The Pathology of Privilege: The Consequences of Government Favoritism
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Matthew MitchellSenior Research Fellow
THE PATHOLOGY OF PRIVILEGETHE CONSEQUENCES OF GOVERNMENT FAVORITISM
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GROWTH
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52 Separate Studies of Economic Freedom
& GrowthDoucouliagos and
Uhubasoglu:
Regardless of the sample of countries, the measure of economic freedom and the
level of aggregation, there is a solid finding of a direct positive association between
economic freedom and growth.
“
”Doucouliagos, Chris and Mehmet Ali Ulubasoglu, “Economic Freedom and Economic Growth: Does Specification Make a Difference?” European Journal of Political Economy, Vol. 22 (2006): 60-81.
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WHY SO LITTLE FREEDOM?
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IDEAS MATTER
SPECIAL INTERESTS MATTER
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“Government must rein in business”
“Government is crushingbusiness”
LEFT RIGHT
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RAISE TAXES? CUT
TAXES?
What did the Tea Act actually do?
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Thursday, September 27, 12
Image by AgnosticPreachersKid
Implicit
$2.25 billion line of credit at the Treasury
Exemption from state and local taxation
Exemption from SEC filing requirements
Lower capital requirements (1/4th)
federal backing Explicit
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Image by AgnosticPreachersKid
Implicit
federal backingExplicit
$224,000,000,000
$336,000,000,000to
in Federal Bailout
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Types of Privilege
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Types of Privilege
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Subsidies
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36 States Require “Certificates of Need”
to Open a Health Facility
Regulations
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Regulations
10 States Require Hair Braiding Licenses
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ExpectedBailouts
Loans at 0.5% Lower Interest than Competitors
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Tax Credits
Sales, Use, Hotel exemptions; Refundable tax credits
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Monopolies
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Loan Guarantees
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Protectionism
2003: Tariffs 8 to 30%
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Non-Competitive Bidding
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THE CONSEQUENCES
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Price
Quantity
Demand
Supply
Price
Quantity
Competitive
Competitive
The value I obtain
Gains From Exchange
The price I pay
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Price
Quantity
Demand
Price
Quantity
ConsumerSurplus
Competitive
Competitive
Supply
Gains From Exchange
The price the seller obtains
The costs she incurs
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Price
Quantity
Demand
Price
Quantity
ConsumerSurplus
ProducerSurplus
Competitive
Competitive
Supply
Gains From Exchange
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Price
Quantity
Demand
Monopolist
ConsumerSurplus
ProducerSurplus
PriceMonopoly
QuantityMonopoly
Dead-Weight Loss
Privileged
Supply
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Price
Quantity
Demand
Supply
Monopolist
ConsumerSurplus
ProducerSurplus
PriceMonopoly
Lazy Higher Costs
X-ineffi
ciency
QuantityMonopoly
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Price
Quantity
Demand
Monopolist
ConsumerSurplus
ProducerSurplus
QuantityMonopoly
Unresponsive
PriceMonopoly
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Price
Quantity
Demand
Monopolist
ConsumerSurplus
QuantityMonopoly
Rent-Seeking
PriceMonopoly
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Misallocation of TalentBaumol (1990)
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Images by scottchan and Michael Marcol
Murphy, Shleifer and Vishney (1991)
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13%
87%
Share of 1955 Fortune 500 Firms
Still on the List
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CHURN GROWTH
Morck, Yeung, and Fogel (2008)
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CHURN GROWTH
Morck, Yeung, and Fogel (2008)
SMALL GOVERNMENT
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Thursday, September 27, 12
Undermined Legitimacy of Government and Business
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0
150
300
450
600
$486 - $585 in TARPSupport
$1 in lobbying
Blau, Brough and Thomas (2012)
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Most Important Determinant of Italian Success?
80%
“Knowledge of Influential People”
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What To Do?
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[The First Amendment] ought to read, ‘Congress shall make no law authorizing government to take any discriminatory measures of coercion.’ I think that would make all the other rights unnecessary.
“
”-FA Hayek in interview with James Buchanan, 1978
Generality
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MMitche3@gmu.edu www.Mercatus.orgwww.NeighborhoodEffects.com @MattMitchell80
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THE PATHOLOGY OF PRIVILEGETHE CONSEQUENCES OF GOVERNMENT FAVORITISM
Thursday, September 27, 12
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