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Crony Capitalism: Practice (Part 2)

Editor note: This post follows Part I’s Crony Capitalism: Principles. On Tuesday, Robert Bradley will post on cronyism in the U.S. energy industry.

Cronyism differs from industry to industry. That variation depends on the extent to which a field is regulated, on how much those regulations are subject to interpretation, and, especially, on whether government is a major payer (as in medical and hospital care) or can give or withhold the permission literally to exist (as in mining or energy production).

Today, a Wall Street firm will contribute millions to the election of Democrats and Republicans, because it dares not risk lacking “access” to the White House and Congress. The firm’s “investment” has nothing to do with innovation, production, or meeting demands of customers. It may be buying protection against political power in exactly the way a restaurant owner in Brooklyn must buy “protection” when the mob comes seeking a cut of his profits. Or it may be buying the political influence to shape regulations and taxes in ways that give it an advantage over competitors.

There also are corporations virtually built on government influence, for whose executives lobbying is a “core competency.” In 2008, Fannie Mae and Freddie Mac, the biggest mortgage-financing firms in America, were publicly owned, profit-making companies, listed on the New York Stock Exchange.

They also were creations of government (designated “government sponsored enterprises”). In the run-up to the 2008 financial panic, they spent huge sums lobbying Congress to win permission to leverage their mortgage investments far beyond limits set on any private bank. They purchased and “securitized” huge numbers of mortgages from banks—enabling those banks to lend still more. Investigations into the complex causes of the real-estate bubble and the deceptive packaging of sub-prime mortgages—and thus the financial panic and recession that followed—routinely point to the role of “Fannie” and “Freddie.”

As the gargantuan “Patient Protection and Affordable Care Act” (known as “Obamacare”) was debated, hundreds of hospitals, physicians groups, pharmaceutical corporations, and medical technology companies besieged Congress to fight for the inclusion or exclusion of sections of the Act that could affect their profits or their very survival.

The orgy of horse-trading continued until the day the Act passed. It was as though armies were locked in battle to fight and die for every inch of ground. Professional organizations and associations, businesses, and lobbyists spent millions, as earlier they had spent millions in campaign contributions to the Congressman—or President—on whom they now called for favors.

The businessmen, doctors, and hospital administrators who flocked to Washington to try to influence the Obamacare behemoth—and spent millions on well-connected professional lobbyists (almost half of former Congressmen in the private sector are registered lobbyists)—did so for one reason. In our crony capitalist system, government has the power to advance or set back the profits, career, and income of anyone who works for a living.

That power, growing decade after decade in America, makes cronyism inevitable. As intervention and spending have burgeoned, so has the constant stream of petitioners to Washington and state capitals, seeking what they need or want from politicians and bureaucrats. In 2009, the U.S. Chamber of Commerce, the country’s largest lobbying group, spent $144.5 million on lobbying; it has 150 lobbyists working on its behalf. ExxonMobil spent $27.4 million.

The American Association of Retired People (AARP) spent $21 million. The American Association of Realtors spent $19.5 million. The American Beverage Association spent $18.8 million. In total, since 1998, just the top 20 lobbying groups spent more than $4.0 billion. But these sums, which count only direct lobbying expenses, are dwarfed by the total expenditures—and the millions of hours—organizations divert to influencing government.

The solution is the one that shapes the philosophy of the U.S. Constitution: strictly limit government power and sharply define and delimit the powers that government is given. Put government back in the business of protecting property rights and upholding a basic framework of laws: the kind of laws enforced by the police and courts—not by regulators and dispensers of trillions of dollars for plans and goals imposed by government.

Don’t think that those regulations and trillions of dollars of largesse are dispensed in “the public interest.” Government cannot discern, cannot fathom, the “public” interest amidst the countless daily choices, plans, and actions of hundreds of millions of individuals and businesses. In reality, the regulations and trillions in largesse are spoils won in the ceaseless war of pressure group against pressure group to seize the transitory advantage of political favor. They can be nothing else

Crony Capitalism Gone Mad

As I mentioned earlier, there is one development, more than any other, that put “crony capitalism” into the vocabulary of the American people

In September 2008, as the financial panic began to unfold, Treasury Secretary Henry Paulson—who came to the Bush administration from the chairmanship of Goldman Sachs, Wall Street’s most powerful and successful investment bank and securities firm—engaged in a frantic round of closed-door meetings with banks, brokerage houses, and insurance companies.

It seemed as though at the close of every weekend a new bombshell dropped: the venerable Lehman Brothers would be “allowed” to fail; the legendary Merrill-Lynch would be forced into a shotgun marriage with Bank of America; American International Group (a multinational insurance company) would be saved…and so it went. Government officials and executives of financial firms were making decisions to “save the financial system,” to prevent another “Great Depression.”

To pay for it all, legislation proposed by Secretary Paulson was rammed through Congress in the atmosphere of rising panic. It included the Troubled Assets Relief Program (TARP) that provided an initial $700 billion in taxpayer funds to Wall Street brokers, investment banks, and insurance companies. The “troubled assets” of those firms were private assets, which they willingly had bought. This was only the beginning.

There followed a complete opening of the U.S. Treasury, and the Federal Reserve with its statutory authority to create new money without limit, to “rescue” Fannie Mae and Freddie Mac, bail out General Motors and Chrysler, and purchase trillions of dollars in “toxic securities” from banks. Americans discovered that their national debt had increased by trillions of dollars.

Washington declared that the U.S. and, indeed, the international financial system had been saved from catastrophe. But from October 3, when TARP was enacted, to March 6, 2009, the flagship U.S. stock-market index, the S&P 500, plunged from 1200 to 666. Stock markets all over the world crashed and the American economy was heading into a slump so severe that it was labeled “the Great Recession.”

