Capitalism, cronyism and corruption
Gallup has a new indicator poll out that shows the nation’s national priorities according to its citizens. It’s interesting in many ways, but primarily because one of the highest calls for action is to address “corruption”.
(As an aside, notice the bottom two “priorities).
Notice carefully how the corruption question is phrased – “Reducing corruption in the federal government”. What sort of corruption? Well, one type, that most fair minded people would identify, is that which we call cronyism. As we listen to the uniformed continue to say we’ve been ravaged by the “free market” system, one can only shake their head in wonder that anyone would identify what we have as a “free market system”. Rarely, if ever, are markets allowed to function as they should in this country (or any others for that matter).
What we have is a system of cronyism (I’m removing “capitalist” from the description since there’s nothing “capitalist” about such a system) that is part of what is killing us economically. David Henderson gives us a good description of the system under which we must operate.
What is the difference between free markets and cronyism? In free markets, buyers and sellers are free to agree on price; no government agency restricts who can buy or sell, and no one is told how or what to produce. In contrast, under cronyism the government rigs the market for the benefit of government officials’ cronies. This takes various forms. Governments sometimes grant monopolies to one firm or limit the number of firms that can compete. For example, most U.S. municipalities allow only one cable company to operate in their area even though there is no technological reason more could not exist. The same is true for most other utilities.
Governments sometimes use quotas or tariffs to limit imports with the goal of protecting the wealth and jobs of domestic producers who compete with those imports. President George W. Bush did this in 2002, for example, when he imposed tariffs ranging from 8 to 30 percent on some types of imported steel. Governments sometimes subsidize favored producers, as the Obama administration did with the politically connected solar-energy firm Solyndra. Governments may use antitrust laws to prevent companies from cutting prices so that other, less-efficient companies can prosper: For example, beginning in 1958, the U.S. government prevented Safeway from cutting prices for a quarter of a century.
The entities governments help with special regulations or subsidies are not always businesses; sometimes they are unions. The federal government’s National Labor Relations Board’s (NLRB) complained against Boeing in April 2011, for example. In response to a complaint from the International Association of Machinists and Aerospace Workers (IAM), the NLRB sought to require Boeing to produce its 787 Dreamliner in Washington State rather than in Boeing’s chosen location of South Carolina. According to the NLRB, by saying that “it would remove or had removed work from the [Puget Sound and Portland] Unit because employees had struck” and by threatening that “the Unit would lose additional work in the event of future strikes,” Boeing was making “coercive” statements to its employees. As a matter of fact, it was not. Boeing was simply telling the employees some likely consequences of the union’s actions.
The Boeing-IAM case is not as simple as most of the press implied. It turns out there was a prior case of cronyism. The government of South Carolina promised Boeing “$900 million in tax relief and other incentives” in exchange for moving production to South Carolina. Such is the tangled world of cronyism.
As we discussed on the podcast last night, we have given, or at least allowed government to amass, power to do what it is doing. We have, over the years, allowed them to use tax exemptions and other favors, etc. to lure businesses to our states (and we’re then thankful for the jobs created) not understanding that by doing so, we empower politicians to be the decision makers in areas that should be the function of markets. And what does that foster? A culture that is incentivized to seek out politicians to grant such favors. To ask for, and receive, subsidies. To allow politicians to leverage that power into favoring businesses that fit their political agendas. They become the focus because we have given them the power necessary to grant those favors.
We see the same sort of game played at a national level as described by Henderson. That has nothing to do with capitalism folks. It has nothing at all to do with “free markets”. In fact, it is the antithesis of both.
Probably the most blatant and disturbing example of cronyism came in the auto bailout:
Of course, a much larger instance of cronyism under the Obama administration, one that makes the Solyndra case tiny by comparison, is the bailout of General Motors (GM) and Chrysler. Bush and Obama together diverted $77 billion in TARP funds to GM and Chrysler. In organizing their bailouts and bankruptcies, Obama violated the rights of Chrysler’s creditors and gave a sweetheart deal to the United Auto Workers union.
Law professor Todd Zywicki provides the details:
In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the “absolute priority” rule— since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company’s secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers—unsecured creditors, but possessed of better political connections—received more than 40 cents on the dollar.
Pure cronyism. The bankruptcy rules were thrown out by government in order to pay a favored constituency – labor. Henderson explains:
Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a “deficiency claim”—the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the creditors. Were bankruptcy experts to comb through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.20
Why did the Chrysler bondholders not object? Many did. But, Zywicki notes, the federal government (in this case, the U.S. treasury secretary) had enormous power over financial institutions through TARP, and these institutions owned much of Chrysler’s secured debt.
While this has been going on for quite some time, never has it been as blatant as with this administration. And that blatancy is what has pushed the corruption priority up the list to where it stands second to job creation in this horrific economy.
What can be done to remedy this cronyism “corruption”. Only one thing, and unfortunately, those enjoying the power are where the remedy must come:
There is only one way to end, or at least to reduce, the amount of cronyism, and that is to reduce government power. To reduce cronyism, we must abolish regulations and cut or abolish special government subsidies. That way, there is nothing to fight about. For example, the government should not bail out companies or give special subsidies and low-interest loans to companies like Solyndra that use technologies or produce products that the government favors. It should have unilateral free trade rather than tariffs, import quotas, and other restrictions on imports.
Will it happen? No. Those who tout the power of markets and demand they be given priority are now considered “radicals”. Just listen to President Obama talk about the former administration and try to convince you “we tried their way before and look where it led”. Spinning a regime prior to his that was as wrapped up in cronyism as is his and claiming it represented free markets is standard, disingenuous, leftist boilerplate with nary a leg to be found standing in reality. It is pure, fatuous BS.
The “corruption in the federal government” isn’t lobbyists. They’re a symptom of that corruption. The problem resides under the Capital dome and within the offices of the executive branch. They have the power that is sought by the lobbyists. No power and there would be no petitioners. Instead, we see the number of petitioners for favorable treatment by government (usually at the detriment to their competitors) continuing to expand.
So while the public has finally identified a major problem (thanks to the blatancy of this administration) it has a long way to go before it realizes the means by which it must be fixed. Stripping the federal government of its power to grant favors to its cronies is almost an impossible task, given we have the fox in charge of the hen house.
I see nothing in the future that says those who must fix this are willing to divest themselves of the power to grant favors (see recent farm bill, an orgy of subsidies and pay offs (earmarks), for a perfect example). Show me when they’ve ever divested themselves of any meaningful power they’ve accrued.
And so cronyism will continue and we will continue to circle the drain of economic collapse. Meanwhile, Coke and Pepsi will fight about the marginal nonsense that won’t make a significant difference and make all the usual promises about being the panacea for all our ills that voters have been pining for so long.
Or it is “kick the can down the road” politics as usual.