George Leef (Highland County Press, 12/26/2014):
“The book’s great value is in Lewis’s relentless turning over of rocks so that we can see the creepy things that prefer to dwell in darkness. Readers will remember his big message because it is so well-supported with particulars.”
[Complete review: HighlandCountyPress.com]
Gene Epstein (Barron’s, 5-31-2014):
“Hunter Lewis, author of the excellent Crony Capitalism in America: 2008-2012, . . . points out that [Thomas] Piketty’s charting of the ups and downs of income returns to the top 10% correlates with central-bank-induced bubbles. These bubbles, Lewis explains, constituted ‘an explosion of crony capitalism as some rich people exploited all the new money, both on Wall Street and through connections with the government in Washington.’”
Grady Walton (San Francisco Book Review, 2/4/2014):
“We like to feel informed and indignant about the current state of American politics. Crony Capitalism in America, by Hunter Lewis, scratches that itch. Lewis comes from the perspective that special interests have become so embedded with politics that the prices we pay at the register are not true prices. The government offers subsidies to special interests to get something in return, usually political donations. Special interests even donate to hostile politicians to discourage them from turning rhetoric into action. This book will enlighten voters about the insidious creep of crony medicine, crony finance, crony auto industries, crony agriculture, crony Big Pharma, crony labor, and crony lawyers, to name a few. Political leaders also promote laws that give legal protection to special interests. Why does this happen? Lewis believes one major cause is the revolving door between Washington, government enforcement agencies, and big companies. An executive working at a drug company will quit and go to work for the government agency that oversees the drug company. After a while, the executive leaves the enforcement agency and returns to the drug company. Nobody seems concerned with conflicts of interest. Crony capitalism takes from all of us and gives to a special few. Happy reading!”
Jeremy Hammond (Barron’s, 11/2/2013):
Who wins from regulation
If you think you know what a corrupt place Washington is, think again. Author and investment consultant Hunter Lewis shows that no matter how bad you thought it was, the nation’s capital is much, much worse.
It can be misleading, Lewis suggests, to refer to the public versus the private sector, since it is so often hard to tell where one begins and the other ends. The label “government-sponsored enterprises” rightfully applies not only to companies like Fannie Mae and Freddie Mac, but also to a long list of other businesses—and even entire industries, such as defense, health care, and law.
The corruption has numerous manifestations apart from the familiar one of politicians showering their private benefactors with special privileges. There is also the revolving door of Washington, where the public servants “regulating” corporate behavior are drawn from the very same corporate world they are charged with overseeing. Then, after passing regulations favorable to their own industry, they go right back to work in the “private” sector, making profits from the policies they helped enact.
Whatever the means, the purpose is to circumvent or eliminate the free market. While government bailouts are an obvious example, sleight of hand is often involved. Thus, for example, the public may be deceived into thinking that regulations are aimed at limiting corporate abuses when their effect is just opposite. The legal complexities of dense regulations alone benefit big businesses, since they “discourage new competitors, especially small companies, which have not grown big enough to afford an army of accountants, lawyers, and political advisors.”
The tentacles of this crony capitalist system—the merger of corporate and state power (which is how Mussolini defined fascism)—are everywhere. As an active player, President Barack Obama is unusual mainly for his hypocrisy, condemning the corrupt system in public statements while assiduously exploiting that system in practice.
It is disturbing enough when such massive corruption exists in the world of politics and finance. But when it comes to control over what food we eat and the medicine we give our children, the cronyism is downright terrifying.
Crony Capitalism is a companion volume to Hunter Lewis’ other outstanding work, published at the same time, Free Prices Now! Together, the two volumes are a major contribution to the effort to correct the popular misperception that the problem plaguing the U.S. is free-market capitalism. Free-market capitalism serves the interests of us all. The real problem lies with capitalism of the elitist, crony kind.
JEREMY HAMMOND is the author of Ron Paul vs. Paul Krugman: Austrian vs. Keynesian Economics in the Financial Crisis.
Thomas DiLorenzo, Professor of Economics, Loyola College in Maryland (LewRockwell.com – 10/10/13):
“. . . The American warfare/welfare state, funded by the Fed, has . . . greatly enriched the ‘one percenters’ at the expense of almost everyone else, as documented in great detail by David Stockman in his book, The Great Deformation: The Corruption of Capitalism in America, and by Hunter Lewis’s Crony Capitalism in America.”
