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Crony Capitalism Versus “Making” Money

Crony Capitalism Versus “Making” Money

By Walter Donway

May 7, 2012 -- Saluting the philosopher who gave reason its foundational tool, Ayn Rand named the three sections of Atlas Shrugged after Aristotle’s axioms of logic. The second section, “Either-Or,” is the novel’s pivot point. (It is now being made into a movie, Atlas Shrugged II, scheduled to reach theaters in October.) The heroes of Atlas Shrugged face a choice: either cooperate with an advancing dictatorship—by struggling to keep producing despite the tightening stranglehold of regulations—or refuse to work, to produce, in the absence of freedom.

To keep producing also means to witness the proliferation of a breed of businessman eager to curry favor with politicians whose power can enable a business to defeat rivals without the need to do a better job. Today, the system that spawns and rewards that breed of businessman has a name: crony capitalism.

The reign of cronyism throws into relief two radically different breeds of businessman.
How people interpret that phrase reveals what is at stake. To the great economists of free trade and free markets, from Adam Smith and David Ricardo to Ludwig von Mises and Milton Friedman, capitalism meant laissez faire (“let us compete free of government help or hindrance”). To them, laissez faire in the phrase “laissez faire capitalism” was redundant. To opponents of capitalism, today, such as leftist MIT Professor Noam Choamsky or sociologist Jane Jacobs, “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? On January 18, a poll by the Rasmussen firm revealed that 39 percent of those responding consider ours 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.
 
In Atlas Shrugged, Orren Boyle is able to “tame” the competition of Hank Rearden and his revolutionary invention, Rearden Metal, only by using political pull to win regulations and quotas that cripple Rearden. And, in an obscene twist, the consummate crony capitalist, James Taggart, “helps” his company’s new railroad line in Colorado—built by his sister, Dagny, in a display of sheer productive genius—by getting his pals in Washington to shackle Taggart's enterprising rival, the Phoenix-Durango line. Any reader who cares about ability or merit is outraged, then disgusted, as the innovators and entrepreneurs in Atlas Shrugged are betrayed, then crippled, by the manipulations of businessmen who thrive on pull with their cronies in Washington.
 

“Crony Capitalism” on the Campaign Trail


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.
 
As the 2012 Presidential election heats up, we are likely to hear the term with increasing frequency. Mitt Romney, now front-runner for the Republican nomination for president, published an op-ed article in the Detroit News on February 14 accusing President Barack Obama of “crony capitalism on a grand scale.”

“Crony capitalism” has entered the vocabulary of the 2012 Presidential election.
He said, in part, “A labor union that had contributed millions to Democrats and his election campaign was granted an ownership share of Chrysler and a major stake in GM, two flagships of the industry. The US Department of Treasury—American taxpayers—was asked to become a majority stockholder of GM. And a politically connected and ethically challenged Obama-campaign contributor, the financier Steven Rattner, was asked to preside over all this as auto czar.”

I quote Mr. Romney not as endorsement, but to provide an example of how “crony capitalism” has entered the vocabulary of the 2012 Presidential election. If you Google “crony capitalism,” you will find references to “crony capitalism” in dozens of publications both for and against Mr. Obama.
 

Must Capitalism be Cronyism?


Capitalism is distinguished from every other economic system (such as socialism, fascism, feudalism, or syndicalism) by the degree of involvement of government in the economy. Capitalism is the economic system that emerges when government recognizes the right to private property, private enterprise, free competition, and private profit—the right, not permission or sufferance when those in power deem an activity “in the public interest.” The term “laissez faire” is added for emphasis to make clear that when government intervenes to limit property rights, freedom of enterprise, and trade, the system no longer is capitalism. There is a well-recognized term for the new system: “mixed economy”—a mixture of freedom and controls. It is not “capitalism” when every business can thrive—or die—depending upon political influence.

