?

Makes you wonder if they’re working for the people or just out for themselves.

Author: Michael

It's me from my laptop computer.

One thought on “Decrying “crony capitalism””

  1. You’d do well to pay more attention to those who teach the “dismal science,” especially Roberts and his fellow professors at George Mason. Roberts hosts a weekly podcast that is superb, EconTalk. He also contributes to this site: (you can download EconTalk there). Spend some time reading the stuff on that site and you’ll be richly rewarded.

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