The Pathology of Privilege: The Consequences of Government Favoritism

Matthew MitchellSenior Research Fellow

THE PATHOLOGY OF PRIVILEGETHE CONSEQUENCES OF GOVERNMENT FAVORITISM

Thursday, September 27, 12

GROWTH



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.


WHY SO LITTLE FREEDOM?


IDEAS MATTER

SPECIAL INTERESTS MATTER


“Government must rein in business”

“Government is crushingbusiness”

LEFT RIGHT


RAISE TAXES? CUT

TAXES?

What did the Tea Act actually do?



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


Image by AgnosticPreachersKid

Implicit

federal backingExplicit

$224,000,000,000

$336,000,000,000to

in Federal Bailout


Types of Privilege


Types of Privilege


Subsidies


36 States Require “Certificates of Need”

to Open a Health Facility

Regulations


Regulations

10 States Require Hair Braiding Licenses


ExpectedBailouts

Loans at 0.5% Lower Interest than Competitors


Tax Credits

Sales, Use, Hotel exemptions; Refundable tax credits


Monopolies


Loan Guarantees


Protectionism

2003: Tariffs 8 to 30%


Non-Competitive Bidding


THE CONSEQUENCES


Price

Quantity

Demand

Supply

Price

Quantity

Competitive

Competitive

The value I obtain

Gains From Exchange

The price I pay


Price

Quantity

Demand

Price

Quantity

ConsumerSurplus

Competitive

Competitive

Supply

Gains From Exchange

The price the seller obtains

The costs she incurs


Price

Quantity

Demand

Price

Quantity

ConsumerSurplus

ProducerSurplus

Competitive

Competitive

Supply

Gains From Exchange


Price

Quantity

Demand

Monopolist

ConsumerSurplus

ProducerSurplus

PriceMonopoly

QuantityMonopoly

Dead-Weight Loss

Privileged

Supply


Price

Quantity

Demand

Supply

Monopolist

ConsumerSurplus

ProducerSurplus

PriceMonopoly

Lazy Higher Costs

X-ineffi

ciency

QuantityMonopoly


Price

Quantity

Demand

Monopolist

ConsumerSurplus

ProducerSurplus

QuantityMonopoly

Unresponsive

PriceMonopoly


Price

Quantity

Demand

Monopolist

ConsumerSurplus

QuantityMonopoly

Rent-Seeking

PriceMonopoly


Misallocation of TalentBaumol (1990)


Images by scottchan and Michael Marcol

Murphy, Shleifer and Vishney (1991)


13%

87%

Share of 1955 Fortune 500 Firms

Still on the List


CHURN GROWTH

Morck, Yeung, and Fogel (2008)


CHURN GROWTH

Morck, Yeung, and Fogel (2008)

SMALL GOVERNMENT



Undermined Legitimacy of Government and Business


0

150

300

450

600

$486 - $585 in TARPSupport

$1 in lobbying

Blau, Brough and Thomas (2012)


Most Important Determinant of Italian Success?

80%

“Knowledge of Influential People”


What To Do?


[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


[email protected] www.Mercatus.orgwww.NeighborhoodEffects.com @MattMitchell80

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THE PATHOLOGY OF PRIVILEGETHE CONSEQUENCES OF GOVERNMENT FAVORITISM


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The Pathology of Privilege: The Consequences of Government Favoritism

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