Last weekend, Donald Trump and Vladimir Putin expressed mutual admiration for each other. But their similarities go deeper. Donald Trump’s lead in the race for the Republican nomination reflects the widespread disenchantment of America’s blue collar families with “politics as usual.” Trump’s followers believe that the professional political class has given us crony capitalism, a captive media, unsustainable debt, foreign Main Street; we should remove them and get America moving again. Russia could be on its way to a Donald Trump moment.
go to Forbes.com
Showing posts with label crony capitalism. Show all posts
Showing posts with label crony capitalism. Show all posts
Tuesday, December 22, 2015
Wednesday, July 18, 2012
What If the Rich Really Gave Back as Obama Wants?
President Obama tells us that the rich should give back to society.
He even knows many wealthy people who want to give back more. (I guess
they can’t until their taxes are raised). We learn from him that the
rich owe their success not to business acumen and risk taking but to
public roads, schools, the courts, food stamps, disability payments,
workplace regulation, and other government services. We even owe the
first rumblings of the internet to DARPA, unfortunately the research arm
of the military-industrial complex. (Or was it Al Gore?). Obama feels
it is only fair that the rich return what the government gave them. What
business could survive without access by public road? Fair is fair,
after all.
What would happen if we, like France’s socialist state, taxed away seventy five percent of earnings above one and a quarter million and high-net-worth business executives with $2.5 million in salary, dividends and rental property pay a marginal rate of 90.5 percent. At such rates, our rich would really be giving back to government what it is due, and perhaps more. Fair is fair.
With so much “going back,” there is little reason to go forward. The “rich” should just cash in their chips, stop building their businesses or starting new ones, pay their high taxes, and live off their wealth, unless that is taxed away too. After all, the government can “invest” their money in Solyndras, Volts, and entitlement programs. As Obama claims, government investment has higher returns than private investment.
If Steve Jobs had paid his fair share back to society after he made his first ten million, Apple today would today be a relatively small company worth less than a billion and employing a thousand or so. It would not be the world’s largest company in market cap, it would not employ 60,400 people worldwide, and we would not have the IPads, IPhones, Apps, and other innovative Jobs products, which improve the quality of lives and raise living standards. Apple shareholders would not hold shares worth a half trillion dollars.
go to forbes.com
What would happen if we, like France’s socialist state, taxed away seventy five percent of earnings above one and a quarter million and high-net-worth business executives with $2.5 million in salary, dividends and rental property pay a marginal rate of 90.5 percent. At such rates, our rich would really be giving back to government what it is due, and perhaps more. Fair is fair.
With so much “going back,” there is little reason to go forward. The “rich” should just cash in their chips, stop building their businesses or starting new ones, pay their high taxes, and live off their wealth, unless that is taxed away too. After all, the government can “invest” their money in Solyndras, Volts, and entitlement programs. As Obama claims, government investment has higher returns than private investment.
If Steve Jobs had paid his fair share back to society after he made his first ten million, Apple today would today be a relatively small company worth less than a billion and employing a thousand or so. It would not be the world’s largest company in market cap, it would not employ 60,400 people worldwide, and we would not have the IPads, IPhones, Apps, and other innovative Jobs products, which improve the quality of lives and raise living standards. Apple shareholders would not hold shares worth a half trillion dollars.
go to forbes.com
Wednesday, November 16, 2011
Berezovsky vs. Abramovich: Insecure Oligarchs Spell Bad Russian Economy
Two Russian oligarchs are battling in a London civil court over the spoils of Russian privatization. One is “in” with the Kremlin. The other is “out.” The one who is “out” played the game of Russian politics and lost. Their case shows that the Kremlin decides whether they can keep their spoils or not. Their testimony reveals why such insecure oligarchs have little incentive to create value. As long as the owners of Russia’s “national champions” have such insecure property rights, Russia cannot be a major player in the world economy, member of the WTO or not.
read the rest
read the rest
Thursday, July 21, 2011
Green Fallout: RFK Jr., Wind, “Sacred Views,” and Deeper Issues
Robert F. Kennedy Jr. opposes Cape Wind’s long-stalled plan to cover 25 square miles of Nantucket Sound with 130 massive steel windmill-turbine towers. Among his objections: Wind-powered electricity costs four times more than cheap hydro power from Canada. Even worse, the windmills obstruct views of the sunrise and sunset “sacred” to Native Americans.
RFK Jr. also complains of political chicanery. He is shocked by crony capitalism, in Massachusetts no less! Regulators, he warns, are striking sweetheart deals behind tax payers and rate payers’ backs. Under the influence of “heavy-handed Cape Wind backers,” Massachusetts regulators are holding up a proposed merger of two electric companies until they agree to buy Cape Wind's power.
