Watch out! Crony capitalism is coming to America

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There have been many analyses of the probable macroeconomic impact of Trump’s tariffs, which will, if they are anywhere near as big as he has suggested, be seriously inflationary. Arguably, however, their corrupting influence will, in the long run, be an even bigger story.

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Why do tariffs create more potential for cronyism than other taxes? Because the way they operate under our laws offers so much room for discretionary enforcement. The Treasury secretary can’t simply exempt his friends from income taxes (although Andrew Mellon handed out highly questionable rebates in the 1920s). The president can, however, exempt allies from tariffs. And does anyone really believe that the Trump administration will be too ethical to do so? Trump himself has bragged about his ability to game the system; he has bragged that not paying his fair share of taxes makes him “smart.”

Will tariffs be the only major potential engine of crony capitalism under the incoming administration? It’s doubtful. If you think about it, Trump’s deportation plans will also offer many opportunities for favouritism.

Some of Trump’s advisers, notably Stephen Miller, seem to imagine that they can quickly purge America of immigrants who entered the US illegally, rounding up millions of people and putting them in “vast holding facilities.” Even if you set aside legal issues, however, this is probably logistically impossible. What we’re much more likely to see are years of scattershot enforcement attempts, with raids on various businesses suspected of employing such immigrants.

But what criteria will decide which businesses become priority targets for such raids and which will be left alone, effectively exempted, for years? What do you think?

And there’s more, of course. For example, Trump has suggested a willingness to take away the licenses of TV networks that provide, in his view, unfavourable coverage.

If crony capitalism is coming, what will it do to America? Obviously it will be bad for democracy, both by helping to lock in a large Republican financial advantage and by guaranteeing vocal business support for Trump, no matter how much damage his policies do. It will also enrich Trump and those around him.

Beyond that, a system that rewards businesses based on their political connections will surely exert a drag on economic growth. Many attempts to explain Italy’s dismal economic record over the past generation attribute poor performance in part to pervasive cronyism.

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One recent study found that populist regimes, whether of the left or the right — regimes that are generally crony capitalist as well — tend to suffer a long-run growth penalty of about 1 percentage point each year.

Time will tell. The evidence suggests that the rules for how to succeed in American business are about to change, and not in a good way.

This article originally appeared in The New York Times.

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