'The Economist' Misses the Point on Crony Capitalism

'The Economist' Misses the Point on Crony Capitalism

The Economist’s latest cover story warns readers of “The New Age of Crony Capitalism.” The magazine’s editors are to be commended for shining a journalistic light on cronyism’s rise and the corrosive effects of rent-seeking behavior.

The Economist does a fine job of defining rent-seeking as “the difference between what people are paid and what they would have to be paid for their labour, capital, land (or any other inputs into production) to remain in their current use.” The magazine offers a “crony-capitalist index” using Forbes data “to calculate the total wealth of those of the world’s billionaires who are active mainly in rent-heavy industries, and compare that total to world GDP to get a sense of its scale.”

This bizarre methodology suffers numerous limitations (three of which even The Economist recognizes) and misses the broader point of what the oft-used phrase “crony capitalism” even means and why lovers of free markets despise its rise.

At the Government Accountability Institute, we define “cronyism” or “crony capitalism” as those instances when government gives certain companies favorable rules or taxpayer monies others don’t enjoy. The reason we investigate and expose cronyism is that when government gives an unfair advantage to a politically-connected business it ends up undermining true competition, which is the heartbeat of economic freedom.

Put simply, when government picks winners and losers it disrupts free markets, doles out taxpayers’ money in the form of corporate welfare, and sets up incentives for politicians and companies to engage in corruption and kickbacks.

Unfortunately, The Economist‘s index is not constructed to capture the critical moves cronies make. Indeed, a more complete cronyism index would include metrics such as the number of government-backed loans a company or individual has received, subsidies or set-asides, and the number of concessions scored by so-called “offensive” lobbying efforts.

Part of the problem lies in the fact that The Economist has championed things like government-backed green energy initiatives and so-called “public-private partnerships” (PPPs)–the very things that fuel cronyism and corrode true free-market competition. For example, The Economist defends billions provided in subsidies to green energy companies, ignoring the fact that politically connected firms like Solyndra have received the bulk of these cash grants and government backed loans.

The Economist’s crony-capitalism index also isolates business sectors like casinos, oil and gas, and real estate as crony sectors while ignoring things like high-tech, healthcare, and entertainment. By that measure, the magazine concludes that the United States ranks number 17 and China fares even better with an index score of 19. “The total wealth of [American] billionaires is high relative to GDP, but was mostly created in open sectors. Silicon Valley’s wizards are far richer than America’s energy billionaires.”

By not focusing on things like the entertainment industry and Silicon Valley, the index elides critical instances of cronyism, such as President Barack Obama and Vice President Joe Biden’s role in “milking” donations from Hollywood and Silicon Valley during the debates over the Stop Online Piracy Act (SOPA) and the Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act (PIPA). Or what about the $22,471,562 in campaign donations the health sector donated to Obama in 2008? Were those contributions not instrumental in gaining massive crony concessions in Obamacare? Indeed, Obamacare’s enactment has powered the S&P 500 healthcare sector index to an astounding 37.5% gain, “making it the S&P 500’s best-performing sector” in 2013, reports Reuters.

The Economist did its readers a service by elevating cronyism to cover-story status. However, citizens must be clear on what crony capitalism is and what it isn’t. Sadly, the methodology the magazine currently uses to construct its cronyism index misses many of the key variables that drive cronyism. Worse, the magazine’s editorial embrace of government support for green energy and PPPs further undermine its ethos on the issue.

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