Crony capitalism is teaching young entrepreneurs the wrong lessons

by Ryan Streeter on June 7, 2012. Follow Ryan on Twitter.

Luigi Zingales is one of my favorite economists, and his new book on crony capitalism is a must-read. He summarizes the main thesis in his WSJ column today.

Zingales draws parallels between our debt and deficit ratios to Greece and Portugal. Now, there’s a common retort to such parallels that you see a lot in the blogs – namely that the U.S. is a fundamentally different political economy and thus can shoulder greater debt ratios than other countries. People advocating this view point to the bond markets and investor confidence.

While there’s some truth to the claim that the U.S. is different on this front, Zingales makes a strong case that overall political and economic behavior has the U.S. following Europe more and more, rather than differentiating itself.

Increasingly, political connections matter more. Our fastest-growing economic sectors – health care and education – are not free markets but in fact the markets with the most government control and interference.

But I’ve always thought the geography of this problem is the best way to highlight how America has changed. Zingales writes:

The U.S. tax code is filled with loopholes and special exemptions. Political connections increasingly count more than innovative ideas; young entrepreneurs often learn to lobby before they learn how to run a business. Seven out of the 10 richest counties in the U.S. are in the suburbs of Washington, D.C., which produces little except rules and regulations (emphasis added).

It’s easy to miss the significance of this while living in Washington, as I did for nearly seven years. Your friends seem normal. People deal with all the normal issues of life like diapers and where to move to get their kids in good schools. There are lots of good, unpretentious people working in the nation’s capital. There’s a healthy church community, people are civically involved. And so on.

Because of the normalcy of life there, it’s easy for people living out there to miss how utterly different it is as a region than everywhere else, particularly when it comes to the growing significance of its political culture on the economy. And as a result, “the way things are done” in Washington seems normal, which now includes the perpetuation of the crony capitalism that Zingales writes about.

This is one of the bigger issues facing today’s rising generation that I find most troubling. The idea that economic advancement needs a healthy dose of political patronage to work is how they’ve been doing it in Italy for years, with disastrous results.