Category — Political capitalism/rent-seeking
“How is any American going to feel good about reforming Medicare, Medicaid and Social Security when … businessmen are making off with so many tax dollars?”
- Richard Fink (Koch Industries), quoted in Bill Wilson and Roy Wenzl, “The Kochs’ Quest to Save America,” Wichita Eagle, October 13, 2012.
A major political-economy theme at MasterResource is how government intervention stifles value-creating entrepreneurship, or, in the case of mineral resources, resourceship.
MasterResource has chronicled the sorry history of government trying to turn energy losers into winners. Last year alone, this site published 60 blog-posts on the history, operation, and current politics of (government-enabled) industrial wind power. And who can forget Solyndra on the solar side, a name that might enter the textbooks as the Teapot Dome of our time.
Special government favor to wind, solar, ethanol, and battery/electric vehicle companies is a leading area of cronyism today. Coming on top of the major bailouts of 2008/2009, exposing and understanding cronyism has become a major initiative.
March 29, 2013 4 Comments
Last week, a Hall of Shame cronyism memo turned 15 years old. Dated December 12, 1997, it was written from Kyoto, Japan, in the afterglow of the Kyoto Protocol agreement by Enron lobbyist John Palmisano.
Global green planners such as Palmisano were euphoric that, somehow, someway, the world had embarked on an irreversible course of climate control (and thus industrial and land-use control). His memo reflects the train-just-left-the-station mentality, as well as the specific benefits for first-mover ‘green’ Enron. Enron, in fact, had no less than six profit centers tied to pricing carbon dioxide (CO2), and seven if CO2 were capped and traded.) The story of Enron as the darling company of Left environmentalists has been well told elsewhere.)
The Washington Post broke the memo soon after Enron’s demise, showing how Enron was hardly a free-market, capitalistic company. “[Enron] chairman Pushed Firm’s Agenda With Clinton White House.” Indeed, Enron was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business” [Jeremy Leggett, The Carbon War (Penguin, 1999), 204.]
The Kyoto Protocol, also 15 years old this month, and now at the expiration of its 2008–2012 (non)compliance period, is predictably on life support, a topic which will be examined next week.
Here is Palmisano infamous memo, 15 years old last week. [Read more →]
December 24, 2012 No Comments
America’s energy industries (oil, gas, electricity) have been a bastion of crony capitalism for much of their history. Leading gas and electricity firms sponsored state and then federal public-utility regulation during the Progressive Era and New Deal. Like other so-called public utilities, they welcomed the prospect of making commission-approved “reasonable” profits in an entry-restricted environment rather than taking their chances in open-entry markets.
The U.S. coal industry also longed for federal aid. “The bituminous coal industry has been one of the most chaotic industries in the United States in recent years,” an Ohio University professor wrote in 1940. “Because of this lack of order it has recommended itself to the Nation as an industry urgently in need of social control and, as a result, it has come to serve as a significant laboratory for experiments in certain types of government regulation.” The industry was too competitive, he posited, necessitating “minimum price regulation … to prevent excessive exploitation of the industry by its consumers in other industries which are in a better position to exercise a sabotage of production.” Coal producers could not have been happier with what at least one Ph.D. economist was saying.
On the other hand, integrated and independent oil companies were against public-utility regulation. Cost-based rate ceilings were not considered compensatory for the risk of exploration and production. And gasoline service stations could hardly be cost-and-entry regulated without regulating refiners, and, in turn, producers. Still, crony capitalism roared in with the oil gushers in the 1920s. The quest for stability began with state efforts to limit oil production to “market demand”—a regulatory regime called market-demand proration—to achieve a price of one dollar per barrel (about $12 per barrel today). [Read more →]
September 4, 2012 10 Comments
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.” [Read more →]
September 1, 2012 7 Comments
Editor note: This post will be followed tomorrow by Part II: Crony Capitalism: Practice. On Tuesday, Robert Bradley will post on cronyism in the U.S. energy industry.