[Complete article: LewRockwell.com]
David Gordon (Mises.org – 9/24/2013):
“. . . What we have today is not the free market but ‘crony capitalism,’ an altogether different matter. Government and business are in a predatory partnership that extracts wealth to its own benefit. The fact that many suffer under the present system should occasion no surprise. Predatory ‘cronyism’ has existed throughout history and has been the main block to economic progress. . . . Lewis explains and documents [this] to the hilt. . . . Those inclined to dismiss Lewis’s claim as exaggerated must confront the solid body of evidence he amasses.”
[Complete review: Mises.org]
Murad J. Antia, CFA (CFA Institute):
“Hunter Lewis, co-founder of the investment firm Cambridge Associates, begins Crony Capitalism in America: 2008–2012 with cautionary tales of how crony capitalism has decimated economic growth in such countries as Argentina, Zimbabwe, and Russia. He is concerned that the United States is following the same path, with dire consequences in the offing.”
[Complete review: CFApubs.org]
The Black Conservative (9/28/2013):
“If there’s one BOOK you must read this year MAKE SURE IT IS THIS ONE! Crony Capitalism in America by Hunter Lewis.”
[Complete review: Blackconservative360.blogspot.com]
Jeanne Drisko, MD (Riordan Professor of Orthomolecular Medicine and director of the Program in Integrative Medicine at the University of Kansas Medical Center):
“Crony Capitalism in America is riveting. I could not put it down.”
Too Big Has Failed (9/1/2013):
“It’s time that we reform this system. Lewis’s book aims to do just that. . . . It’s a book that lays out all the data needed to support the theory that cronyism is rampant and that cronyism is wrong.”
[Complete review: TooBigHasFailed.org]
“Lewis gives a brilliant account of the injustices that have rocked our economy, and it’s time we stood up and took notice.” [5 CRESCENTS]
[Complete review: Roxykade.blogspot.com]
Comments from Goodreads Users:
“It is a perfect introduction for the recently disillusioned American hoping to become more privy to the corruption and lobbying of Washington, DC . . . . I personally find the format and writing style of the book invaluable. . . . Thanks, Mr. Lewis!” [5 STARS]
[Complete review: Goodreads.com]
“A well-documented and extensively researched book regarding the unholy alliance of the Mussolini/Hitlarian corporativist style of fascism between government and big business that exposes many industries not only in America but worldwide.” [5 STARS]
[Complete review: Goodreads.com]
Part 1: Introduction
1: Crony Capitalism around the World
Although this book is about crony capitalism in America, it is sometimes easier to see more clearly what is not right before our eyes. We will therefore start with a brief tour of crony capitalism abroad, and then decide how much of this applies to us at home. The first stop of our tour will be post-Communist Russia.
In Russia today, failing companies have the usual choice: make changes necessary to become profitable or shut down. But many of them can fall back on a third choice as well: cash in chips with government cronies. As might be expected, this third option is not without its complications.
For example, shortly after the Crash of 2008, Alfa Bank, led by economic oligarch, Mikhail Fridman, sought repayment of a $650 million loan from a holding company, Basic Element, owned by another oligarch, Oleg Deripaska. On hearing this, Deripaska called Dimitry Medvedev, the then Russian president. Medvedev told Fridman to back off.1
This was not the end of the story. Basic Element had previously laid off many factory workers and owed some of them pay. Vladimir Putin, who preceded and succeeded Medvedev as president and who was then prime minister, staged a media event in which he dragged Deripaska before some of these laid off and unpaid workers and, in full view of state television cameras, proclaimed, “I wanted the authors of what happened [to these workers] to see it with their own eyes.”
Turning to Deripaska directly, he added menacingly, “You have made thousands of [workers] hostage to your ambition, your lack of professionalism, and perhaps your greed.”2
Was Deripaska about to lose his company? Was he in danger of being sent to prison? Would he be treated like Mikhail Khodorkovsky, another “oligarch” who had offended Putin by supporting democracy and opposition political parties in Russia? No, there was not the least danger of any of this happening.
The dressing down was just for the cameras and no doubt carefully rehearsed. Deripaska was on friendly terms with both Medvedev and Putin, and at that very moment was being bailed out by a state-owned bank, which would also support new stock issuance by the company. Even Alfa’s loan would be paid, so Fridman too would be happy.
