Free Markets, Free People

corruption


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.

~McQ

Twitter: @McQandO


Whatever happened to tar and feathers?

This is the story of 20 year-old Tiawanda Moore. It seems she was dissatisfied with a contact she’d had with a Chicago police officer.

Moore, of Hammond, Ind., was being interviewed at police headquarters about her complaint that a patrol officer had grabbed her breast and given her his phone number when he came to her boyfriend’s South Side apartment on a domestic disturbance call.

No doubt the officer, having Moore’s best interests in mind, thought he would be a much better boyfriend. Sadly, Moore took this concern for her well-being amiss, and decided to file a complaint against the officer. At police headquarters, the investigating officers—who similarly appeared to have only Moore’s best interests at heart—suggested an alternate method of dispute resolution, that is to say, to drop her complaint entirely, as they preferred not to conduct a formal investigation, which would, really, just be an inconvenience to everyone involved. At that time, Moore decided to record the remainder of the conversation.

On the muffled recording, which was played for the jury Tuesday, Internal Affairs Officer Luis Alejo can be heard explaining to Moore that if she dropped the complaint, they could “almost guarantee” that the harassment would not happen again. He also suggested that going that route might save her the time and aggravation of a full investigation.

Ah. You see, if she decided not to demand a formal investigation, the IA investigators could "almost guarantee" that the breast-grabbing officer would get the word to cool his jets. And, isn’t an "almost guarantee" good enough? Not for Moore, apparently, who decided to use her Blackberry to record the conversation, because she felt, for some incomprehensible reason, that the Chicago Police Department might be downplaying her complaint.

And that’s why this case is being heard by a jury, as the quote above indicates.

The officers, of course, are not being tried for corruption or dereliction of duty, of course. Tiawanda Moore is the defendant, on two counts of—I kid you not—eavesdropping on a public official. In response to questioning by Assistant State’s Attorney Mary Jo Murtaugh, Moore said:

“I was sure about what I wanted to do –I wanted him (the officer) to be at least fired from his job,” Moore testified. “I wanted justice, I wanted to be protected.”

But this is not the Chicago Way. The Chicago Way is to slap down hard any civilian peasant who presumes to record their politically-protected betters in a possible wrongdoing.

On the one hand, of course, we all know what the eventual result of an internal affairs investigation would be. The police would carefully investigate the police, and after due course would conclude that the police had done nothing wrong. And recording public officials without their knowledge when they are engaged in corrupt behavior might actually endanger their ability to engage in corruption.

On the other hand, all this could have been avoided by dropping her complaint in return for almost a guarantee that she won’t be bothered in the future.

But in Chicago, public officials, engaged in public duties on the public’s dime, have an expectation of privacy, and cannot be recorded without their consent. You, as a member of the public, can be recorded by the police at any time, with or without your consent, but you can never record them unless they graciously allow it.

The only possible reason for such a law, as far as I’m concerned, is to protect corrupt officials, and to prevent the public from exposing it.

We don’t drag public officials naked and screaming out of their offices to tar and feather them any more. Indeed, we can barely muster up the will to toss out incumbents who vote for such laws. But in a just world, , the Illinos Legislature, Internal Affairs Officer Luis Alejo and Assistant State’s Attorney Mary Jo Murtaugh would, even now, be sporting the sleek plumage of an Albatross from the Exxon Valdez.

UPDATE: A commenter informs me the jury appears to have done the right thing and acquitted Moore. Still, none of the other players are sporting a heavy layer of fine down, so the glass is only half full.

~
Dale Franks
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UN Anti-Corruption Office Closed

Is there a more useless or corrupt organization than the UN? The famous “Third World Debating Club”, primarily supported by US tax dollars, is used as a platform for attacking the US (and the West) and squandering money. It is also famous for corruption, such as the oil for food scandal and many others.

Recently, and as quietly as they could manage, the UN shut down it’s Procurement Task Force, an anti-corruption task force set up in 2006 in the wake of the oil for food scandal. Since its establishment the anti-corruption unit has uncovered 20 more major schemes involving about 1 billion in US contracts and individual aid.

And now? Now those cases are being dropped as the PTF is dissolved:

But at the beginning of 2009, the United Nations shuttered the agency and diverted its work to the Office of Internal Oversight Services’ permanent investigation division.

Since then, the number of cases opened, pursued or completed has dropped dramatically and the division has let go most former task force investigators, the AP found in an examination of U.N. documents, audits and e-mails, along with dozens of interviews with current and former U.N. officials and diplomats.

