I don’t often do book reviews, but having just finished Luigi Zingales’ book, A Capitalism for the People: Recapturing the Lost Genius of American Prosperity, I think it is worth writing about. For the last four years I have suggested that there might be common ground between liberals and libertarians. But every time I have tried to advance the notion, either the liberals have savaged the idea or the libertarians have complained of half steps and put forth their “anarcho-capitalist” solution, which is just plain stupid. Zingales offers a middle ground.
Zingales is a free market Professor at the University of Chicago’s Booth School of Business and his main fear is that Crony Capitalism is destroying the competitive nature of America’s economic system. He believes that government has an important role to play in society, but that as corporations become more dominant in financing politics, they “capture” the regulators who are supposed to control them. Similarly, the corporations lobby the congress to put through special subsidies for their industry, thus distorting competition. Zingales sees the cronyism on both sides of the political aisle, such as when Clinton Treasury Secretary Robert Rubin lobbied hard to get the Glass-Stegall Act repealed, in order to help Citigroup, which had already violated the law.
Rubin left the Treasury in July 1999, the day after the House passed its version of the bill by a bipartisan vote of 343 to 86. Three months later, on October 18, 1999, Rubin was hired at Citigroup at a salary of $15 million a year, without any operating responsibility. It is hard not to see the connection between these two events.
Zingales’ prescriptions for fixing this mess are pretty straight forward. Cut all government subsidies and special tax breaks to corporations. Eliminate all tax deductions for individuals, which “would reduce the marginal tax rate for all taxpayers by at least five percentage points, except for taxpayers making more than $500,000, who would see their marginal tax rate unchanged. Use Pigouvian taxes to correct distorted incentives and negative externalities. Examples of this are a progressive tax on payments to lobbyists by corporations; a tax on short term debt held by financial institutions (which he believed caused the 2008 crisis) and a tax on pollution flowing from industry.
It is on various social policies that liberals will find Zingales pushing them into uncomfortable areas. On K-12 education he advocates a progressive voucher system. All schools would have to compete for all children with schools getting paid more to take on under privileged kids. If schools hired bad teachers, they would face the possibility of going out of business. I for one think this idea is worth trying. The K-12 system is so screwed up in this country, we really need to shake it up and perhaps vouchers is the way. But it is in the area of healthcare that I find Zingales ignoring the obvious because of his attachment to the free market. He says that the reason American per capita healthcare costs are so out of control is that “healthcare, unlike most goods and services, is not purchased in a free market.” What this ignores is that the per capita healthcare costs that are so much lower in every other developed nation are directly accountable to their adoption of a single payer system that has the muscle to negotiate with doctors, hospitals and drug companies.
Ultimately taking on Crony Capitalism should be the main task of the next era of reform. Both political parties are so beholden to the corporation that this seems like an almost impossible task. Perhaps we have to start with getting the money out of politics as proposed by Larry Lessig’s Rootstrikers campaign. I know the Republicans are too in the bag to big business to take this on, but if Obama gets a second term, his first act should be to fire Tim Geithner and hire someone like Joe Stieglitz. That would send an unmistakeable message.