Mike Munger is Taking Public Choice Seriously
2019-11-03 · Guest: Mike Munger (Professor at Duke University) · 51:58
Sustainability of capitalism and the threat of cronyism
Bob Zadek interviews Professor Mike Munger about the sustainability of capitalism and the pervasive threat of cronyism. They discuss how democratic systems incentivize “crony capitalism”—which Bob argues is actually “crony governmentism”—and explore Public Choice theory’s insights into why even moral actors in a market can be forced into rent-seeking behavior.
Topics: Capitalism, Cronyism, Public Choice Theory, Economics, Government Regulation, Subsidies, 1986 Tax Reform Act
Speakers:
- Bob Zadek: Host
- Mike Munger: Professor of Political Science, Economics, and Public Policy at Duke University
- Caller (Dave): Listener
Is Capitalism Sustainable? [00:18]
Bob Zadek: Hello, everyone. Welcome to The Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. We are every Sunday morning, 8:00 AM Pacific Time, always the show of ideas, never, ever once the show of attitude. Thank you so much for listening this Sunday morning, the first day without daylight savings for this year.
This morning’s show has as its question a somewhat frightening one, and the answer is equally frightening, at least to me. The question that our guest has posed is: Is capitalism sustainable? Well, I say to myself, I sure hope so, because we’re doomed without it. And so there is the question, and the answer, which you will learn from our guest this morning, is kind of scary as well—at least tentatively scary.
Professor Mike Munger is a professor of political science, economics, and public policy at Duke University. He is very active in AIER, the American Institute for Economic Research. He’s also a scholar with the Independent Institute, a wonderful think tank in Oakland, California. And Mike has just published the book with, as I said, the title Is Capitalism Sustainable? and we sure hope that it is. Mike wonders, and will share his discussion with you in a moment, whether or not the advent of a phrase which we will discuss—because I question the label—but the phrase is “crony capitalism.” Is crony capitalism the Achilles’ heel in the capitalist free market system, and will crony capitalism weaken, ultimately destroy, capitalism? Mike, welcome to the show this morning.
Mike Munger: It is great to be on the show. And let me say, I think that “tentatively scary” is an excellent band name. Somebody ought to use that.
Bob Zadek: Well, you know, crony capitalism, which is, of course, the title of the book you have just released on Amazon—I will question, if I may, the title. I don’t think the subject of crony capitalism—it’s not crony capitalism. It’s not a weakness of capitalism. It is, in effect, it should be called crony socialism, because crony capitalism involves the immoral, if not illegal, interference of government in the capitalist system. Capitalism, in and of itself, is simply individuals entering into mutually advantageous bargains between themselves. And crony capitalism is the cancer when government interferes with an otherwise free market. So the phrase itself almost gives capitalism what I will call an unfair black eye. But we can have that conversation during the show this morning. Now, Mike, explain to our friends out there the premise of the book, why you ask the question, and what troubles you about the concept and perhaps the label of crony capitalism. First, help our friends out there understand what you mean by the concept—what we all mean by the concept—of crony capitalism.
The Pathology of Cronyism [03:48]
Mike Munger: Well, let me take one step back. For years, I have been a critic of defenders of socialism. And the question that I always ask is: Show me an example of a single socialist nation that has been a success. Because there aren’t any. There are zero examples ever of real socialism succeeding. If I look at Cuba, North Korea, more recently Venezuela, the Soviet Union before it converted to a market system, China before it converted to a market system—they’re all just abject failures.
And my friends say, “Oh, no, that’s not real socialism.” And so when I say, “Look at what happened to Venezuela,” they’ll say, “Well, that’s not real socialism. It’s not the kind of socialism that I mean.” And then I realized one day—and I have to admit I was thunderstruck—that we do the same thing. So let me ask you, Bob: What’s an example of a capitalist country?
