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Corruption and Failure of Crony Capitalism

  • Corruption and Failure of Crony Capitalism

  • 19 February 2012 by 0 Comments

Corruption and Failure of Crony Capitalism

By Richard Larsen

Published – Idaho State Journal, 02/19/12

Since the 2008 financial market collapse, nearly every major newspaper and media outlet has featured stories on the demise or failure of capitalism. What they have mostly focused on is the failure of the largest financial institutions in managing risk, and the impact on the rest of us. But what they have mostly failed to do is mark the distinction between capitalism and crony capitalism. If they delved further into the failures of 2008, they would have been proclaiming the failure of crony capitalism.

We’ve seen over the past few years an even greater immersion into crony capitalism that further obscures the risks assumed by the major players in the private sector, poses even greater threats to the economy and our livelihoods, and further inserts government into control and manipulation of the very bedrock of our financial system, energy production, and corporate environment.

Although some amongst us are critical of capitalism, all of us participate in it, benefit from it, and fundamentally believe in it. At its most rudimentary level, capitalism is what we engage in every day. Investopedia defines capitalism as “An economic system based on a free market, open competition, profit motive and private ownership of the means of production.”

Everything we buy, every transaction we conduct, every financial plan we embark on, is based on our ownership of what we buy, build, produce, or service, and our freedom in making choices about price, service, and loyalty. If we want to make a purchase, we shop around for the best prices. Those companies that price comparable products or services too high will likely be passed over in favor of those who are more competitively priced. Those companies that fail to adapt to market forces, fail, and go out of business. The market has worked. Capitalism has worked. Capitalism does work.

Crony capitalism, however, is completely different. It is a perversion and a corruption of pure capitalism. Also referred to as corporatism, or statism, crony capitalism features corporate welfare as one of its most significant characteristics. Mussolini understood all too well this cozy relationship between government and business, for he once said, ‎”Fascism should rightly be called corporatism, as it’s the merger of corporate & government power.”

Investopedia defines it as, “being based on the close relationships between businessmen and the state. Instead of success being determined by a free market and the rule of law, the success of a business is dependent on the favoritism that is shown to it by the ruling government in the form of tax breaks, government grants and other incentives.”

In other words, under crony capitalism, politicians in government determine winners and losers in the corporate world, not market forces. They determine which companies survive and flourish, and which fail.

This is the nature of the relationship in crony capitalism. Government officials express a desire to expand under the auspices of creating new laws, business incentives, and regulation. Corporations, through their lobbyists or CEOs who have been in government, influence the drafting of legislation to their benefit, gaining favorable tax treatment of their operations, regulation that favors their business model, and other business incentives. For this favorable treatment, corporations reward politicians by giving money to their campaigns and family members. Politicians benefit from the campaign donations, and push legislation and regulation that benefits their largest donors.

Financial reporter Christopher Powers aptly said of it, “It has become more and more apparent to seemingly everyone of late, that the American economic system is not based on capitalism, but a twisted hierarchical system of special interests and government favors commonly known as ‘crony capitalism.’

The distinction is very important, because crony capitalism in America – especially during the last century – created a toxic environment that has only recently spilled over into the mainstream understanding of the economy, but has long been under the surface, guiding the tides of public policy.”

Bill Frezza, a fellow at the Competitive Enterprise Institute has written, “Would a farmer who put out a trough of slop be surprised if it attracted a bunch of pigs? Yet activists who promote enlarging the size and scope of government always seem to be shocked when one program after another is hijacked by corporations that find it easier to seek favors in Washington than customers in the marketplace. And, despite knowing that such corruption is inevitable, mainstream media consistently dismiss those who advocate curtailing government powers as corporate stooges.”

Economics professor Donald Boudreaux, described the problem this way, ‎”When government gives up its role as referee in favor of a reciprocal relationship with those it regulates that also benefits those who run government, you have cronyism.  Crony capitalism has as much to do with real capitalism as praying mantises have to do with real prayer.”

In a truly capitalist system, bad banks and financial institutions, and automakers weighed down by massive “legacy” costs would have been allowed to fail in 2008 and 2009. Their profitable and viable operations would’ve been bought by more efficient competitors. Shareholders, bondholders and some depositors would have lost some money, but taxpayers would not have been put on the hook for a dime.

David Stockman, former White House Budget Director, in a revelatory interview with Bill Moyers, said just last month, “Crony capitalism is about the aggressive and proactive use of political resources, lobbying, campaign contributions, influence-peddling of one type or another to gain something from the governmental process that wouldn’t otherwise be achievable in the market. And as the time has progressed over the last two or three decades, I think it’s gotten much worse. Money dominates politics. And as a result, we have neither capitalism or democracy. We have some kind of crony capitalism, which is the worst.”

Economist Walter Williams recently wrote, “Free market capitalism is unforgiving. Producers please customers, in a cost-minimizing fashion, and make a profit, or they face losses or go bankrupt. It’s this market discipline that some businesses seek to avoid. That’s why they descend upon Washington calling for crony capitalism – government bailouts, subsidies and special privileges.”

But as we’ve seen, in a crony capitalist system, such failures are given preferential treatment, if they have the right political connections. Economist Richard Salsman ‎said recently, “Capitalism has been blamed for the Great Recession of 2007-2009 and for the financial crisis and bailouts of 2008, but it’s not ‘capitalism’ but the mixed economy and corporatism-cronyism that did it.”

