Incumbent Italian Firms Invest in Cronyism, Not Innovation

I heard an intriguing paper at the January 2020 AEA meetings in San Diego. It shows that, at least in Italy, big incumbent firms protect their position more through investment in cronyism than through investment in innovation. The abstract of the NBER working paper version of the paper appears below.

Do political connections affect firm dynamics, innovation, and creative destruction? We study Italian firms and their workers to answer this question. Our analysis uses a brand-new dataset, spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii) social security data on the universe of workers; (iii) patent data from the European Patent Office; (iv) the national registry of local politicians; and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. We identify a leadership paradox: When compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity – a result that we also confirm using a regression discontinuity design. We build a firm dynamics model, where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. Our model highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity.

The abstract quoted above is from:

Akcigit, Ufuk, Salome Baslandze, and Francesca Lotti. “Connecting to Power: Political Connections, Innovation, and Firm Dynamics.” NBER Working Paper #25136, National Bureau of Economic Research, Inc., Oct. 2018.

E.U. Farm Subsidies in Central and Eastern Europe Go to Cronies of Politicians

(p. 1) CSAKVAR, Hungary — Under Communism, farmers labored in the fields that stretch for miles around this town west of Budapest, reaping wheat and corn for a government that had stolen their land.

Today, their children toil for new overlords, a group of oligarchs and political patrons who have annexed the land through opaque deals with the Hungarian government. They have created a modern twist on a feudal system, giving jobs and aid to the compliant, and punishing the mutinous.

These land barons, as it turns out, are financed and emboldened by the European Union.

Every year, the 28-country bloc pays out $65 billion in farm subsidies intended to support farmers around the Continent and keep rural communities alive. But across Hungary and much of Central and Eastern Europe, the bulk goes to a connected and powerful few. The prime minister of the Czech Republic collected tens of millions of dollars in subsidies just last year. Subsidies have underwritten Mafia-style land grabs in Slovakia and Bulgaria.

Europe’s farm program, a system that was instrumental in forming the European Union, is now being exploited by the same antidemocratic forces that threaten the bloc from within. This is because governments in Central and Eastern Europe, several led by populists, have wide latitude in how the subsidies, funded by taxpayers across Europe, are distributed — even as the entire system is shrouded in secrecy.

For the full story, see:

Selam Gebrekidan, Matt Apuzzo and Benjamin Novak. “Populist Regimes Siphon Millions in E.U. Farm Aid.” The New York Times, First Section (Sunday, November 3, 2019): 1 & 12.

(Note: the online version of the story has the same date as the print version, and has the title “The Money Farmers: How Oligarchs and Populists Milk the E.U. for Millions.” The online version says that the title of the New York print edition was “Populist Politicians Exploit E.U. Aid, Reaping Millions.” The title of my National edition was “Populist Regimes Siphon Millions in E.U. Farm Aid.”)

Elizabeth Warren Started Out as a Student of Henry Manne’s Libertarian Law and Economics Ideas

(p. A1) Never one to shy away from a fight, Elizabeth Warren had found a new sparring partner. She had only recently started teaching at the University of Texas School of Law, but her colleague Calvin H. Johnson already knew her well enough to brace for a lively exchange as they commuted to work.

Indeed, on this morning in 1981, Ms. Warren again wanted to debate, this time arguing on the side of giant utilities over their customers.

Her position was “savagely anti-consumer,” Mr. Johnson recalled recently, adding that it wasn’t unusual for her to espouse similar pro-business views on technical legal issues.

Then something changed. He calls it Ms. Warren’s “road to Damascus” moment.

“She started flipping — ‘I’m pro-consumer,’” Mr. Johnson said.

That something, as Ms. Warren often tells the story, was her deepening academic research into consumer bankruptcy, its causes, and lenders’ efforts to restrict it. Through the 1980s, the work took her to courthouses across the country. There, she said in a recent interview, she found not only the dusty bankruptcy files she had gone looking for but heart-wrenching scenes she hadn’t imagined — average working Americans, tearful and humiliated, admitting they were failures:

(p. A10) “People dressed in their Sunday best, hands shaking, women clutching a handful of tissues, trying to stay under control. Big beefy men whose faces were red and kept wiping their eyes, who showed up in court to declare themselves losers in the great American game of life.”

. . .

The revelations from her bankruptcy research, by her account, became the seeds of her worldview, laid out in her campaign plans for everything from a new tax on the wealthiest Americans to a breakup of the big technology companies.

. . .

In 1979, Ms. Warren recruited her parents from her native Oklahoma to her home in the Houston suburbs to help babysit her two young children.

Then a professor at the University of Houston, she would be spending several weeks at a luxury resort near Miami, one of 22 law professors selected to study an increasingly popular discipline known as “law and economics.’’ One of its central ideas is that markets perform more efficiently than courts.

Mr. Johnson, Ms. Warren’s former Texas commuting partner, believes that it was an important influence on her early thinking.