Bob Zadek: The best I can do is a—
Mike Munger: There aren’t any. There are no examples of capitalist countries. All of them turn towards what I would call crony capitalism. You said it’s a pathology of socialism. That’s not right. It’s a pathology of democracy. And so in a capitalist system located in a democracy, the temptation for there to be a conspiracy between some—not all, not even most, but some—corporate CEOs and members of the government, both in the bureaucracy and elected officials—the President, senators, members of the House—they find it to their individual advantage, at the expense of the dynamics of the system, to arrange side deals and subsidies. They’re not exactly illegal, but they are clearly immoral. The result is that all capitalist systems tend towards cronyism in a democracy, which means that I am committing, or I have been committing, the same sin that I have decried on the left. Because their idea of socialism is not sustainable. So that’s where the title of the book comes from. Capitalism in a democracy has what seems to be an almost—and I’m saying almost, there’s some hope—but an almost irresistible tendency towards cronyism, towards substituting the profit motive and the making of good products for consumers—stop doing that and find ways to get subsidies, tax protection, protection from foreign products, all of the things that increase your accounting profits but are harmful to the system that capitalism is supposed to serve. That’s what I mean by crony capitalism. And I’m, you know, I’m willing to be corrected. Tell me an example of a capitalist system in a democracy that has not become crony.
Bob Zadek: Well, my point in my thought a second ago directs a response in this way: In any society where there is a government, there are always individuals who would seek to curry favor outside of the economic system. If I am stopped for speeding, and a government agent, a policeman, stops me for speeding, I might be tempted to offer the policeman a bribe. And the policeman might take it. Now, that act of offering the policeman a bribe so that I don’t get a speeding ticket, or bribing a building inspector to approve my building so I can get a certificate of occupancy—that act does not indict an economic system. It simply is a criminal act. It’s like robbery on that level; it’s a felony. It’s a criminal act, but it’s not an example of a weakness in capitalism. It’s just a dishonest player trying to improperly influence and buy a favor from government. So I equate crony capitalism with bribery writ large. And I—
Mike Munger: No, no, no. It’s not illegal. Bribery is illegal. Cronyism is not illegal. It’s just immoral.
Bob Zadek: Actually, we can disagree—
Mike Munger: No, no, no. I agree about that. You’re right about that. The fact that government makes these favors legally available—you have put your finger on the problem. The problem is that government makes these favors legally available. It is a problem of government. You’re absolutely right about that. But why would government not do that? Why would you not expect the government to do that? That really is the heart of the question. So you’ve gone to the heart of the question, Bob. You’ve said the real problem with crony capitalism is that the government—democratic governments in particular—I can give you an example of a capitalist country, Singapore, but it’s not a democracy. So the problem is that democratic governments make these favors available legally. And how can we prevent that?
Defining Public Choice Theory [10:18]
Mike Munger: And I come from a branch of political science—and in fact, the blurb that you guys did for this show today said, “Michael Munger performs Public Choice on Public Choice.” Public Choice is an approach to political science, not to economics, but to political science that says we cannot assume virtue and good action on the part of the state. We have to have rules that prevent bad action even when people who work for the government maybe don’t have a very strong moral sense. So the problem is what you just said: for the policeman not to accept the bribe, for the member of Congress not to accept the campaign contribution, would require good people. And that’s the one thing that Public Choice tells us we cannot assume.
So the problem is—you’ve quickly summarized, I think, the entire argument and come to the nub of the problem. How can we prevent the government—and when I say government, I mean the individual elected officials who operate in their own self-interest. We can’t assume they’re operating like “public servants” (I’m making air quotes, which is great radio). We can’t assume that these public servants have as their first priority service to the public. Their first priority is service to themselves, to benefit their own careers and to pad their own pockets. That’s just the nature of politics. So long as that’s true—
Bob Zadek: And that’s not per se bad.
Mike Munger: But it is in a system where you can offer favors to capitalist companies. That’s when it becomes bad. So it’s the intersection. No, I think people operating in their own self-interest in a system that causes that self-interest to operate for the public good—that’s the institutions we’re trying to devise. That’s not per se bad. Assuming people are going to be altruistic and act for others—that’s the path to destruction. I’m not advocating that. But the point is, there’s a paradox in Public Choice. It seems that, given the argument you correctly made that it’s the government’s fault for offering these favors, Public Choice at once says you can’t assume good people are in the government and we have to have good people or otherwise we’re going to offer these favors to corporations.