The mortgage market meltdown illustrated how convoluted and corrupt crony capitalism is in the mortgage industry. Economist George Stigler, a Nobel laureate for his research into the causes and effects of public regulation conducted an exhaustive study characterizing the corrupt relationship between financial institutions, the Government Service Enterprises (GSEs, including Ginnie Mae, Freddie Mac, and Fannie Mae) and politicians. The abstract of his research states,

“How special interests, measured by campaign contributions from the mortgage industry, and constituent interests, measured by the share of subprime borrowers in a congressional district, influenced U.S. government policy toward the housing sector during the subprime mortgage credit expansion from 2002 to 2007.”

It continues, “Beginning in 2002, mortgage industry campaign contributions increasingly targeted U.S. representatives from districts with a large fraction of subprime borrowers. During the expansion years, mortgage industry campaign contributions and the share of subprime borrowers in a congressional district increasingly predicted congressional voting behavior on housing related legislation. The evidence suggests that both subprime mortgage lenders and subprime mortgage borrowers influenced government policy toward housing finance during the subprime mortgage credit expansion.”

Russell Roberts, a Distinguished Scholar and professor of Economics at George Mason University, scholarly breaks down this unhealthy relationship further, stating that “public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess.”

This entanglement between Wall Street institutions, the GSEs, and politicians gets even more convoluted when you research on your own the role played in the mortgage collapse of people like Franklin Raines, Jim Johnson, Tim Howard, Timothy Geithner, Hank Paulson, Chris Dodd, and Barney Frank.

It’s crony capitalism that allows companies like General Electric, which had profits of $14 billion in 2010, to pay no corporate income taxes on a tax return that was 57,000 pages long. Tax deductions, tax credits, loopholes, “stimulus” funding, all speak volumes of the benefits of CEO Jeffrey Immelt’s cozy relationship with Washington, and how the largest corporations can “play the system” for increased profits.

The “green energy” movement is the fastest growing crony capitalism sector, receiving preferential tax treatment for deductions, government loans, and “stimulus” funding in the form of grants. Their capital outlays for lobbying have increased twelve fold over 2008 levels and the number of lobbyists for “green energy” companies and associations have increased 10 fold, according to OpenSecrets.org.

An entire library would likely be needed to document all the cases of abuse and crony capitalism in “green energy,” but the collusion between green energy companies and the government is absolutely shocking. The now bankrupt Solyndra debacle involving a government stimulus loan for half-a-billion dollars is just the tip of the iceberg. American Thinker goes so far as saying “green jobs are a euphemism for crony capitalism.”

According to Peter Schweizer, a research fellow at Stanford University, “an examination of grants and guaranteed loans offered by just one stimulus program run by the Department of Energy, for alternative-energy projects, is stunning. The so-called 1705 Loan Guarantee Program and the 1603 Grant Program channeled billions of dollars to all sorts of energy companies. The grants were earmarked for alternative-fuel and green-power projects…”

He continued, “a large proportion of the winners were companies with Obama-campaign connections. Indeed, at least 10 members of Obama’s finance committee and more than a dozen of his campaign bundlers were big winners in getting your money. At the same time, several politicians who supported Obama managed to strike gold by launching alternative-energy companies and obtaining grants. How much did they get? According to the Department of Energy’s own numbers … a lot. In the 1705 government-backed-loan program, for example, $16.4 billion of the $20.5 billion in loans granted as of Sept. 15 went to companies either run by or primarily owned by Obama financial backers—individuals who were bundlers, members of Obama’s National Finance Committee, or large donors to the Democratic Party.”

It doesn’t seem to make much difference which political party is in control in Washington, for crony capitalism has thrived, as David Stockman said, for the past thirty years openly, and “under the public radar” for the past century. The problem has been significantly exacerbated over the past few years, as political favoritism toward specific industries and companies has accelerated the tax breaks, tax free loans, and outright government grants to corporate favorites as anointed by Washington.

The costs are massive, and impossible to get a complete grasp on. The Fiscal Times has quantified the cost of just the top 10 tax breaks to corporations at nearly $500 billion. The New York Times reports that subsidies in one corporate sector has tripled in the past few years, leading to a “gold rush mentality” in that sector. When all the tax breaks, incentives, subsidies, grants, and loans are totaled, the figure could well exceed $1 trillion. And government costs that currently administer all those programs could be in the hundreds of billions.

The solutions are not easy, but must be addressed. We need honest people who can’t be “bought off” in Washington, and term limits for congressmen and senators would help keep them that way. The influence peddling and free money exchange between major industries and Washington has to end, which could include a lower cap on campaign contributions by corporations and individuals. A flat tax on corporations would help to eliminate the cronyism in our tax code.

If “fairness” is truly one of our core American values, as the president said in his State of the Union Address, expunging the crony capitalism that has infested Washington is a great place to start.

AP award winning columnist Richard Larsen is President of Larsen Financial, a brokerage and financial planning firm in Pocatello, and is a graduate of Idaho State University with a BA in Political Science and History and former member of the Idaho State Journal Editorial Board.  He can be reached at rlarsenen@cableone.net.

Complete Bibliography available upon request.

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More than anything, I want my readers to think. We're told what to think by the education establishment, which is then parroted by politicians from the left, and then reinforced by the mainstream media. Steeped in classical liberalism, my ideological roots are based in the Constitution and our founding documents. Armed with facts, data, and correct principles, today's conservatives can see through the liberal haze and bring clarity to any political discussion.

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