Cronyism and its Scapegoats

Cronyism destroys trust and assigns the blame to scapegoats of its own creation.

Only a fiercely committed left or right-winger would fail to recognize that there is today a social and political divide that does not easily fit within the traditional mold of left vs. right. If, loosely speaking, the left leans socialist and the right leans capitalist, there is a third branch, cronyism, that is characterized by the rising power and wealth of rent-seeking industries and individuals. In the past, this branch was dominant mainly in poorer countries with weaker institutions. But today it has also gained significant strength in a number of developed countries, including the United States.

In fact, if the Republican Party has been hijacked by Trumpism, as some allege, then we could say that capitalism has been similarly hijacked by cronyism. In our view, this parallel is nearly seamless, given that the GOP is traditionally pro-capitalism – in words if not always in deeds – and that the incumbent administration is largely populated with captains of rent-seeking industries.

Rent seekers themselves claim to be capitalists – many quote freely from Milton Friedman and Ayn Rand -, an amalgamation that gets a regular airing in the media when, for example, a finance executive or a Reagan administration official pens an op-ed touting the recently enacted tax reform or other initiative as a victory for free market capitalism.

As to the left, it is more than happy to stick the capitalist label on cronies (with for example the convenient oxymoron “crony capitalism”) since it helps it to discredit the profit motive of individuals and corporations and to highlight the widening wealth inequality in American society, while claiming that its long-standing anti free market philosophy is being vindicated by the abuses inflicted by cronies.

We are fortunate however that the separation of capitalism and cronyism is gaining more and more understanding. In a recent interview about his work on the rising mortality of working-age whites, Princeton Economics Professor and Nobel Prize Winner Angus Deaton clearly differentiated between capitalism and rent-seeking [our emphasis]:

A lot of people are thinking about rent seeking. There is this sense that it is not just letting it go to the people at the top, it is letting the people at the top get rich on the backs of ordinary people.

I’m in favor of inequality if it comes about from people making great innovations that make us all better off. And I think those people deserve to be rich. But the people who get rich by lobbying the Congress to give them special protections that come out of the hides of the workers seems to be a bad idea.

With this statement, Professor Deaton drew a straight line connecting the rent-seeking economy with the surge in opioid usage and “deaths of despair” among white Americans. This differs significantly from other theories that attribute these social ills to joblessness resulting from ‘unfair’ free trade or unchecked immigration. Perhaps then it is cronyism that is the real culprit? Not the barefoot immigrant but the well-heeled lobbyist or executive?

Cronyism and Trust

Underlying the social crisis identified by Deaton are the growing disenchantment and falling trust among constituencies across America. Revolt gives way to despair when trust in the institutions that are tasked with enforcing equity begins to falter. Cronyism of course destroys trust because it corrodes faith in the integrity of these institutions.

To use the most obvious example, if one of the reasons of the 2008 crisis was the rise of too big to fail banks, then why are these same banks ten years later as big or bigger than they were in 2008? A probable explanation is the influence of insiders seeking to blunt the impact of regulation or to arrest any initiative directed at breaking up the mega-banks. For context, consider this chart from Visual Capitalist that shows how 37 banks in 1990 merged and merged again over time to create a group of four that today hold 45% of all US customer deposits. Whether they should be broken up remains an open question and a valid debate, now nearly ten years after the crisis.

This lack of action after the 2008 debacle, whether on too big to fail banks or on white collar prosecutions, has contributed to a hollowing out of the effectiveness of government institutions, with predictable results. According to Joseph Parilla, a fellow at the Brookings Metropolitan Policy Program, trust in national institutions has taken a big hit in the forty-five years since 1972:

Trust in the federal government to “do what is right” declined from 53 percent to 22 percent since 1972. Trust in media has declined from 68 percent to 32 percent. We also trust each other less: The share of adults that felt “most people can be trusted” dropped from 46 percent to 31 percent.