Bob Zadek: And so we agree on that. And you’ve used the phrase—the important phrase—Public Choice, which is the subtext of your book. Now, explain—you have kind of—but as a separate paragraph, explain James Buchanan’s Public Choice theory, what it is, and what it was—it was revolutionary at the time, and yet so obvious. So help our friends understand what Public Choice theory is and how it influences the study of political science and economics.
Mike Munger: Well, Public Choice was devised in the late ’50s and early ’60s as a response to then what was mostly in political science a functional theory that, you know, the President serves us this way, the Congress serves us this way. Public Choice said government is not aggregate institutions; what it is is individual people. And those people have their own goals, their own incentives. And as you said before, that’s not bad, that’s just human nature. So the question is: What sort of people does government attract, and how do they react to the incentives that they’re presented with?
So Public Choice is the study of the interaction between rules for choosing and the likely behavior of the very real human beings who occupy those offices. And so it kind of merges psychology, political science, economics. The advantage of Public Choice is that it allows us to look at individuals as people who have their own goals, their own plans and purposes, and then look at—so a big concept in Public Choice is aggregation. What are the aggregate consequences of all these individuals acting according to their self-interest? And you might contrast that with the market. The market is an aggregation process. Everybody operating in their own self-interest—the baker makes bread, the butcher provides meat—we all rely on each other, and if we use the price mechanism, the result is that people acting in their self-interest actually benefit other people. So Public Choice asks the question: Is that true in politics? And the answer, unfortunately, is generally—not always, but generally—no, unless you have good rules.
And in the United States, we got really lucky. The US Constitution, the system that the US Constitution put together with a set of protections for both political and economic rights, was either a work of genius or great good fortune. So the result is, in the United States, we had a set of rules that generally led even politicians acting in their own self-interest to benefit the public interest. But you can’t assume that self-interest and public interest are the same. So that was a long answer, but the simple characterization of Public Choice is: You cannot simply assume that the self-interest of members of the government and the public interest of citizens are identical.
Bob Zadek: And therefore—and Madison, of course, observed that—he tries not to undeify government officials. “If all men were angels, we wouldn’t need laws.” But of course, all men are not angels—and by men, he meant people, of course. And therefore, you have to—you can’t make an assumption that somehow there is something special, there is something in the DNA of people who happen to be employed by the government that makes them more moral, more generous than people in the private sector. It is just a job, and people elect to work in public service because their goals—personal and career and economic—their goals are best satisfied by working for the government. But other than that, they are not self-sacrificing individuals, whether they are teachers or first responders. It is a job, and they have chosen that job because the combination of benefits satisfies them the best.
But if you’re going to assign some lofty motivation to people in the government, then either assign the same goal to people in the private sector, or more accurately, don’t assign that label to either. Just assume it’s all the same—it’s either one job or another job, but individual motivation is identical. There’s nothing special about public servants. And that is, in short, the Public Choice theory. And if we start with that, we start to understand the issue of crony capitalism—which I wince at the title; to me, it’s crony governmentism, not crony capitalism. I don’t want to indict capitalism when it’s not capitalism’s fault, if you will.
The Three Levels of Cronyism [18:00]
Bob Zadek: But now, you have explained in your book the thinking of a CEO of a large corporation and why the CEO might be driven to seek a favor from government, and why the seeking of the favor is actually part of that CEO’s duty. So not only is it not bad, it is his duty to at least seek the favor. And please explain that dynamic to our listeners.
Mike Munger: Right, and that’s the reason that I call it crony capitalism, because I guess I think of it like a virus. So the AIDS virus uses the body’s own defense mechanisms against itself. And so crony capitalism uses capitalism’s own defense mechanisms against itself. And it operates at three levels.
