To what extent might such cronyism exacerbate wealth inequality? There are no overall estimates of the costs of cronyism or its effects on inequality, but we can put figures on some items.
Federal farm subsidies cost taxpayers more than $20 billion a year, and the benefits are skewed toward the wealthy.105 The average income of farm households is 40 percent higher than the average of all U.S. households, and 60 percent of farm subsidies go to the largest 10 percent of farm businesses. Even some billionaire landowners receive farm subsidies.106
Federal sugar regulations and trade barriers increase sugar costs for U.S. consumers by up to $4 billion a year.107 U.S. sugar producers gain wealth because the sugar protections give them monopoly power. The Fanjul family of Florida, for example, has built a net worth of about $8 billion in the sugar industry partly off the backs of U.S. consumers who face artificially high prices. To protect their interests, the Fanjuls have maintained close political ties to presidents and members of Congress.108
State occupational licensing reduces job opportunities while raising consumer prices. Licensure boards are often dominated by existing providers who seek to exclude new entrants—classic cronyism. About one‐quarter of Americans work in occupations that require licenses. These rules raise incomes in protected professions but increase costs to U.S. households by about $1,000 annually on average, which is a heavy burden on low‐income families in particular.109
Yale University law professor Jonathan Macey describes these sorts of policies as “wholesale” cronyism.110 In addition, he says there is “retail” cronyism, which involves particular individuals and businesses using connections to unethically gain excess benefits from programs.
Government contracting is rife with retail cronyism. In the recent “Fat Leonard” scandal, for example, Leonard Glenn Francis cozied up to U.S. Navy leaders in the Pacific to win hundreds of millions of dollars in lucrative deals to resupply Navy ships.111 He made large profits by overpricing contracts and submitting fraudulent invoices. Francis had numerous moles inside the Navy steering government contracts his way. He wined and dined Navy officers, providing them with gifts, prostitutes, and other favors to get their help and protection. The scandal exposed “a staggering degree of corruption within the Navy,” concluded a Washington Post investigation.112
The Solyndra scandal was also classic cronyism.113 The Department of Energy (DOE) gave solar panel maker Solyndra a $535 million loan guarantee in 2009. Solyndra was a spendthrift company and its products were uncompetitive. It went bankrupt and closed its doors in 2011 with taxpayers footing the bill for the failed loan.
Why did the DOE give Solyndra a big loan guarantee? Solyndra’s largest investor had ties to billionaire George Kaiser, who was also a major fundraiser for President Barack Obama. The New York Times found that Solyndra “spent nearly $1.8 million on Washington lobbyists, employing six firms with ties to members of Congress and officials of the Obama White House.”114 Similarly, the Washington Post found that the “main players in the Solyndra saga were interconnected in many ways, as investors enjoyed access to the White House and the Energy Department.”115
President Obama visited Solyndra and at a press conference called the firm an “engine of economic growth.”116 At the time, a Solyndra board member wrote to George Kaiser, “The DOE really thinks politically before it thinks economically.”117 The White House pressured the DOE to approve the subsidy, and that appeared to tip the scales.118
As the federal government has grown larger, both wholesale and retail corruption have likely increased, thus contributing to wealth inequality. The larger that subsidies, procurement, and other government spending are, the more likely people will abuse the system and live high on the hog at taxpayer expense.
At the same time, the experts who know how to manipulate the government have prospered. Six of the 10 highest‐income counties in the nation are now suburbs of Washington, DC.119 That wealth is partly driven by highly paid federal government workers but also by the many high‐paid lobbyists and federal contractors who live in the DC region.120
Today, the federal government funds about 2,300 different subsidy programs, more than twice as many as in the 1980s.121 The number of pages of accumulated federal regulations has increased from 55,000 in 1970 to 127,000 in 1990, to 165,000 in 2010, and to 185,000 today.122 The growing volume of programs and regulations provide many ways that lobbyists can twist the rules and gain unfair advantage over consumers and other businesses. Some share of lobbying stems from businesses protesting misguided regulations that in themselves create unfair restrictions, such as various barriers to competitive entry.
People may believe that regulations fix failures in the economy and improve our standard of living. Some do, but many regulations serve narrow private ends and do not improve economic or social outcomes. Economist George Stigler’s celebrated essay “The Theory of Economic Regulation” in 1971 argued that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.”123 By “acquired,” he meant that businesses are able to influence the design of regulations so that they benefit industry incumbents and undermine the broad public interest.
This idea has become known as “regulatory capture.” At the time of Stigler’s writing, heavy regulations on trucking, railroads, and airlines protected businesses from competition and raised prices. The regulatory agency for the railroads was the Interstate Commerce Commission, which Milton Friedman said “started out as an agency to protect the public from exploitation by the railroads” but ended up as “an agency to protect railroads from competition by trucks and other means of transport.”124 Similarly, the Civil Aeronautics Board “managed and enforced a cartel among air carriers” to the detriment of the general public between 1940 and 1978, noted economist James Miller.125
Bipartisan deregulatory efforts in the 1970s and 1980s increased competition in transportation and drove down prices, thus benefiting consumers and likely reducing wealth inequality. Unfortunately, many self‐serving regulations remain in other industries, although the overall harm done by anti‐competitive or crony regulations is difficult to quantify.
