Cronyism's Costs

It's not enough to blame misguided Keynesian stimulus in all its forms -- the specific 2009 legislation, annual trillion-dollar deficits, central bank quantitative easing, and others -- for both the depth of the recession and the horrid three-year so-called recovery which has followed it. There's much more to this story of epic underachievement, and most of it involves cronyism.

Though it has always been present to an extent and will never disappear as long as humans remain imperfect creatures, our Punk President (named by me) and his Gangster Government (tagged by Michael Barone) have taken cronyism -- other than the financial industry component of the TARP bailouts, which Obama enthusiastically supported -- to levels never before seen in the history of this great nation.

Unlike prior administrations, Team Obama has been brazen, shameless, and unapologetic about its cronyism. Its members have bragged about its results when they've been even remotely positive and pooh-poohed the far more numerous and financially devastating failures as mere costs of doing the government's business. Ultimately, they and their comrades who pretend to be in the "private sector" want Americans to buy into the idea that cronyism on steroids is the only way things can get done in what is an otherwise opportunity-barren, unfair world.

Their supposed signature achievement is General Motors, whose government takeover -- never envisioned by George W. Bush, who nonetheless created the hijacking opportunity -- Obama believes could become a kind of model for general application ("Now I want to do the same thing with manufacturing jobs, not just in the auto industry, but in every industry").

Really? GM received at least $50 billion in government aid and thus far has saddled taxpayers with a $25 billion loss. Thanks to a special break approved by the Obama Treasury Department, it is escaping and will continue to escape paying tens of billions in income taxes on its post-bankruptcy income by carrying forward its pre-bankruptcy losses, something other firms emerging from insolvency cannot do. At least $70 billion in these and other subsidies, tax benefits, and assorted favors -- an amount which is probably greater than the cronyism losses seen during any other single presidential term before the turn of the century -- has been expended in the name of protecting roughly 70,000 jobs (that's $1 million per job) and keeping the United Auto Workers Union alive. Despite all of Uncle Sam's help, GM has seen its U.S. market share shrink to 18%. According to some experts, it is mismanaging its way to a still distant but distinctly possible return to bankruptcy.

Crony, an enterprise of the not-for-profit Charles Koch Institute (yeah, that Charles Koch Institute; deal with it) which is doing necessary and arduous work aggregating examples of and educating Americans about cronyism, defines the term as follows:

Cronyism occurs when an individual or organization colludes with government officials to get forced benefits they could not have otherwise obtained voluntarily. Those benefits come at the expense of consumers, taxpayers, and everyone working hard to compete in the marketplace.

Cronyism has nothing to do with capitalism as envisioned by Adam Smith and his successors or as practiced in free-market situations. Thus, the term "crony capitalism" is nonsensical.

Cronyism should not be confused with what I will call "favoritism," which abounds in the private sphere and ordinarily isn't a bad thing. Relatives (technically "nepotism, a subset of favoritism), friends, and longtime associates get jobs and opportunities to do business which frequently aren't available or even known to outsiders. Such people often get jobs when better talent can be found, or have business directed to their firms even when more efficient and higher quality vendors or service providers are available. To the extent one can place a higher degree of trust in a such a person or firm and avoid the often high costs of looking at only marginally better outsiders, engaging in such favoritism often makes economic sense.