The economies in the US and Europe are currently characterized by high debt-to-GDP ratios. Lately, the most popular remedy for that condition has been to engage in government stimulus spending. The stimulus spending has not proven to be as effective as hoped, and has increased national debts. The proponents of the stimulus approach argue that stimuli have had limited effect because they haven’t been large enough, proposing more. At the same time they want to increase tax rates to finance the new spending and the interest payments on the increased debt.
That debate largely sidesteps the true origins of the economic situation we are faced with: government intervention in markets. The interventions may be well-intended but just as often they are on behalf of individuals or entities seeking an unfair competitive advantage, called rent seeking or, more commonly, crony capitalism. Rent seeking is when a company lobbies the government to back, endorse, or create an artificial market for productsand services for which there is no sustainable business case. In most cases the government is the business’ only customer. In other words, without government sponsorship the product or service would not have sufficient buyers in the open market to make it a viable business. “Crony capitalism” highlights that the relationship between the business and the government is based on graft: favors made in exchange for money or power. In crony capitalism, the government may persecute the favored entity’s competitors, create regulations that only the favored entity can conform to (thereby eliminating smaller competitors), grant special loans or loan guarantees, create subsidies and tax exemptions, etc. The monstrous 72,536 page US tax code is the foremost example of decades of special interest (i.e., crony-supporting) tax exemptions.