The Man Who Would Save Capitalism From Capitalists

Could the sweetheart ties between government and big business kill capitalism and Western democracy?

Prime Minister Benjamin Netanyahu has a new economic bible. It is a relatively new book: “A Capitalism for the People: Recapturing the Lost Genius of American Prosperity,” the bestseller by Italian-American economist Luigi Zingales, published by Basic Books in June 2012. In a closed meeting that took place recently at the Kirya, Netanyahu pointed to the book, which was brought from his bedside, and said: “I’m with this guy, I’m with him.” At the swearing-in ceremony of Karnit Flug as Bank of Israel governor earlier this month, Netanyahu mentioned the book in the context of restoring fairness to the economy, and in a Knesset speech he used the book to justify a call for reform at the Israel Land Authority.

Zingales, a professor at the University of Chicago Booth School of Business, is one of the leading economists in the U.S. today. Last year, the magazine Foreign Policy crowned him one of the world’s top 100 most important global thinkers. He is an intellectual who has devoted his life to battling crony capitalism, a prophet of doom who fled corrupt Italy for the United States, and there found in recent years that it is becoming more and more like Berlusconi’s Italy. In his book ‏(which was preceded by “Saving Capitalism from the Capitalists,” which he co-authored with the influential economist Raghuram Rajan, now governor of the Reserve Bank of India‏), Zingales charts the course of America’s economic decline, and likewise the decline of the Western economy as a whole, having fallen prey to close-knit ties between business interests and governments.

He has never met Netanyahu, and was not aware that the book he wrote has received such warm recommendations from Israel’s prime minister. “I’m proud, this is a surprise to me,” Zingales, 50, says in a telephone interview with Haaretz while in Italy. “Precisely because they are not clearly on the right or the left, I was hoping that someone would see the value of my ideas.” (Guy Rolnik looks at nine things Netanyahu could learn from Zingales’ book in today’s Haaretz Magazine.)

Zingales does not fit any familiar stereotype. In the eyes of many, he is considered a conservative economist: he teaches at the University of Chicago, cradle of the free market champions, and he defines himself outright as a free-market economist. No one could suspect him of being a socialist: He is not fond of unions, and both his books are characterized by a profound anxiety about what he sees as an unprecedented threat to the identity of American capitalism as we have known it for the past century.

Nevertheless, many of the things Zingales says would not sit well with the conservative economic camp. He regularly attacks the corrupt connection, in his eyes, between big business and the U.S. government, and he believes in strong regulation − particularly of the banking sector − and in social safety nets. A market, he says, cannot function without well-defined rules.

He is “one of them,” as he writes in his book − a wealthy professor of economics, a member of the 1-percent club − yet he assails the class to which he belongs and identifies with Occupy Wall Street. He does not consider himself a conservative economist, but rather, in his own words, a “radical.” In general, he thinks the old distinctions between left and right are outmoded. “The false dichotomy between people who support unions and people who support business is fake,” he argues. “There is no right and left anymore; there are only two sides − pro-business or pro-people.

“I am a free-market economist, yes,” Zingales avers. “I don’t trust the political system to be good at substituting for the choices of human beings. So in that sense, I am in the tradition of [Ronald] Reagan, to say I want people to be free as much as they can, but on the other hand, I do recognize that the free market is a creation of human beings, it’s not like a natural outcome. It’s a delicate balance, it needs to be built in advance and protected. I think that all too often people say they are free-marketeers, they basically say ‘laissez-faire, laissez-faire.’ They don’t recognize that there are distortions in the marketplace, and we need to intervene to minimize these distortions.

“In general, the political spectrum is divided between those who say ‘we should not intervene at all’ and those who want to intervene very massively because they don’t trust the market to function at all. I think that if the market is put in the right conditions, it can work. Unfortunately, very often it is not, so there is too much monopoly power, there is too much political power, there is too much corruption, and in this situation, saying that we should do nothing and just let the market play is a crime, because that’s not a market, it’s a jungle, and that’s very dangerous.” In fact, it seems there is very little in the current system that he would care to preserve: “Absolutely,” Zingales confirms with a laugh.

