Still a Bad Thing: How Crony Capitalism Distorts Markets and Harms American Entrepreneurship

Vox’s Jim Tankersley adds some empirical evidence to what should be instinctively obvious and commonsensical: Having politicians bully companies — say, via Twitter — is bad economics. You want companies making decisions based on what will allow them to innovate and expand based on satisfying customers, not on what will keep Washington off their backs. (I wrote a The Week column on this very subject.)

Tankersley:

One big worry is that such aggressive — and unpredictable — presidential intervention can change how corporate leaders think. There’s an argument that this can be good, which my former colleague Steven Pearlstein has made in his Washington Post column: Trump might be blowing up an inefficient norm of American business, one that prizes offshoring production even when it might be better to make things in the United States.

Many economists fear a more troubling likelihood: that companies will focus less on serving their customers and more on keeping the Trump administration happy. Four of them — Tarek Hasssan of the University of Chicago, Stephan Hollander and Laurence van Lent of Tilburg University, and Ahmed Tahoun of London Business School — recently produced a working paper that scoured years of corporate earnings calls to tease out the effects of government-induced risks on corporate behavior. They found that those risks were associated with lower investment and less hiring.

They also found that big companies responded to increased risks by spending more, the following quarter, on lobbying. “You might say that large firms are in a position to manage this risk, by influencing the political process, where small firms aren’t,” Hassan said in an interview. “We need to think about whether we’re comfortable with that.”

If you work for one of those big companies, and that company has managed to stay in the president’s good graces, you’re probably more likely to approve of that approach. It’s trickier for small business owners, and trickier still for any entrepreneur who dreams of disrupting one of the big kids someday. This is a market distortion, where some companies are favored for no economically efficient reason.

Do we really want to give big incumbent companies yet another advantage over startups and smaller rivals?