Those who insist that the rich and powerful always will exert their influence to extract favors and advantage from politicians and bureaucrats may welcome this advice: Devise a government strictly limited by its constitution (as did the founding fathers) so that politicians and bureaucrats simply don’t have the power to help or hinder business. Then there will be no use lobbying, bribing, or putting friends into office. Do not say that capitalism is impossible without cronyism until you separate government and the economy in the same absolute way that the U.S. Constitution separates government and religion.

We see, today, the result of decades and decades of relentless efforts to erode the separation of government and economy. Businessmen themselves often spearheaded these efforts; they were the type of businessman who finds it easier to get a subsidy than earn a profit, easier to shackle a rival than compete. Other businessmen fought the encroachment of regulation, the taxation of some for the benefit of others, and the erection of trade barriers to “help” home industries.
 

Crony Capitalism in Action


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 “Obama care”) 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 their lobbyists spent millions, as earlier they had spent millions in campaign contributions to the Congressman—or President—on whom they now called for favors.    
 

But Can One Succeed Without a “Crony”?


There is a clear and honest choice between achievement and manipulation—in principle. But today we must take care in applying that distinction. The bureaucrat’s power to help or hinder, enable profit or inflict loss, is so pervasive—at times, decisive—that no businessman can ignore it.

There is a clear and honest choice between achievement and manipulation.
We should make distinctions, and we have a touchstone. It comes from the pivotal second section of Atlas Shrugged, where Francisco D’Anconia makes one of the most cogent expositions of an idea ever penned for a fictional character. The setting is a party thrown by one of the pull-peddlers in chief—one of the swarm of men grown rich as politicians and their cronies feast on the last of the country’s wealth. Someone throws out the hackneyed phrase “money is the root of all evil…” and Francisco replies with a defense of money that pierces to the roots of human morality.

At the climax of the speech, he says: “If you ask me to name the proudest distinction of Americans, I would choose—because it contains all the others—the fact that they were the people who created the phrase ‘to make money.’ …Americans were the first to understand that wealth has to be created.”

Is a businessman, today, who is struggling to navigate through the shoals of regulations and permissions, nevertheless engaged in the creation of new goods or services, the “making” of money? Or are his negotiations with politicians and bureaucrats the activity that in itself gets the money—through subsidies, stifling of competition, or new regulations that channel profits into his business?

Consider just one example: The world today is hungry for copper to build the infrastructure of new industrial civilizations in China and India. But, to open a new copper mine in the United States or Canada, say, you need permission from environmental agencies on the federal, state (or provincial), and local levels. Obtaining these permissions can require years of costly studies to satisfy hundreds of regulatory conditions. The judges are bureaucrats at all levels, usually under pressure from dozens of conflicting lobbies. Hundreds of millions of dollars ride on their decision. They may be ideologically opposed to “exploiting” natural resources (as are many in the Obama administration). To surmount their dogged opposition, you may need a politician who applauds your goal and can run interference for you. The goal is to clear the path to the production of copper.
 

Why They Came to Washington


The businessmen, doctors, and hospital administrators who flocked to Washington to try to influence the Obama care 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 or 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 only count 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
 

When Crony Capitalism Went Mad


As I mentioned earlier, there is one development, more than any other, that put “crony capitalism” into the vocabulary of the American people and thrust it into the 2012 election campaign.

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.”

 

EXPLORE: 

Fight Club: How Bad Politics Turn Good Neighbors into Rivals  by William R Thomas

The Two Faces of Capitalism by Robert Bradley, Jr.


Walter Donway has been a trustee of the Atlas Society since its inception. Until 2002, he was editor of Cerebrum: The Dana Forum on Brain Science for the Dana Foundation, where he was director of the Dana Press. He has published dozens of articles on the economics of health-care regulation in Private Practice, Medical World News, and Human Events. His lead op-ed article in the the Wall Street Journal, “In Defense of Decades of Greed,” exposed myths about the history of monopolies. Donway has also published articles in Newsday, Cosmopolitan, Commonweal, and Occasional Review, among other venues. He is the author of a book of poetry, Touched By Its Rays.

 

 

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