First, suppose that I’m a corporate CEO, and I’m pretty self-interested. I want to make a good living, I want to be able to retire, I would like to get more money, and I want to make my stockholders happy. So I look and I see that it is possible for me to apply for some subsidies. I realize that these subsidies from the government actually don’t have any rational basis. They’re just saying if I pretend that I’m producing something called “green energy”—and I don’t mean to say that real green energy is useless, it’s just that there’s a rent-seeking contest, a contest among people for applications saying we’re going to have a long list of things we’re going to certify that we benefit the environment. The result is we can get an extra million dollars a year, not from consumers who buy our product voluntarily, but from the government who takes money involuntarily from taxpayers and just funnels the money to us because we’ve promised to do something that the government wants. So I’m a corporate CEO, and I realize that it’s actually immoral for me to do this, because it’s not a voluntary exchange. Capitalism’s based on voluntary exchange. If I put something out there for consumers and they buy it, it’s because they want it. If I apply for subsidies from the government and I get them, that money was taken at gunpoint from taxpayers. So the corporate CEO—in a way you couldn’t blame him, because he’s increasing his return and increasing his stock price by doing this legal but immoral thing, which is going to the government, hiring more lobbyists—not more engineers, but hiring more lobbyists—in order to get this subsidy money. Or maybe it’s protection from competition, it’s a patent that has no rational basis. There’s all sorts of things that you can do that you know aren’t producing things for consumers, but do increase my bottom line. It increases what looks like my profit, but it’s not honest profit in the capitalist sense. Okay, that’s level one, that the person themselves might do it.
But suppose—and this happens—the corporate CEO says, “Look, I got into this business in order to make good products and sell them to consumers who want to buy them voluntarily. It would be wrong for me to do that.” So the second level is: My stockholders say, “Well, there were these subsidies you didn’t apply for.” And I say, “Yeah, it would be wrong. That’s not capitalism. That’s cronyism.” And they say, “All right, at the annual meeting, we fire the CEO and hire another CEO.” There’s a competitive market for managers. If you won’t do it, we’ll find someone who will, because it’s legal but immoral. We want to have increased stock prices. All right, that’s level two.
But suppose that even your stockholders say, “You know, that’s just wrong. Yes, we could have a higher rate of return, but we’d rather not. We would rather have the lower rate of return and know that this is a morally conducted business.” So level three is the acquisitions and takeovers market. This is the essence of capitalism, and this is the reason, Bob, I want to argue it’s crony capitalism, because they’re using the internal mechanisms of capitalism itself to attack capitalism. And what happens is, I’m a corporate takeover artist, and I look and I see that this company could be applying for subsidies. They could be applying for protection from competition, but they’re not. Which means that, let’s suppose our stock price is $90 a share. Well, if I were to take over that company and impose new management that does these crony things—applying for subsidies and getting this other kind of protection—the stock price should be $105. Well, that means that I can go to a bank and I can borrow against the $105 that the stock price will be, knowing that it’s only $90 now. I can offer $95 a share. Probably quite a few of the stockholders will sell. I take it over, fire the management, the stock price goes to $105, I pay off my loans and I make a fortune as a corporate raider. I make a fortune. So the reason I think it’s crony capitalism is that this virus of cronyism is using the defense mechanisms of what would normally be the defense mechanisms, which is competition. The competitive market for managers is competition. The mergers and acquisitions market mean that outside people are looking to see if you’re underperforming, if your capital is underperforming. The problem is that it means that even a corporate CEO who is moral, or stockholders who say, “You know, that’s just not right,” it can’t survive. And that’s why capitalism is not sustainable in a capitalist system.
Bob Zadek: Mike, I’m smiling. You can’t hear me smiling, but I’m smiling because you said something in the beginning of that comment you just made. You snuck it by the audience—and I’m smiling, I’m teasing you, of course. And what you said is: You started the discussion by saying the CEO applies for a subsidy which is available. Obviously, the cause of all of this—all of this—is the subsidy was available. If the subsidy wasn’t available, that last comment doesn’t even get off the ground. So it is the distortion starts with the money being available, which is a governmental act. If the money wasn’t available, the series of unhappy events resulting in the corporate takeover never occurs.
Mike Munger: Sure, yes. And the question is: Will a rational government agent make it available?
Bob Zadek: That’s right. And so there it is. So when I say crony capitalism starts with a government shortcoming, your story starts with that. We agree about that at the outset. Good deal. So I say it’s—and we’re going to go to break for only 30 seconds. You commented also that either we got lucky or the drafters of the Constitution were brilliant, or both. And maybe the fortuitous event was The Wealth of Nations was published in 1776. That was almost—you think there’s some external force at work here because it’s so scary that 1776 Wealth of Nations is published and we start a revolution. There’s something magical about that. So we can discuss what the Constitution says about free markets when we come back from our break. This is Bob Zadek. I’m speaking with Professor Mike Munger. Mike has written a series of essays entitled Is Capitalism Sustainable? and the subtopic is Mike is justifiably concerned about the corrosive effect of cronyism on the capitalist system. We’ll be back in 30 short seconds. Lots more to follow. Please stay tuned.
