Cronyism Causes the Worst Kind of Inequality

liberty cc c2c cc

This is one of the main points we try to make. Entrench cronies in an ever expanding and controlling government and watch opportunity diminish, the economy stagnate, and people lose hope.

Economies need to be free to create opportunity. Managed economies relegate people to economic castes. Still, some people do not understand this. They truly believe that increased government intervention in the economy is somehow good for people in general. They are very wrong. They are tragically wrong. But coming to accept something which is anathema to one’s belief system is a tall order.

But it does happen. We do what we can day in and day out.

(From Bloomberg)

But there might also be other factors contributing to the correlation between inequality and growth. It could be that there is something out there that causes both high inequality and low growth at the same time.

The obvious candidate for this dark force is crony capitalism. When a country succumbs to cronyism, friends of the rulers are able to appropriate large amounts of wealth for themselves — for example, by being awarded government-protected monopolies over certain markets, as in Russia after the fall of communism. That will obviously lead to inequality of income and wealth. It will also make the economy inefficient, since money is flowing to unproductive cronies. Cronyism may also reduce growth by allowing the wealthy to exert greater influence on political policy, creating inefficient subsidies for themselves and unfair penalties for their rivals…

…[W]hen we control for the fact that some billionaires acquired wealth through political connections, the effect of politically connected wealth inequality is negative, while politically unconnected wealth inequality, income inequality, and initial poverty have no significant effect.

In other words, when billionaires make their money through means other than political connections, the resulting inequality isn’t bad for growth.

Click here for the article.