James Pethokoukis offers that disturbing phrase in a recent American Enterprise Institute blog entry about the role of cronyism in American companies’ profits.
It’s one thing when a company generates profits from creating value. That’s a beautiful thing. But how about when the profit comes from manipulating the political system? If that latter situation is commonplace, then rising profits might show something is deeply wrong with an economy.
Such a situation could, as James Bessen writes in Harvard Business Review, “represent a decline in competition and, with that, a decline in economic dynamism. While a dynamic, competitive economy rewards innovative firms with high profits and punishes poor performers with low profits, sustained aggregate profits suggest, instead, that firms are able to get away with higher prices because competition is limited. Firms engage in political ‘rent seeking’—lobbying for regulations that provide them sheltered markets—rather than competing on innovation. If so, then high profits portend diminished productivity growth.”
Pethokoukis offers an extended quote from Bessen:
I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.
Bessen goes on to note how regulation can help incumbent firms by raising entry barriers for prospective competitors. Indeed, he notes that over “the last 15 years, political campaign spending by firm PACs has increased more than thirty-fold and the Regdata index of regulation has increased by nearly 50% for public firms.” That is hardly a recipe for economic dynamism. …
… This is just one analysis, but it certainly provides reason to ponder to what extent the US economy is suffering calcification by cronyism.
