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True Capitalists Are Pro-Market, Not Pro-Business—A Commentary by Stephen L. Carter ’79

The following commentary was posted on Bloomberg.com on June 7, 2012.

True Capitalists Are Pro-Market, Not Pro-Business
By Stephen L. Carter ’79

Since the failure of the effort to recall Wisconsin Governor Scott Walker, a curious meme has been slithering through the commentariat: Public-employee unions are down and out.

They aren’t, of course. They remain as formidable as ever, and will spend the current election cycle doing what they do, spending tens of millions of dollars to elect candidates who favor their interests. We might be better off if the unions had less political clout -- as long as the pro-business groups that get up to the same mischief were less powerful, too.

Or so argues Luigi Zingales, a regular contributor to Bloomberg View and a professor at the University of Chicago Booth School of Business, whose new book, “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity,” was recently excerpted in Bloomberg View.

Despite the charmingly misleading title, the volume is not a paean to forced equalization of income or the strict regulation of industry. Quite the contrary. Zingales, who seems to be something of a moderate libertarian, wants to rescue markets and competition from the forces that threaten them: overregulation on the left and, on the right, a pro-business (as opposed to pro-market) ideology.

Crony Capitalism

This last distinction is what makes his book so fascinating. The great threat to our economic future, in his telling, is crony capitalism, along with other forms of rent- seeking that have become ubiquitous in a complex regulated state. Although much of the argument might seem to be standard public-choice theory, Zingales provides an enormous service by laying out such persuasive evidence. Most of the book is devoted to setting forth an original, middle-ground program for getting us out of our current economic mess by reducing the opportunities for rent-seeking and increasing the opportunities for competition.

No reader, including me, is likely to agree with everything Zingales says. But he provides a useful corrective to the sloganeering and cant that inform so much of our public debate about economic policy.

Zingales considers the free market both a moral and economic imperative. He recognizes the current tide of populist anger, reflected in different ways in both the Tea Party and Occupy movements -- and that much of the anger is directed against capitalism in general and big business in particular. The real trouble, he contends, is the death of the Horatio Alger myth. People no longer believe that hard work and following the rules will get you ahead. The game, they believe, is fixed.

Zingales thinks they’re right. Special interests -- particularly big business and big labor -- hold too much influence over the divvying up of resources that has become among the most important functions of government. His solution, however, is less regulation, not more. He prefers fewer and simpler rules, and a government that encourages entrepreneurship without trying to become an entrepreneur.

Predictably, Zingales scoffs at nearly all bailouts: “As with the punishment of children, the costs of financial distress have an important incentive effect.” Were policymakers right in thinking that without the 2008 bailout, the banking system would have collapsed? Zingales is skeptical. Government officials got their information from the very financial institutions they were charged with monitoring. Naturally, he writes, every call from Wall Street to Washington said, “Buy the toxic assets.”

At the same time, he tells us that he has become a supporter (sort of) of the Glass-Steagall Act, which separated commercial and investment banking and was repealed in 1999. In economic terms, he concedes, the costs probably outweighed the benefits. But the rule had a simplicity that even a “six-year- old can understand”: “Banks should not gamble with government- insured money.”

Simple Rules

Simple rules, he says, are better than complex ones, in part because they can actually be subjected to democratic debate, in part because it is harder “to hide the loopholes.” If the basic problem slowing us down is a government built around secret favors for special interests, then simpler rules will leave space for fewer favors.

Then there is the matter of taxes. Zingales would tax capital gains at the applicable personal rate, and in return would slice the corporate income tax to avoid the problem of double taxation. In this way, as any number of economists have pointed out, taxes would be assessed on the profits distributed to the actual owners of the corporation.

But Zingales identifies a different advantage. It is much easier for corporations than for individuals -- even very wealthy individuals -- to lobby for special treatment in the tax code. If corporations aren’t being taxed, or are being taxed only a little, their incentives to seek rents through the tax code evaporate.

He also sees the entire spectrum of deductions on individual returns as an instance of special interests grabbing federal subsidies. He would abolish all deductions while cutting all tax rates, a change that would (he and others insist) produce the same amount of revenue.

Here I register a small but important point of disagreement. Tax simplification is indeed imperative, and doing away with deductions is an attractive idea. But I would preserve the special treatment for charitable donations.

Everything else the government might choose to subsidize through the tax code -- home buying, child care, and so on -- it can support directly, with full transparency and opportunity for debate. The charitable world it cannot, both because the bureaucracy would lack the needed information and because government support would swiftly put an end to the diversity of civil society. I would turn the deduction into a refundable tax credit, to encourage giving even by those who are most poorly off, and to acknowledge formally that a dollar given to support the institutions of civil society is no less important than a dollar given to support the operation of the bureaucracy.

At the same time, Zingales does see the tax code as a vehicle for certain incentives -- not by creating a welter of deductions but by deciding what to tax. Consider his approach to campaign-finance reform. Rather than fussing around in arguments over who should be able to give how much to whom, Zingales would prefer a progressive tax on all campaign contributions, as well as all money spent on lobbying. If it costs me $250 in taxes to make a $1,000 contribution, I am going to think twice. The bigger the contribution, the bigger the tax bill.

The genius of capitalism, he tells us, “is not private property, not the profit motive, but competition.” He sees competition as important in the public as well as the private realm -- a proposition that I will take up in a future column.

(Stephen L. Carter is a Bloomberg View columnist and a professor of law at Yale University. He is the author of “The Violence of Peace: America’s Wars in the Age of Obama,” and his next novel, “The Impeachment of Abraham Lincoln,” will be published in July. The opinions expressed are his own.)