I wish everyone would read this article... several times if needed:
There is far too much info in this to do justice with quotes, but here are a few:
This simple idea—that voluntary exchange is mutually beneficial—is at the heart of modern economics.
Indeed, a national economy, with all its sophistication and complexity, is simply a very large number of mutually beneficial trades. And a recession is nothing more than a collapse in the number of such trades. Moreover, as individuals expand the number of people with whom they exchange, they are able to consume a wider diversity of products while becoming more specialized in production. Specialized production, in turn, permits greater productive efficiency and allows us to do more with less. It is no exaggeration to say that the expansion of mutually beneficial exchange accounts for the lion’s share of human progress.
Think of the thousands of talented lawyers, lobbyists, and strategic thinkers who occupy the expensive office buildings lining K Street in Washington, D.C. All of this talent might be employed in the discovery of new ways to bring value to consumers and to expand the gains from exchange. Instead, many of these smart and hardworking people spend their time convincing politicians to hand out privileges to their own firms or fending off attempts to hand out privileges to their competitors
Privilege can also have a profoundly negative effect on innovation. And a lack of innovation, in turn, can disadvantage an entire society.
In a classic, sweeping study, economist Mancur Olson went so far as to claim that special-interest privilege can account for the “rise and decline of nations.” As societies grow wealthy and stable, he argued, the seeds of their own destruction are sewn. Stable societies are fertile ground for special interests. These interest groups grow in power and influence over time, and once entrenched, rarely disappear. “On balance,” they “reduce efficiency and aggregate income in the societies in which they operate and make political life more divisive.” Eventually, “The accumulation of distributional coalitions [those that seek rents] increases the complexity of regulation, the role of government, and the complexity of understandings, and changes the direction of social evolution.
But we need not look so far for examples. Atif Mian of the University of California at Berkeley and Amir Sufi and Francesco Trebbi of the University of Chicago recently conducted an extensive examination of the political activity of the U.S. mortgage industry and housing interests in the run-up to the subprime meltdown of 2008.101 The authors found, “Beginning in 2002, mortgage industry campaign contributions increasingly targeted U.S. representatives from districts with a large fraction of subprime borrowers.” Analyzing more than 700 votes related to housing, the authors found that these contributions became an increasingly strong predictor of congressional votes. They also found that the share of constituents with low credit scores exerted increasing influence over voting patterns. Thus, “Pressure on the U.S. government to expand subprime credit came from both mortgage lenders and subprime borrowers.”102 Indeed, a slew of policies encouraged the expansion of credit in the subprime market. These policies, of course, benefited the privileged firms as well as the privileged subprime borrowers. But they also fanned the flames of an overheating housing market. For nearly a decade, capital and labor poured into housing and related industries, and when the bubble eventually burst, it threw the United States into its worst recession in decades.
As often happens with privilege, the “solution” to this problem involved more privilege.
Government-granted privileges are pathological. Privileges limit the prospects for mutually beneficial exchange—the very essence of economic progress. They raise prices, lower quality, and discourage innovation. They pad the pockets of the wealthy and well-connected at the expense of the poor and unknown. When governments dispense privileges, smart, hardworking, and creative people are encouraged to spend their time devising new ways to obtain favors instead of new ways to create value for customers. Privileges depress long-run economic growth and threaten short-run macroeconomic stability. They even undermine cultural mores, fostering cronyism, blurring the distinction between productive and unproductive entrepreneurship, and eroding people’s trust in both business and government.
Want to understand how our economy is supposed to work on a simple basic level?
Read Section I
Want to understand the various ways this can be perverted?
Read section II
Want to understand why I'm against "over regulation"?
Read Sec II B
Want to know why conservatives are all bent out of shape about Solyndra?
Read Sec II D
Want to understand why we need simple, fair, flat taxes?
Read Sec II E
Want to know why the Government is ALWAYS slower, more expensive and less innovative?
Read Sec III B and C
Want to get "money out of politics"? Tired of companies "buying lawmakers"?
Read Sec III D
Want to understand why people's approval of Government is at an all time low?
Read Sec III J&K
I. The Gains from Exchange
II. TYPES OF PRIVILEGE
A. Monopoly Privilege
B. Regulatory Privilege
D. Loan Guarantees
E. Tax Privileges
G. Expected Bailouts
H. Tariffs and Quotas on Foreign Competition
I. Noncompetitive Bidding
III THE ECONOMIC AND SOCIAL COSTS OF PRIVILEGE
A. Monopoly Costs
B. Productive Inefficiencies
C. Inattention to Consumer Desires
E. Distributional Effects
F. Unproductive Entrepreneurship
G. Loss of Innovation and Diminished Long-Run Economic Growth
H. Macroeconomic Instability
J. Diminished Legitimacy of Government and Business
K. Lost Social Trust
IV CONCLUDING REMARKS
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