What Medvedev and Putin got in return, or had gotten at some earlier time from Deripaska, we do not know. But we can guess. Stories have circulated in Russia about how a business “friend” of Putin’s has siphoned off hundreds of millions in “charitable” contributions from Russian companies, totaling billions, in order to create off-shore accounts for Putin and also build him what is alleged to be a billion dollar villa on the Black Sea.3
This is only one of Putin’s lavish residences. He enjoys 20 in all, along with four yachts, countless cars, helicopters, and airplanes, one of which has an $18 million cabin with a $75,000 toilet.4 Meanwhile the president reports total personal income of $113,000 a year. In all, including 250,000 personnel involved in personal security, the cost of maintaining Putin is believed to total $5 billion a year.5
Russian reformer Yegor Gaidar said about the Putin regime: “A self-serving state . . . oppresses . . . society, . . . destroys . . . it and in the end destroys itself.”6
He died mysteriously in 2009 at age 53.
The Russian state no longer claims ownership of the economy, as it did in Soviet days. How much better to control it without having to take direct responsibility for any of its failures? But there are few boundaries between private and public. Businessmen depend on the state for favors. The state siphons off whatever money it needs or wants, either for political or personal use. As much as possible, it is all done behind closed doors. If control of money and media does not produce the right election result, ballots can be stuffed, also as discretely as possible. And opponents can be intimidated or if necessary beaten, jailed, or killed.
Although Russia may be the “poster boy” for cronyism among the larger national economies today, there are many other vivid examples. Respected economic columnist Larry Kudlow has written that “the Communists in China have adopted deregulated free market capitalism.”7
He must have been joking.
The Chinese banking system is perennially insolvent, because of bad loans to government cronies, but is always rescued with new cash created by the central bank. The whole country lurches from government-financed bubble to bubble. Stimulus program funds, also in large part generated by the central bank, have been used by state-owned companies to buy private rivals.8 If this essentially corrupt system finally implodes, as is likely, the entire world will feel its effects, thanks to China’s central role in world trade, by far larger than Russia’s.
In South America, cronyism has taken deep root, but the most tragic example may be Argentina. Before Juan Perón introduced his own brand of fascism in the 1940s, the country’s income per head rivaled that of the United States. Waves of European immigrants came to the country seeking a better life. As Alan Beattie has noted, “The millions of emigrant Italians and Irish feeling poverty at home at the end of the 19th century were torn between two destinations: Buenos Aires or New York.”9 Sixty years later, Argentine income per head had fallen to less than 20% of the US figure.
Given Argentina’s natural riches and other advantages, the decline is almost entirely attributable to rampant crony capitalism, which has only gotten worse with time. In 2002, the government defaulted on its global debts. In 2010, it seized private pension monies, and channeled some of these funds to private sector cronies, allegedly to build housing. In 2012, it rewrote rules for the central bank to give itself unlimited use of national reserve funds.
Friends of the government buy a dollar for 4.5 pesos, while others pay 6, if they can get a dollar at all. Taxes are suffocating and on the rise. Economic statistics are all so cooked that the International Monetary Fund has officially criticized them and international publications like The Economist refuse to run them. Inflation, always a threat despite government cover-ups, is surging along with unemployment, but Argentine economists are fined for even releasing projections. The government commandeers television whenever it likes and otherwise restricts what is said or shown.
Meanwhile the recent rulers of Argentina, first Nestor and then his wife Cristina Kirchner, have grown rich, principally through land and hotel deals in their native province. When Mr. Kirchner was governor there, he bought at least one piece of land from a town government. An unknown number of purchases were financed by a bank that had been privatized and sold to a family friend. What happened to the proceeds of the privatization sales, including a large oil company, remains a mystery.10
Zimbabwe too was once considered a breadbasket, in this case of Africa, but in the 2000s began to suffer mass starvation. The principal reason was that President Robert Mugabe promised land reform, but actually gave the once rich farms to his cronies. At about the same time, everything was price controlled, often below the cost of production. The Central Bank was printing unlimited numbers of Zimbabwean dollars, so that by 2008 prices were rising 98% a day. Property and market values plunged by at least 99%, but it was hard to say for sure, because there were no buyers. While these events were unfolding, Mugabe railed against “greedy entrepreneurs, ruthless markets, and the forces of globalization.”11
Russia, China, Argentina, and Zimbabwe are all extreme examples of crony capitalism, and therefore useful in defining what we mean by the term. At the same time, they are by no means isolated cases. Most of the world today is crony capitalist to one degree or another.
The kind of political and economic system exemplified by these four countries has clear roots in the “national socialism” developed by Mussolini in Italy and copied by Hitler in Germany. But it was by no means a 20th century invention. The earlier monarchies of Europe and Asia worked in a not dissimilar way. Indeed it may be argued that cronyism is as old as recorded human history and has always been the dominant system.