RFK Jr’s detractors counter that his real agenda is to preserve unobstructed views from the Kennedy compound not his professed concern about costs or “sacred views.” They also point out that his “ecologically pure” proposal to substitute cheaper Canadian hydro power requires building transmission lines through the “sacred” forests of three states. RFK Jr’s detractors also point out that Cape Wind will only raise average electricity bills by $1.25 per month. They even suggest inconsistency or worse. RFK Jr. lobbies for solar power, which shares the inconveniences of higher costs and voracious land use with wind power.
This amusing tussle among the green elite offers revealing insights and raises a series of questions about the economics and political economy of green electricity.
Question No. 1:
Why did Cape Wind propose to locate 130 steel windmill-turbines in RFK Jr.’s backyard, knowing it would raise the ire of the Kennedys, local fishermen, and tourism interests?
Answer:
Wind power can only be applied in areas that have sustained winds of over 30 miles per hour. In the United States, such areas are located in the Mid West, Northwest, Hawaii, and coastal areas (like Cape Cod). In other words, there are only a few locations suited to wind power. These areas are either already occupied, or are remote, requiring huge investments in infrastructure and transmission. If you must have wind power in New England, off-shore Nantucket is probably your best bet at least that is Cape Wind’s conclusion, not shared by RFK Jr.
Question No. 2:
The most popular internet postings claim that wind power is almost competitive with coal powered electricity. Why are RFK’s cost figures so high for wind-powered electricity?
Answer:
Engineering estimates show that offshore wind power is twice as expensive as onshore wind power. If political mandates or environmentalist pressure dictate the use of wind power in a state like Massachusetts, there are no possible onshore locations. There is no choice but to locate offshore with the associated capital costs and high prices.
Question No. 3:
Why is so much offshore land (25 square miles) land required?
Answer:
An underappreciated fact is the land intensity of wind (and solar) power. Under the best of conditions (Offshore Horns Rev Denmark), it takes 13 square miles to produce one twh of electricity. With such a ratio, it would take more than one third of Germany’s land mass to produce Germany’s annual electricity needs (assuming the impossible that Germany could find enough land with high wind intensity).
Question No. 4:
If the cost differences are so great, how is it that Massachusetts electricity consumers will see only minor hikes in their bills? (I imagine Mass households still will not welcome the $1.25 per month increase).
Answer:
The American Recovery and Reinvestment Act (ARRA) of 2009 provided a cornucopia of benefits and subsidies and continue a long tradition of preferential treatment of green electricity. Among the many benefits is a 2.2 cent subsidy for each kwh produced by wind. Below the surface fester a wide range of other promotions and benefits. These subsidies and benefits transfer costs of wind power from the consumer to the unaware tax payer. The $1.25 price increase, however, confirms the very high price of wind power, despite all the subsidies. Wind power is just a tiny percentage of the total.
Question No. 5:
Are low prices to consumers a good idea?
Answer:
Economics teaches that prices should reflect costs. If wind power is more expensive, the price to consumers should reflect this fact and send proper signals of scarcity to consumers to use less electricity. These direct and hidden subsidies mask the true resource costs of wind power.
Question No. 6:
Is Cape Wind an example of crony capitalism as RFK Jr. claims?
Answer:
Of course. In 2009, the Wind Power Energy Association spent $5 million on lobbying. This figure is trivial in comparison to the lobbying, political influence, and crony capitalism of GE, the major wind turbine manufacturer, and other fat cats of the “Big Wind Complex.” Note that Massachusetts regulators (and probably Washington’s) are also party to the conspiracy. By holding the merger of the two electric-power companies hostage to Cape Wind, they are forcing them to buy green electricity they do not want.
Question No. 7:
Is RFK Jr. being inconsistent or hypocritical?
According to his detractors, RFK Jr. lobbies for solar power, which has all the Cape Wind disadvantages about which he complains. According to the textbook definition, the hypocrite label seems to fit.
Question No 8:
What is the biggest lesson to take away?
Answer:
Everything speaks against the state of Massachusetts as a site for significant wind power generation. Naïve idealists and special interests decided that the state should have wind power generation. The result is high-cost power that adversely affects other activities, such as tourism, fishing, and the unobstructed views from the Kennedy compound. But at least the people of Massachusetts can have a warm and fuzzy feeling that they are saving the planet, G.E. can sell more of its wind turbines, and Cape Wind’s backers can make some big bucks.
