So, why does cronyism occur? In my paper, entitled The Economics and History of Cronyism, released today by the Mercatus Center, I cite two factors: government power over the economy and the discretionary power available to particular government officials. If there was ever a doubt that this connection existed, consider this study from MIT, which shows that in the days following the leak of Tim Geithner’s appointment to Treasury Secretary, stocks of firms having any pre-existing connection to him jumped by about 15 percent. Clearly, the market expected firms that were connected to Geithner to do better, all other things equal.

This is from my op/ed, “The Growing Dangers of Cronyism,” in Real Clear Policy, published today.

In the study, I tell my favorite story of cronyism in U.S. politics, which is not a new one but is one told by Robert Caro. Here’s an excerpt from the study:

Between December 1939 and January 1943, despite countless attempts, the owners of Austin, Texas, radio station KTBC were unable to get permission from the Federal Communications Commission (FCC) to sell the station. But on January 3, 1943, the wife of a Texas congressman filed her application to buy the station and 24 days later, after waiting more than three years, the owners were allowed to sell. The congressman’s wife paid $17,500 for the radio station. In June 1943, she applied for permission to operate 24 hours a day, up from daylight hours only, and at a much better part of the AM frequency. The FCC granted permission one month later. While all this was happening, the FCC was under attack by another powerful congressman, Eugene Cox of Georgia. The aforementioned Texas congressman strategized secretly with FCC official Red James and used his influence with Speaker of the House Sam Rayburn to deflect the attack. In fact, James later admitted that he had recommended to the congressman’s wife that she apply for the license. In 1943, the congressman and his wife had a net worth of approximately zero. But by 1964, when this congressman was elected president of the United States, Lyndon Baines Johnson and his wife’s net worth was at least $14 million. The radio station’s value accounted for about half of this $14 million.