The Price Mechanism and Market Information [27:24]
Bob Zadek: Welcome back to The Bob Zadek Show, the longest-running live libertarian talk radio show in all of radio. This morning we are speaking with Professor Mike Munger. Mike is a professor of political science, economics, and public policy at Duke University. Mike has published a series of books. His most recent book is a collection of essays entitled Is Capitalism Sustainable? Mike worries about cronyism as an infection which will bring down, or at least weaken, capitalism, produce distortions in the marketplace. And capitalism is per se—requires unfettered markets so that individuals can freely trade in voluntary, mutually beneficial exchanges.
Now, Mike, we talked a bit about—or the topic is: Is capitalism sustainable? I have a somewhat different, more perhaps optimistic view. I find capitalism to be somewhat inevitable. There is a cycle, of course, and we are in, I think, a period of American economic history when capitalism is being weakened by movements to give government more and more power over the markets and more control over a market economy. That, I think, is the result simply of almost too much wealth being produced, there being understandable distortions in the market, so-called income inequality—I hate the phrase, it doesn’t tell us anything except the obvious. It’s like saying there is inequality in height of individuals; some people are taller than others, and woe is us, we have to fix that. Well, income inequality is the same thing. Everybody can’t have exactly the same amount unless it’s through legislation, but it can’t happen in the market.
But when the government distorts the market, what it does is it interferes with the key element of a free market system, a capitalist system, which is the price mechanism. And no economy can function without this most important of bits of information, which is: What is the relative value of a good or service versus something else? Imagine how individuals would have an impossibility running their economic lives if they could not tell what the relative value of something is. And isn’t the essential—isn’t it correct to say a free market system is essential simply to provide information about what items are worth relative to another item? And we cannot function—no society can function without that crucial bit of information.
Markets vs. Capitalism [30:38]
Mike Munger: Of course that’s right. But who says we’re going to function? Look at Venezuela. Venezuela was a developed, wealthy nation that used the price mechanism. It was capitalist as can be. And it elected—and it’s a democracy—it elected Hugo Chavez, who said capitalism is not sufficiently considerate of the needs of the people. And the majority voted for that. The result was, first they just started to distort the price mechanism, then they started nationalizing industry. And the result was that they basically have become a third-world country. It’s one of the only examples in history of a developed nation reverting to being a developing nation.
Argentina did something close to the same thing by substituting central planning and price controls for the functioning of a market. In 1900, Argentina was a very wealthy country. So your saying—and you’re right—the market system is essential if we’re going to survive. It’s not obvious to me we’re going to survive. It’s not—let me say this—it’s not obvious in the sense that it’s a given. The rules matter a lot. And when again I keep going back to the Founders, the Founders of the American Republic recognized that the rules really are important and they tried to embed them in a Constitution that’s very difficult to change. But it turns out that over time we’ve changed a lot of the provisions of the US Constitution using the Supreme Court. The Supreme Court has imposed those changes in the period of the ’30s and the ’40s. So yes, markets are essential, but they’re not inevitable.
Bob Zadek: And the reason I say markets are inevitable is because in, of course, in Venezuela, in any centrally planned economy, what happens is the proverbial black market springs up. And the black market is simply society requires a market to determine—to provide goods and services and to determine the price. And a black market is nothing other than a capitalist system within a planned economy. And because a black market always springs up—underground—and because a black market always springs up, that’s why I say that you cannot—you cannot legislate away a market. You can make it illegal, but it doesn’t go away, it just goes underground. It’s like prohibition. You cannot legislate you cannot drink alcohol, you cannot legislate you cannot use marijuana, because society has a natural way of behaving. And the natural way of behaving is for there to be markets, negotiated exchanges between individuals. So the reason I am marginally optimistic is markets inevitably spring up and grow even when they’re suppressed by a government system. That’s the source of my optimism.
