Crony Capitalism: Unhealthy Relations Between Business and Government A White Paper by the Committee for Economic Development of The Conference Board October 2015
Crony Capitalism: Unhealthy Relations Between Business and Government
Table of Contents
Sustainable Capitalism Subcommittee 2
Executive Summary 4
Introduction 8
Business-Government Relationships — Good and Bad 9
The Causes And Tools Of Crony Capitalism 20
The Economic Cost of Crony Capitalism 29
Policy Options for Combating Crony Capitalism 31
Notes 38
CED Members 41
1 Crony Capitalism: Unhealthy Relations Between Business and Government
Sustainable Capitalism Subcommittee
Co-Chairs Bruce Batkin William H. Donaldson Raymond V. Gilmartin Chief Executive Officer Chairman W. Bowman Cutter Chairman, President & Senior Fellow and Terra Capital Partners Donaldson Enterprises CEO (Ret.) Director, Economic Merck & Co., Inc Policy Initiative Lydia I. Beebe Robert H. Dugger The Roosevelt Institute Corporate Secretary Founder and Managing Timothy B. Goodell (Ret.) Partner General Counsel Larry D. Thompson Chevron Corporation Hanover Provident Hess Corporation EVP Government Capital LLC David L. Bere Affairs, General Counsel Bill Goodwyn Chairman and CEO Debra Fine & Corporate Secretary President & CEO Nonni’s Foods, LLC Chief Executive Officer (Ret.) Discovery Education PepsiCo, Inc. I Have A Dream Shideh Bina Foundation - Los Angeles Kathy Hopinkah Hannan Patrick W. Gross Partner National Managing Chairman Insigniam Howard Fluhr The Lovell Group Chairman Partner, Global Lead Angela Braly The Segal Group Partner Members President & Founder KPMG LLP The Braly Group, LLC Margaret Foran Michael G. Archbold Vice President, Chief Hollis W. Hart Chief Executive Officer GNC Holdings, Inc. Neri Bukspan Governance Officer and President, International Partner, Financial Secretary Franchise Management Paul Atkins* Accounting Advisory Prudential Financial Citi Chief Executive Officer Services Patomak Global Partners, EY Henrietta H. Fore Ben W. Heineman LLC Chairman Senior Fellow, Schools of Michael Chesser Holsman International Law & Government James Bacchus Chairman and CEO Harvard University Partner (Ret.) Barbara Hackman Great Plains Energy, Inc. Franklin Greenberg Traurig, LLP Jack A. Hockema President & CEO and Chairman, President & David Chun Former U.S. Secretary of Bernard C. Bailey CEO Chairman and CEO CEO and Founder Commerce Kaiser Aluminum Authentix Equilar, Inc. Barbara Franklin Enterprises Chris Bart Kenneth W. Dam Lisa A. Hook Founder and Lead Max Pam Professor Thomas P. Gerrity President and CEO Faculty, The Directors Emeritus of American Joseph J. Aresty Professor Neustar College; & Foreign Law & Senior of Management CEO, Corporate Missions Lecturer The Wharton School Lloyd W. Howell Inc., The Directors University of Chicago of the University of Executive Vice President College Law School Pennsylvania Booz Allen Hamilton Inc.
2 *opposed Larry Jensen Martha McGarry Catherine Reynolds Jeffrey Sonnenfeld President & CEO Partner President & CEO Senior Associate Cushman & Wakefield/ Skadden Arps Catherine B. Reynolds Dean, Yale School of Commercial Advisors Foundation Management Patricia A. McKay Yale University D. Bryan Jordan Partner R. Timothy Rice Chairman, President and Templeton & Co. Chief Executive Officer Robert J. Stanzione CEO (Ret.) Chairman, President and First Horizon National Linda E. McMahon Cone Health Chief Executive Officer Corp. Co-founder and former ARRIS Group, Inc. Alice M. Rivlin CEO Senior Fellow, Economic Andrea Jung WWE Paula Stern President and CEO Studies The Brookings Institution Chairwoman Grameen America, Inc. Lenny Mendonca The Stern Group Director Emeritus Theo Killion Nathan O. Rosenberg McKinsey & Company Founding Partner - Frederick W. Telling Vice Chairman Vice President, Herbert Mines Associates California Brian A. Murdock Insigniam Corporate Policy & Chief Executive Officer Strategic Management Ronald J. Klein Strategic Investment Landon H. Rowland (Ret.) Partner Group Chairman of Lead Bank Pfizer Inc. Holland & Knight LLP Ever Glades Financial John F. Olson Davia B. Temin Robert J. Kueppers Partner Patricia F. Russo President and Chief Senior Partner - Global Chief Executive Officer Regulatory & Public Gibson Dunn & Crutcher Executive Officer (Ret.) Temin and Company Policy (Ret.) Alcatel-Lucent Deloitte Jane Palmieri Business President, Dow Technologies, Inc. Scott Wieler Building & Construction Chairman David H. Langstaff Mary Schapiro The Dow Chemical Signal Hill President Advisory Board Vice Chair Company Argotyche, Inc. Promontory Financial John C. Wilcox Group, LLC Mark Leiter Donald K. Peterson Chairman Chief Strategy Officer Chairman and Chief Elliot S. Schreiber Sodali Ltd. Nielsen Executive Officer (Ret.) Chairman Avaya Schreiber Paris, LLC Keith Williams Daniel J. McCarthy President and Chief President and Chief Todd E. Petzel Larraine Segil Executive Officer Executive Officer Managing Director and Chief Executive Officer Underwriters Frontier Chief Investment Officer The Little Farm Laboratories Inc. Communications Offit Capital Advisors LLC Company
3 Crony Capitalism: Unhealthy Relations Between Business and Government
Executive Summary
Sustainable Capitalism: its best uses, at low transactions cost). If it does, Why This Policy Statement? the system will... • Facilitate the formation of new and innovative Capitalism is the economic system, if you will, businesses, and that underlies all of the economic decisions — • Cause productivity growth, output growth and big, small, profound, mundane — that we make high employment, and therefore widely shared every day. prosperity (which is CED’s stated goal).