Sources:
http://rredc.nrel.gov/wind/pubs/atlas/chp3.html
http://www.europakolloquium.eu/fileadmin/pdfs/EnergieKostenGantefoer.pdf
Robert F. Kennedy JR. “Nantucket's Wind Power Rip-off,” Wall Street Journal, July 18, 2011.
Cape Wind’s Response to Robert F. Kennedy Jr. Op Ed in Wall Street Journal, July 18, 2011. http://www.capewind.org/news1205.htm
Saturday, July 2, 2011
Bank of Moscow Bailout/Takeover: All You Need to Know About Crony Capitalism
Russian bank regulators and state-controlled bank VTB Group announced a $14 billion loan (at half a percent interest) to take effect after VTB boosts its share of Bank of Moscow to 75%. According to regulators, the bailout of Bank of Moscow was needed because it made more than half of its loans to its own businesses, including to a real-estate company of Elena Baturina, the billionaire wife of the recently fired Moscow mayor. No one outside of a narrow circle knew the bank’s loan portfolio because former Mayor Yuri Luzhkov prevented anyone from asking "unwelcome questions." The results shown to investors and the central bank, according to one banking official, were pure fraud."
In an understatement, a bank analyst stated: "We cannot rule out problems in many banks."
Bank of Moscow’s former head expressed surprise (after fleeing to safety abroad) at the size of the state aid to VTF and cited “political motivation’ as the real reason for the takeover and bailout. After all, he conducted Bank of Moscow business like any other bank.
This example shows crony capitalism in action. It is repeated daily in China, Brazil, Kazakhstan, Nigeria, and the majority of countries around the globe. A non-crony banking system is the exception rather than the rule.
Crony banking works as follows: A politician or a politically-connected figure gains control of a bank. The bank makes “friendly loans” at low rates of interest to friends, relatives, connected businesses, and to persons from whom they need business or political favors. The borrowers either earn low returns (after sharing the loan proceeds with the banker) or are unable to repay, at which time they receive another loan. If necessary, the crony bank receives new capital from municipal, state, or national authorities (that is from taxpayers) to continue the Ponzi scheme. All the while, credit worthy businesses sit on the sidelines deprived of loans.
The current round of the Ponzi scheme ends when the politician-banker falls out of favor, is fired, and becomes a convenient scapegoat. At that point, banking officials and politicians express surprise and dismay that such things were going on under their very noses. They bring in new owners, currently in political favor, to start the Ponzi scheme over again. They lend to friends, relatives, and patrons, not to real businesses in real need of finance.
The story is not about Luzhkov and his bank-for-himself-and-friends. It is about how crony capitalism can ruin an economy. In an economy that is starved for capital, crony capitalism directs capital to projects that have low or perhaps no return and most capital ends up in the pockets of cronies. There is no way an economy can grow and raise its standard of living under these circumstances.
Tuesday, April 19, 2011
The Wrong and Dangerous Narrative of Chinese Growth
The following quotations capture what is coming to be called the “Beijing Consensus,” namely the superiority of the Chinese model:
Report of Chinese Academy of Social Sciences:
“China’s success in the past 60 years, especially after the opening-up, has surpassed the achievements of Britain during the Industrial Revolution and the US progress in the 19th century.”
Thomas Friedman (New York Times):
“One party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century.”
George Soros (Speech in Paris):
“The world does need order, and that order needs maintenance. The idea that markets can correct their excesses turned out to be false. Perfect order and global governance are not realistic expectations. However, it is a sad fact that Western democracies provide less successful leadership than China.”
The growing consensus that China’s “socialism with a Chinese face” is superior to the “liberal” American model .is based on three stylized facts: 1) China is the world’s fastest growing economy, 2) China weathered the financial crisis better than others, 3) China is building a better infrastructure Hence the conclusion that the Chinese one-party state makes better economic decisions through an enlightened industrial policy executed by state enterprises.
Any claim that political decision making yields superior economic results must be greeted with natural skepticism. Past praise of Soviet planning, French Planification, and Japanese industrial policy was muted when confronted with long-term results.
If “enlightened” Chinese industrial policy is executed by state enterprises (or “national champions,” as they are called), they should be the engines of growth. Nothing is further from the truth. The state sector has been shrinking and must defend itself against further encroachments by the private sector just to hold its own.
The state sector is shrinking despite two major advantages:
First, Chinese banks, which are state owned, make 96 percent of their loans to state enterprises. Private companies get a miserly four percent. They must turn to informal lenders where they borrow at very high interest rates. China’s state banks have huge portfolios of toxic loans, while the unofficial private lending market prospers. All this against the backdrop of a country that has a gross saving rate of fifty percent.