A number of studies have compared corruption across countries, so we can get an idea of the relative extent of the U.S. cronyism problem. The United States ranks as the 22nd least corrupt country of 180 countries on Transparency International’s “corruption perceptions index.”126 This index draws from various surveys and expert views on government bribery, misuse of funds, financial disclosure rules, and other measures of clean administration.
The United States ranks 25th least corrupt of 213 countries on the World Bank’s “control of corruption” index.127 And the United States ranks 20th of 126 countries on the World Justice Project’s “Rule of Law” index, which includes measures such as the use of public office for private gain and the number of government officials sanctioned for misconduct.128 Overall, these indexes show that the United States is one of the less corrupt countries but that there is room for improvement.
It is widely recognized that corruption undermines economic growth. Experts agree that rampant corruption in countries such as Russia damages those countries’ economies. The average GDP per capita in the bottom half (most corrupt) of the Transparency International countries in 2017 was $9,300, while the GDP per capita in the top half was $34,400.129 A scatterplot of these corruption ratings and GDP per capita shows a strong relationship across countries.
If the United States took steps to reduce corruption or cronyism, it would likely boost overall income levels by reducing economic distortions. But given that we are one of the less corrupt countries, it seems unlikely that corruption or cronyism is a major driver of U.S. income levels or wealth inequality.
Economists Sutirtha Bagchi and Jan Švejnar investigated the cross‐country relationship between corruption and the type of wealth held by billionaires.130 Using the Forbes list, they separated the billionaires who made their wealth from political connections from those who did not. Let’s call those bad and good billionaires, respectively. Across countries other than the United States, 17 percent of billionaires were bad and 83 percent were good. In the United States, just 1 percent were bad and 99 percent were good.131 Thus, American billionaires overwhelmingly earned their wealth in productive and noncorrupt ways, according to this metric.
Bagchi and Švejnar found that countries with high shares of bad billionaires rank poorly on indexes of corruption—countries such as Malaysia, Indonesia, Thailand, Colombia, and Mexico. By contrast, countries with few politically connected billionaires rank well on corruption indexes—countries such as Britain, Singapore, Sweden, Switzerland, and the United States. The findings indicate that corruption is not related to the amount of top‐end wealth generally but rather to how people at the top made their wealth. Countries should focus on equal treatment and uniform laws so that people gravitate toward productive ways of generating wealth and not unproductive cronyist ways.
Bagchi and Švejnar also compared country shares of good and bad billionaires to economic growth and found that countries with large numbers of bad billionaires experienced weaker economic growth. That result is not surprising because cronyism often entails regulations and subsidies that restrict competition and misdirect investment.
The Economist created its own cross‐country “crony capitalism index.”132 It uses the Forbes list to estimate billionaire wealth in each country obtained from sectors said to be prone to crony capitalism.133 Each billionaire is classified as either crony or not based on the industry they are most active in. The magazine compared its cronyism measure to economic performance and found that billionaire wealth in crony sectors as a share of GDP is about three times higher in low‐income countries than in high‐income countries. Again, cronyism appears to undermine economic performance.
As with the Bagchi and Švejnar analysis, the United States scored quite well on The Economist’s index. In 2016, it had crony billionaire wealth of 1.8 percent of GDP, which was the seventh least corrupt of 22 countries. In the United States, billionaire wealth earned in crony sectors is only about one‐sixth as large as billionaire wealth earned in non‐crony sectors.
The Economist argues, “Over two decades, crony fortunes leapt relative to global GDP and as a share of total billionaire wealth.”134 If true, that may help explain changes in wealth distribution in some countries that have high levels of cronyism, such as Russia. It is less relevant in countries that have lower levels of corruption, such as the United States.
With all this in mind, the mistake made by politicians such as Senators Sanders and Warren is to imply that most fortunes owned by America’s wealthy are ill‐gotten. They tend to conflate wealth in general with cronyist wealth. Sanders lambastes all wealth inequality as “obscene” in his speeches.135 Both Sanders and Warren would impose their wealth taxes on every wealthy individual, including entrepreneurs who create innovations that benefit the poor.
Most wealth at the top in the United States is earned in open and competitive industries, not through cronyism. It is true that the government intervenes in many U.S. industries, but most of the profiles on the Forbes list of the wealthiest Americans indicate people who have created value that benefits the general public.
Nonetheless, cronyism is an important problem, which probably does increase wealth inequality to an extent. Surveys show that Americans are concerned about cronyism. According to a recent poll, 67 percent of voters surveyed said they believe that big businesses and government regulators often work together to create rules that are harmful and unfair to consumers.136
So how do we address the problem? Table 1 indicates the types of cronyism that we should target for reform. Our goal should be to allow open competition in every industry so that entrepreneurs can challenge established businesses on a level playing field. Adam Smith stressed the benefits of competition:
All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.137
The public should press policymakers to eliminate the subsidies, regulations, and tax preferences that fuel cronyism. If the government reduced its interventions in the economy, there would be fewer levers for special interests to pull. Interventions often begin with good intentions, but businesses twist and exploit policies to gain unfair advantage. As Adam Smith noted, we should give “most suspicious attention” to intervention schemes that businesses promote.
Cronyism distorts the economy and likely increases wealth inequality. It erodes confidence in government and is rejected by the general public. The problem the nation faces is not wealth inequality per se. Rather, the problem is government policies that protect and subsidize favored businesses and unjustly aid the wealthy.