To the great economists of free trade and free markets, capitalism meant laissez faire: “Let us compete free of government help or hindrance.” To Adam Smith and David Ricardo, to Ludwig von Mises and Milton Friedman, laissez faire in the phrase “laissez faire capitalism” was redundant.
But today, opponents of capitalism such as leftist MIT Professor Noam Chomsky and sociologist Jane Jacobs believe that “crony capitalism” is the redundant phrase. They believe that capitalism by its nature involves corruption of the political process to favor one enterprise over another.
What about the American public? Earlier this year, a poll by the Rasmussen firm revealed that 39 percent of those responding consider ours to be a system of “crony capitalism.” And they are right. But that does not answer the question: Does it have to be?
Defining “Crony Capitalism”
What is “crony capitalism”? The Wikipedia definition will serve: “an economy in which success in business depends on close relationships between business and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, and so forth.”
The reign of cronyism throws into relief two radically different breeds of businessman: the one who profits by innovating, producing, cost-cutting, and serving customers—and the one who prospers by means of “pull” in Washington, the state capital, or the town hall.
Crony capitalism has been around for a long time—indeed it plagued the great era of railroad building in nineteenth-century America, when huge subsidies and land grants were given for proposed lines—some never built. But the event that put the term into the active vocabulary of the American public, I believe, was the massive government intervention in private business that followed financial panic of 2008. If, today, almost 40 percent of Americans identify our system as “crony capitalism,” we may hope that they also know—or are open to learning—about the real thing. [Read more →]
August 31, 2012 9 Comments
“The two greatest enemies of free enterprise in the United States … have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.”
- Milton Friedman, “Which Way for Capitalism?” Reason, May 1977, p. 21.
The above quotation is striking, not so much for the ‘fellow intellectual’ part but for ‘business corporations.’ We often think of business in the same breath as ‘free enterprise,’ right?
But on closer inspection, and with the Bush/Obama bailouts, cronyism, or crony capitalism, is in focus. And Friedman’s above Reason quotation from 35 years ago is more understandable.
I have a whole website dedicated to the subject of political capitalism. I speak on this subject regularly to groups like the Bastiat Society, a group that is “building an international society of principled wealth creators.” In many of these talks, I share the Milton Friedman quotations from below.
“With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.”
“Few U.S. industries sing the praises of free enterprise more loudly than the oil industry. Yet few industries rely so heavily on special government favors.”
- Milton Friedman, “Oil and the Middle East,” Newsweek, June 26, 1967. Reprinted in Friedman, An Economists Protest. Glen Ridge, NJ: Thomas Horton and Daughters , p. 21. [Read more →]
August 3, 2012 7 Comments
“Georgia Power’s Plant Vogtle is seen as the first example in the country’s ‘Nuclear Renaissance’. The technology indeed employs new simpler, safer, and more efficient designs than the last round of nuclear plants. However, there is nothing new about the crony politics and financial shenanigans surrounding the project.”
Georgia Power, a subsidiary of the mighty Southern Company, is pressing ahead with development of a two-unit, 2,240 Megawatt (MW) nuclear plant, Plant Vogtle. With a pending $8.6 billion federal loan guarantee, a cap on liability, production tax credits and pre-collection of profits this makes Georgia Power the nation’s biggest welfare queen.
And the predictable bad news is already coming in. Recent news reports state that Vogtle may be nearly $1 billion above budget. Bad for electricity users and taxpayers; good for utility stockholders given that the extra rate base receives a guaranteed rate of return.
All these financial goodies didn’t come from performance in the marketplace but from well-planned lobbying at the state and federal levels. Tracing the actions and rationalizations that went into getting this project off the ground and into construction is illustrative, although disheartening. [Read more →]
May 23, 2012 19 Comments
“No New Energy Subsidies: Oppose NAT GAS Act!” (free market voices rise up against tax-code politicking)
Call it the iron law of political economy: Government goes to those who show up.
The good news is that limited-government groups are showing up. And they are not pro-industry (such as the natural gas industry) but pro-consumers, pro-taxpayers, and pro-marketplace. The bad news is that too many business leaders–and think T. Boone Pickens in this instance–are using their resources to politicize industry.