“Before Liz converted, she came to us from the decidedly anti-government side of law and economics,” he said.

The summer retreat was colloquially known as a “Manne camp,” after its organizer, the libertarian legal scholar Henry G. Manne. With financial support from industry and conservative foundations, Mr. Manne had formed a Law and Economics Center at the University of Miami. (He would later move operations to Emory University and then to George Mason University.)

The mission of the retreat was to spread the gospel of free-market microeconomics among law professors. One participant, John Price, a former dean of the law school at the University of Washington, described it as “sort of pure proselytizing on the part of dedicated, very conservative law and economics folks,” with an emphasis on an anti-regulatory agenda. One faculty member, he recalled, suggested eliminating the Consumer Product Safety Commission.

. . .

While some in the group have said Ms. Warren expressed skepticism at the libertarian ideology, Ms. Blumberg remembers someone very much developing the early stages of her career, who was “far more captivated than I” with the theories.

. . .

Ms. Warren . . . wrote to Mr. Manne in 1981, attaching a copy of her latest published article. She was sending him one article a summer, she wrote, and each “increasingly reflects my time at LEC.”

. . .

“This is really hard-core law & econ analysis,” Todd J. Zywicki, a law professor at George Mason who formerly served as executive director of the Manne Center, wrote in an email. “If you had given me this article with the author anonymized and asked me who wrote it, I would have answered that it was one of the leading scholars in the law & economics of commercial and contract law. Never, in a million years, would I have thought this article was written by EW.”

For the full story, see:

Stephanie Saul. “THE LONG RUN; Warren’s Awakening to a World of Desperation.” The New York Times (Monday, Aug. 26, 2019): A1 & A10.

(Note: ellipses added.)

(Note: the online version of the story has the same date as the print version, and has the title “THE LONG RUN; The Education of Elizabeth Warren.”)

Consumers May Again Be Free to Choose an Incandescent Bulb

(p. A1) The Trump administration plans to significantly weaken federal rules that would have forced Americans to use much more energy-efficient light bulbs, a move that could contribute to greenhouse gas emissions that cause global warming.

The proposed changes would eliminate requirements that effectively meant that most light bulbs sold in the United States — not only the familiar, pear-shaped ones, but several other styles as well — must be either LEDs or fluorescent to meet new efficiency standards.

The rules being weakened, which dated from 2007 and the administration of President George W. Bush and slated to start in the new year, would have all but ended the era of the incandescent bulb invented more than a century ago.

. . .

The Trump administration said the changes would benefit consumers by keeping prices low and eliminating government regulation.

For the full story, see:

John Schwartz. “New Rollback To Ease a Ban On Old Bulbs.” The New York Times (Thursday, September 5, 2019): A1 & A15.

(Note: ellipsis added.)

(Note: the online version of the story was last updated Sept. 6 [sic], 2019, and has the title “White House to Relax Energy Efficiency Rules for Light Bulbs.”)

Chester Arthur Reformed Civil Service After Reforming Himself

(p. A15) One of America’s obscure vice presidents was Chester A. Arthur, a machine politician from New York. No one thought of him as presidential timber, least of all Arthur himself. He was chosen as the Republican vice presidential candidate in 1880 only to pacify the corrupt yet powerful boss of the New York Republican Party, Sen. Roscoe Conkling, who had fought against the nomination of reform-minded James A. Garfield for president.

Then Garfield was assassinated soon after entering the White House and the machine hack was suddenly President of the United States.

. . .

But reform was in the air. Rutherford B. Hayes, elected president in 1876, had run on a platform promising to overhaul the civil service. He ordered a 20% staff cut at the Custom House, followed by an executive order forbidding “assessments” and barring federal workers from performing political work on or off the job. . . .

When Arthur unexpectedly became president, nearly everyone expected that the federal government would soon return to business as usual. It didn’t. Conkling wanted Garfield’s Custom House appointee fired and his own man put in, so he could use the patronage to fuel his political machine. Arthur refused. “For the vice presidency I was indebted to Mr. Conkling,” Arthur explained. “But for the presidency of the United States, my debt is to the Almighty.”

Mr. Greenberger also highlights the remarkable role that a perfect stranger played in Arthur’s transformation. Julia Sand, a semi-invalid living with her family on Manhattan’s Upper East Side, wrote Arthur a series of letters encouraging, warning and criticizing him, consistently urging him to overcome his corrupt past. He visited her only once, unexpectedly, but carefully preserved her letters even though he burned most of his other papers.

Her encouragement had its effect. In his first annual message to Congress, Arthur called for civil service reform and the reactivation of the moribund Civil Service Commission. In his second message, he called on Congress to pass laws banning assessments and requiring competitive examinations for civil service positions. Under public pressure, Congress quickly complied.

. . .

Even Mark Twain—no apologist for politicians—wrote that “it would be hard indeed to better President Arthur’s administration.”