On the other hand, looking at the local level,

The one area where trust has remained high is within local communities. In fact, trust in local government has actually increased over the past several decades, and Americans remain very satisfied with their friendships and social networks.

Why? Americans have been self-selecting into communities that reflect their cultural and ideological preferences. We likely display more affinity for those institutions and leaders that are closest to our influence.

So, Americans trust what is close to them in part because they choose it and control it, but they are less trusting of what is far and less easy to choose and control. Neither is really good news. On one hand, it is normal to trust a proximate community that you chose to join. The inclination to trust, in this case, precedes the selection and is then confirmed as a natural and expected result. On the other hand, the decline in trust vis a vis far away national institutions is ripe with undesirable consequences.

Missed Promises

Trust tends to wane when promises made are not honored, and when well-founded expectations are disappointed. When it comes to the government, it would be too easy to list all the promises that were made and missed in recent decades, from balanced budgets that rarely balance, to free trade agreements that create large inequities, to trillions of dollars spent nation-building abroad, to wars won that are still being fought, to bailouts that lead years later to larger bailouts, etc.

The central cause for the decrease in trust is the global ascendance of cronyism, a phenomenon that continues to corrode the institutions of this and other countries. This growth was accelerated by globalization and in 2008 by the unwillingness of policy makers to let failing companies and individuals simply go under. In our view, Trumpism with its ersatz populism and its promotion of rent-seeking sectors is not as advertised a new dawn but the penultimate stage of cronyism to be replaced by the final and most complete stage under a quasi socialist administration.

Fueling this populism is the clear fact that many people are unhappy and are closing in and hunkering down on the local level. But this too has undesirable consequences in that it leaves out the nomads in our society who do not “have a local” level, in other words who are not by history or heritage part of any local community. These include mainly two groups: first, the 14% foreign-born residents who by definition did not originate in any locality in America, and second, the educated elites, or “cosmopolitans” in the parlance of another era, who have left their original local cities and towns to live in global cities like New York or London.

Not coincidentally, these are precisely the two groups scapegoated by cronies looking to deflect blame for their own misdeeds. Both groups are now under attack from the new populism and both are at danger of becoming the chief victims of the decline in trust. Let us examine each in turn.

Immigration and Social Capital

Immigration. What is it good for?

In our view, the smartest way to think of immigration is within the framework of social capital. Social capital is the collection of networks and interactions among people in a society that foster trust and reciprocity and that help that society function effectively. Corporations, schools, parent-teacher associations, sports teams, bowling leagues, political parties, book clubs etc. are all networks that strengthen social capital.

Immigrants Lining up
1912 Immigrants Waiting for Medical Examination (Source: Popular Science Monthly Vol. 80)

In his book Bowling Alone, the author and sociologist Robert D. Putnam differentiates between bonding and bridging social capital as follows:

Of all the dimensions along which forms of social capital vary, perhaps the most important is the distinction between bridging (or inclusive) and bonding (or exclusive). Some forms of social capital are, by choice or necessity, inward looking and tend to reinforce exclusive identities and homogeneous groups. Examples of bonding social capital include ethnic fraternal organizations, church-based women’s reading groups, and fashionable country clubs. Other networks are outward looking and encompass people across diverse social cleavages. Examples of bridging social capital include the civil rights movement, many youths service groups and ecumenical religious organizations.

Bonding social capital is good for undergirding specific reciprocity and mobilizing solidarity… Bridging networks, by contrast, are better for linkage to external assets and for information diffusion.

Bonding social capital is good for “getting by”, but bridging social capital is crucial for “getting ahead.”

Bridging social capital can generate broader identities and reciprocity, whereas bonding social capital bolsters our narrower selves.

Bonding social capital has high levels of trust and reciprocity but it is exclusionary and is strongest within a singular community. By contrast bridging social capital has lower levels of trust and reciprocity but it is inclusive and acts as a bridge among disparate communities.

