In the presidential race, it’s striking to note that the Republican and Democratic candidates’ campaigns contain only vague echoes of the two significant popular movements of the last few years: the “tea party"and Occupy Wall Street. In an attempt to tap some of the political momentum behind these movements, each party has pushed the idea most amenable to its base: the tea party’s anti-tax stand for Republicans; Occupy’s soak-the-rich attitude for Democrats. Yet both parties ignore what unites the two movements: their fundamentally anti-elite, anti-establishment attitude.
The tea party and the Occupy movement both arose in response to pervasive frustration. As we’ve grown accustomed to hearing in recent years, Americans are angry. They’re angry at bankers, who helped cause the financial crisis but paid no price for it. They’re angry at Washington, which blamed the bankers but deserved as much blame, if not more, for failing to rein them in. And they’re angry at an economy that seems to enrich the wealthy while leaving most everyone else standing still or falling behind.
This anger manifests itself in a strong anti-elite bias and a determination to resist an oppressive leviathan — though the monster takes different forms in the two movements. For the tea party, it’s the federal government in Washington; for Occupy, it’s bailout-addicted big business.
The difference is more apparent than real. The problem is not big business per se but monopolistic and politically powerful business. It is not government per se but intrusive and corrupt government. Is Fannie Mae inefficient, for example, because it is a large monopolistic company or because it is a state-sponsored enterprise? The answer is both.
Does the blame lie with the government or with the private sector? Neither. Their failures are the result of an increasingly corrupt system of crony capitalism, in which businesses succeed not through competitive merit but through government connections and favoritism such as tax breaks, subsidies and other preferential treatment.
For many people, the way big banks escaped the financial crisis with their profits intact (and often enhanced) epitomized American-style crony capitalism. Neither party has had the courage to confront it, for fear of losing campaign contributions and political power.
What would meaningful reform entail? The first step would be an elimination of all tax deductions and loopholes. Many of them have some justification, but their existence creates the incentive to lobby for more.
Because cronyism thrives in opacity and complexity, the second step would be to require that new regulations be so simple that even members of Congress could understand them. In a perfect world, legislators should be required to take a test on the content of a law before they can vote for it. This requirement would promote more competent representatives, and it would also produce simpler legislation more sensitive to people’s needs and not to the wishes of politically powerful corporations, which hire armies of lobbyists to distort laws in their favor.
What is also needed and has been shown to work is for every piece of legislation to contain a metric against which its effectiveness could be measured, so that any regulation that doesn’t achieve the stated objective can be abolished.
To prevent undue influence on the political process, lobbying and campaign contributions should be taxed progressively. I’m not a legal scholar, but as freedom of enterprise doesn’t prevent taxes on business, why should the 1st Amendment prevent taxes on lobbying?
The battle against crony capitalism is foremost a battle against anti-competitive, monopolistic corporations. Antitrust regulation should thus be extended to the political consequences of mergers. When companies become disproportionately big, they become disproportionately powerful, and as we have seen, their influence distorts the political system.
In no sector is this truer than in finance, where consolidation has made banks “too big to fail” and too powerful to combat. A reinstitution of the separation between commercial and investment banking, along the lines of the old Glass-Steagall Act (repealed in 1999), would help contain this excessive power.
It’s worth keeping in mind that the patriots who threw English tea into Boston Harbor in 1773 were not revolting against higher taxes (the Tea Act, in fact, lowered the price of tea legally imported in America) but against the privileges granted to the British East India Co.. The American Revolution was a battle for political rights, but it was also a battle for economic freedom — and against an 18th century form of crony capitalism.
Corrupt arrangements of this kind have unfortunately endured to the present day, and their abuses finally sparked protest movements from the right and the left. The two political parties ignore these movements at their peril.
Luigi Zingales is a professor at the University of Chicago Booth School of Business and a contributing editor to City Journal. His new book is “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity.”