This is precisely why the human race has made so little progress in overcoming poverty. For most of human history, there has been no economic growth at all. People born poor died poor. Whenever economic capital began to be accumulated, it was generally stolen by rulers or their friends or allies.
The British economist John Maynard Keynes observed in the 1930s that only one treasure trove, taken by the English privateer Sir Francis Drake in the 16th century from a Spanish galleon, the Golden Hind, invested at 3%, would have equaled the entire English economy by the time he wrote. Such is the power of compound interest from a successful business or financial investment. But for most of human history, large-scale investments have been unthinkable. It has not been safe to make them. Treasure was to be spent or hidden.
By the beginning of the 18th century, the world was just as impoverished as it had always been. But very gradually, in some countries, especially in Britain and the newly formed United States, governments learned to be less greedy, to avoid killing the goose of enterprise that laid the golden eggs. Reforms, especially reforms that freed some prices from government control, were achieved, the so-called industrial revolution began, and poverty began to decline, especially by the 19th century.
Even then, reform was limited, cronyism remained strong, and millions remained in poverty despite advances. Outside the more reformed and thus more advanced countries, people remained uncertain about their next meal. How could it be otherwise when their economy was run on crony capitalist lines—principally for the benefit of rulers and powerful allied special interests?
1. Economist (March 21, 2009): 57–58.
2. Economist (December 5, 2009): 73.
3. David Ignatius, Palatial Corruption, Russian Style, Washington Post, http://www.realclearpolitics.com (December 23, 2010).
4. http://www.reuters.com (August 28, 2012).
5. P. Johnson, Forbes (October 22, 2012): 36.
6. Economist (December 19, 2009): 149.
7. Washington Times (November 2, 2009): 37.
8. Ibid., 24.
9. Alan Beattie, False Economy: A Surprising Economic History of the World, http://www.bloomberg.com Review (April 16, 2009).
10. Economist (February 27, 2012): 27–29.
11. Michael Grunwald, Washington Post (December 27, 2002): A–10.
Part 11: Solutions
From time to time, many proposals are made to control crony capitalism. Some of them have great merit, including these:
Forbid former government employees to lobby the agencies where they previously worked;
Forbid government wages to be siphoned into political campaigns via public employee union dues;
Give all union members control over the use of their dues for political purposes;
Forbid political contributions by government contractors, grant recipients, and employees;
Require disclosure of all political campaign donations along with the source of independent campaign expenditures;
Require disclosure of all loans and terms or other financial assistance to public officials;
Require recusal, with no waivers, by all public employees on matters pertaining to a former employer, whether the work was done as an owner, employee, or contractor;
Re-instate the Glass-Steagall prohibition against federally insured banks engaging in investment banking or speculation for their own account;
Restore and increase bank reserve requirements;
Prohibit “too big to fail” rescues of financial or other companies;
Separate food and drugs within the FDA and either attach dietary supplements to food or give them their own agency with its own rules;
Forbid the FDA and FTC from censoring the dissemination of solid, peer-reviewed science by vendors of products;
Restore consumer choice in medicine;
Prohibit government-industry partnerships in vaccines;
Repeal and then radically simplify the present tax system, which is currently used to reward political allies and punish opponents;
Forbid regulatory agencies from assuming an executive, legislative, and judicial role, thereby making a mockery of constitutional separation of powers;
Require specific Congressional approval of all government regulations;
Sunset new laws and regulations to ensure review;
Limit medical malpractice and other corrupted tort awards;
Abolish government-sponsored “private” enterprises such as Fannie Mae and Freddie Mac and end government control of the mortgage market;
Turn over the development and implementation of public assistance programs to charities to ensure that they cannot be used as vote buying schemes, to allow greater flexibility and creativity, and in general build the charitable sector to become a co-equal with business and government. Provide a charitable tax credit to accomplish this.
These ideas are important. Some of them are big ideas. Enacting any of them would make a real difference. In addition, there are other useful steps that could be taken. At the same time, no such list of incremental changes will be enough. What our society and economy need at this point is a truly systemic reform that will strike crony capitalism at the roots.
This systemic reform will take government out of the business of influencing, manipulating, or controlling market prices. The crony capitalist system depends on these price manipulations; they are what private interests buy and what public officials sell. Crony capitalism will wither without them. As it withers, corruption will subside. The economy will recover and thrive. Jobs will once again be available for those able to work. Free prices must therefore be the banner under which today’s reformers march.
