Crony Economy

For John, BLUF:  Too much regulation is bad for the economy.  Cronyism is worse.  Nothing to see here; just move along.

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In yesterday's Boston Globe was an OpEd by Mr Tom Keane, Democrat Operative.  It was the usual screed, but at one point I registered Hernando DeSoto in my mind.  That was when he talked about Boston's new Mayor, Marty Walsh.

Marty, May I? For years known as “Tommy, May I?,” this retitled game features a host of players seeking permission to develop buildings, run businesses, or otherwise get something done in the city.  “Marty, May I . . . open a bar?” asks one supplicant.  “Marty, May I . . . get a zoning variance?” begs another.  Sometimes Marty says yes, sometimes Marty says no — and you’ll never know why!  If turned down, you can always try again.  But next time, you might want to hire some new lawyers, become buddies with local unions, or, best of all, get to know Marty’s neighbors in Dorchester.  He always listens to them!

Why did I say Hernando De Soto?  Economist De Soto has written about the cost of an economy where permissions to move into a new field, to open a new business, a new shop, a new push cart, is controlled by a centralizing government that favors its friends and ignores the rest.  He presents one version of this in his book, The Other Path.  Here is the short description from Amazon:

In this, his classic book on the informal economy of Peru and the reasons why poverty can be a breeding ground for terrorists, Hernando De Soto describes the forces that keep people dependent on underground economies:  the bureaucratic barriers to legal property ownership and the lack of legal structures that recognize and encourage ownership of assets.  It is exactly these forces, de Soto argues, that prevent houses, land, and machines from functioning as capital does in the West--as assets that can be leveraged to create more capital.  Under the Fujimori government, de Soto's Institute for Liberty and Democracy wrote dozens of laws to promote property rights and bring people out of the informal economy and into the legitimate one.  The result was not only an economic boon for Peru but also the defeat of the Shining Path, the terrorist movement and black-market force that was then threatening to take over the Peruvian government.  In a new preface, de Soto relates his work to the present moment, making the connection between the Shining Path in the 1980's and the Taliban today.

I recently saw one statistic that had the US informal economy at 15% of the nation's GDP.  This is anything from the illegal immigrant someone hires to help build a patio in the back of their house to the 28% of cigarette sales in Massachusetts that are smuggled in from out of state and sold without Massachusetts taxes.

OK, I am against smuggling of cigs, but it raises the question of where the taxes are set.  There is a point with most products where the level of taxes will make smuggling (or tea parties) a reasonable move on the part of some people.  With no taxes there is no smuggling.  At some point rising taxes attract smuggling.  At that point the Government can start trying to arrest people, putting them in jail, which serves to increase the the need for taxes.  Or the Government can bring down the sin tax to be in line with what the consumers will find acceptable.

It is the other areas I am concerned about.  I am not so much concerned about about the lack of regulators inspecting these folks as I am about the fact that many of these folks feel that they can't join the formal economy and operate above board because of existing government regulations and licensing requirements.  That is to say, we are strangling the ability of entrepreneurs to meet the needs of customers, and missing out on the collection of taxes.  Worse, this kind of thing can easily lead to corruption, which is hard to clean up.

Regards  —  Cliff