The underlying issue is crony-capitalism

An interesting piece in The Economist, The party winds down. A couple of years ago they attempted to create a crony-capitalism index.

Behind the crony index is the idea that some industries are prone to “rent seeking”. This is the term economists use when the owners of an input of production—land, labour, machines, capital—extract more profit than they would get in a competitive market. Cartels, monopolies and lobbying are common ways to extract rents. Industries that are vulnerable often involve a lot of interaction with the state, or are licensed by it: for example telecoms, natural resources, real estate, construction and defence. (For a full list of the industries we include, see article.) Rent-seeking can involve corruption, but very often it is legal.

Our index builds on work by Ruchir Sharma of Morgan Stanley Investment Management and Aditi Gandhi and Michael Walton of Delhi’s Centre for Policy Research, among others. It uses data on billionaires’ fortunes from rankings by Forbes. We label each billionaire as a crony or not, based on the industry in which he is most active. We compare countries’ total crony wealth to their GDP. We show results for 22 economies: the five largest rich ones, the ten biggest emerging ones for which reliable data are available and a selection of other countries where cronyism is a problem (see chart 3). The index does not attempt to capture petty graft, for example bribes for expediting forms or avoiding traffic penalties, which is endemic in many countries.

The attempted index is an extremely crude proxy for crony-capitalism and only has value as a catalyst to create a better index and in comparison to the non-existent alternative indices.

According to the current version, world crony-capitalism is declining and the USA has a comparatively low crony-capitalism problem. I respect The Economist for its effort but I think their index hides the magnitude of the problem.

Wall Street continues to be controversial in America but its tycoons feature more prominently in populist politicians’ stump speeches than in the billionaire rankings. We classify deposit-taking banking as a crony industry because of its implicit state guarantee, but if we lumped in hedge-fund billionaires and other financiers, too, the share of American billionaire wealth from crony industries would rise from 14% to 28%. George Soros, by far the richest man in the hedge-fund game, is worth the same as Phil Knight, a relative unknown who sells Nike training shoes. Mr Soros’s fortune is only a third as large as the technology derived fortune of Bill Gates.

So one of the most regulated industries, finance, which, in combination with and on behest of government policy, created the circumstances leading to the Great Recession of 2007, is not included as a crony industry. That seems a pretty major omission.

Likewise with technology.

The final reason for vigilance is technology. In our index we assume that the industry is relatively free of government involvement, and thus less susceptible to rent-seeking. But that assumption is being tested. Alphabet, the parent company of Google, has become one of the biggest lobbyists in Washington and is in constant negotiations in Europe over anti-trust rules and tax. Uber has regulatory tussles all over the world. Jack Ma, the boss of Alibaba, a Chinese e-commerce giant, is protected by the state from foreign competition, and now owes much of his wealth to his stake in Ant Financial, an affiliated payments firm worth $60 billion, whose biggest outside investors are China’s sovereign wealth and social security funds.

If technology were to be classified as a crony industry, rent-seeking wealth would be higher and rising steadily in the Western world. Whether technology evolves in this direction remains to be seen. But one thing is for sure. Cronies, like capitalism itself, will adapt.

Technology is not a rent-seeking industry? The 427 weekly visits of Google executives to White House over the past seven years along with the dozens of executives joining the federal government and even larger numbers of federal regulators gaining jobs with Google would suggest otherwise. Combine that with the fact the the technology titans Facebook and Google have both conducted projects to determine the extent to which they can use their algorithms to affect customer preferences and it suggests that there are in fact good reasons to consider the technology industry a crony capitalist reserve.

We know from the article that including the finance industry would raise the percentage of billionaires who had made their fortune in industries subject to rent seeking from 14% to 28%. Imagine what that number might be if you were to include technology. 40%? 50%?

I think The Economist should be lauded for attempting to quantify the difficult issue of crony-capitalism but that their initial efforts shed light on the fact that the problem is much larger than is being acknowledged, for the USA and all other countries.

I believe that the record high unfavorables ratings for Clinton and Trump are related to the fact that both are long established crony capitalists whose achievements (meager in the former case and questionable in the latter's) are entirely due to the fact that their records are besmirched with many and well documented instances of insider dealing and crony-capitalism. I also think this is why the media have done such a poor job reporting on this election cycle. They live in the interior of the rent seeking enabling political establishment, and like fish with water and humans with air, are little aware of the essence of their immediate environment.

They are astonished that so many people hate political establishment candidate Clinton for her incapacity to the tell the truth and her constant financial self-advancement through political favors. They are even more astonished by the fact that a political outsider like Trump, the very off-spring of a crony capitalism, could con so many people into believing that he is anything but the same as Clinton but without the political insider experience.

I think the mainstream media are blinded by their own blinkers. No one believes that either Clinton or Trump is anything but a crony-capitalist, always seeking to advance their own interests through the power of the state and at the expense of ordinary citizens. The only difference is that Clinton's track record in that regard is entirely well-established when it comes to politics. Trumps's track record is only established in regards to private commerce. There is a remote chance that he won't be a political crony-capitalist if given the chance.

That remains to be seen. The underlying issue is crony-capitalism and the unwillingness of the establishment - Big Business, Big Government, Big Media, and Big Labor - to either acknowledge the issue or address it.