Free prices should not be confused with an abandonment of legitimate principles of social justice. Our original constitutional system embraced the ideal of government as social and economic umpire, enforcing the rules against force and fraud and disavowal of contracts. Banning child labor or inhuman working conditions is legitimately part of the umpire’s role and does not interfere with prices. The early laissez-faire reformers generally agreed. British Member of Parliament Richard Cobden (1804–1865), one of the principal leaders of the movement, wanted to get government out of a leadership role in the economy. But he voted for restrictions on child labor as well as for more child education. Like other laissez-faire reformers, he also fought for broadening the right to vote, the removal of restrictions on Jews, and against slavery.
Our constitutional system was never perfect. As previously noted, the first law passed by Congress was an import Tariff Act which both interfered with prices and rewarded special interests, the crony capitalists of the day. But over time, the early mistakes were compounded by the wholly fallacious belief that government could improve on the free price system by controlling and manipulating it, indeed by subverting it. What a paradoxical doctrine, that the economy can be improved by destroying the price mechanism on which it depends.
Ben Bernanke, chairman of the Fed, would superficially seem to agree. He tells students in a university economics class that “prices are the thermostat of an economy. They are the mechanisms by which an economy functions.”477 But then he radically expands the price fixing reach of the Fed from short-term interest rates to all kinds of interest rates.
At the same time, the federal government, supported and financed by the Fed, expands its own price manipulations, monopolies, and subsidies, even adding a “fall-back” price control feature to the Affordable Care (Obamacare) Act. Some state governments follow suit: Massachusetts amends its “Romneycare universal health plan” by passing a medical price control law in 2012, a law that requires government approval not only of price changes, but of all “material” changes by healthcare providers.478 In each case, price controls are expanded as a remedy for ills created in the first place by earlier price controls.
These are obvious examples, but on close examination almost everything the government does in trying to lead the economy involves a price manipulation or control. It is time to pay heed to some sensible advice from humorist P. J. O’Rourke: “[The free price system] is a bathroom scale. We may not like what we see when we step on the bathroom scale, but we can’t pass a law making ourselves weigh 165. . . .”479
A thriving economy is comprised of billions of prices and trillions of price relationships. Left alone, these prices almost miraculously coordinate demand with supply so that buyers can obtain as much as possible of what they want. Refusing to let prices fall or pushing them higher (2% a year, now 2.5% a year, per the Fed’s announced target, linked to an artificial and dubious index) is like jamming a stick into the spokes of a wheel or pouring sand into the fuel tank of an engine. If we do this, we should not wonder if the wheel ceases to turn or the engine refuses to run.
A successful society is a cooperative society. A cooperative society is an honest society. By far the most reliable barometer of economic honesty is to be found in prices. Honest prices, neither manipulated nor controlled, provide both investors and consumers with reliable economic signals. A corrupt, crony capitalist economic system does not want honest prices, honest information, or honest results. The truth may be inconvenient or unprofitable for powerful government leaders or private interests allied with them.
We need to allow prices to tell the truth, free from the self-dealing and self-interested theories that stand in their way. Any proposed government action in the economy should be evaluated on this one criterion at least: does it confuse, manipulate, or control prices? If it does, it should be rejected.
Is it possible that this one reform proposal—free prices applied logically, systematically, and courageously—can free us from the crony capitalist corruption and economic stagnation of the past, thereby opening up an economic future for everyone, not just the rich and powerful? Yes it is. Even the arch enemy of free prices, economist John Maynard Keynes, agreed that “ideas rule the world.”480
It was not so long ago that humanity condemned economic competition and described economic change as evil. No wonder economic progress was unknown. Born poor, we died poor, with the limited exception of those few who controlled weapons and could take what they wanted, although under this system there was not much to take. It was the gradual discovery of the power of free prices, beginning especially before the so-called industrial revolution, that allowed for the advancement of living standards even with population growth.
That revolution remains tragically unfinished today. Indeed, it is in danger of being extinguished altogether by a resurgence of crony capitalism and controlled prices. But for our own sake, for the sake of the poor, and for the sake of our descendants, it is time to rediscover truth and re-commit to reform.
477. Grant’s Interest Rate Observer ( July 13, 2012): 1.
478. Pipes, http://www.forbes.com (August 20, 2012).
479. Smith, http://www.nypost.com (October 2, 2010).
480. See end of John Maynard Keynes’s General Theory of Employment, Interest, and Money (Amherst, NY: Prometheus Books, 1997).