Over the past year, not a single significant fraud or corruption case has been completed, compared with an average 150 cases a year investigated by the task force. The permanent investigation division decided not to even pursue about 95 cases left over when the task force ceased operation, while another 80 unfinished cases have languished.

What that really says, at least as I see it, is the PTF was all for show – an organization that was established in the wake of the oil-for-food scandal as an effort to placate an enraged world. But 3 years later, the UN feels safe enough that it can disband its only real anti-corruption unit, a unit that was obviously becoming a hindrance to the ability of the corrupt among the body to siphon off billions.

I am not now, nor have I ever been a fan of the UN. It lost its way not long after its formation and has become nothing more than a vehicle for looting richer nations and providing a forum for dictators and authoritarians to condemn those who oppose them.

This development provides the US a perfect opportunity to pull out of the UN. Unfortunately we won’t and I know that as well. Making the best of a bad situation, the least we should do is insist that the PTF be rechartered as a permanent addition to the UN structure and strengthened with more investigators before we send the organization another dime of “dues”. Without that, the corruption that is apparently inherent in the organization will run rampant, and that’s simply unacceptable. No permanent PTF, no dues. And drag our erstwhile “allies” into this as well.

Yeah, I know – accountability, what a concept. Perhaps we ought to try it out here first before we demand the UN do it, huh?

~McQ


Government Motors? Oh Yeah …

Politics and special interests now run General Motors – a company which should be making business decisions based on what is best for the company and its future and not what is best for some politician:

Rep Barney Frank (D-Mass.) won a stay of execution on Thursday for a General Motors plant in his district that the automaker had announced it would close.

No other lawmaker has managed to halt the GM ax. As chairman of the House Financial Services Committee Frank oversees the government’s bailout program, known as TARP. Frank’s staff said the lawmaker spokes with GM CEO Fritz Henderson on Wednesday and convinced him to keep the Norton, Mass. plant open for at least 14 months.

Because what happens in about 14 months boys and girls?

The 2010 midterms. And who controls all the bailout programs? Why the guy who was able to change Government Motors mind on the plant in his district.

Of course had some backbench freshman congressman from a red state district made the same request, what do you suppose the answer would have been?  It doesn’t get any more blatant than this — but who among our “leaders” has the stones to call him on it?

About the only thing you could hope for in this instance is a bankruptcy judge would say “no dice” and force GM to carry out its original plan, but as stagemanaged as this whole bankruptcy procedure is, I doubt something like that would happen.

~McQ


Blago and Burris – Pay to Play?

Sure sounds like it to me:

A transcript of a secretly recorded phone call between the brother of former Gov. Rod Blagojevich and U.S. Sen. Roland Burris was released in federal court today, a call in which Burris, then seeking the Senate seat, was recorded offering the Blagojevich campaign a campaign check.

“I know I could give him a check,” Burris said. “Myself.”

But in the same call, Burris tells Robert Blagojevich he is concerned he and Rod Blagojevich will “catch hell.”

“And if I do get appointed that means I bought it,” Burris said.

“And, and God knows number one, I, I wanna help Rod,” Burris says later in the call. “Number two, I also wanna, you know, hope I get a consideration to get that appointment.”

The culture of corruption on steroids – or as a friend says, “the ususal Chicago politics”. Of course Burris would never voluntarily give up the seat and would most likely have to be dragged from the Senate kicking and screaming.

Any chance the Democrats will clean their own house?

Yeah, that’s a joke.

~McQ


Quote Of The Day

The person to whom the Navy recently bestowed the formerly prestigious Distingusihed Public Service Award had this to say:

“If I’m corrupt, it’s because I take care of my district,” Mr. Murtha said.

Because, you know, there’s obviously no other way to do that than be corrupt.

Shades of Georgia’s Eugene Talmadge:

 “Sure, I stole. But I stole for you,”

~McQ


Jack’s Friends

Political Wire writes that tomorrow might be an interesting day in Congress, corruption-wise.  It seems that some things have been going on around Congressman John Murtha (D-PA) which may not be entirely copacetic.

There’s a potentially big story brewing on Capitol Hill…  Apparently 104 members of Congress of both parties — 42 Republicans and 62 Democrats — secured earmarks for a lobbying firm linked to Rep. John Murtha (D-PA) in a single bill. The earmarks were inserted in a bill Murtha controlled as the defense appropriations subcommittee chairman.

It looks like business as usual, of course, until we learn that the company’s executives and clients seem to be big, big political donors to Rep. Murtha.

So, I guess it is business as usual.