So what’s wrong with this cozy relationship between business and government? It’s not just that cronyism takes wealth from the less politically organized to give to the more politically organized, but also that this taking and giving destroys wealth. For example, when the government bails out its cronies (think former Treasury Secretary Paulson and AIG), it destroys wealth in several ways.
First, by taxing people to get the bailout funds, it reduces the incentive for taxpayers to be productive. Even if the bailout is financed with borrowed funds, borrowing now means higher taxes later. Additionally, business risks are transferred from companies and banks to the taxpayers footing the bill.
Second, by giving money to companies that can’t make it on their own, the government diverts capital from where consumers want it used to where the government wants it used. As we’ve seen in the case of Solyndra and so many other subsidies, the government doesn’t always hit the mark when it comes to good investments.
Finally, when politicians dispense special privileges to certain businesses, a vicious cycle ensues: Businesses put their financial resources towards currying favor with politicians rather than investing those resources in their product and their customers. In short, the government doesn’t do a very good job of picking winners and losers. As Lawrence Summers, Obama’s former economic adviser once said, “…the government is a crappy [venture capitalist].”