Free Markets, Free People

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”. 


corruption poll


(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.[1] 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.[2] 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.[3]

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,”[4] 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.[5] 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.

Happy Monday.


Twitter: @McQandO

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30 Responses to Capitalism, cronyism and corruption

  • Show me something I can get behind to eliminate the power of government to engage in crony capitalism and I will get behind it, as long as it not yet another suggestion to vote for small government conservatives, who have proven, time and time again, that they are neither.

    I’ve shared my ideas, publically financed elections, tying the nomination process to small donations exclusive to a potential candidates constituents. But apparently conservatives think that violates the First Amendment rights of big money entities (corporations, unions, etc) to engage in crony capitalism, I mean petition the government.

    You are so right about Coke and Pepsi, and while they duke it out for crumbs around the edges, none of us can get what we want.

    This is the ONLY issue, the rest should be important, but can never be properly addressed until or unless we figure out how to solve this one.

    Every insider has something to lose, so it will be an uphill battle, and that is why I believe the only way it can ever happen is if Coke and Pepsi (voters, not the machine) get together, call a truce, and work together to get an honest government, and once that’s done, they can foght for control over policy.

    • The only remedy I can think of would be a constitutional amendment forbidding congress from favoring any business, or industry in taxes, purchases, tariffs, disbursements, regulation, or bankruptcy law.

  • Radically reform the tax code.
    Reassert the entire concept of the Federal government being STRICTLY LIMITED to a few, essential functions.
    Devolve power back to the states and the people.
    Sunset virtually the entire Federal code.

    • Sure, I’m good with that.

      So, how are you going to get a government that is willing to do that?

      Vote for small government conservatives…. again?

      How are you going to get people who have to rely on crony largess (from unions, corporations, shadow groups, etc) to get elected, to turn around do the opposite of what their benefactors want?

      I’m listening.

      • How ARE we going to pass your law Cap, given the legislature is crony capitalist bought and paid for?
        I submit it’s more likely to happen by electing principled people than by the magic of, god knows what.
        Do you really think passing a law will prevent it?  That the people who pass the law won’t be engineering loopholes in it even as they assure you it will fix the problem?   Please.   “we have to pass it to find out what’s in it”.
        I am endlessly entertained by watching the government that is supposed to police itself ignore it’s own Freedom of Information Act, refuse to pass a national budget, refuse to enforce a national border, refuse to investigate itself on a contempt of Congress Charge, etc, etc, etc.
        And you think a law will fix it.  Publicly funded elections will fix it.  How much are you willing to spend on these elections?  I think a publicly funded election fund of, $100.00 is plenty.   What’s your magic number?

        • “How ARE we going to pass your law Cap,”

          I get it, you don’t any part of the ideas I have put forward. My question is what do y’all propose?

          Does anyone seriously think that voting for people who are funded by this criny system are going to change it?

          I don’t. That’s why I have not been suggesting asking Congress to pass a law. I have been leaning more toward a Constitutional Amendment.

          But forget my ideas, you hate those, so give me something I can get behind. Our political disagreements are pointless if it doesn’t matter whether you win or I win, we are going to get the same nonsense.

          Maybe Kyle is on the right track.

          Maybe one way to handle is to forbid any Congress critter from voting or advancing any bills that benefit a contributory group. Other that what I have suggested, I don’t know. But I do know that nothing else matters unitl or less we deal with this problem.

          • It’s not that I don’t desire to fix it, I just don’t think another law is the answer.
            At least not with the current legislature – Cap – we’re down to that essential question – because these are the people who will craft the law, OR your Amendment – Who will watch the watchers?
            We’re asking the people who are most likely to benefit from any corruption to STOP being corrupt long enough to change the system to prevent them from being corrupt.    We’re asking the fox to restrain himself and to actually GUARD the hen house instead of looting it.
            That’s why I think it comes back to electing people.

          • We all know a record can be manufactured, or ignored – QED.
            But it’s a lot harder to do that state after state, time after time.
            The whole process is crap as it stands – we’re ONLY allowed to choose from the clowns we’re offered by the parties.  The deck is already stacked.  McCain is a perfect example, Pelosi is a perfect example.
            Want to outlaw parties?  🙂   (I ain’t kiddin….)

      • Vote for small government conservatives…. again?

        Your lie d’jour.  Name a time when small government conservatives were ever more than a minority of even the GOP caucus.

  • I’m listening.

    No.  You are not.  What a monumental lie.

  • “No.  You are not.  What a monumental lie.”

    Show me a idea that has a chance, if I don’t get behind it, then you can call me a liar.

    Otherwise, STFU.

  • “No.  What an amazing little pustule on the ass of humanity.”

    For you to insult me, I must first value your opinion.

    I don’t.

    • Obviously ANOTHER lie.  Why else “STFU”?

      • “Why else “STFU”?”

        I never post for you, I post in response to you for other readers.

        I recognize how hopelessly devoted to the negative you are.

        I believe there are some on your side that are interested in doing something other than saying how bad the other side is.

