«For almost the last forty years, we have witnessed an extreme tolerance towards all kinds of mergers and acquisitions.»
Murky deals, favoritism and the non-transparent role of special interest groups in the legislative process are making headlines in democracies around the globe. Luigi Zingales warns that such intrigues are undermining free markets and people’s trust in capitalism. Therefore, the renowned professor of entrepreneurship and finance at the University of Chicago Booth School of Business is championing fair competition and stricter antitrust legislation.
Professor Zingales, in the United States as well as in Europe, criticism against capitalism is on the rise. How concerning is this development to you?
It’s pretty bad. It’s pretty bad because in the last twenty years capitalism has not delivered what it promises to deliver. There are a lot of problems with capitalism today. As a result, what we’ve seen all over the world is a revolt. It’s an irrational revolt – but irrational in terms of the form, not necessarily in the critic against the capitalist system as it is run today. This revolt takes different forms: From President Trump in the US to Brexit in the UK to the recent political crisis in Italy. What every case has in common is the complaint that the system, as it is designed today, is not delivering for the vast majority of people. It’s not what I call a capitalism for the people.
What are the consequences of this revolt?
There is a huge backlash to throw away the baby with the bathwater. The good news is that there is not a coherent alternative. Fifty years ago, there was a coherent alternative. It was wrong and called communism. In those days, people were going to the streets in France, in Italy and in Germany trying to create a different world. These people had a very clear alternative in mind. Today, I don’t think there is a real alternative to capitalism out there. In some ways it’s maybe an attempt to go back to a world that we can’t recover, to try to close down against globalization and to try to appeal to ethnic identities. But there is not really a coherent narrative. What’s coherent however is dissatisfaction.
So what we’re seeing now is that the United States, historically a beacon for free markets and global trade, is imposing import tariffs on steel and aluminum.
I don’t think we have seen the worst yet. Especially because I don’t see really a good reaction by the establishment. Here at the Stigler Center at the University of Chicago we recently hosted a conference called «Populist Plutocrats: Lessons from Around the World». We did analysis of major Trump-like figures: Silvio Berlusconi in Italy, Thaksin Shinawatra in Thailand, Rodrigo Duterte in the Philippines and Alberto Fujimori in Peru. What I found most interesting is how similar these situations are and how much the rise of populism is a reaction of the failure of the existing elite. The people are sick and tired of the establishment’s attitude. That’s the reason why the more newspapers like «The New York Times» pile up against Trump, the more votes he gets.
Trump promised his supporters to attack the establishment and to «drain the swamp» in Washington. How’s that working out so far?
The swamp is alive and well. I don’t think it has changed much. We have to realize that Trump has been elected by a coalition of two groups: The populists à la Steve Bannon on one end and the rich establishment à la Robert Mercer at the other end. Until recently, Trump really put through the agenda of the rich establishment. He didn’t do anything disruptive with respect to the swamp. But I don’t think he can continue this way because this would clearly lead to a disaster in the next election. That’s probably why he started to use these trade sanctions. It will be interesting to see what he’s going to do in the future. He needs to deliver on the populistic front and we don’t know what he has on his agenda.
Trump also promised to break the power of lobby organizations and special interest groups.This situation is even worse now. Before Trump lobbying was mostly about pressure to design laws in your favor. Also (ALSN 116 4.32%), there was at least a pretense of some objective and impartial procedures. Today, what Trump is trying to do is to introduce total arbitrariness. He’s not behaving like a developed country leader but more like a leader of a Latin American country where you’re always at risk of being attacked by the government if you are not on the president’s side.
What are the social and economic ramifications when it comes to the growing power of lobbyism?
Once you gain a lot of economic power it’s much easier to gain political power. Then you can you use the political power to entrench yourself and to prevent competitors from entering in. I call this the Medici vicious circle because the Medici made their money in banking, based on their skills, in the 15th century in Italy. But once they became economically powerful they became also a political dynasty in Florence and obtained many licensing rights in mining and in other sectors. This allowed their dominance to last for centuries. So what I’m saying is: your economic ability may be limited in time. But what gives you staying power is when you control political power. So everybody who has a lot of money tends to try to transform his wealth into political power because that gives him or her a longtime perspective.
Is this what’s happening in Washington right now?
Absolutely, you can observe it in every sector. Just look at what was exposed with respect to AT&T (T 32.39 0.09%), Novartis (NOVN 84.08 1.96%) and other large companies. They were trying to get some special relationship with Trump’s personal lawyer Michael Cohen in order to get more power in the future. So the entire game of lobbying is being played in this direction – and that’s really bad for free markets.
Then again, on Wall Street Trump is celebrated as a pro business presidentMost people confuse these two things: Being pro-market is being in favor of a competitive market system where you give everybody opportunities, but you don’t favor anybody. On the other hand, being pro-business is actually favoring existing businesses at the expense of other constituencies. An example of this is Wisconsin giving 4 billion dollars in tax credits to Foxconn to build a new factory.
What’s wrong with that?
This is a huge distortion: While Foxconn is subsidized, other companies which operate in Wisconsin are paying regular taxes. So basically, they pay regular taxes to subsidize Foxconn. Also, this leads to a race to the bottom. Take the fight for Amazon (AMZN 1819.96 3.35%)’s second headquarters as an example. States and cities compete for the attention of big corporations and at the end of the day the winners are the corporations not the taxpayers. In this dimension, the European Union is much better than the United States.
Because the European Union prohibits countries to compete with favors. Yes, you can have lower taxes like Ireland has. But everybody in that country has lower taxes. It’s not like you allow only lower taxes to Apple (AAPL 222.15 2.2%) because it’s a big company and a friend of the government or for other reasons. These kinds of deals which favor large businesses at the expense of other companies are really the prototype of a conduct which is pro-business but is very much undermining competitive markets. It’s like feeding wild animals.
What do you mean by that?
I recently went to the Grand Canyon. There, I saw a note that was saying: Please don’t feed the wild animals. Below was an explanation saying when you feed them they lose the ability to gather food in the wilderness. So it’s precisely because you love animals you don’t want to feed them. The same is true for businesses. I would like that such a note be posted in Washington, in Rome and in every other capital saying don’t feed businesses. So it’s not because I don’t like businesses. But precisely because I do like them I want them to remain competitive and to be able to make profits in the marketplace. I don’t want to give any favors to them because that will undermine their resilience.
Another trend we’re seeing is an accelerated activity in terms of mergers and acquisitions. What’s your view on this?
For almost the last forty years, we have witnessed an extreme tolerance towards all kinds of mergers and acquisitions. This presumption of «laissez faire, laissez passer» has dominated mostly in the United States whereas Europe has been more restrictive. Now, I think the time has come to question whether we have gone too far. That’s something that needs to be changed. We should analyze each merger much more carefully case by case.