The Charles Koch Institute’s senior research fellow Dana Wade hosted a conversation with author and historian Amity Shlaes at CPAC.
On February 23, 2017, the Charles Koch Institute hosted a CPAC panel with bestselling author and historian Amity Shlaes for a discussion about the rise of cronyism in America.
Charles Koch Institute senior research fellow Dana Wade began the discussion by explaining that cronyism—in which politicians and bureaucrats bestow narrow privileges to select firms and industries—creates “a two-tiered society where government privileges go to the influential and well-connected and everyone else gets ignored.”
Shlaes, the author of four New York Times bestsellers, including The Forgotten Man: A History of the Great Depression, then provided the historical context for the term “forgotten man,” drawing a distinction between two competing definitions.
During the Great Depression, President Franklin Delano Roosevelt identified “the forgotten man” as an economic class: “the forgotten man at the bottom of the economic pyramid.” Roosevelt’s understanding of the term informed the policies of the New Deal, which, according to Shlaes, amounted to “targeted rewards to various constituencies,” including agricultural subsidies, heightened power for labor unions under the Wagner Act, and protectionism. Shlaes contends that these policies made the economy worse, not better, noting that the stock market did not fully recover until the 1950s.
Alternatively, the phrase “the forgotten man” was used decades before Roosevelt’s presidency by Yale professor William Graham Sumner. Sumner defined “the forgotten man” as “the man who pays, the man who prays, the man who is not thought of.” Shlaes noted that Sumner was referring to the injustice of cronyism: “A and B get together and force C to subsidize the perhaps good, perhaps dubious, project for X.” For Shlaes, “the forgotten man” is “the one who pays” (“C” in the above example) for corporate welfare that benefits only the well-connected few.
Protectionism, Shlaes pointed out, is a form of corporate welfare, as it grants a benefit—i.e., protection from competition—to a favored group, while everyone else bears the costs, typically in the form of higher consumer prices. Professor Sumner, said Shlaes, “abhorred protectionism and was a great campaigner against it.”
Wade and Shlaes also discussed the recent financial crisis and subsequent bailouts of large financial institutions. Shlaes offered a succinct criticism of the response of policymakers during the crisis, declaring that “a bailout is always cronyism.” In addition, Shlaes contended that the Dodd-Frank Act of 2010 further “enshrined the ‘too big to fail’ doctrine.”
With this rise in cronyism came a decline in trust, said Shlaes. According to the Financial Trust Index, a measurement tool created by Professor Paola Sapienza of the Kellogg School of Management at Northwestern University and Professor Luigi Zingales of The University of Chicago’s Booth School of Business, Americans’ trust in private financial institutions has eroded since the 2008 crisis and subsequent bailouts.
However, Shlaes still sees room for optimism. She pointed to disruptive entrepreneurs and firms such as Uber, Lyft, Airbnb, and eBay that have “overcome cronyism” and rely instead on trust as an integral part of their business models.