Zingales visited Israel last December. In an interview he gave to Haaretz at that time, he described at length what he saw as a connection between the economic ills of his native Italy, his adopted homeland the U.S. and Israel: “There is essentially no difference between the U.S. and Italy and Israel. In all three, the problem is the close tie between business and government. The three countries are at different stages of this relationship, and in all three cases the ones who profit from the deal may be different, but the mechanism is the same mechanism,” he said, adding: “Business, the unions and government are part of the same game. They use each other to advance their own interests. The unions cooperate and the government supports. It is a very dangerous situation.”

In “A Capitalism for the People,” Zingales expands on the similarities between today’s U.S. and Berlusconi’s Italy. In the 2012 interview, he pointed out quite a few similarities he sees between Italy and Israel: “In Israel, the ownership in the business sector is concentrated, just like in Italy, which gives the owners of major companies great political power,” he said. “Both are relatively small countries, and a situation has formed in them in which a small business elite is in bed with the government. In both countries, there are parties on the left that most of the time put on a show of fighting the capitalists, but in practice they are more connected to them than opposed to them. In both, there is media that has difficulty maintaining independence, and an independent media is vital to preserving democracy. Without democracy that functions well, there is no free market.”

Zingales, whom in 2008 the Italian newspaper Corriere della Sera called among the “most brilliant brains behind globalization,” has spent the past few years careening between anger and fear. He fears the waves of economic and political populism he recognizes on left and right, the ones that call for the toppling of the system, and that brought about the rise of phenomena such as Occupy Wall Street and the Tea Party in the U.S., Beppe Grillo’s Five Star Movement in Italy and, to a certain extent, also the success of Marine Le Pen in France. He is furious because, he admits, he agrees with many of the things the populists are saying. He is furious because American and Western capitalism has been hijacked, to his mind, by a degenerate alliance between the capital holders and the politicians, an alliance that is based on personal ties and government subsidies. He is furious because the present economic system guarantees that the rich will get richer and the poor will remain behind. He is furious because he left Italy to get away from a system that robbed the Italian people of a chance for prosperity − only to find that Italy had trailed him to the U.S.

‘Italy invented the term nepotism’

Luigi Zingales was born in 1963. His childhood memories of Italy in the ‘60s and ‘70s are closely bound up with phenomena such as runaway inflation, high unemployment and violent riots, but also with nepotism. “I came here in 1988 from Italy because I was trying to escape a system that was fundamentally unfair,” he writes in “A Capitalism for the People.” “Italy invented the term nepotism and perfected the concept of cronyism, and it still lives by both. You are promoted based on whom you know, not what you know.”

Zingales developed an interest in economics while at Bocconi University in Milan and wanted to pursue graduate studies in the field. “Many people, including my father, told me that if I wanted to have a university career, I had to pay my dues to some local professor... which meant essentially working for free not only on his academic projects but also on his consulting ones. I decided instead to apply to universities in the United States,” he writes in the book.

Even though the application process for admission to U.S. schools was not easy − Zingales had trouble getting a letter of recommendation from one of his professors, because, he claims, that professor had time to write recommendations only for those who had secured the support of influential people − Zingales managed to get into MIT and in 1988, he moved to the U.S. He idealized the U.S. and wanted, in his own right, to realize the American Dream, the one in which a talented individual can achieve and be anything he wants − in contrast to Italy, where he might become one of the thousands of talented people who got stuck in junior positions because they didn’t know the right people, while their mediocre friends who wisely buttered up the right people or had been born to the right parents were promoted.

“Even emergency-room doctors in Italy are promoted on the basis of political affiliation instead of ability. Young people, rather than being told to study, are urged to ‘carry the bag’ ‏(fare il portaborse‏) for powerful people, in the hope of getting back some favors,” he writes in his book.

Until the financial crisis of 2008, he writes, he was not much involved in the American political debate. But over the years, he did notice signs that “felt more like home.” The bailout of the hedge fund Long Term Capital Management ‏(LTCM‏) in 1998, for example, which was brokered by the government and demonstrated perfectly what crony capitalism is. Or George W. Bush’s years in the White House, when corporations enjoyed the dual sponsorship of Republicans and Democrats at the same time. This was unique to Bush’s presidency; the Republican party moved away from pro-market policies espoused by Reagan and became increasingly pro-business, while Democrats were becoming cozier with big-business interests.

When the financial crisis hit, the consequences of these processes were already apparent. The real median wages of households in the U.S. fell and unemployment among young people rose sharply. While the middle class groaned beneath the burden, the bankers who had put the U.S. in its severest crisis in 80 years went on granting themselves fat bonuses − from the money of the taxpayers who had rescued them − and to keep rising even as they failed.