Aaron Renn, a senior fellow at the Manhattan Institute, said in this podcast that cities and communities should try to find the right balance between change and preservation, and between bonding and bridging social capital. He made these comments in the context of the ongoing debate on immigration:

[at 2:55] I suggest thinking about that balance like Aristotle talked about virtue. Virtue is the mean between two extremes. There is a happy medium.

[at 3:15] I see immigration as a practical thing. It’s a change force. You absolutely need to have some change in your cities. You need to have new blood, you need to have new ideas.

Without this new blood, there is an increased risk of atrophy in places with too few immigrants, or too little bridging social capital:

[at 3:55] Immigrants are the natural constituency of the new. A lot of these midwestern cities I wrote about really had difficulty changing and adapting to the future. And that is because they didn’t have any new blood. So they sort of fossilized. All the social networks and the ways of doing business there really made it impossible to move forward. If you don’t have a certain percentage of newcomers, it is very difficult to do that.

[at 8:50] When you have too many connections and it is all the same people – imagine the same ten people who have always been in the room – there are never any new ideas that come in, and it is hard to change. You keep getting locked into the same patterns.

Renn also highlights the risk of too little bonding social capital. There are trade-offs to consider when a place has too many newcomers.

[at 3:30] But if you have too much change, too many newcomers, you hear things like “we are losing our soul as a city”.

[at 6:50] Immigration does bring a lot of uncomfortable change for a lot of places and a lot of people, particularly in cities where it is not the norm. Research has shown that diversity, which immigration can promote, does in fact lower social capital and lower social trust. Some of that is good because these Rust Belt communities have too much social capital.

On the other hand,

[at 9:20] When you start having too little bonding social capital, you can end up with tremendous divisions, lack of social solidarity, and a sort of social disruption.

Some bonding social capital is hugely positive, but too much can lead to atrophy and sclerosis. Conversely, some amount of bridging capital is needed to move forward, but too much may result in social disruption. This means that the main virtue of some immigration is precisely the fact that immigrants do not fit in at first and that they bring something new and constructive. The fact that the foreign-born do not “have a local”, do not have ties to one locality, is the main benefit of welcoming foreign-born people in our midst in the first place.

The question then is whether there are too many immigrants in America today and whether we have deviated from the Aristotelian happy medium. The foreign-born in New York City and New York State add up to 37% and 22% of their respective populations, well above the 14% national average. Upstate New York (excluding the City and near suburbs) by contrast only has 5% foreign-born. A large number of Southern and Midwestern states have fewer than 5% foreign-born. Every place seems to have found its own equilibrium, the level at which it can absorb immigrants without causing disruption. But places that are economically stagnant should perhaps ponder the question of whether they have too much bonding and not enough bridging capital.

Elites and Cronies

The other target of cronyism are the nomadic urban elites on both coasts. There is some irony in cronies donning the mantle of populism and seeking to scapegoat these elites given that they travel in the same circles, socialize at the same clubs, work at the same firms and have their children educated at the same schools. From the vantage point of an outsider, there is very little that differentiates cronies from the urban cosmopolitan elites.

Yet, in a most brazen “not me, but him” act of self exculpation, cronies in rent-seeking sectors have deflected all responsibility for the crash in trust away from themselves and redirected it towards other subsets of the elites, mainly academia and the media, notwithstanding the fact that this is the same academia that they court (often without reserve) to educate their children and the same media that they court to gain some measure of public notoriety.

Of course, scapegoaters are not intellectually rigorous and a bona fide elite crony may see no contradiction whatsoever in downing a fellow member of the elite across town. Quite the opposite in fact. The ranks of the elites have become so bloated in recent decades that a periodic culling of the more vulnerable would suit the survivors just fine even if there is little to differentiate them from the fallen, outside of serendipity and a fortunate set of connections.

For the demagogue and the intellectually unrigorous, there are many available pretexts to persecute people individually or as a group, as history has shown repeatedly with the victimization of ethnicities and religions that stood out as being different, as “having no local”. This is all the work of dishonesty and scapegoating for the sake of self-exoneration about the crash in trust. It has worked before and it may work again.