Millions of Americans lost their retirement accounts in the stock market crash; for the first time in memory, housing prices plunged year after year and mortgage defaults soared; and unemployment rose toward 10 percent (according to official government sources, although private tallies place it at 16 percent).

In government offices, university economics departments, and the news media the almost unanimous opinion, today, remains that government and financial executives—reaching deals in the frantic nights and weekends of autumn 2008—saved us from catastrophe. Considerably fewer than half of Americans polled in 2010 accept this justification for TARP and all that followed.

My point, here, is not to judge the specific, short-term outcomes of this truly unprecedented intervention in the American economy. Its effects, including trillions in new national debt and historic money creation (inflation) by the Federal Reserve, are still unfolding. My point is that government and “private” business became indistinguishable in determining “who got what,” who had to be “saved” and who did not—and that this is not capitalism.

Apparently, a large plurality of Americans know this and are sick of it. They do not call it “capitalism” because it is not capitalism—and because they respect the historic benefits of wealth and liberty that capitalism delivers.

No, they call it “crony capitalism.”

7 comments

1 Ed Reid { 09.01.12 at 2:48 pm }

Many companies which did not donate money to campaigns have been quietly, but not particularly subtly, informed that it would “be in their best interests” to contribute to the party in power and its members. Of course, none would dare suggest any “quid pro qou” might possibly have been involved.

2 Walter Donway { 09.02.12 at 11:46 am }

Our Congressman, Tim Bishop, out in Suffolk County, is in big trouble. A hedge fund head wanted to have spectacular fireworks for his son’s Bar Mitzvah, but the environmental agency said, “No dice,” there is a piping plover nest on that beach. Our hedgie called Tim Bishop, who visited the environmental agency in person and damn quick the piping plover was told to get some earplugs. Well, Rep. Bishop’s daughter for several years has been in business raising funds–actually, for Tim Bishop. Two days after the permission was granted, she called our hedgie and said that Rep. Bishop was in a tough campaign and could sure use $10,000. Not a problem. The problem was that our hedgie then sent an email to the fireworks outfit’s boss making a humorous but cynical comment on the shakedown. Alas, this email came to public attention and now there are newspaper editorials and comments by the fellow running against Rep. Bishop this year. As one newspaper said, Rep. Bishop has blamed his rival for the problem, blamed the press, blamed the hedgie…but…to accept a payment for a service to a constituent is not only unethical (an investigation is getting started in Congress, but won’t actually occur until, um, after the election), but also criminal. Rep. Bishop has refused all questions from the “hostile” press, but the gun is smoking like crazy and not only has Rep. Bishop got himself in trouble, but also gotten his daughter in hot water (near rhyme, there). All this is understandable and forgivable, I am informed, because Rep Bishop is a reliable left-liberal who supports the environment (well, except for the occasional pregnant piping plover), Obama care, and, well, every other good thing. I don’t think he can scrape through, here. The evidence is too blatant (damned emails, anyway).

3 Jon Boone { 09.03.12 at 1:04 pm }

Mr. Donway might also have mentioned the political suasion from traditional labor unions, and, even more ominous, the growing clout exercised by public sector unions, which, if ObamaCare ever gets off the ground, will dominate the political landscape in ways wholly inimical to getting best care at affordable cost.

Then there’s the casual use of the tax code to provide incentives to right action. Most Americans take their home mortgage and dependent child deductions as Constitutional rights, rather than seeing them for what they really represent: precedent for bloat that makes the current national tax code incomprehensible, raising the tide for thousands of freeloading accountants and lawyers to float on an ocean of income through tax avoidance, which then results either in reducing services for everyone or increasing the share everyone else must pay for the services that remain.

Perhaps there might be occasion for future articles to explore the implications of the constitutionally sanctioned notion that corporations are “individuals,” having “rights” like any other citizen. This has been a springboard for much mischief, bastardizing any reasonable sense of language and meaning while protecting the club of cronies now assaulting the commonweal.

Finally, perhaps there should be a nuanced commentary about some of the reasons laissez faire economic systems have never existed, much as that might be desirable. Beginning with the paradox that all freedom begins with a sense of restraint and continuing through to the idea that ALL laws, regulations, ordinances–even parking tickets–stem from a felt need to restrict indiscriminate use of property, such a commentary would discuss the issue of the rotten apple in the barrel–persons who would degrade the lives and properties of others in order to advance their idea of “making money.” In a better world, there would be no need for zoning or covenants–or any enforceable restrictions on right conduct.

4 Ray { 09.04.12 at 11:33 am }

I am reminded of Microsoft. They didn’t have much of a presence in the Washington DC area prior to being sued by the Government for including a browser in the Windows operating system in 1998. Now they have a big office here with lots of lobbyists.

5 Walter Donway { 09.04.12 at 11:39 am }

Jon Boone makes one insightful comment after another; I find all of them very interesting. And they suggest a host of future articles, as he suggests–not easy article to write because the issues he raises are subtle and important ones. Many thanks.

6 » MasterResource on Crony Capitalism: Practice (Part 2) Crony Chronicles { 09.06.12 at 6:00 am }

[...] Donway at the MasterResource blog writes the second piece in a three part series on cronyism. This article talks about how cronyism is practiced in our [...]

7 Kathy Hamilton { 09.06.12 at 8:21 am }

Jon Boone said:
“Perhaps there might be occasion for future articles to explore the implications of the constitutionally sanctioned notion that corporations are “individuals,” having “rights” like any other citizen. This has been a springboard for much mischief, bastardizing any reasonable sense of language and meaning while protecting the club of cronies now assaulting the commonweal.”

Hear, hear! Problematic here in Canada, too!

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