But the nature of our economic system is not a By these standards, capitalism has performed question that people necessarily ask every day. spectacularly throughout history. It has supported the Societies do not need a profound philosophy to development of the greatest economy that the world produce and exchange; the motivation comes from has known. It has also allowed for the reduction of instinct. Adam Smith did not in the 18th century poverty at home and abroad on an epic scale. establish the economic system of his time — capitalism; he observed, described, and analyzed However, in the most recent decade, the U.S. what he saw already going on around him. economy has suffered; and some would blame capitalism itself. Pre-Adam Smith, there was less philosophical • Some would argue that capitalism has imposed a or analytical underpinning to thought about substantial cyclical and perhaps even structural economic systems. More of the variation in systems shock on the economy, although of course came from alternative approaches to ownership. capitalism’s responsibility (as opposed to other For example, a sovereign might own everything forces, such as government policy) is in dispute. and make the decisions of who gets what, and what • It arguably has imposed excessive costs of they do with it. Alternatively, property (including allocating capital (although many dispute that the individual citizen’s own labor) could be owned argument). privately, and all owners could make independent • It arguably has less accurately allocated capital, decisions — the system that Adam Smith observed judging from very low new business formation and analyzed. Post-Adam Smith, variations were (again debated). more self-conscious. Socialism and communism • Since the financial crisis, the economy has were created, advocated, and put into practice. One generated less employment (though again might say that they have evolved into “state-owned causation is subject to intense debate), and capitalism,” as it is being practiced today in the therefore has shared income growth more formerly communist China and Russia. narrowly than we would want.
But capitalism is our economic system — basically The remarkable success of capitalism in the United what Adam Smith observed — based on private States has been made possible by widespread property, independent choices of work and public support for that system. Sadly, in recent investment, and free exchange. years, and especially since the September 2008 financial crisis, that support has seriously eroded. The Committee for Economic Development of Increasingly the public is coming to view the The Conference Board (CED) judges capitalism system as unfairly benefitting the few and as according to three basic criteria — the functions favoring Wall Street over Main Street. Moreover, we expect an economic system to perform: the system is no longer perceived to be producing • Allocate capital, accurately and efficiently (i.e. to the same impressive economic results as before.
4 This apparent recent erosion of consensus about community, or of capitalism itself; and that is the merits of the U.S. economic system, however by no means our intent. We emphasize that U.S. well- or ill-founded over the long term, at least business, operating under capitalism, has over the reduces the comity of our dialog over public issues, long term produced tremendous improvements in threatens our policymakers’ ability to mobilize income and living standards for the population at consensus in any future emergency, and diverts our large; and that capitalism must, for that reason, be energy from vital public concerns. made sustainable. But we recognize that a small minority in the business community did cause Looking forward, we want to reestablish and fulfill enormous harm in the course of the financial the fundamental objectives of an economic system. crisis. We also will describe a gradual and perhaps But we can’t just go back to the “good old days,” growing tendency of private interests, including because the world has changed. We need to adapt but not limited to business, to try to mute or capitalism to the changing world — we need to circumvent market competition by influencing the foster “Sustainable Capitalism.” policymaking process in Washington and in state capitals and local governments around the country. We by no means see fundamental, fatal flaws in our Our goal is to raise awareness of this trend, which capitalist system. But we do see several respects may have grown so gradually as to attract less in which capitalism must change if it is to succeed attention than its remedy would require. We where it may have stumbled over recent years. This seek to bring capitalism fully on track, to make it policy statement will address just one of them: the sustainable, and to unite Americans of differing problem of “crony” capitalism. persuasions behind the core principle that our economic system can work for all of us. Crony Capitalism Why do such deals happen? To some critics, one reason for the perceived Crony deals predate the identification of recent shortcomings of economic performance capitalism, and capitalism itself; sovereigns have — and allegedly capitalism itself — is the rise of rewarded themselves and their families and friends so-called “crony capitalism:” deals between some for eons, and any government could exercise policy private interests (business, anti-business interests, in such a way as to misallocate resources. Such professions, social groups) and government that opportunities might be thought to recede when “pick winners” and thereby also pick losers, on the markets displace sovereign power in the allocation basis of political influence rather than merit. Such of resources. But crony deals have been made deals would inhibit the productive reallocation throughout the history of our Republic. of society’s resources, and reduce innovation and economic growth. Examples of such deals In practice and for a variety of reasons, include cash subsidies, tax preferences, earmarked government over the past 40 years has become a appropriations and no-bid contracts, regulatory more important factor in the economy in terms and trade protection, among other forms of of its share of overall spending, the breadth and favorable treatment. They can be crafted to benefit influence of that spending across the economy, and virtually any sector of the economy, and though its increased regulatory reach. Every increase in each alleged deal has its defenders — else it would the government’s reach also increases the number not exist — the list of questionable private sector- of potential channels of public policy’s influence. government interactions is long. Every increase in the weight of the government’s touch increases its potential leverage in such The term “crony capitalism” has become a part of misallocations. The increased importance of the our vernacular, and so we use it here. However, it government has been an incentive for private also is to some an indictment of all of the business interests, including but not limited to business, to
5 Crony Capitalism: Unhealthy Relations Between Business and Government
seek competitive advantage from the government. party, have the deep pockets needed to provide It has also given those who oppose business an campaign finance and engage in sophisticated opportunity to secure restrictions on business. lobbying, and upstart challengers do not.
How are such deals achieved? This symbiotic and potentially destructive Self-interested private-sector-and-government relationship between private interests and deals can be achieved in a variety of ways. The government has been evident in basic trends that simplest nonmonetary deals — as old as elections, have characterized the U.S. political economy over and dotting our entire political history — can the past few decades: occur whenever an elected official provides what- • There has been a sharp increase in the costs of ever some particular private interest wants, and the election campaigns for all levels of public office. private interest provides the elected official with This has made politicians more dependent on votes and reelection. However, a disturbing trend raising campaign financing and less focused on in recent years has been a growing nexus among solving the nation’s problems. The increase in crony deals, campaign contributions, and lobbying. campaign funding surely has increased the need for campaign funding still further, as electoral Lobbying is the constitutionally protected opponents have engaged in a veritable arms race petitioning of the government by its citizens. — “deterrence,” “mutually assured destruction,” Much of today’s lobbying is the non-self-interested and “overkill” — against one another. communication of important information to • There has been a marked increase in lobbying by busy non-specialist legislators, and argument for all sectors of our