Mike Munger: Markets—I agree about markets, but capitalism is not inevitable. Capitalism is a subset of the system. Capitalism is a system where you have open private ownership. So the essential feature of capitalism is liquid capital. And the reason that liquid capital is so important is that the stock ownership form of being able to sell shares of equity in the future prosperity of the company means that we have reasons to look forward. So not just go and buy eggs in the black market today—I agree markets work for that. Capitalism requires that we have an actual legal system that defines the ownership and exchange of equity shares in corporations. And I don’t think that’s inevitable. Venezuela has destroyed that. I’m worried that we’re going to by having basically public management of corporations. So some of the Democratic candidates want to have all sorts of other representatives on the board of directors. And if people vote for that, the problem in a democracy is if we vote for that, it’s going to happen even though it’s not part of the logic for capitalism. The counter-argument to my claim might be: Look at China. China for a very long time was poor. And then they switched to markets. Not to capitalism yet—China does not have the stock ownership form, they don’t have equity shares of these corporations. But they do have markets, and the result has been the greatest increase in prosperity the world has ever known. The poverty rate in China, defined in an absolute sense, has gone from 70% to less than 10%. So the greatest market success story that I think we’ve ever seen is China. And so maybe markets are inevitable. Maybe I’m being too pessimistic.
A CEO Against Subsidies [35:49]
Bob Zadek: We have a caller on hold. I always like to try to take callers if I can. Dave, welcome to the show this morning. What’s on your mind?
Caller (Dave): Well, I just wanted to agree with your guest and give an example of something he discussed earlier. Over 30 years ago, I was chief economist for an oil company, and together with the CEO, we penned an order for all people in the company that required they got the CEO’s permission to accept any government subsidy on any program or any investment. And we did it.
Mike Munger: Wow.
Caller (Dave): I know you say “wow.” Because as a matter of fact, the only other time I’ve called was when you were the speaker.
Mike Munger: Well, that’s a great example. It is possible, particularly for a small, closely-held company. It is possible because then if you have the—if the CEO or the management group also controls a substantial part of the stock, then it may be possible. But the genius of capitalism is to share broadly—and I mean literally share broadly—all the ownership of this equity. And so that’s the reason that I think many large corporations are more susceptible. But isn’t it interesting that 30 years ago, when this was not, I think, nearly as big a problem, a CEO would recognize this tendency—that the accepting of bribes is going to change the nature of our company. Dave, that’s just a fantastic example.
Bob Zadek: Dave, thanks so much for your comments. We sure appreciate your thoughts, sharing the story, and for your being a listener to our show. We really appreciate it.
The Constitution and Economic Power [37:31]
Bob Zadek: Now, Mike, your comment on the Constitution is quite interesting because I would like to remind our listeners that the Constitution says nothing about free markets, nothing about capitalism, nothing about any economic system whatsoever. What it does say—what it does say—is that the government cannot interfere with private contracts. It cannot pass a law to abridge a contract, which is the sanctity of a contract, which is a property right. The Constitution as originally drafted gives the government enumerated powers—it’s kind of quaint today, but that’s the way it started in 1789—where the government could only do—the federal government could only do limited, limited governmental activities. And it could do very little in economics other than keep interstate commerce—commerce between the states—regular. It could regulate it, which meant keep it regular. And the government, as Madison observed, had only limited powers. Therefore, there was no need to worry about free markets because the government was never given the power to mess with the markets in any event.
And as Mike correctly pointed out under the Public Choice theory, people who work in government—they are drawn to, among other things, the fact that in government you are given lawful power over others. You have power over others. So the people who work in government under the Public Choice theory are drawn to that as one of the appealing aspects of that occupation. Well, those who are in power—it is human nature, not because you’re venal, it is human nature—if you enjoy having power, you like more of it. It’s a bit of an intoxicant, and you seek to acquire more power.