The public rage that formed in the presence of this deep and thorough sickness at the heart of the American economy led to a populist wave that contributed to the creation of two movements: the Tea Party on the right − which, under the auspices of billionaires like the Koch brothers and Rupert Murdoch, harnessed the populist rage of the Republicans against the system − and Occupy Wall Street on the left. Despite the profound ideological differences between the two movements, Zingales recognizes similarities, seeing them as two sides of a common phenomenon.

“I think we have seen throughout Europe, and even in the United States, a rise of populism, and I think that I provide a way to answer some of the issues without going to the radical alternative. So I think that any intelligent politician who is afraid of some radicalization of the political debate should look at the book and see something useful there,” he tells Haaretz. “I think that the [Italian] election at the beginning of this year witnessed a party run by a professional comedian [Beppe Grillo]. I make a distinction, because a lot of the other politicians are just amateur comedians, and this one is a professional, getting 25 percent of the votes.

“Unfortunately, I think it’s a preview of coming problems in other countries, as well. We have seen that in France, where the first party according to polls is Marine Le Pen [the National Front], and in Greece, this position is divided between some communist parties and neo-Nazi parties, so I think this disaffection of a lot of people is growing and I think any politician with a brain, whether he is from the left or the right, should see this problem and should try to address it.”

Wrong about ‘too big to fail’

The financial crisis also led Zingales to change many of his views on basic economic questions. “I got more worried about the instability of the free-market economy, and I’m also very worried about the devastating effects of bad investments and bad regulation. I think the combination of the two needs to be addressed. I did not think that ‘too big to fail’ was such a huge problem, and I’ve also been proven completely wrong. If you had asked me in 2005 if it was a big problem, I would have said no, and of course now I realize how big a problem it is.”

Today, he is in favor of reintroducing the Glass-Steagall Act in the U.S., legislative provisions from 1933 that restricted affiliations between investment banks and commercial banks. “I think that a homogeneous banking sector would be too powerful politically,” he says, meaning that it cannot coexist with a functioning market.

In “A Capitalism for the People” Zingales sketches a frightening version of the way in which nepotism and the culture of cronyism destroyed Italy. He also describes the potential − and bleak − future of other economies threatening to follow suit, particularly the U.S.: Mothers who push their daughters into the arms of the wealthy, because they view a match with power brokers as the sole path to social advancement; mediocre people who reach key positions because of personal connections, who then employ only people inferior to them. In countries where nepotism is rampant, he warns, the most talented rush to leave, and the human capital of the country dissipates. Crony capitalism leads to a cruel cycle of erosion in competitiveness, and to expensive government subsidies for the private sector, creating debts which are paid, ultimately, by generations to come. This ultimately leads to an inevitable decline in the quality of life. The root of a solution, Zingales says, is first of all to understand the difference between being pro-market and being pro-business: “The typical business person would like to have a free market when they want to enter an industry, and the moment they are in the industry, they want protections.” That is why he wrote the book, he says: to try to save American capitalism from self-destruction and restore the U.S. to its former standing as a meritocracy, a country in which the talented can succeed based on their talent, rather than on the basis of their parents’ capital or their acquaintanceship with this or that senior official who used to be the CEO of Goldman Sachs.

Echoes of Zingales’ economic approach could be heard in Netanyahu’s pre-taped address on November 6 to the Israel Democracy Institute’s Eli Hurvitz Conference on Economy and Society. Netanyahu spoke about “cartels and monopolies” of private capital holders having taken hold of the country. “These cartels collaborate with officialdom, the law and the bureaucracy,” Netanyahu said, in a speech that underscored the importance of competition as a tool for improving the social situation.

A week later, Netanyahu again brought up Zingales’ economic philosophy. At Flug’s appointment ceremony, he said: “There is a difference between being pro-business and pro-market. Pro-business is aiding cartelization or monopolization of the economy. Pro-market says the opposite: encouraging competition, because competition is beneficial. So long as there is no draining of factors that prevent competition, and it makes no difference whether it be government or business or other factors, to the best of our ability to enable real competition, prevent concentration, prevent unfairness, enable distribution of financial and other resources to truly make those tools possible, both for growth and for the distribution of the growth, the fruits of growth. That is a far from simple task, because no small concentration has grown up in the State of Israel.”