economy. Institutions that can what the lobbying organizations deeply believe afford lobbyists too often dominate legislative to be the public interest. Business interests that consideration of issues that affect those that compete with one another need to express their cannot afford lobbying (although businesses most perspectives, lest only the other side be heard. subject to government intervention might need At the same time, most campaign donors seek to to lobby so that their real-world perspectives achieve what they wholeheartedly believe to be a will be brought into the formulation of public better world. policy). Business interests that are involved in either seeking legislative advantage or opposing Increasingly, however, to achieve their self-interest, contrary legislation are often blamed, sometimes some organizations engage in direct lobbying for good reason, for the failure of government; of politicians, or more commonly they employ but many other private interests seek their own professional lobbying firms. For their part, because rewards, sometimes merely opposing business. of the human instinct of reciprocity, politicians Because large incumbent firms have the faced with ever-more-expensive electoral resources to engage in such lobbying, they tend campaigns inevitably provide more time for the to be over-represented in business-government arguments of the lobbyists who have regularly deals — often for fully legitimate reasons, but provided financial support than for those who sometimes to forestall competition from young have not provided such support. To be sure, there and innovative competitors, and sometimes to is no bright line between campaign contributions achieve competitive advantages over one another. that are purely support for like-minded elected Such manifestations of “crony capitalism” — and policymakers, and those contributions that are self- lobbying by anti-business interests — can have serving. And some of the worst abuses occur when unfortunate consequences for the economy. elected officials demand campaign contributions behind veiled threats of retribution through their Although there are numerous instances of healthy governmental power. But abuse is possible when public-private partnerships, the unhealthy incumbent interests, which may align with either interaction between large government and private
6 interests, when coupled with costly election could be classified as crony deals — which include campaigns and the increased influence of lobbying, appropriated spending, tax subsidies, and even has exerted an important toll on the U.S. economy. potential manipulation of purchases under some This has occurred along the following lines: benefit programs. We provide recommendations • It arguably has impeded fundamental economic through which the regulatory process could reforms, which could in principle yield equity be streamlined — which would be beneficial and efficiency gains. in its own right, but also could remove access • It has reduced the overall degree of points where crony deals could interfere in the competitiveness of the economy by favoring marketplace. We recommend changes to the insiders over outsiders. legislative process that would reduce the frequency • It has resulted in the costly introduction of of occasions for the enactment of anticompetitive subsidies or tax breaks that benefit vested tax or spending laws. interests at the expense of the general public. • It has encouraged rent-seeking rather than Although there are strong differences of opinion economically productive behavior. on these issues — witness the current controversy surrounding campaign finance — we seek policy If left unchecked, crony capitalism will continue to decisions based more on the merits, and less on the sap vitality from the economy. It also will continue influence of money in politics. Reducing the role of to undermine public support for the American money in politics also would reduce the potentially model of capitalism. This adds urgency to the task undue deference that elected policymakers and of finding solutions to the rise of crony capitalism. candidates must show to lobbying interests that are also potential sources of funding in the now Remedies must touch all parts of this vicious cycle apparently endless arms race of political spending. of economic cost and public disillusionment. Reducing the breadth and weight of government’s Finally, fundamental reforms of the policymaking involvement in the economy would reduce and process in Washington — to ensure transparency lighten the touch-points through which harmful and both due diligence and ultimate action on deals have their impact. Here we recommend our serious public problems — would improve changes in every major component part of the the performance of our economy and renew our federal budget — which are necessary to achieve people’s faith in capitalism. long-run fiscal sustainability in any event. High on the list of changes that we recommend is the In short, the nation needs reform to make our reduction or repeal of many of the subsidies that capitalism sustainable.
7 Crony Capitalism: Unhealthy Relations Between Business and Government
Introduction
There can be no doubt that America’s unique brand The Public View of Crony Capitalism of capitalism has served both the United States and the global economy well since the republic’s very Although American capitalism enjoyed particularly founding. It has supported the development of the strong public support in the golden post-war greatest economy that the world has known. It has economic growth years from 1945 to the early also allowed for the reduction of poverty at home 1970s, since then that support has been eroding.1 and abroad, and projection of democracy and Three basic reasons might explain that erosion. freedom around the world, on an epic scale. The first is that American economic growth has not continued at the extraordinary pace of those The remarkable success of America’s exceptional fortuned early post-War years. The second is that form of capitalism — exceptional in our nation’s the gains from economic growth are now widely endowments, its energy, its culture, and its seen to be increasingly unevenly distributed. cohesion — has been made possible by widespread The third — which many believe is an important public support for that system. Sadly, the system cause of the first two — is that policy decisions are is no longer perceived to be producing the same coming to be viewed by the public as reflecting impressive economic results as before, and so in the preferences of the connected and organized recent years and especially since the financial crisis few rather than those of the general public.2 that erupted in September 2008, that support has Deterioration of public support for capitalism for all been seriously eroded. Many among the public of these reasons contributes to the demoralization of are coming to believe that the economic success the citizenry and the difficulty of solving America’s that some enjoy increasingly arises from close problems, including increasing economic growth — relationships between private interests (including and so to some extent these problems grow through businesses, nonprofit institutions, and labor a vicious cycle and are self-perpetuating. Thus, unions) and their lobbyists on the one hand and slowing economic growth and crony capitalism are government officials on the other; and we fear to some degree mutually reinforcing. that there is reality behind the troubling and damaging appearance. Reversing these perceptions The weakness in the recent performance of the U.S. would seem to be a major long-run challenge if economy has included slower growth of aggregate America’s brand of capitalism is to be sustained output, of labor productivity, and of median and strengthened. household income. And while those adverse trends have worsened the absolute status of typical U.S. This report focuses on the growing public households, the conspicuous display of rapidly rising perception of a crony form of capitalism in incomes among a small proportion of the well-to-do America. The report then considers the underlying has compounded the popular frustration.3 reasons for crony capitalism, and highlights a number of ways in which it has reduced economic In the public mind, these trends seem to be efficiency. A final section of this report explores connected.4 The standard of living of the typical some solutions that have been proposed to curb citizen is advancing slowly by historical standards, the power of vested interests and to restore the while a few are doing well. The game is rigged, market-driven motivation of American free people tell opinion researchers, with the results enterprise that has served the country so well. pre-programmed to favor some over others. The perverse system that yields these unfortunate results has come to be known by its critics as “crony capitalism.”