Second, the private sector has grown despite the obstacles placed in its way by the state. Private companies can be put out of business at any time by authorities who watch over them “with one eye shut and one eye open.” That they continue to prosper and grow is a testament not to industrial policy, but to their ability to survive a hostile state policy. The success of China’s private enterprise is a monument to capitalism, definitely not to state industrial policy.
Chinese growth is accounted for by the private sector which operates outside of (and in spite of) state industrial policy.
State enterprises are estimated to earn a four percent return on capital versus a minimum of 14 percent for registered private companies. China’s inflation makes the state enterprises real rate of return negative! Unregistered private companies earn much more. They continue to grow despite borrowing in unofficial lending markets where the “Wenzhou rate” is at least 18 percent.
State enterprises accounted for almost all of GDP in the mid 1970s. They have now shrunk to some thirty percent. Rapid Chinese growth is therefore due to private companies. The state sector alone would have given China a modest rate of growth.
China, along with other Asian countries (who by the way do not use the Chinese model), emerged from the financial crisis of 2008-2010 less scathed than Western economies.
We forget that business cycles are a part of the free enterprise system. Keynes’ promise to end them did not pan out. One-party states can better promise stability than democratic market economies. Despite their inevitability, every business cycle is heralded as a “failure of capitalism.”
We have already forgotten that the current financial crisis followed upon what economists call “the Great Moderation” – a long period of growth and tranquility from the early 1980s to 2006. Unless we abandon our institutions, we will embark on another extended expansion, and the “failure of capitalism” will again be forgotten.
The worst time to draw conclusions about the superiority of one economic and political system over another is at the end of an economic downturn.
Report of Chinese Academy of Social Sciences:
“China’s success in the past 60 years, especially after the opening-up, has surpassed the achievements of Britain during the Industrial Revolution and the US progress in the 19th century.”
Thomas Friedman (New York Times):
“One party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century.”
George Soros (Speech in Paris):
“The world does need order, and that order needs maintenance. The idea that markets can correct their excesses turned out to be false. Perfect order and global governance are not realistic expectations. However, it is a sad fact that Western democracies provide less successful leadership than China.”
The growing consensus that China’s “socialism with a Chinese face” is superior to the “liberal” American model .is based on three stylized facts: 1) China is the world’s fastest growing economy, 2) China weathered the financial crisis better than others, 3) China is building a better infrastructure Hence the conclusion that the Chinese one-party state makes better economic decisions through an enlightened industrial policy executed by state enterprises.
Any claim that political decision making yields superior economic results must be greeted with natural skepticism. Past praise of Soviet planning, French Planification, and Japanese industrial policy was muted when confronted with long-term results.
If “enlightened” Chinese industrial policy is executed by state enterprises (or “national champions,” as they are called), they should be the engines of growth. Nothing is further from the truth. The state sector has been shrinking and must defend itself against further encroachments by the private sector just to hold its own.
The state sector is shrinking despite two major advantages:
First, Chinese banks, which are state owned, make 96 percent of their loans to state enterprises. Private companies get a miserly four percent. They must turn to informal lenders where they borrow at very high interest rates. China’s state banks have huge portfolios of toxic loans, while the unofficial private lending market prospers. All this against the backdrop of a country that has a gross saving rate of fifty percent.
Second, the private sector has grown despite the obstacles placed in its way by the state. Private companies can be put out of business at any time by authorities who watch over them “with one eye shut and one eye open.” That they continue to prosper and grow is a testament not to industrial policy, but to their ability to survive a hostile state policy. The success of China’s private enterprise is a monument to capitalism, definitely not to state industrial policy.
Chinese growth is accounted for by the private sector which operates outside of (and in spite of) state industrial policy.
State enterprises are estimated to earn a four percent return on capital versus a minimum of 14 percent for registered private companies. China’s inflation makes the state enterprises real rate of return negative! Unregistered private companies earn much more. They continue to grow despite borrowing in unofficial lending markets where the “Wenzhou rate” is at least 18 percent.
State enterprises accounted for almost all of GDP in the mid 1970s. They have now shrunk to some thirty percent. Rapid Chinese growth is therefore due to private companies. The state sector alone would have given China a modest rate of growth.
China, along with other Asian countries (who by the way do not use the Chinese model), emerged from the financial crisis of 2008-2010 less scathed than Western economies.
We forget that business cycles are a part of the free enterprise system. Keynes’ promise to end them did not pan out. One-party states can better promise stability than democratic market economies. Despite their inevitability, every business cycle is heralded as a “failure of capitalism.”