Mike Munger: I don’t think you have to go even there. It’s not just an intoxicant. Many people go into government because there’s something they want to accomplish. And suppose I really care about the homeless. And you’re saying, “Yes, but you don’t have the power to do that. You don’t have the power to do this really good thing you want to accomplish.” So even if it’s not an intoxicant, you’re telling me there’s this thing that if I could just get more power, I could do this important thing that I want to accomplish. And so I think people who work for government often find the Constitution very frustrating because it says you lack the power to do this thing that you really care about. And this is true of people on the left and the right. So it is an intoxicant—you become addicted to it—but it’s also because you want to be able to accomplish things. And the problem is that if you have the power to do what you want, you have the power to do other things too. And once the scope of the power of the state is increased, all of us, I think, are going to agree, “No, we never meant that. We didn’t mean for you to have that power.” But this slow accretion over time of the powers of the state has resulted in—partly an intoxicant, but partly a sense, since Roosevelt, since the 1930s and the Great Depression, we have come to expect more from government. And these are things the government can’t actually do. They can’t protect us from risk, they can’t make sure that everyone’s employed, they can’t make sure there’s no hurricanes, for heaven’s sakes. But we have this idea that we should increase the power of the government because it will be used for good. So the power thing is, again, you have put your finger on the core of the problem. This desire for power is partly because people who want to work for government think that they will use it responsibly and they’ll use it for good. And that’s just not true.
Bob Zadek: And one characteristic I have found is the Constitution becomes really inconvenient when you have that mindset. And when people see the Constitution as an inconvenience, it scares the bejesus out of me.
Mike Munger: The Second Amendment—there are so many people who just think that Second Amendment is so inconvenient, we should ignore it. Well, I tell my friends on the left, if you can ignore parts of it, I’m afraid we’re going to ignore all of it. And if that’s true, then we’re sunk. We have to take the words of the Constitution seriously. So you can’t say in the Second Amendment that those words don’t mean anything unless you also think the First, Fourth, and Fifth Amendments can be ignored.
The Sugar Subsidy and the Virus of Cronyism [42:35]
Bob Zadek: And as you point out in your series of essays, and you use, I think, the correct metaphor of a virus, and what happens is once the floodgates are opened, as you point out, once one enterprise, one economic activity is given a benefit, then every other competing activity is in catch-up mode and they desperately need their own benefit to stay even. And you give lots of examples. One of the most—it makes me so angry I can’t even talk about it—which you mention is the sugar subsidies and agricultural subsidies in general, and the distorting effect it has on the market and how harmful that is to consumers. Explain that to our listeners if you would, Mike.
Mike Munger: Well, the sugar industry was concentrated in the state of Florida, and it’s relatively inexpensive to get protection from the Caribbean nations that also grow sugar. And so Senator Aldrich, who was not from Florida—Senator Aldrich was from a northeastern state, I think it was New York or Connecticut—kept putting in provisions. The Republicans were in favor of big increases in tariffs from about 1890 on. The Republicans were the party of the tariffs in Congress. And so between 1900 and 1920, the sugar industry managed to get a large number of tariffs and quotas—that is, protection from foreign sugar. Now, you can make a national defense argument for this, I suppose, that soldiers need to have sugar, we need to have a secure source for sugar, but it’s hard to say that without laughing.
The result is—and what’s interesting is when you play this out—the result is that a lot of the diabetes crisis in the United States is a consequence of Senator Aldrich getting protections for the sugar industry. So sugar in the United States is somewhere between 30 and 50% more expensive than it is in the rest of the world. The result is that we use sugar beets and corn—high-fructose corn syrup—far more than other countries do, which means that high-fructose corn syrup has a very high glycemic index for the same sweetness. So if you use products that would otherwise have sugar if we had world prices, if the sugar market were open, then we wouldn’t be using so much high-fructose corn syrup. The result would be much healthier products and probably a substantial decline in the extent and severity of diabetes. So you said it’s a virus. In this case, there’s literally health consequences. Once you protect one industry, then you have to end up spending more about healthcare for diabetes for poor people. So it metastasizes. The problem spreads out and you’re constantly pursuing new regulatory remedies to a problem that wouldn’t have happened in the first place—none of this would have happened if you hadn’t had the crony business to begin with. So we’re always playing catch-up, we’re always imposing new regulations, we’re always adding new subsidies, but it’s always because we started doing this in the first place. So the ripples still spreading out from the fact that we had a relatively minor protection for the sugar industry in the 1920s is something we’re still—the consequences of that is something we’re still paying for.
