Crony Capitalism in America 2008-2012, Chapter 29, Diagnosis

Crony_Capitalism_in_America_cover

Chapter 29 of Hunter Lewis’s new book.

To begin with, it may be helpful to summarize the most salient features of today’s crony capitalist economic system:

1. Crony capitalism is not just a manifestation of private greed. It often arises as an unintended consequence of good intentions and idealistic impulses. As this author has written in Free Prices Now!, the companion volume to this one:

Fearful of private greed, wanting what is best for all, we bring government into ever more minute management of economic as well as political affairs. But in doing so, we do not strengthen our community. Instead we create an epidemic of lying, cheating, theft, and corruption, with more and more people trying to get something for nothing, relying not on what they can do, but on whom they know in government. In surprisingly little time, all the bonds of trust and cooperation nurtured by the free price system become frayed or just disintegrate.473

The US Federal Reserve finances government expansion in a variety of ways:

-„„ By blowing up economic bubbles with newly printed money, it increases tax revenues, at least until the bubbles burst.

-„„ By repressing interest rates, it enables government to borrow at rates that may be even less than consumer price inflation, which in turn makes it feasible to borrow almost unlimited amounts of money.

-„„ By printing new money that is then used, directly or indirectly, to buy government bonds.

Thibault de Saint Phalle, author of The Federal Reserve: An Intentional Mystery (1985) showed how the Fed was financing government deficits even before the huge (and arguably illegal) expansion of its powers by Chairman Ben Bernanke after the Crash of 2008:

The Fed, by financing the federal deficit year after year, makes it possible for Congress to continue to spend far more than it collects in tax revenue. If it were not for Fed action, Congress would have to curb its spending habits dramatically.474

3. A growing government, taking more and more control of the economy without actually owning it, as in socialism, makes deals with powerful special interests, as per the following list, which we have already seen:

What Private Interests Want from Government

„„- Exemption from legislation—e.g., NRA/Sierra Club in Campaign Finance Bill

-„„ Favorable legislation—e.g., UPS/FedEx battle in Congress, Card Check, proposal to let
unemployed sue, rum interests

„„ -Sales—e.g., defense, drugs, vaccines, school lunches

„„- Regulatory changes—e.g., health, drugs, housing, banking, financing, agriculture, food, autos, broadcasting, railroads, insurance, trucking, airlines, education, energy, law, accounting

-„„ Exemption from regulation—e.g., Obamacare, waivers, family offices under Dodd-Frank, flame
retardants

„„- Regulation that discourages new or small competitors— e.g., drugs, supplements, generic drugs, slaughter houses, healthcare

– Influence over price controls—e.g., State of Massachusetts medical

– Access to credit—e.g., green energy, housing, Wall Street

„„- Access to cheap credit—e.g., banking, housing, finance

-„„ Extension of monopoly status—e.g., patents and copyrights

-„„ Monopoly status—e.g.,, drugs, unions, National Football League, securities rating services

– Noncompetitive bidding or contracts—e.g.,vaccines

-„„ Direct subsidies—e.g., education, including unionized teacher salaries, unions, auto, agriculture, junk food, ethanol, green energy, vaccines, housing (mortgages), AMA, earmarks, high speed rail, fast internet service

– Indirect subsidies—e.g., law and accounting both expand with regulations, AARP, Wall Street consultant after Crash, GMO food sales to farmers and abroad, mammograms, health
insurance mandate

„„- Bail-outs—e.g., banking, finance, autos, Goldman Sachs

„„- Influence on reversal or phase-out of rescue or subsidy—e.g., electronic records companies, collection of union dues

-„„ Promise of future bail-out (which reduces current cost of credit)—e.g., banking, housing, finance

– „„Protection from competitors, domestic or foreign

– Protection from prosecution—e.g., Goldman Sachs, drug companies, vaccine makers, GM bondholders

-„„ Licensing—e.g., broadcasting, medical, most professional services, airlines, drugs, law, accounting

-Tariffs—e.g., sugar, sugar ethanol

„„- Avoid punitive measures—e.g., medical device makers in Obamacare

– Favorable price contrast restrictions—e.g., Fed control of interest rates, price of farm crop insurance, price of milk, Medicare prices, Medicaid, Obamacare Payment Advisory Board

-„„ Targeted tax breaks—e.g., In 2009 stimulus bill for Hollywood and World War II Filipino veterans

– Modifications of tax penalties, deductions, clawbacks, or phase-outs—e.g., Pease deductions, Bush tax cuts, loss of subsidies when income rises, in effect a tax on work

-„„ Prestigious public appointments

What Public Officials Want from Private Interests

-„„ Campaign contributions

„„- Direct campaign assistance

– Indirect campaign assistance

– Assistance with “messaging”

„„ – Money (illegal if a bribe, but not necessarily in other cases, e.g. assistance with a loan or access to a “sweetheart” investment)

– Support from “foundations” related to campaign contributors

„„- Regulatory fees to support agency jobs

– Jobs for friends, constituents, or eventually themselves

„„- Travel, entertainment, other “freebies”

– Power, control, and deference

The alliances and relationships formed between public officials and private interests may be counter-intuitive. A company may give more campaign money to a potentially hostile legislator than to a friendly one, in order to forestall trouble.

4. All these crony capitalist deals not only introduce lying, cheating, and corruption into the economic system. From a purely economic point of view, they also interfere with free economic prices and profits, the signals on which any economy relies. The result is economic chaos as well as corruption. Hobbled prices, linked to growing corruption, are enough to destroy any economy. Nor is it possible to restrain corruption without allowing truthful, unfettered prices. Oystein Dahle, a Norwegian businessman, perceptively noted that “the Soviet Union collapsed because it would not allow prices to tell the economic truth.”475

With this brief summary in mind, we will now turn in the final chapter to a proposal for thorough, root and branch reform of our economic system.