Cronyism and the Misuse of Government Subsidies
Cronyism is the downfall of shaping major infrastructure because it allows political powers to replace market discipline. A driving force in the race for innovation, which can be traced back to the beginnings of the development of transcontinental railroads. This era was a transformative period in American history when rapid industrial growth and westward expansion occurred in the United States. The development of the transcontinental railroad reduced travel times, boosted trade, and encouraged people to live all over the US. It also sped up economic development, unified the country, and played a large role in shaping America today. However, there were some flaws that needed to be worked through in order for its success to be relevant today. Because government subsidies often unfortunately invite cronyism, leading to inefficiency and a waste of resources.
Cronyism
What is cronyism? Before this lecture, I had never heard of this term before. So in my own words, cronyism is similar to what some people call handouts. When people in power give jobs or advantages to their friends, family, or political allies. Not necessarily because they are qualified, but simply because of their personal connection. Which can lead to unfair advantages, corruption, or misuse of resources. This topic is similar to our discussion on government subsidies from the previous week. In the sense that subsidies aren’t always the right way to go about when it comes to innovation. Especially if the success of the business is more reliant on the government, rather than looking for other ways to provide more competitive products or services. Ultimately this leads to a lack of innovation, a waste of resources like financial support, and creates an unfair market for all businesses.
Government Subsidized Railroads
The Union Pacific and Central Pacific Railroads were the first continental railroads to be built and they were heavily supported by the government with land and government bonds. The people behind the building of these railroads took advantage of their resources and began to slow down their process to gain more subsidies. Not only did they slow down their process but they also chose more expensive routes to try and gain more subsidies for their own means. Because they were not using the resources provided to them and instead taking what they could, the railroads they were producing were poorly constructed, and built in a way that did not benefit the public. This misallocation of resources was a form of corruption that led to overbuilding and later on bankruptcy from these companies when the government pulled their funding.
Non-Subsidized Railroads
James J. Hill, used as an example from the lecture, was an entrepreneur who operated based on efficiency, profit and loss discipline, and long term insight. Without the help of subsidies, he was able to produce a railroad system that was shorter and straighter. He also used high-quality materials to ensure that less maintenance would have to be performed on the railroads over time. Which reduced his overall costs and improved reliability for taxpayers. His railroad is proof that success is driven by market exploration and not political favor, unlike the other railroad companies.
How Can We Prevent the Negative Effects of Cronyism?
While some subsidies have benefits and when used properly can help those in need of support, they can often distort incentives. Entrepreneurs who work under profit and losses are held accountable and can encourage the natural effects of innovation. Cronyism that is encouraged by subsidies can lead to waste and in the case of the railroads, this is evident. Because the railroad companies that did receive bonds didn’t necessarily have the qualifications for the job but they knew the right people. However, the results of this led to financial failures showing that this is not always the best approach.
**Conclusion **
What surprised me the most about this topic was how selfish everyone was. I am shocked that so many people used this new emerging system to try and get some sort of financial compensation from it. While I can understand trying to help family or friends, many of the people involved sought to mainly help themselves with the help of those they knew. It also makes me wonder how much this still happens today, even with a more advanced checks and balances system. I also found it inspiring that despite no financial support from bonds, Hill was able to outperform the two other companies that did receive government assistance. It shows that smart entrepreneurs can use the resources they have to provide products or services that they have without the help from handouts.
