Trump’s transition looks an awful lot like crony capitalism

January 19, 2017, 11:23am

Donald Trump won the White House in part because of his promise to remake the U.S. economy. Now even those who voted for him should be worried about him keeping that promise.

From the apparent backroom deals with individual companies, to pushing the limits of anti-nepotism laws, to installing superrich and inexperienced political allies in his Cabinet, Trump’s transition has set the stage for a sharp turn away from the rules and norms that have long defined how the U.S. economy — and, in turn, the U.S. itself — has been run for a half-century or more. And in its place, something else appears to be emerging, a system based on, well, cronies.


“Trump is consciously or unconsciously creating the conditions in which crony capitalism or outright corruption could thrive,” says Simon Johnson, an economics professor at MIT and a former chief economist at the International Monetary Fund.

The danger, economists say, is that the emerging Trump system not only risks corruption but also could damage the basic mechanics of the American economy, creating stronger incentives for companies to focus their efforts on gaining favor with the government rather than winning customers through efficiency and innovation.

Economists call such behavior “rent-seeking.” (A rent, in classic economics, is an unearned financial benefit that’s higher than would have been gained in a competitive market.) A certain amount of rent-seeking is a feature of most economies — in the U.S., we call it lobbying. But if unchecked, rent-seeking can grow to a point where it warps a healthy market economy into a system of crony capitalism.

To be clear, critics of the close — and sometimes corrupt — relationships between the U.S. government and corporate interests have often called such connections “crony capitalism.” Fair enough. There is no universally accepted definition for the term. But for many people who study cronyism in its purest form, usually seen in emerging economies with relatively weak adherence to rule of law, there are key distinguishing factors that mark a crony system.


Such a market involves a small set of people receiving an unfair advantage because of personal relationships “based on trust, loyalty, family, and long-standing social networks,” according to one academic primer on the subject. In that 2014 paper, authors Paul Dragos Aligica and Vlad Tarko also note that crony capitalism’s “key distinguishing feature is that the prevailing rent-seeking structure is legitimized by means of a populist ideology.”

It’s not hard to see the hallmarks of crony capitalism potentially taking form in the nascent Trump administration.

In extreme cases, crony-based economies are effectively handed over to the political elite. That’s how it works in Russia, where close personal friends of President Vladimir Putin run the large state oil and gas companies that drive the economy. Or in Indonesia, where members of the Suharto family held control over huge swaths of the country’s economy during the dictator’s two-decade reign ending in 1998.

Trumpism likely won’t be as egregious; the U.S. has much stronger institutions and no history of authoritarian leadership. Still, Trump’s transition already looks much different than anything the U.S. has seen in the recent past. In a direct test of anti-nepotism laws, Trump plans to bring family members like his daughter Ivanka and her husband, Jared Kushner — along with their own complicated business entanglements — into the White House. In addition to his Cabinet, Trump has announced vague quasi-positions for wealthy loyalists and business partners, suggesting they would have influence over areas of policymaking in which some have very clear commercial interests.


For example, failed presidential hopeful Rudolph Guiliani, an early and vocal Trump supporter, has been tapped as a cybersecurity adviser; he also happens to run a cybersecurity consulting business. Carl Icahn, a Wall Street investor and longtime business associate of Trump’s, has been named a “special adviser” on overhauling regulations despite the fact that the value of many of his own investments could rise with fewer regulations.

Earlier this week, the Wall Street Journal reported that the spending involved in any effort to expand infrastructure investment under Trump will for no immediately apparent reason be overseen by a pair of wealthy New York real estate moguls, Richard LeFrak and Steven Roth.

And then there are Trump’s market-moving tweets, in which he metes out praise and threats aimed at major public figures and companies.

Trump’s first high-profile act after winning the election was to cut a deal with heating and air-conditioning company Carrier in order to keep it from moving a factory from Indiana to Mexico. No one would argue against saving jobs, but economists were deeply troubled by the way Trump negotiated an ad hoc deal with a single company to achieve a specific end. The rule of law depends on fair application of the same law to all people and companies, without favor or threat of retaliation.

“The way it has been done, the fact that it does not promote a new policy vis-a-vis everybody but gives targeted incentives and targeted fear — because there is a fear of retaliation — is basically the dawn of a crony capitalist world,” University of Chicago economics professor Luigi Zingales told Bloomberg News in the wake of the Carrier deal.


Some people who’ve studied the phenomenon suggest crony capitalism actually can play a helpful role for developing economies that have poorly defined property rights; giving powerful figures a share of a company’s profit stream is a good way to defend against arbitrary expropriation by the government. But there’s a reason economists abhor crony capitalism in broad terms: Over time, it generates terrible economic results by undermining entrepreneurs, discouraging innovation, and making economies much less productive.

So what happens if cronyism takes hold in the U.S.? No one knows, in part because there haven’t been many examples of rich countries that have turned away from democracy and open capitalism and toward cronyism led by a strongman.

But if you push economists for an example, they’re liable to name Argentina. A century ago, the country was one of the 10 wealthiest on earth, with average incomes higher than those in France, Germany, and Italy. Then, during the worst of the Great Depression, the country broke with seven decades of civilian-led (though limited) constitutional democracy.

A military junta took power, promising to reinvigorate growth by boosting domestic production over imports and tightening immigration controls. This backlash against trade, along with a turn away from democracy, set the stage for decades of crony capitalism, subpar economic performance, periodic financial crises, and tumultuous fights for political power. The U.S. should take note.

“Industrial policies of that sort don’t really have a happy history,” said Raymond Fisman, a professor of economics at Boston University who studies corruption.