We have already forgotten that the current financial crisis followed upon what economists call “the Great Moderation” – a long period of growth and tranquility from the early 1980s to 2006. Unless we abandon our institutions, we will embark on another extended expansion, and the “failure of capitalism” will again be forgotten.
The worst time to draw conclusions about the superiority of one economic and political system over another is at the end of an economic downturn.
Sunday, February 6, 2011
Obama Does Not Understand Business
As a teacher of comparative economics and textbook author on the subject, I cannot refrain from commenting on President Obama’s unfortunate lack of understanding of business.
Obama’s last weekly address to the nation shows his profound misunderstanding, despite an international consensus as to what determines a good business climate. The various indexes that purport to measure it have one thing in common: A good business climate is one where the government gets out of the way of business. Overregulation, inconsistent application of the rule of law, a heavy tax burden, and insecure property rights reduce business formation, investment, and economic growth. The strong positive correlations between such measures of business climate and economic performance prove this basic fact.
Obama’s pronouncements suggest a quite different understanding: In his mind, a good business climate emanates from public and private alliances, subsidies of progressive business activity, industrial policy, state-directed investment, the “saintly” non-profit sector, and massive infrastructure campaigns. It should be noted that none of President Obama’s “good business climate” measures are included in the existing business climate indexes.
Obama’s stated goal is as American as apple pie: to “make America the best place to do business” In return, businesses should “set up shop here, and hire our workers, and pay decent wages, and invest in the future of this nation. That's their obligation." Contrary to Obama’s assertion, the real obligation of businesses is to make profits for their owners. In pursuing this goal, far sighted businesses will hire, invest and pay decent wages.
Three examples, among many, illustrate the President’s thinking:
The most recent is his vaunted “move to the center” in appointing the “pro business” Jeffrey Immult, the CEO of General Electric, as his chief economic advisor. Immelt and GE exemplify a business whose fortunes hinge on a cozy relationship with government -- aan American version of Crony Capitalism. Notably, he did not appoint a true self-made entrepreneur, who made it on his own without the government.
The second example was the notorious bullying of secured Chrysler creditors – an outright attack on contracts and property rights. The shoving of Chrysler’s creditors to the back of the line helps explain much of the current reluctance to lend.
The third example has been the Obama administration’s conclusion that it was the government’s responsibility to deal with “excessive” executive pay rather than leaving the matter up to shareholder owners, as has always been the case.
It will not be possible to make America the best place to do business in the world with such thinking, but there are few signs, other than some PR forays, that this message has been heard. If such misconceptions continue to shape government policy, the result will be a continued deterioration in the U.S. business climate.
Obama’s last weekly address to the nation shows his profound misunderstanding, despite an international consensus as to what determines a good business climate. The various indexes that purport to measure it have one thing in common: A good business climate is one where the government gets out of the way of business. Overregulation, inconsistent application of the rule of law, a heavy tax burden, and insecure property rights reduce business formation, investment, and economic growth. The strong positive correlations between such measures of business climate and economic performance prove this basic fact.
Obama’s pronouncements suggest a quite different understanding: In his mind, a good business climate emanates from public and private alliances, subsidies of progressive business activity, industrial policy, state-directed investment, the “saintly” non-profit sector, and massive infrastructure campaigns. It should be noted that none of President Obama’s “good business climate” measures are included in the existing business climate indexes.
Obama’s stated goal is as American as apple pie: to “make America the best place to do business” In return, businesses should “set up shop here, and hire our workers, and pay decent wages, and invest in the future of this nation. That's their obligation." Contrary to Obama’s assertion, the real obligation of businesses is to make profits for their owners. In pursuing this goal, far sighted businesses will hire, invest and pay decent wages.
Three examples, among many, illustrate the President’s thinking:
The most recent is his vaunted “move to the center” in appointing the “pro business” Jeffrey Immult, the CEO of General Electric, as his chief economic advisor. Immelt and GE exemplify a business whose fortunes hinge on a cozy relationship with government -- aan American version of Crony Capitalism. Notably, he did not appoint a true self-made entrepreneur, who made it on his own without the government.
The second example was the notorious bullying of secured Chrysler creditors – an outright attack on contracts and property rights. The shoving of Chrysler’s creditors to the back of the line helps explain much of the current reluctance to lend.
The third example has been the Obama administration’s conclusion that it was the government’s responsibility to deal with “excessive” executive pay rather than leaving the matter up to shareholder owners, as has always been the case.
It will not be possible to make America the best place to do business in the world with such thinking, but there are few signs, other than some PR forays, that this message has been heard. If such misconceptions continue to shape government policy, the result will be a continued deterioration in the U.S. business climate.
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