8 Business-Government Relationships — Good and Bad
The greatly expanded role of government in the would need to restore competition, which U.S. economy, as described more fully below, has inevitably is easier said than done. substantially increased the number and magnitude of interactions between business and government. There are many other examples. If a producer Many such interactions are necessary and cannot reap the full reward of its efforts, it healthy, and benefit the overall U.S. economy. The will produce too little. Hence, the typical broadening interface between government and the economics textbook says that basic research and economy also has led business legitimately to take development (R&D — sometimes “research and action to defend itself against instances of undue experimentation,” or R&E) must be subsidized, government intrusion and regulation.5 At the same or even undertaken directly or indirectly by time, however, it has provided strong incentives for government, if the nation is to invest enough in private-sector interests — both business and non- vital new ideas.6 This is an example of a “public business — to attempt to influence government good,” where the benefits of production or decisions to their advantage, often at a substantial consumption “spill over” to the public at large, cost to overall economic efficiency. It is this latter such that “free riders” can enjoy the benefit without sort of private sector-government activity that paying. National defense is another clear example has been of particular concern to many of the of a public good. critics of capitalism from both sides of the political spectrum. A further example of spillovers, bad instead of good, is pollution. A factory that generates How can we distinguish the harmful government dangerous by-products might cheaply dispose of interventions in the economy from the necessary them by dumping them in an adjacent river. Then, and constructive? they are the problem of the metaphorical town downstream. As just noted, some interactions between business and government are necessary and healthy. From The summary, though, is that there is relatively the time of Adam Smith, most economists have broad acceptance that markets work, and should believed that the market yields the best (indeed, be allowed to work whenever possible. This can optimal) outcomes. However, markets are not apply even in some instances of market failure, always perfect, and when they are not, public such as the pollution example, where market- policy must intervene if the economy is to attain oriented solutions might be better than hard-and- — or sometimes just to approach — optimal fast regulation. Outright regulation that “thou outcomes. But when government intervenes shalt not dump” might require an exceedingly effectively in such a fashion, we can have good costly alternative disposal system, whereas a public-private “deals.” market-oriented fee based on the concentrations of harmful pollutants might allow the use of The first textbook example of an imperfection in an inexpensive filter that removes such a high a market (sometimes called a “market failure”) percentage of the contaminants that the problem is monopoly. Markets yield efficient outcomes if is for all practical purposes solved. In some there are many producers, so that none has market instances, everyone, including consumers as well as power. But if there is only one producer (or merely producers, could be better off with a market-based too few to make a competitive market), the seller solution to such a market failure. can restrict supply and extract excess profits from consumers, reducing society’s welfare. Government The concept of market failure is not so much
9 Crony Capitalism: Unhealthy Relations Between Business and Government
controversial on the basis of ideological orientation. gains for the heretofore victims than it imposes (In fact, President George H.W. Bush recognized costs on the polluters. In theory, the victims can a market failure and used an auction of permits compensate the regulated polluters out of those to limit sulphur dioxide emissions to combat acid larger gains, and everyone can be better off. Some rain.) What is controversial, rather, is precisely “crony deals” might be true and precise zero- whether any particular situation constitutes a sum transactions — for example, a dispute over market failure. Because perfectly competitive which interest gets to use an economic resource markets are extremely rare, we must judge real- (perhaps which bidder gets a concession to operate world markets based on relative degrees of a restaurant location on a limited-access public imperfection, not by clear and absolute standards. highway), where the economic consequences Often one might conclude that there is a significant would be identical whichever bidder wins. market failure, but that none of society’s relatively However, a truly bad crony deal might prevent an blunt public-policy instruments would solve the innovator from challenging an incumbent business problem without causing even worse collateral with a new and superior technology. In that damage. And one person’s perceived monopoly instance, deprived of additional competition and or oligopoly power, for example, is another innovation, society as a whole is worse off — even person’s hard-earned success and profitability in a though the protected interest may be better off. If competitive market. Such judgments are sometimes an incumbent interest can in that fashion protect cut along fairly well-defined partisan lines; so, an inferior way of doing things merely to safeguard for example, some might look for monopoly its own advantaged position, we have a crony deal power in our economy first in terms of labor and at its worst. union organization, rather than few and powerful businesses in a particular industry. Furthermore, even though the concept of crony capitalism cannot properly be extended to all Thus, our crucial issue of “crony capitalism” is, for all interventions into government policy, it should of its importance, not clear cut. Just as market failure embrace improper interventions from whatever is to a considerable degree in the eye of the beholder, source. Thus, although interventions by business it follows that “crony capitalism” is a matter of to pursue the benefits of “corporate welfare” are judgment. Because market failure can require perhaps raised most commonly, there can be equal government intervention in the economy, “crony ill effects on the performance of the economy capitalism” cannot be defined as any and every from unjustified interventions from any interest government intervention. Rather, crony capitalism — including (among those sometimes mentioned) would constitute government intervention not labor, the tort bar, and particular subgroups of the justified by market failure, but rather as part of a population. Some improper interventions seek pursuit of a purely private interest through some benefits for business, or segments of the business subsidy (whether delivered through public spending community; some seek to hinder business for the or as a tax preference) or some regulatory protection perceived benefit of other groups. Public-private against fair competition. deals cannot be judged by their source, but only by their merit; and judgments inevitably will differ A consequent characteristic of bad public-private from one observer to the next. deals is that they are negative-sum uses of the nation’s resources. A government intervention that Thus, bad crony deals do not come with indelible effectively addresses a market failure may not make bar codes to identify them. If challenged, even a every interest in society better off, but it makes bad crony deal will be defended by the interests society as a whole better off. Thus, in the pollution that profit from it. However, we can say that example, creating a deal under which dumping under the best unbiased analysis, a bad crony is appropriately reduced in severity creates larger deal will be found not to address any true market
10 failure, and it will fail a society-wide cost-benefit Agricultural Industry Relationships With test. Unfortunately, this is no easy answer to the Government problem of combating crony capitalism; it is an endless series of judgment calls and public-policy Among the more studied instances of arguably puzzles. For example, no mere mortal can know harmful and costly effects of public-private deals on precisely the benefits of future competition; and U.S. economic efficiency and fairness have been that of so no one can know the costs of a bad public- the agriculture sector in general and of corn and sugar private deal that forestalls future competition. Any producers in particular. Ever since the New Deal, judgment on this point will be subjective, and will a highly organized agricultural lobbying effort has be challenged. succeeded in obtaining a wide array of farm subsidies and import tariffs for agriculture that have distorted Today, the broader interface between an expanded markets and that have benefited the agricultural sector government and (particularly) large business at the expense of the general public. enterprises encourages many private-sector attempts to influence government policy. These Opponents argue that agricultural deals not only efforts have taken many forms, as have been have distorted market functioning, but also have catalogued in the following list by researchers at done very little to help the small farmers that George Mason’s Mercatus Center (there could be purportedly are the principal focus. Indeed, it many more):7 is estimated that ten percent of the recipients of farm subsidies collect almost three quarters of the • Obtaining exemptions from legislation or subsidies, which in the mid-2000s amounted to securing the passage of legislation to provide around $90,000 per farm. By contrast, the bottom 80 targeted benefits; percent of farmers collected some $3,000 per farm. Among those receiving large farm subsidies have • Effecting regulatory changes, exemptions from been a number of Fortune 500 companies, several regulation, or regulations that discourage new or prominent former and current congressmen, and a small competitors; number of celebrities.8 Research also indicates that the main recipients of farm subsidies have been • Obtaining targeted tax breaks or modification of those companies which spend the most on lobbying tax penalties; and on election campaigns.9
• Securing direct or indirect subsidies; The federal government funds programs to market U.S. agriculture products overseas; those programs • Obtaining tariff or quota protection from foreign arguably could be funded privately. The federal competition; government also makes public lands available for grazing (and for mineral exploitation) for what some • Gaining access to bailout funds or loan argue are preferentially low rates in comparison to guarantees; prices charged by private landowners.
