Interview With My Favorite Economist

Luigi Zingales of the University of Chicago, co-wrote Saving Capitalism from the Capitalists in 2004, a book hailed as “one of the most powerful defenses of the free market ever written.” Remarkably, it has been praised by those on both the left and the right of the political spectrum as it cuts through the usual entrenched positions, and documents the fragile balance between the market infrastructure needed for economic prosperity and stagnation at the hands of government.

Professor Zingales has just finished a new tome called A Capitalism for the People: Recapturing the Lost Genius of American Prosperity, due out June 6. He drew inspiration for his title from the Gettysburg Address.

 

I recently visited with him about his books, and his passion for a vibrant, competitive financial sector.

Here’s an edited transcript of our interview …

 

Why are you so passionate about free market capitalism?

 

I grew up in country where there was no free market (Italy). It was really a crony capitalist system that was always in danger of collapsing into socialism. We were just a few miles from communist (Yugoslavia). In my country, there was always fear of a communist party take over.

 

What concerns you most about the direction America is heading in now?

 

America has always been the land of opportunity. But America is turning into Italy. I’ve lived this. We take free markets for granted here in America. That freedom is at risk. The financial crisis and bailouts … there is a real attempt at changing capitalism, which is throwing away the baby with the bathwater. We need to fight to preserve the rules and system that make free markets work. Fortunately, America has a popular tradition of capitalism.

 

What are your thoughts on the Wall Street bailouts of 2008?

 

The problem with TARP (Troubled Asset Relief Program), the approach … if you make mistakes in the financial industry you don’t pay for that mistake. It’s becoming a one-way bet. If I win, I keep the money, if I lose, you the taxpayer pay the cost. What makes it insidious, this is presented as way to help people in a distressed situation. It was sold as way to save America. Either you approve this or ATMs will run dry and world will fall apart.

 

Should we have let the banks go bankrupt?

 

My proposal was a managed bankruptcy process. You don’t want to have a bank panic like the Great Depression. But banks have long-term debt in their corporate structure. It could have been used to bear some of the losses before the taxpayer came in. But there was no political will do it. The bankers who made these bad decisions, they still have their jobs and money. We didn’t go after them. If we had declared some form of bankruptcy, there was a way to claw back excessive compensation and pay. Obviously, the bankers did not want to do that. But without the bankruptcy, there’s no legal framework to claw money back. It’s pretty outrageous.

 

What are your thoughts on the Dodd-Frank regulation?

 

It’s a monstrosity. It’s 2,400 pages. It mandates 67 studies and further regulation down the line. It’s designed in a way no human being can follow it. In the shade of complication, all bad things happen. All too often we advocate for zero regulation. We need regulation, but it should be so simple that everyone can understand. Once we lose the ability to understand the regulation, that regulation is designed to aid incumbents in the marketplace.

 

Something needed to be done. I was in favor of much simpler approach, not to add 200 agencies to do studies and do nothing. We underestimate the burden this brings to the country. Every page of regulation employs a few accountants, lobbyists, and lawyers to fight over it. This is unproductive work that is bringing down the competitiveness of America.

 

Regulation should be simple so regular people can understand whether this is a good idea. This would eliminate the waste of regulation.

 

What can we do to get the simple regulation and pro-market policies we need?

 

We really need more awareness. There are not enough people in United States who understand how corrupt the system is. I myself did not understand how corrupt the system is. The system of fundraising is distorting in favor of incumbent (firms). The system is designed to employ lobbyists and lawyers in D.C.

 

Our participation in politics is crucial. We need to demand simple regulations that we can understand. We need a simpler tax code. The differences in tax code are horrendous and facilitate dishonesty. The code favors people trying to hide money rather than favoring hard-working America. I think the need for simplicity and transparency is crucial.

 

I think whistle-blowing is a strong form of popular control. We could eliminate some government agencies, and replace them with a whistle-blowing system. We could have very simple rules enforced by ordinary people rather than government agencies that don’t have the political will to go after the powerful.

 

We also need to eliminate government subsidies. Subsidies distort markets, and take away incentive to achieve. The best example of how terrible it is … I teach entrepreneurial finance. In the Spring of 2009, I had students who wanted to start a new kind of financial intermediary. I was initially excited, then, as I moved along, I realized they wanted somebody to help lobby in D.C. to get them subsidies. When the students at the University of Chicago (home of Milton Friedman) are now specializing in lobbying Washington, we’re losing the essence of free market capitalism.

 

Can we change things?

 

We need to not let the intellectual debate about crony capitalism be monopolized from the left. Eventually, there will be awareness of the danger of crony capitalism. Let’s remind everyone that being supportive of business does not mean being in bed with business. We need to create a grassroots popular movement that really fights to change the current system.

 

 

About Nicole Coulter

Nicole is always looking to discuss practice management strategies. Follow her on Twitter (@RIAWriter) and she will follow you back.