I’ll start with a backhanded compliment. Zingales quickly acknowledges that the anecdote about his friend depicts a quite rare occurrence and then provides evidence of the broad discontent of which is it symptomatic. He provides no comparable evidence for his claim that “Until recently, Americans stood out for their acceptance of basic market principles and even for their tolerance of some of the negative side effects markets produce, such as marked income inequality”. I have seen evidence of that being the case relative to Europe, but Zingales needs to present comparable data from the past to say what kind of change has occurred over time.
The public opinion data he does present is evidence that people place little trust in corporations, even relative to government. However, he is inconsistent in how he presents it: percentages for government but “one out of” for corporations, the latter including a “less than”. In terms of absolute percentage points, the differences do not seem that large.
A repeated theme throughout the piece is how uniquely competitive, the free-market capitalism of the U.S is. That’s overstating things a bit. I consider the Fraser Index to be the best measurement of the economic freedom of various countries, and the U.S has not been number 1 for years. Zingales associates with economic dynamism as opposed to corporate cronyism with less concentration of the economy in large (presumably politically influential) firms. But going by employment, America has less of a small business sector than much of Europe. As Scott Shane points out, that’s the tendency for wealthier countries compared to poorer ones. Rather than simply looking at the size of firms, it would be better to look at how old the major players are. I had a good link in mind for that issue but can’t seem to remember where I found it. Oh well.
Zingales provides symmetry when discussing self-made billionaires in the U.S vs Germany, but then proceeds to associate other countries with industries he views as especially dependent on government concessions without showing how the U.S stacks up. He lists what Italian managers consider to be important components of financial success, but does not do the same for America (or note that Italy is probably unusual among western European nations). Kudos for his mention of research showing how support for capitalism declines with perception of corruption. Bryan Caplan has a less populist take on it than Zingales here.
Zingales portrays anti-trust as anti-business but pro-market. I wish he would have dealt with some of the extensive literature on anti-trust as a weapon often wielded by less competitive established businesses against cheaper and more efficient competitors (Alcoa being the poster-boy), but perhaps that’s too much to ask (and yes, left-libertarians, it probably is too much to ask him about the use of the Sherman act against labor unions). He admits that America’s anti-finance populism led to policies that were “inefficient from an economic point of view, but helped preserve the long-term health of America’s democratic capitalism”. Perhaps as an economist he has special insight about the former, but I’d like some evidence for the latter. He holds up bank regulations that kept banking fragmented as an example, but some economists hold them responsible for U.S economic instability. Canada, in contrast, did not have such branching restrictions, hence a less fragmented banking system, and as a result (many claim) a better performance in the Great Depression and recent recession. Zingales had earlier made the claim in City Journal that it was wise to have financial and political capitals in different cities, but that is not at all obvious. He may also undersell his case for Jackson’s refusal to renew the Second Bank of the United States’ charter: he claims Jackson’s decision contributed to the panic of 1837 whereas one could say that bank president Nicholas Biddle deliberately caused it in retaliation against Jackson.
Zingales also says of salaries in finance “Every attempt to explain this gap using differences in abilities, or the inherent demands of the work, falls short”. This is disappointing coming from an economist. With labor, like anything else, begin with supply and demand. It is widely acknowledged that there was increasing demand for finance. Zingales statement only (implicitly) references the supply of labor. The next question should be whether the redirection of human capital into finance could not keep up (perhaps because of the time required for education), whether the field is characterized by a cartel (as Half Sigma believes) that restricts the entry of labor of something similar. Zingales later suggests that the cream of human capital was being directed into finance for the past 20 years, whereas previously it had been into “science, technology, law, and business” (not medicine?). The gist of that seems plausible, but I’d like some data. He then moves on to deformation professionelle, but gives little evidence that the U.S political elite is disproportionately drawn from finance (rather than, say, business and law). I’ve heard the argument that a disturbing number of our technocrats are Goldman Sachs alumni, but it is the nature of their position rather than background that predisposes them not to think nuclear power is more important than finance. I admit though that his comparison of the last six Treasury Secretaries against the previous six is the sort of evidence I’ve been asking for elsewhere.
I suppose I’m being too harsh for a publication that may not permit lots of footnotes. So here’s hoping that Zingales gives the whole enchilada elsewhere.