Bob Zadek: Each of these incidents of successful cronyism begets other incidents, and we have the government distorting the marketplace, which means lots of goods and services are selling at a price which is above their relative value.
Mike Munger: Or below. I mean, in some cases it can be below. The point is you’re right, it’s different. Some of them are above their correct price in terms of opportunity cost, some of them are much below. So the electric cars are actually pretty expensive. Those batteries are pretty expensive. It’s not clear they really save much because some people call them “coal-powered cars” because the electricity system, much of it is still from coal-powered electric generating facilities. So we have some prices that are too low and some prices that are too high. And you can’t say one or the other of those is worse. It’s distortions from the market price that reflect the opportunity cost of that resource. It means that people use too much or too little. And there’s hundreds of examples like sugar or like the subsidy of electric cars. If these things are going to compete in the marketplace, they have to do it on their own merits, not because we’ve decided to subsidize some or to put taxes on others. The government is terrible at choosing winners and losers, but that’s the position that we’ve put the government in: to say you decide what to subsidize, you decide what to tax, instead of letting the market system let prices find their own level.
Lessons from the 1986 Tax Reform Act [48:07]
Bob Zadek: The harm to all of us is we have innovation when capital is directed to where it can produce the greatest good to the greatest number of people and fulfill a need. And once capitalism doesn’t know where to go—once capital doesn’t know where to go—because of market distortions, then bad capital investment decisions are made. Innovation is not destroyed, but is limited, becomes impaired, and economic growth for all of us is interfered with. So the real harm, while it’s scandalous and sinful for the government to pick winners and losers, when they do it badly—and they know they’re doing it badly, it’s not the goal to build innovation, the goal is to satisfy a specific need—then growth, economic growth for the entire country, the entire world, is impaired.
And that’s why this is such an important topic. Now, Mike, we have only a few minutes. It was really interesting to me when you explained the relevance of the Reagan 1986 tax cuts and how that was a giant step backward against cronyism and what it took to achieve that, because that’s what it’s going to take going forward to get us back on track. Let’s end with your discussion, if you will, of what the lesson is from the Reagan 1986 tax cuts.
Mike Munger: Well, to be full disclosure, I was a Reagan revolutionary myself. In 1984, I was working at the US Federal Trade Commission. I was working for Wendy Gramm, Phil Gramm’s wife, the senator from Texas. And we were trying to figure out a new set of rules. We were going to have economic growth because we were going to unshackle the dynamism of the economy. And one of the things that Reagan had said from the beginning was that tax cuts would unleash a new era of increased productivity. But there’s a lot of opposition to tax cuts, and I think the tax cuts—and for some reason, because we were worried about deficits. Now we no longer are worried about deficits, since the deficit that we’ve had under the last three presidents have increased so much. But at the time, we were worried about deficits.
So in 1986, a group of forces came together, and I think there is some hope for us to look at this as a model, where people said we can cut taxes, but we need to do it in a way that will not increase the deficit very much. So is there a way we can increase the efficiency of the economy? The distorting effect of the deductions, the tax deductions, would offset the tax increases. And so the members of Congress came together, led by the committee chairs in both the House and the Senate, and we said, “All right, we’re going to cut the deductions,” which is going to hurt some people. “We’re going to cut taxes,” that’s going to offset the cuts in deductions. Everybody’s going to take a hit, but everybody’s also going to get a benefit. And so this one bill that could not be amended—all of us said—
Bob Zadek: Mike, I’m sorry to interrupt. We have about 30 seconds left. I’m sorry, and I just want to have you make the point about the cooperation. Everybody gave up something, and that was what it took.
Mike Munger: Everybody gave up something, and we all benefited enormously. That was the point that you taught me when we spoke.
Bob Zadek: Mike, I’m sorry to interrupt, we’re going to be cut off. I just wanted to make the point that everybody gave up something, and we all benefited enormously. That was the point that you taught me when we spoke. This is Bob Zadek saying thank you so much to Mike Munger for an hour of his time this morning and to all of my listeners out there. I’ll be back again next Sunday. See you then.