Still, it is hard to imagine Netanyahu, the sworn neoliberal, agreeing with everything Zingales says. Battling unions he can understand, but how would he react to Zingales’ advice regarding severing the pact between politicians and big business? Increasing competition is a slogan that pretty much any politician can agree with, but what about actively fighting inequality, or increasing government investment in education and vocational training?

It is easy to identify with the inspiration Zingales draws from Ronald Reagan, but Zingales does not appreciate only the economic legacy of the late American president: He also calls on politicians to listen to the “populists” in the protest movements of recent years, and respond to their calls.

Together with six other economics professors, Zingales founded Stop the Decline ‏(Fermare il Declino‏), a political party that ran in Italy’s 2013 general election and aspired to lead far-reaching reforms in that country’s economy. It drew for inspiration on The People’s Party, also known as the Populists, a short-lived party that changed the political debate in late 19th-century America. In Italy, the movement wanted to sever political debate from the polarization that had taken it over: The right claimed the major threat to Italy’s economy was over big government, while the left claimed the problem was the business sector. Meanwhile, nobody was dealing with the pact that had been forged in reality between the two sides.

Stop the Decline did not meet with the electoral success Zingales and his colleagues had hoped for. Shortly before the elections, it was discovered that the party’s leader − journalist Oscar Giannino − had falsified large parts of his resume, mainly his academic degrees. Zingales, who was not himself a candidate for election, was the one who exposed the fraud.

“This damaged the party tremendously, but I felt I had to do it because it [would have been] very dishonest, once I learned it, not to reveal it,” he says.

Even if it had not collapsed, it is hard to believe that a party founded on the basis of Zingales’ ideas would have won the support of the masses. His economic message is too complex and tough to pigeonhole. On the one hand, he supports a free market, while on the other, he supports tight supervision of that market. On the one hand, he is an avowed Reaganite who is in favor of minimum government intervention in the economy, but on the other, he supports taxes, social safety nets, and government investment in education. On the one hand, he rejects professional unions as a hothouse for nepotism and corruption, and on the other, he denounces the corruption of the big corporations and the politicians who are in their pocket. In the current political situation, regardless of the country, Zingales is a strange bird.

In his book, Zingales describes meticulously the current ills of the American system: the closeness between the financial system and its regulators; the big money that has turned the branches of government into the slaves of lobbyists; the culture that lets people like James Johnson, the former CEO of the government mortgage behemoth Fannie Mae, who played a large role in creating the conditions that led to the crisis and still serves on the board of directors at Goldman Sachs, to get ahead despite the disasters for which they were responsible. Seven of the 10 wealthiest counties in the U.S., he points out, are in the vicinity of Washington, D.C. “And you know, nothing is produced in Washington,” he tells Haaretz, “so all that wealth is a result of rent-seeking.”
Zingales says the takeover of the media by large conglomerates played a major role in the corruption of capitalism, since an independent media is vital to a functioning economy. He notes that much of the media in European countries and elsewhere is subsidized by the government. If you prop up failing businesses, you preserve bad information, he says.
In contrast to the many economists who denigrate the social protest movements or simply pick the side that suits their personal interests, Zingales suggests that politicians overlook the details that differentiate the protest movements on the right and left and listen to their remarkably similar insights into the ills of the system. Accordingly, the solution Zingales dreams of is a populist party that supports free markets and is characterized by complete distrust of the government, big business and organized labor − that would restore the government to the public. Inequality isn’t going to resolve itself, he says.

“I am worried about the survival of the Western democracies. During the past 50 years, I think that they worked relatively well, but [that’s because] there was a fairly generalized consensus. Increased inequality may undermine the consensus and generate, paradoxically, a style of two extremes − on the one hand, sort of populist and on the other hand, cronyism. Look at Latin America, places like Argentina, where inequality has always been huge, and see how devastating the politics have been there; so we have to be extremely careful about that.”

Zingales describes himself as “an old capitalist,” the kind who draws inspiration from Adam Smith as much as on more modern economists. His book harshly criticizes the American economy, which he says is turning into “an economy of superstars”: an economy in which “the winners enjoy a disproportionate share of the market and the profits, and the rest get the crumbs.” The direct consequence of such an economy, which is partly also a consequence of technological progress and is especially common in the software industry, is greater inequality.

Reuters