• Securing benefits from non-competitive bidding. A particularly harmful example of public-private deals in the agricultural sector arises in the sugar While no comprehensive studies are available industry, which spends a disproportionate amount as to the aggregate economic cost of unjustified on lobbying and campaign contributions through private-sector and government interaction, the political action committees. (See following chart.) distortionary effect of such public-policy activity The government protects the domestic sugar might be illustrated by the following oft-cited industry by shielding producers against foreign specific industry examples. competitors through import tariffs and quotas. It
11 Crony Capitalism: Unhealthy Relations Between Business and Government
also shields the industry against low prices through Figure 1 Sugar Producers’ Sweet Deal a non-recourse loan program that serves as an effective price floor. A consequence of such policy Sugar crops …but sugar …and sugar PAC make up less lobbying costs donations are is the huge disparity in sugar prices that American than 2 percent of more than a third more than all consumers face compared to the rest of the world. the total value of of all U.S. crop other U.S. crops all U.S. crops… As a result of these government actions, U.S. lobbying… combined. Sugar 1.9% consumers and businesses have had to pay twice the 100% world price of sugar on average since 1982. Recent All other 75% U.S.Crops estimates put the annual direct cost to consumers 98.1% 34.2% at almost $4 billion per year. But there are further 65.8% 50% 55.1% costs imposed on the taxpayers through higher 44.9% government spending — for subsidized loans to 25% producers, through payments to foreign producers as compensation for import quotas below levels 0% 2009 U.S. Crop Lobbying PAC Donations set in trade agreements, and potentially through Production Value Expenditures 2002-2011 subsidized sales of excess sugar to motor-fuel 2002-2011 producers for use in ethanol production — alleged Sources: Chart from Heritage Foundation. Crop values: U.S. further instances of favoritism to agriculture. Department of Agriculture, USDA National Agriculture Statistics Service, Agricultural Statistics 2011 (U.S.Government Printing Sugar-using firms, such as producers of finished Office; Washington, D.C.), 2011, http://www.nas.usda.gov/Pub- food products, have opposed these subsidies — lications/Ag_Statistics/2011/2011_Final.pdf (accessed April 10, 2012). Lobbying expendityures and PAC donations: Center for but without success. Those firms are estimated to Responsive Politics, “Lobbying Spending Database:Crop Prduction have lost about 20,000 jobs because of the higher and Basic Processing,” http://www.opensecrets.org/lobby/in- cost of sugar.10 Most of the benefits of protection dusclient.php?id=A01&year=2011 (accessed April 9, 2012); and “PAC Contributions to Federal Candidates,” http://www.opense- have accrued to a handful of sugar producing crets.org/pacs/industry.php?txt=A01&cycle=2012 (accessed April corporations, which have engaged actively in 9, 2012). lobbying and in financing political campaigns. This illustrates the potential nexus among the growing henceforth, however, is to cite a list of public- influence of government on the economy, political private arrangements that we believe cry out for campaign contributions, and lobbying (which will impartial review by our elected policymakers. We be discussed in more detail below). believe that, with such review, many would be found unjustified and would be repealed. Sugar producers, not surprisingly, see this issue differently. They believe that current policy The Export-Import (Ex-Im) Bank balances supply and demand to keep prices stable, and to avoid the issuance of subsidy payments to Another current example of differences of opinion U.S. sugar farmers — unlike other agricultural about “corporate welfare” or “crony capitalism” is commodity programs. They argue that the the Export-Import (Ex-Im) Bank. Some see the routing of imports to the ethanol industry avoids Ex-Im Bank, which provides financing guarantees excess supply in domestic markets — which in for U.S. exporters to risky (according to its stated other commodity programs would trigger direct intent) overseas markets, as a quintessential payments to farmers.11 private-interest deal between government and big business, providing what amounts to an explicit These differences of opinion illustrate that just subsidy to its selected beneficiaries.12 Others about any public-private deal can be viewed in counter that all of our major competitor nations very different ways by different interests. We can have such export-financing facilities, and that state our opinions, but these opinions are definitive Ex-Im is needed to level the playing field; they go only to ourselves. What this statement will do further to add that if we hope to negotiate away
12 such facilities in future trade talks but eliminate But the three most recent Secretaries of Defense, our own facility now, this equivalent of “unilateral whose Administrations admittedly have been disarmament” would allow our competitors to faced with the looming budget crisis, have weighed refuse to yield in negotiation and to retain a anew the merits of existing defense procurement significant competitive advantage. The lineup programs against the new and different security of U.S. firms on the two sides of this debate is threats that we face as a nation, and have concluded indicative of the difference of point of view. As that our scarce national resources could be allocated one example, U.S. aircraft manufacturers support far more effectively; and that so doing would result Ex-Im to help them to sell in other markets, and in a significantly different hardware portfolio for the to protect their manufacturing jobs. U.S. airlines various services. oppose Ex-Im on the ground that it allows cheaper acquisition of U.S. aircraft by their competitors It is important to understand that as large as the overseas. The balance is in the eye of the beholder, Department’s procurement budget is, it understates and the differences of opinion are strongly held. the true cost of all that hardware. All that the procurement dollar does is to put that hardware We do have a concern that the Ex-Im Bank has on the tarmac. If a weapons system is to be used been cowed by public criticism into abandoning its to provide national security, it must be manned, it core mission. If Ex-Im should exist at all, it should must be fueled and armed, it must be maintained, finance transactions that the private sector will and in some instances it must be transported to the not — specifically, sales to risky markets, usually theater of its use. Thus, an investment in a weapons in less-developed countries, and sales by smaller system is a commitment to a much larger stream companies that are less able to obtain financing. of funding extending well into the future. If there But because of misguided criticism that some of is any question whether a weapons system is well those deals in the end lose money, Ex-Im instead chosen to address true national security needs for has leaned toward safe deals in safe markets, which years to come, that case must be given the most the private sector would be more likely to finance. careful hearing before such a commitment is made. In taking this safer path, Ex-Im has strayed toward the grounds of crony capitalism. Thus, the popular DOD procurement projects have been subject to press and unschooled critics actually ask for crony both misstep and scandal in the not-too-distant capitalism, and — no surprise — that is what past. There are allegations of favoritism in contract they get. However, this criticism clearly does not terms (such as non-competitive contracts), and in address the conundrum of a world in which other one recent instance there was a major scandal in nations follow the same ill-advised strategy of the contracting process.13 subsidizing their exports, leaving the United States to choose whether to compete on that unfavorable To combat challenges to existing programs, the ground or to abandon the entire marketplace to defense industry has engaged in what might be our national competitors. called tactical subcontracting. Large projects have been known to spread the construction work The Defense Establishment all across the country. Therefore, if the project is challenged, the largest possible number of Members The Department of Defense has an enormous of Congress would find their constituencies procurement program. Some contend that adversely affected. That ensures the highest weapons systems designed for the last war are probability that the case for the weapons system will continued in the interests of the contractors that receive a sympathetic hearing on Capitol Hill. supply them; this of course is subject to complex judgments. (NASA projects and their contractors Some believe that a quick resolution of defense sometimes are seen in the same light.) budget issues could be reached by delegating