“The Unexpected President” is popular history, dependent on secondary sources, especially Thomas Reeves’s magisterial biography of Arthur, “Gentleman Boss.” But it generally avoids the pitfalls of the genre, such as assuming facts not in evidence in the sources. Above all, Scott Greenberger’s slim, well-written biography is a worthy tale of redemption—of a wandering man who, suddenly finding himself president, rose to the occasion and did his duty.

For the full review, see:

John Steele Gordon. “BOOKSHELF; Growing Into the Office; Chester Arthur was a product of the New York patronage machine. Then Garfield was killed, and suddenly the political hack was president.” The Wall Street Journal (Tuesday, Sept. 28, 2017): A15.

(Note: ellipses added.)

(Note: the online version of the review has the date Sept. 27, 2017, and has the same title as the print version.)

The book under review is:

Greenberger, Scott S. The Unexpected President: The Life and Times of Chester A. Arthur. New York: Da Capo Press, 2017.

Empty Threats to Leave Jersey, Gain Firms $100 Million Taxpayer Subsidies

(p. A1) PEARL RIVER, N.Y. — In the summer of 2015, Jaguar Land Rover North America told state officials in New Jersey that it was considering moving to an office development in New York called Blue Hill Plaza.

To keep the automotive giant’s headquarters in New Jersey, the state offered $26 million in tax credits. So Jaguar stayed.

Five months later, FC USA, a travel company, also told New Jersey that it was looking to relocate to the very same office development in New York.

So did Groupe SEB, an appliance manufacturer.

In total, over five years, 12 companies threatened to leave New Jersey and move to Blue Hill Plaza unless the state provided tens of millions in tax credits.

None followed through on the threat. In fact, an investigation by The New York Times suggests that nearly all of the 12 companies never seriously considered moving to New York.

But all 12 received lucrative tax credits from New Jersey to stay — more than $100 million in total, according to documents obtained by The Times.

For the full story, see:

Nick Corasaniti and Matthew Haag. “Businesses Are Cashing In on Empty Threat to Leave New Jersey.” The New York Times (Tuesday, Sept. 24, 2019): A1 & A25.

(Note: the online version of the story has the same date as the published version, and has the title “How One Address Led to a $100 Million Tax Credit Scheme.”)

Higher Education Is a Lumbering “Dinosaur”

(p. A15) We are at the end of an era in American higher education. It is an era that began in the decades after the Civil War, when colleges and universities gradually stopped being preparatory schools for ministers and lawyers and embraced the ideals of research and academic professionalism. It reached full bloom after World War II, when the spigots of public funding were opened in full, and eventually became an overpriced caricature of itself, bloated by a mix of irrelevance and complacency and facing declining enrollments and a contracting market. No one has better explained the economics of this decline—and its broad cultural effects—than Richard Vedder.

. . .

“Restoring the Promise: Higher Education in America” is a summary of the arguments he has been making since then as the Cassandra of American colleges and universities.

. . .

At Mr. Vedder’s alma mater, Northwestern, tuition rose from 16% of median family income in 1958 to almost 70% in 2016. Over time, armies of administrators wrested the direction of their institutions away from the hands of faculties and trustees.

. . .

Though Mr. Vedder’s critique concentrates on the economic mire into which higher education has tumbled, he is not alone in his more general criticism. Over the past 20 years, analysts as diverse as Derek Bok, Alan Kors, Richard Arum and Josipa Roksa, Jeffrey Selingo, and Benjamin Ginsberg have warned that higher education, in its current form, is a dinosaur—an over-built, under-achieving creature whose chances of survival are increasingly dim. But on it lumbers. . . .

What may, . . ., bring about some kind of change is the dramatic fall-off in American birth rates since the Great Recession of 2008, as highlighted in Nathan Grawe’s “Demographics and the Demand for Higher Education” (2018). No amount of federal student loans, or tuition increases, will do colleges and universities any good when, over the next decade, the pool of age-eligible students shrinks by 13% (by Mr. Grawe’s estimate). Inventing online alternatives and attracting full-tuition students from abroad is one way of paying the bills, but colleges have been trying both strategies for the past two decades, so the yield may not increase by much.

For the full review, see:

Allen C. Guelzo. “BOOKSHELF; High Cost, Low Yield; A college degree is ever more common these days, but it comes with ever heavier loan burdens and, in many cases, only limited job prospects.” The Wall Street Journal (Tuesday, June 25, 2019): A15.

(Note: ellipses added.)

(Note: the online version of the review has the date June 24, 2019, and has the title “BOOKSHELF; ‘Restoring the Promise’ Review: High Cost, Low Yield; A college degree is ever more common these days, but it comes with ever heavier loan burdens and, in many cases, only limited job prospects.”)

The book under review is:

Vedder, Richard. Restoring the Promise: Higher Education in America. Oakland, CA: Independent Institute, 2019.