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 Chronicles.org, 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.

In a free-market economy, there’s a control on firms which too frequently cross the line into hiring poor workers and inferior suppliers on grounds of favoritism alone: Leaner, higher-quality, and more innovative competitors will take business away from them, and will ultimately put them out of business if they don’t get their act together.

Favoritism becomes cronyism once governments become involved. The fear of going out of business facing firms in the private sector largely disappears, at least in the short and intermediate term. State and local governments which allow their costs to spiral out of control by hiring too many ineffective cronies, getting too chummy and generous with cronies in organized labor, or handing out too many excessively priced contracts to crony firms simply raise taxes and threaten dire consequences if they don’t get their way. Their ability to pursue relentless tax-and-spend policies and the cronyism which almost inevitably accompanies them is somewhat but nowhere near sufficiently limited by balanced-budget laws, the ability of people and firms to “vote with their feet” by moving to other locales, and ultimately in the long-term, as residents of many California cities are learning, by bankruptcy.

Unfortunately, the federal government as currently structured can fund their cronyism by running deficits, printing money without limit, and engaging in accounting maneuvers which would put private-sector players behind bars. The only controls are executive and legislative branches determined not to play the game, which hasn’t been the case in either branch for decades, and an electorate which promptly and consistently throws out the rascals.

Crony Chronicles identifies three distinct forms of cronyism, all of which could be applied to numerous Obama administration programs and initiatives:

• Manipulation of the tax code — See GM above.
• Corporate welfare — Earlier this month, we learned that the Obama administration allowed (I’m not kidding) a private equity group to acquire a majority interest in a Philadelphia, Pennsylvania, refinery which had been targeted for shutdown for no initial investment (well, “at least” it wasn’t the hated Bain Capital). This conveniently saved over 800 union jobs and avoided a potentially steep spike in northeastern gas prices. The Keystone State “just so happens” to be a November presidential election swing state.
• Regulation and its selective enforcement — While continuing its environmental war on Texas, the Environmental Protection Agency granted the buyers of the aforementioned refinery an exemption from “a 2005 consent decree with the Environmental Protection Agency under which Sunoco (the previous owner) agreed to limit emissions …”

Two other items Crony Chronicles identifies as unfortunate effects of cronyism are exponential increases in lobbying for special favors and the employment revolving door between the government and its “private” beneficiaries.

Ultimately, we will pay a difficult to measure but undeniably steep price if the culture of cronyism and its concomitant corruption come to be seen, as Obama clearly wants them to be seen despite his 2008 campaign promises and current pious pronouncements, as the only way to get things done and the easiest path to career advancement. The bigger the federal government has gotten, the worse the cronyism has become. The best idea for reining it in is to sharply reduce the size of government.

Crony Chronicles has produced a brief video on cronyism’s potential impact on society should it become deeply ingrained. Showing a number of children with traditional positive dreams of achievement and contrasting them with ones who want to grow up to be power-hungry cronies, it is at once funny and sobering.

What the current culture of cronyism might do to the dreams of our children if it continues for four more years is just one of many reasons why the Oval Office needs a different occupant on January 21, 2013.