13 Crony Capitalism: Unhealthy Relations Between Business and Government
decisions to a commission. But even ignoring Inappropriate Energy Subsidies and Investments constitutional niceties,14 this phenomenon is a fundamental reason why the sometimes vaunted Policy relating to energy and the environment is “base closure commission” model of cutting defense subject to varying criticisms from different points (following on the Base Realignment and Closure of view. Those most concerned about the potential (BRAC) Commission) in fact is productive in only a ill effects of climate change decry perceived very narrow range of circumstances. Taking account subsidies for fossil fuels, and want increased of the co-location of some of the designated facilities, support for low- or no-carbon sources. Those who the initial round of recommendations from the BRAC are more skeptical of climate change tend to argue adversely and significantly affected perhaps two that uneconomic sources of so-called green energy dozen congressional districts. That meant that when are being kept alive only by costly and wasteful those recommendations came before the Congress, subsidies — which field has had its own scandals the other more than 400 House Members had an of late.16 intense interest in seeing the order take effect, lest a subsequently revised version should turn around and Just about anyone might wonder at a system hit facilities in their districts. Thus, the BRAC process that provides subsidies to both carbon-intensive took advantage of an opportunity to fabricate a large and carbon-free sources of energy. But recent majority for retrenchment. In contrast, enacting critics point particularly to failed investments any legislation to eliminate a major weapons system in companies and products, some of which have that has been or would be built through tactical been alleged to be scandalous favors to political subcontracting would require that a large majority of supporters and providers of campaign finance. To Members of Congress vote to terminate jobs among be clear, however, we are not troubled that some their own constituencies, not others’. government-supported investments failed. We are troubled, rather, at the kinds of investments That is why the BRAC model, however cleverly that failed. designed it was for the particular task to which it was applied, is not a generally applicable tool and is We noted earlier that a valid — indeed, vital — unlikely fundamentally to change the dynamic and activity of government is to support basic research reduce the difficulty of cutting the overall defense — the development of new knowledge that is prior budget, and to rationalize and modernize defense to, and not tied directly to, any particular product. procurement. That model might allow all Members of By its very nature, investment in basic research Congress to disavow responsibility for the formulation is speculative and highly risky. Some — perhaps of the retrenchment plan, but it would not allow them many — investments in basic research will have to deny a role in allowing jobs to be eliminated in no ultimate commercial payoff. There will — with their districts.15 So Members of Congress will have certainty — be some “dry holes” dug. If such to do their jobs and make the difficult but necessary investments were “sure things,” the private sector decisions to allocate our tax dollars. would undertake them. But that reality does not negate the case for government investment in basic We believe that the maintenance of outdated or research. Rather, it reinforces the need for mature poorly targeted military systems, especially given policymakers to accept the reality and make the our overall fiscal struggles, is particularly unwise. necessary decisions with their eyes open, and not Each dollar poorly spent detracts from what could to use failed projects as opportunities for political be devoted to our true national security, because it gain against some electoral adversaries. adds to our nation’s public debt. We believe that this issue should be high on the list of priorities for review We are troubled, rather, that the federal and reassessment in an effort to reduce or eliminate government would invest in the development or unwise public-private deals in Washington. even the production of existing product designs
14 that should stand in the marketplace on their own such pressure. Also, substantial national funding two feet. Whether carbon emissions are a concern has been offered for high-speed rail projects, or not, it makes no sense to subsidize both carbon- which arguably are uneconomic and primarily intensive and “green” sources of energy. Likewise, benefit local communities and those constructing it is economically unwise to favor particular the projects. Subsidies to Amtrak and to regional sources of “green” energy over others without a and local airports also are either uneconomic or mature market judgment on their relative merits. not the appropriate responsibility of the federal Thus, the popularly expressed concern that the government; others cite environmental benefits, federal government lost money on its green energy aid to ailing out-of-the-way communities, or investments is not the point. The private sector will simply jobs. Construction undertaken by the provide the necessary investments in profitable federal government is subject to Davis-Bacon product development and marketing. The point restrictions on wage rates, which some argue is that the federal government should invest in increase the costs to excessive levels. technology, not products based on that technology. One locus of infrastructure-oriented public- If carbon emissions truly are a matter of concern, private deals was the American Recovery and then rational policy might eliminate subsidies, in Reinvestment Act of 2009, commonly known as some way penalize emissions of carbon at a level in the “stimulus bill.” Many economists believed that keeping with the estimated damage, and allow the the economy was in freefall, and that action was market to choose among low-carbon alternatives needed urgently. However, the form which the bill (and conservation, energy efficiency and research). took — an enormous piece of emergency, must- Potentially productive basic research, which in any pass legislation — left the door open to special- field would be an appropriate focus of government, interest deals. Some activities that could not should be a key part of that strategy. move expeditiously in any event were nonetheless called “stimulus” and put into a huge bill where Local Benefits From Infrastructure they could not possibly receive appropriate review. In much the same sense, the monetary- In infrastructure, the federal government policy response to the financial crisis, along with undertakes numerous projects — water projects, legislation allowing federal government “bailouts,” including some beach restoration, are prominent created a massive and urgent program that was — that are argued by some to provide essentially open to miscalculation and abuse — although local rather than national benefits, and thus again the needs of the economic and the financial arguably should be funded at the local level. (Local sector were dire. advocates obviously see a greater national benefit, or argue that needs rise to the level of emergencies, We are concerned particularly with the tendency or are appropriate transfers from wealthier to of influential legislators to use their power to poorer parts of the nation.) Some such projects provide local benefits at the expense of the used to be funded by explicit statutory earmarks, Federal Treasury. If the Congress wishes to which some contended were unfair and opened provide assistance to needy parts of the country, the door to corruption (such as in a noted scandal either because of disaster or secularly lagging regarding defense spending17); although explicit regional economic growth, it should say and do so earmarks are now prohibited, Members arguably explicitly. Instead, under the current scattershot can achieve the same effect with simple letters approach with no explicit rationale, many more or telephone calls to cooperative executive- parts of the country line up to get their “share” of branch agencies, which are dependent on the infrastructure spending — with the result that the Congress for their funding — if the program Treasury is drained to serve influence rather than administrators are willing to knuckle under to genuine need.