Elements of the gas industry want to use special government favor to increase demand and thus prices of their product. A quick summary of the New Alternative Transportation to Give Americans Solutions Act was given by the Leftie group DeSmogBlog:
As stated in an earlier article, “The bill is 24-pages long and rewards [natural gas vehicles] with tax [subsidies] to help ‘drive’ consumption. The bigger the vehicle, the more tax credits given.” The bill’s main purpose is to build up a massive fueling and vehicle infrastructure for the natural gas industry, which currently does not exist in the United States.
The NAT GAS bill was written by and for natural gas insiders, chief among them energy magnate T. Boone Pickens, Chesapeake Energy CEO Aubrey McClendon, and Clean Energy Fuels CEO Andrew Littlefair — referred to in an earlier post as the “self-enriching trifecta.” The bill currently possesses 183 bipartisan co-sponsors and until finally getting a hearing Friday, had sat in the Congressional coffers since early April. [Read more →]
November 22, 2011 14 Comments
The U.S. Department of Energy publishes periodic reports (see the latest) on federal government subsidies to energy production in the U.S. These reports total up the costs of direct financial support for various energy technologies, tax incentives, research related to marketing and implementation and price support.
Federal support for energy in FY 2010 alone includes the following activities:
Direct Expenditures to Producers or Consumers – $14.3 billion. Federal programs involving direct cash outlays that provide a financial benefit to producers or consumers of energy.
Tax Expenditures – $16.3 billion. Provisions in the federal tax code that reduce the tax liability of firms or individuals who take specified actions that affect energy production, consumption, or conservation.
Research and Development (R&D) – $4.4 billion. Federal expenditures aimed at a variety of goals, such as increasing U.S. energy supplies or improving the efficiency of various energy consumption, production, transformation, and end-use technologies.
Loans and Loan Guarantees – $1.6 billion. Federal financial support for certain energy technologies. . . [in particular] innovative clean energy technologies. 1
Electricity programs serving targeted categories of electricity consumers in several geographic regions of the country – $0.6 billion. Theses are primarily activities of the Tennessee Valley Authority (TVA) and the Power Marketing Administrations (PMAs), which include the Bonneville Power Administration (BPA) and three smaller PMAs.
Of this total of over $37 billion, about $21 billion went to energy production, the remaining $16 billion was spent on electricity transmission & distribution, conservation and efficiency and automobile programs. This paper focuses on federal subsidies to energy production. [Read more →]
November 18, 2011 16 Comments
“They about had an orgasm in Biden’s office when we mentioned Solyndra,” read a Feb. 27, 2010, email from [Ken] Levit to [Steve] Mitchell. A follow-up email from Mitchell to Levit later that day responded, “That’s awesome! Get us a [Department of Energy] loan.”
- Quoted in “Emails Reveal Biden Team’s Enthusiasm Over Solyndra Loans,” Fox News, November 9, 2011.
Kids in the taxpayer candy store. That describes the heady days when Solyndra executives and lobbyists gleefully found out that the politicians loved their speculative, defective product. It turns out that Solyndra was a photo-op for President Obama and his “dream ‘green’ team”–one that may well end up being their undoing. (Does Obama use the term ‘green jobs’ anymore?.)
Enron was the canary in the renewable-energy coal mine. Ken Lay had a vision for Enron to become the world’s leading renewable energy company, part of the company’s green and Corporate Social Responsibility imaging. 
Enron’s investments in solar and wind produced financial losses in each year of operation, but many photo ops were generated, including a solar project that duped the New York Times.
Solyndra’s orgasmic glee in Vice President Biden’s office reminds me of the dreamy memo by John Palmisano, Enron’s lobbyist in Kyoto, Japan, written the day after the Kyoto Protocol was ratified in late 1997.
With the tenth anniversary of Enron’s bankruptcy filing just weeks away, this is an opportune time to remind one and all of just what the whole global warming crusade meant for the most rent-seeking of all rent-seeking companies, Enron. Excepts follow…. [Read more →]
November 14, 2011 8 Comments