        You are not alone, there are a ton of people just like you on the liberal side who can only talk about how evil, stupid, misinformed, wrong, and foolish conservatives are. Pointing out problems and differences between Americans is easy and fun, but pointless. Finding solutions is difficult because it requires thought outside of the ideological box. Don’t feel bad, many people suffer from the limitations you have. You are just an example of something that people trying to have serious conversations have to put up with.

        I don’t care whether you STFU, even though I may suggest it occasionally. I post it to point out your inefficacy to rational people.

        Even this post is for them.

        •  “Finding solutions is difficult because it requires thought outside of the ideological box”

          Wrong. Just because something has idealogical appeal does not mean it is not a solution.

    • Wrong. He *did* insult you. For you to *feel insulted* you would have to value his opinion.

  • “who will craft the law, OR your Amendment ”

    I suspect it might have to be a Constitutional Convention. That is the only method of having the amendment passed without Congress.

    “That’s why I think it comes back to electing people.”

    I don’t have confidence in this approach, but since I think votiing is a waste of time in this system, but if there are any small government advocates on the ballot, I’ll vote for them.

    What do we need, Ron Paul? He is a small government libertarian (in theory), but yet he inserts pork in the spending bills he votes against and keeps his constituents happy with that local spending.

    I think that ultimately, nothing can or will change unless there is a huge majority behind it, transcending party and ideology. Keeping the R vs D debate hot is in the best interests of the status quo.

    I have policy opinions, but they just don’t matter, neither do yours, until we figure out a way to fix this. I just don’t see voting for people elected through the same system can work. Do you, really?

    • I think that ultimately, nothing can or will change unless there is a huge majority behind it…

      Which is what I said several days ago.
      But you weren’t listening.
      Were you?

      • “Which is what I said several days ago.”

        I have been saying it for years, weren’t you listening?

    • At present, no, and largely because as I said, we’re constantly offered crap sandwiches (to steal from Bill Quick) as candidates by the major parties.
      The tea party theory may change that, but it has a long way to go before it can become a controlling factor.  I don’t know if ‘fear’ of the Tea Party is enough for conservative candidates, and the Democrats don’t really care about them, and certainly aren’t going to try and appeal to them.
      I do know I’m tired of being offered crap sandwiches to choose from.

      • “I do know I’m tired of being offered crap sandwiches to choose from.”


  • Re: your Convention – you’re going to have to elect someone, through the current system, that you trust to do the job – or you convention will fail at the task.
    You see, unless YOU are your representative to the convention, you are going to have to trust someone else.  Hence you’re really back to electing small government representatives that you think you can trust as your answer.
    You can’t build this building without that foundation, any other answer is likely to give you what you already have.

  • “Hence you’re really back to electing small government representatives that you think you can trust as your answer”

    As I understand the process, an Article V Constitutional Convention would be called by the states, bypassing Congress completely.

    The state legislatures could appoint delgates to the convention, or they could hold elections.

    If this were done. it could become a runaway train, and that is a risk, but if the text of potential amendments were drafted up front, potential delegates could commit to them. Of course they can always change their minds once elected, but that’s another risk.

    I’ll be happy to vote for a small government conservative, but in no case would I vote for someone that thinks it is okay for anonymous entities to pour unlimited money into our electoral system. That would be voting for the status quo.

    When do we get to the point that no matter how great the risks, the risk on inaction is greater?

  • I’ll be happy to vote for a small government conservative, but in no case would I vote for someone that thinks it is okay for anonymous entities to pour unlimited money into our electoral system.

    Typical lies.  “I would vote for a small government conservative who wanted to kill the 1st Amendment…”
    If there ever are enough people supporting the kind of change it will take, they WILL NOT be anything BUT ideologically uniform.
    There is no such thing as a “small govt. Collectivist”.  Collectivist.

    • “I would vote for a small government conservative who wanted to kill the 1st Amendment…”

      Really, you think there is a Constitutional right to anonymous particpation in our political system? You do understand what anonynous is, right? That would mean that China, Venezuela, and anyone else who shoud NOT be participating on our political, would have an open door to do so.

      Y’all go out of your way to try and make no one can cast one vote without their identity being verified with specific forms of government idenitification, and then you support anonymous cash investments into the electoral system.

      Breathtaking hypocrisy.

      And entirely consistent.

      • No.  Let me teach you about “hypocrisy”, you lying puke…
        There is no way under current law that “anonymous” donors could pour money into an election.
        Now, as Obama did in 2007-08, you CAN flagrantly violate the law and accept foreign money.
        But that is a unique example.

  • Let’s take Germany, for example—a mixed socialist/capitalist economy (leaning more to the socialist side):  Unemployment is now approaching 5%; and third to fifth largest economies (depending on which information you use); half the members of board of director represented by employees—for companies exceeding 2000 employees; automatic extensive maternity leave (not to mention generous paid vacations); universal health care.

    • What’s ironic is you are flacking for a fascist economy.  Unwittingly.  That is…without any wits.