Thousands of Occupy Wall Street protesters were camped out in New York and other cities across the country one year ago. Their central complaint was that crony capitalism benefited the wealthy at the expense of the poor. Unfortunately, a year later, it appears that cronyism is on the rise while capitalism is waning in America. The election illustrates this point. Both presidential candidates talked about getting tough on China in their recent debate. They play to popular misguided fears about international trade while any getting tough means creating regulations that will benefit particular U.S. companies that compete with Chinese imports at the expense of consumers.
Government bailouts and subsidies enrich established economic interest groups at the expense of society. The protesters were right to oppose TARP and Fed-engineered subsidies to big banks and financial firms. Unfortunately they were all too silent when it came to green energy subsidies like Solyndra received.
Whether subsidies go to financial firms, green energy, or big oil, they all distort the competitive process and promote cronyism. Market prices signal to entrepreneurs when they can create value for society. Government subsidies distort that price signal and misdirect entrepreneurship. They also encourage entrepreneurs to spend their time lobbying congress rather than inventing better mousetraps.
When subsides come in the form of bailouts, whether to GM or a bank, they promote reckless behavior in the future. Capitalism only works well when it is a profit and loss system. If the pain of losses is taken away, entrepreneurs take excessive risks. Heads they win, tails and the taxpayer loses is a bad bet for everyone not on the dole.
Unfortunately, the occupy movement wanted to throw the baby out with the bathwater. They identified capitalism and the rich as the problem as much as they blamed cronyism. The New York protesters marched to the homes of people among the richest one percent of Americans, to express their outrage that NYCs two percent millionaires tax was set to expire last December.
Protesters thought that the rich, in general, were guilty of some wrongdoing that made everyone else poorer. But wealth is not a fixed pie to be distributed, it has to be created. Most of the rich people in this country earned most of their wealth by working for, and making investments in, companies that provided all of us with a higher standard of living.
The protesters were worried about the wrong concentration of wealth and power. As economist Robert Lawson explained, a tiny cabal of 535 individualsjust 0.00017 percent of the populationspent $3.5 trillion, or about 23 percent of the economy. This group, of course, is the U.S. Congress.
Congress spending understates their power over our economy. Their real power is to coerce and they can do it by regulating our activities as easily as they can by taxing wallets. The directory of federal regulations has grown to more than 81,000 pagesreading 100 pages a day would it would still take you more than 2 years to read them all.
No voter knows each of these regulations and no voter knows how Congress spends each dollar. But each special interest who benefits from Congress largess knows which regulations and which budget lines benefit them.
Because individual voters are ignorant of the particular details of government spending and regulation, but interest groups are not, political competition pushes politicians to create programs that concentrate benefits on well defined groups and spread the cost across society in general. If the programs that do it play up to popular fallacies and boogiemen, like fear of international trade, all the better.
The governments vast economic power is the real source of the problems the occupy movement was upset about. Capitalists dont make society poorer when they have to win your voluntary purchase of their products. These wealthy people are only a problem when they get government to act on their behalf. If the government didnt have such vast spending and regulatory powers there would be nothing for crony capitalists to hijack. Unfortunately, the size and scope of the U.S. government has continued to grow at the expense of our economic freedom. Too bad the occupy movement didnt slow that trend.
Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been assistant professor of economics at San Jose State University, a fellow with the Mercatus Center's Global Prosperity Initiative, and a visiting research fellow with the American Institute for Economic Research. Benjamin is also the editor of Housing America: Building out of Crisis.
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