15 Crony Capitalism: Unhealthy Relations Between Business and Government
Finance and Housing antitrust restrictions, with the result that firms become too large and accumulate unhealthy market The federal government has for decades supported power — including becoming “too big to fail;” the demand for housing through tax and outlay others would respond that financial firms that subsidies. In finance and over the same period, the are too small would be insufficiently diversified government has supported the mortgage markets and therefore unstable, and antitrust enforcement through the semi-governmental Fannie Mae and is exceedingly difficult and has been pursued to Freddie Mac, which benefited from an “implicit the extent feasible. Many cite in particular the guarantee” of their securities. In the depths of the tax advantage (treatment as capital gain, taxed at financial crisis, that implicit guarantee became reduced rates) for income received by hedge-fund explicit, and so bondholders were protected managers as “carried interest,” which critics contend (though equity investors suffered large losses). is more in the nature of cash compensation than a More broadly, the reality that some systemically return to the risk of the managers’ own capital. important financial institutions are “too big to fail” created an incentive to engage in large-scale Health Care risky behavior without fear of the consequences if their bets should lose. Some institutions followed Many see Medicare as an unimpeachable source that incentive. Again, in the financial crisis, some of support for elderly persons who could not investors suffered severe losses, but skeptics argue otherwise afford health insurance or afford that responsible parties often did not pay for their medical care (and who themselves paid payroll miscalculations or misdeeds. Banking regulation taxes to provide coverage to preceding generations in the run-up to the crisis was not effective; large of elderly). In any event, no political candidate volumes of questionable mortgages were issued would attack the program outright, though there for years without rebuke, and many critics ask are sharply differing views on what it means truly why. Some might claim that regulators were to support Medicare. Still, Medicare’s system “captured” by the firms that they were charged of administered prices arguably creates the to regulate, or otherwise lacked the imagination opportunity for favoritism and manipulation. For or persistence to see that financial institutions example, a vigorous debate rages between those were running enormous levels of undiversified who advocate that government demand rebates risk.18 Others argue that the federal government of part of pharmaceutical prices for low-income itself pressured financial institutions to make beneficiaries, and others who contend either that risky mortgage loans — so that the government Medicare is too large a share of the total market could claim rising homeownership rates — under to bargain effectively, or that reducing Medicare’s threat of being cited for violations of law (such as prices will reduce the pool of funds needed to charges of discrimination under the Community finance research and innovation. Reinvestment Act) or other regulations.19 Under whatever combination of influences — there is Despite recent hopeful news of slowing cost widespread acknowledgment of multiple instances growth, projected Medicare expenditures still of incompetence and wrongdoing, with most of exceed available budgetary resources, and hence the dispute over the causal importance of each drive a projected unsustainable growth of public particular failure — massive harm was done across debt. Thus, principled support for the program in the economy, and the regulatory system clearly concept still requires intense effort to ensure that either caused or failed to prevent it. the program’s expenditures are as well targeted as possible. Therefore, some would join CED in More broadly, in finance (and in other industries arguing against the current administered-price as well), some would contend that the federal system, and for a more-market-oriented program, government has fallen down on the job of enforcing driven by cost-conscious consumer choice.20
16 Medicaid spends enormous sums on difficult-to- passed on time — although again, under current regulate long-term care for the indigent disabled. patterns of behavior, Congressional oversight of That system has been challenged by some as overly even annually appropriated programs is next to favorable to particular industry interests. nonexistent.
Some argue that compensation for medical The following items are just a small sample of the malpractice is poorly determined and delivered tax expenditures often cited as constituting crony only after excessive delay because of the interest of deals. the tort bar in maintaining traditional adjudication of complex and emotionally charged episodes. Health insurance. CED has recommended reforms to the malpractice The largest single tax expenditure, costing the system that we believe would reduce the cost Treasury more than $200 billion per year, is the of and the delay in reaching decisions without exclusion from measured income of employer-paid harming the interests of those who are truly health-insurance premiums. But that allocation harmed. of massive resources has left employer coverage stagnant and far short of broad coverage, because “Tax Expenditures” the tax expenditure is poorly targeted. Because the subsidy is distributed as an exclusion from Many families of issues are raised by the measured income, the greatest incentive goes preferential provisions in the tax system — to those with the highest incomes, whose tax sometimes called “tax expenditures,” a term coined savings are determined by the highest tax rates by tax-policy attorneys and economists to refer and therefore are the largest. Those with moderate to provisions of law, regulation or custom that incomes, who need more help and incentive, get amount to “spending through the tax system.”21 less; those with the lowest incomes, who need the Although measurement of tax expenditures is most help and incentive, get nothing at all. This difficult, the best evidence is that their cost in “upside-down subsidy” yields the least progress terms of revenue forgone is growing faster than is with the greatest cost. Furthermore, making health the economy as a whole. insurance appear cheaper dulls the incentive of these consumers to try to hold healthcare costs There are at least two reasons why legislators down. Some would argue that the exclusion is and private interests find tax expenditures more supported by unions, which claim that they can attractive than outlay programs. First, in political provide better health-insurance coverage than optics, a spending program makes government unorganized workers can negotiate on their own. look bigger, and to many constituencies therefore Restructuring this provision could save needed is considered bad; whereas pursuing precisely the revenue while providing more support to those same objective with precisely the same resources who need it most. through preferential treatment in the tax code makes the government appear smaller (revenues Retirement savings. are lower rather than outlays higher), is a “tax cut,” The second largest single use of resources and therefore probably to most constituencies (combining five closely related but separately listed looks good. Second, in most instances a tax cut is tax expenditures), consuming more than $100 written into permanent law, and therefore in the billion of federal tax dollars each year, is household environment of recent years is never evaluated saving for retirement. And yet the majority of or reviewed. In contrast, if the same resources U.S. households, overwhelmingly those of modest were devoted to the same purpose through an means, are sorely underprepared for retirement. appropriated program, that program would be Poor financial education and an unwillingness to at risk every year if appropriations were not defer gratification surely play a role. But another
17 Crony Capitalism: Unhealthy Relations Between Business and Government
