CRONY CAPITALISM

By James Craig Green


Adam Smith called it mercantilism.

Libertarians call it corporate socialism.

Others call those who practice it political entrepreneurs.

The idea that government should protect, subsidize or otherwise protect businesses from economic loss is now frequently called Crony Capitalism. This has an appropriate ring, because it combines the worst of government cronyism (special favors for one's friends) with cozy deals between business and government that soften or eliminate losses to politicians' favorite businesses. Although good for a particular business, it always forces resources away from more efficient and profitable businesses, into the hands of less efficient, losing businesses. Because these wealth transfers are made by force, allocated by politics, they always result in a net loss to the economy.

Some of the worst cases of Crony Capitalism were revealed during the economic meltdown of the investment banking and insurance industries between 2007 and 2009. While Congress was debating how much "stimulus" money to give the biggest welfare queens in America, President Bush's treasury department and the Fed chairman both stepped up to the plate to provide backup promises to businesses "too big to fail." Even obvious, outright criminals like Bernie Madoff became poster children for the stupidity of government cronyism. The SEC (Securities and Exchange Commission) repeatedly failed to act on complaints about Madoff's Ponzi schemes, until it could no longer ignore the problem. Is this the much-ballyhooed government regulation that is supposed to protect innocent consumers from the dishonest schemes of evil capitalists?


What Free Market?

During the last century, government has escalated its aggressive interference into almost every market you can think of. From antitrust legislation in the 1890's, to the Federal Reserve, to the New Deal, Great Society and two world wars, American markets are more regulated today than they have ever been. Pork barrel spending by the federal government dominates deliberations of Congress, where only the next election and bringing home the bacon to one's State or congressional district are valued.

Many businesses find it less risky and more profitable to solicit governments as customers because:

• Invoices are rarely scrutinized
• More spending (not production) supports higher budgets next year
• Reduced accountability of contractors, encouraging shoddy work
• Subsidies favoring some businesses over others

When businesses have government for a customer, they are insulated from market forces, becoming wards (and supporters) of the state. Avoiding market risks is one reason why so many companies choose government contracts and political action, including promoting legislation that restricts their competitors.

The main purposes of government today are to force wealth away from those who earn it, deduct a sizeable chunk for the government and give what's left to those who didn't earn it. This damages those whose assets were confiscated, and creates long-term dependencies for those who receive them. This net loss resulting from government's forceful transfer of wealth always makes the economy worse, not better. For example, after ten years of "green" jobs creation in Spain, as referenced earlier in my SOLAR JOBS article, it was found that more than two other jobs were eliminated for every new one claimed by government. Most of the new jobs were temporary construction jobs; not unusual for government job programs. But, many companies profited from these government expenditures.

Today, Spain is one of those European countries you've been hearing about in the middle of financial default, with people rioting in the streets. But, they're not rioting demanding that the government get its financial act together. It's that they don't want the welfare state gravy train to stop. They don't seem to realize that the welfare state that gave them such generous benefits was fueled by empty promises made by politcians; not actual production of real wealth.

Today's American governments, contrary to the U.S. Constitution and Founders' intentions, promise “free lunches” to everyone. Like any narcotic, "free" government money is an easier choice for most people than risk, hard work and responsibility. To government, profit is something to restrict and tax due to its “selfish,” (non-public) nature. By doing this, governments jeopardize economic stability while claiming to do the opposite. It is the height of irony and stupidity to include government spending (consumption) with GDP (gross domestic product), alongside the productive private sector which creates all wealth.

This is like adding working parents' income to their non-working children's spending to estimate the family's total income. This is the highest form of logical fallacy - counting the same income (the parents') twice. Getting back to the wider mixed (half socialist, half capitalist) economy of the U.S., government gets to count its consumption as a credit for production in published economic data (i.e., GDP). This double-counting is just like the parents and children analogy, since the production of those not employed by, or otherwise subsidized or dependent upon, government is combined, and therefore confused with, their dependents' (government) spending.

If governments were not governments (forceful monopolies tyrannizing innocents), it might be possible to figure out how much of government spending actually produces valuable goods and services (books, maps, courts, etc). But, with typical bureaucratic ineptitude, there is today no real limit on government spending, because more dollars can be created at whim, for any purpose whatsoever. But, without a market price mechanism to regulate supply and demand, the real market value of government services is lost in a confused jungle of mandates, policies, regulations and other busywork, most with contradictory goals against the others.

If you haven't already seen it, you should also see my previous post, MARKETS WORK - GOVERNMENTS DON'T .

Blaming free markets for today's economic woes makes about as much sense as saying wet streets cause rain.