Charles Koch on Cronyism

“Today, many governments give special treatment to a favored few businesses that eagerly accept those favors. This is the essence of cronyism…. One obvious example of this involves wind farms. Most cannot turn a profit without the costly subsidies the government provides.”

– Charles G. Koch, “The Importance of Economic Freedom.” August 17, 2012.

William Simon, the top energy regulator in the Nixon’s Federal Energy Administration, was surprised. Oil company head after head was visiting his office to demand this or that to alleviate their shortages of oil or get more entitlements credit for their refineries. But Koch Industries had come by to just ask the federal government to leave them alone—to allow price signals to allocate crude oil and petroleum products. It was a meeting that Simon would not forget. [1]

For Charles Koch, it was lonely. Just about every fellow CEO talked about capitalism and freedom but did not practice it when the bottom line was affected. Instead of capitalism in principle, he wrote in 1980, they practiced capitalism a la carte. [2]

Fast forward to today. Business-government and government-business cronyism is rampant.  Yet reducing and eliminating such political capitalism is a cause for both ends of the political spectrum as indicated in the graphic below.

Here are some quotations from the nation’s leading critic of business-government favoritism, aka cronyism.

Kellen Jenkins, “Charles Koch: Business Giant, Bogeyman, Benefactor and Elusive (Until Now),” Wichita Business Journal, February 28, 2014.

“I think one of the biggest problems we have in the country is this rampant cronyism where all these large companies are into smash and grab, short-term profits.”

“… ‘We don’t want [the government to allow firms] to export natural gas because of my raw materials’ [like Dow Chemical]… Well, you say you believe in free markets, but by your actions you obviously don’t. You believe in cronyism.”

“I think it’s in our long-term interest, in every American’s long-term interest, to fight against this cronyism. As you all have heard me say, the role of business is to create products that make peoples’ lives better while using less resources to do it and making more resources available to satisfy other needs.”

“When a company is not being guided by the products they make and what the customers need, but by how they can manipulate the system — get regulations on their competitors, or mandates on using their products, or eliminating foreign competition — it just lowers the overall standard of living and hurts the disadvantaged the most.”

Charles G. Koch, “Corporate Cronyism Harms America,” Wall Street Journal, September 9, 2012.

“Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.”

“The role of business is to provide products and services that make people’s lives better—while using fewer resources—and to act lawfully and with integrity. Businesses that do this through voluntary exchanges not only benefit through increased profits, they bring better and more competitively priced goods and services to market. This creates a win-win situation for customers and companies alike.”

Trouble begins whenever businesses take their eyes off the needs and wants of consumers—and instead cast longing glances on government and the favors it can bestow. When currying favor with Washington is seen as a much easier way to make money, businesses inevitably begin to compete with rivals in securing government largess, rather than in winning customers.”

“We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism. Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.”

“We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn’t ordinarily buy.”

“Because they have the advantage of an uneven playing field, crony businesses can drive their legitimate competitors out of business. But in the longer run, they are unsustainable and unable to compete internationally (unless, of course, the government handouts are big enough). At least the Solyndra boondoggle ended when it went out of business.”

“By subsidizing and mandating politically favored products in the energy sector (solar, wind and biofuels, some of which benefit Koch Industries), the government is pushing up energy prices for all of us—five times as much in the case of wind-generated electricity. And by putting resources to less-efficient use, cronyism actually kills jobs rather than creating them. Put simply, cronyism is remaking American business to be more like government. It is taking our most productive sectors and making them some of our least.”

“The effects on government are equally distorting—and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.”

“Subsidies and mandates are just two of the privileges that government can bestow on politically connected friends. Others include grants, loans, tax credits, favorable regulations, bailouts, loan guarantees, targeted tax breaks and no-bid contracts. Government can also grant monopoly status, barriers to entry and protection from foreign competition.”

“Whatever form these privileges take, Americans are rightly suspicious of the cronyism that substitutes political influence for free markets. According to Rasmussen, two-thirds of the electorate are convinced that crony connections explain most government contracts—and that federal money will be wasted ‘if the government provides funding for a project that private investors refuse to back.’ Some 71% think ‘private sector companies and investors are better than government officials at determining the long-term benefits and potential of new technologies.’ Only 11% believe “government officials have a better eye for future value.”

“To end cronyism we must end government’s ability to dole out favors and rig the market. Far too many well-connected businesses are feeding at the federal trough. By addressing corporate welfare as well as other forms of welfare, we would add a whole new level of understanding to the notion of entitlement reform.”

Charles Koch, “Why Koch Industries Is Speaking Out,” Wall Street Journal, March 1, 2011 12:01 a.m. ET

“Government spending on business only aggravates the problem. Too many businesses have successfully lobbied for special favors and treatment by seeking mandates for their products, subsidies (in the form of cash payments from the government), and regulations or tariffs to keep more efficient competitors at bay.”

“Crony capitalism is much easier than competing in an open market. But it erodes our overall standard of living and stifles entrepreneurs by rewarding the politically favored rather than those who provide what consumers want.”

“The purpose of business is to efficiently convert resources into products and services that make people’s lives better. Businesses that fail to do so should be allowed to go bankrupt rather than be bailed out.”

“For example, because of government mandates, our refining business is essentially obligated to be in the ethanol business. We believe that ethanol—and every other product in the marketplace—should be required to compete on its own merits, without mandates, subsidies or protective tariffs. Such policies only increase the prices of those products, taxes and the cost of many other goods and services.”

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[1] This anecdote was told to me many times by William A. Johnson, Simon’s number two at the Federal Energy Administration.

[2] Charles Koch, “Will Businessmen Be The Death of Free Enterprise?,” Chief Executive, Autumn 1980, p. 10.