reason why such vast resources fall short of the and creates a lobbying free-for-all every time it goal is that the tax expenditure is poorly targeted. approaches its expiration date. We believe that Again, the “upside-down subsidy” gives more of the the Congress should make up its mind and either revenue forgone per dollar of pension contribution make the tax credit permanent or, preferably, repeal to the taxpayers with the highest incomes, those it as part of a fundamental tax reform to reduce who need the incentive and the resources the least. corporate tax rates and thereby make all U.S. firms If the current subsidy could be redirected to provide more competitive internationally. Firms would then relatively more incentive to those of more-modest undertake R&E spending according to its value in means — there is a tax credit in the law, but it has the marketplace. not been sufficiently effective — we could expect increased (though perhaps still not sufficient) Other Tax Issues retirement security for more Americans. As a nation, we need more savings from whatever source The federal government collects excise taxes on to finance more business investment and thereby alcoholic beverages but has not increased those increase productivity and incomes. But our total tax rates in dollar terms for years, such that they resources are scarce, and so it is preferable to target have been greatly eroded by general inflation, and more of our incentives toward people who would arguably do not compensate society for the ill effects be most likely to increase their savings, rather of alcohol consumption. With a similar lack of price than those who probably would save even with indexation, the federal government also has allowed a lesser inducement. gasoline tax collections to fall far short of the cost of needed highway construction and repair, which may Other tax expenditures. gratify many highway users but slows the economy Deductions for state and local taxes paid are said by in traffic congestion and costs money and lives some to provide tax savings for purchases of services through unsafe driving conditions. (education, infrastructure, etc.) that are no more deserving of subsidy than private purchases. Others Regulation argue that the deduction tends to equalize burdens across localities of different levels of wealth, and Misguided regulation can divert economic that it makes it less painful for states and localities resources from their best uses and thereby to increase revenue when needed. Interest earned reduce economic growth. As just one example, a through life insurance policies is tax-deferred and 2003 rule issued by the Securities and Exchange in some instances not taxed at all, in contrast to Commission had the effect of strongly motivating interest earned from many other sources. The federal investment fund managers to hand off the voting government provides a tax credit for investment of their corporate shares to outside proxy advisers, in low-income housing which some would argue a class of business that is dominated by just two is inefficient, and essentially merely increases firms. Investment fund managers were implicitly the income of the developers. The research and told that they must vote on every shareholder experimentation (R&E — sometimes called research issue, such that they could not abstain, but also and development, or R&D) tax credit receives broad threatened by potential challenges of conflict support, but some argue that even it provides a of interest in the votes that they did cast. They subsidy for activities that firms would undertake in were told that giving their proxies to the outside any event. Despite complicated legal drafting, it can proxy adviser firms would guarantee safety from be manipulated to reward comparatively steady-as- conflict-of-interest charges. The result was that the you-go research spending as much as extraordinary two dominant proxy advisory firms were given incremental effort. In addition, the R&E credit’s the power to influence the vote of vast numbers temporary status — it must be re-enacted periodically of corporate shares that they did not own, and to — subjects businesses to unnecessary uncertainty, operate essentially as a duopoly in this narrow
18 segment. The SEC has issued revised guidance, but from the point of view of a single community needs to ensure that shares owned by investment that is suffering a downturn and in desperate fund managers are voted (or not) according to the need of jobs. But from the perspective of the interests and preferences of the owners, not by nation as a whole, dueling subsidies from many others designated in effect by the SEC itself. such down-on-their-luck communities looks more like a negative-sum race to the bottom. Other Questionable Private-Sector Deals Those communities need jobs in part to generate tax revenue to maintain needed public services, Labor also can engage in public-private deals. but job-seeking subsidies give those potential Some argue that antitrust exemptions for unions, revenue gains away, at least in part. Furthermore, and particularly the ability of public-sector unions if the process devolves into a contest among all to collect mandatory dues and then contribute communities as to which can provide the biggest to the political campaigns of the officeholders subsidy, then almost by definition the community who will negotiate their pay and benefits, are most able to pay is the one least in need. And at the questionable public-private deals. Others point to end of the agreement that provided the subsidy, the Davis-Bacon Act (which supports wage levels the subsidized business would have been shown by in public projects), the Jones Act (which restricts example every reason to put its location back up shipping between U.S. ports to U.S. constructed for bid again, including by the current subsidizing and flagged vessels using U.S. labor), and state community; and likewise, every other business in laws that facilitate union organizing (as opposed that community (and every other one) would have to “right-to-work” laws, which do not) as restraints been taught to ask for the same kind of subsidy. on competition that reduce the well-being of It is easy to preach from afar, especially to those citizens at large while providing protection to feeling compelled to sign contracts of desperation, small classes of the workforce. We believe that the but in the long run it would make much more Jones Act has had a particularly perverse effect of sense for a locality to market itself with the highest increasing costs and inhibiting commerce. Some quality workforce, infrastructure and schools would also argue that non-for-profit organizations rather than to bargain away its tax base. serving particular favored constituencies influence the political process to obtain funding, regardless Some would argue that professional licensing of the substantive merit of their activities. requirements for trades from law to hairdressing merely restrict entry of additional workers, Questionable Deals at the State and Local limiting supply and so raising prices.22 Protection Government Level of tenure for teachers, in some instances without adequate assessment of performance, is highly Although the focus of this statement is on crony controversial. Licenses and concessions to do capitalism as practiced at the federal level, other business in particular fields (gambling licenses, alleged public-private deals are not confined to certificates of need for provision of medical care) the federal government, or are exclusively in the are sometimes awarded at no cost, even though domain of state or local government. such rights might have considerable market value. Some might argue that exclusive rights should not State and local governments engage in “economic be sold if those fees would then be passed on to development,” which often means providing the public. However, that raises the question of subsidies to businesses as an inducement to locate whether such free licenses or rights are given to the in the jurisdiction in question. Such subsidies, most worthy candidate, or rather are handed out at usually delivered through tax concessions, are zero or below-market prices as favors to the most highly questionable policy instruments. A tax politically well-connected — perhaps because of subsidy might seem an acceptable price to pay election campaign contributions.
19 Crony Capitalism: Unhealthy Relations Between Business and Government
The Causes And Tools Of Crony Capitalism
Three interconnected trends have increased most campaign donors seek to achieve what they the potential for public-private deals to benefit wholeheartedly believe to be a better world. narrow interests at the expense of the U.S. economy as a whole. First, dating back to World Our concern, however, is that the leverage of War II and even before — for a variety of reasons government on the economy, pursued through including national defense, a growing public role the tools of campaign finance and lobbying — in retirement, the growing cost of and public sometimes applied simultaneously — can lead role in health care, the complexity of modern to crony deals that aid a narrow private interest transportation and communications, and many but may hurt others and even the total economy other factors — the government has become an on net. increasingly important, some might say even dominant, player in the U.S. economy. It has As noted above, the increased importance of become so through its increased regulatory reach government in the economy has allowed various as well as its taxation and spending policies. This interest groups, companies, trade associations trend has made it increasingly profitable — and and labor unions potentially to benefit if they can in the perceptions of some, apparently necessary affect public policies, perhaps even to obtain direct — for private interests to attempt to influence the support from the government. This potentially workings of government. leads to the nexus of manipulation of public policy through the tools of crony capitalism. Associated with the growing size and influence of The worst case is if elected policymakers, in dire government in the economy, two trends in politics perceived need of campaign finance, give undue and policymaking have created the tools by which weight to the lobbying of incumbent interests in such deals could be struck. For one, a rapid rate preference to less-well-heeled new businesses and of increase in the costs of election campaigns innovators, because those established interests are for all levels of public office has made politicians able to provide greater campaign contributions. particularly dependent on higher and higher levels Such circumstances can play on the natural of campaign finance. human impulse of reciprocity: Lawmakers feel an obligation to give a full hearing to those And in addition, there has been a marked increase who have supported their election campaigns. in lobbying activity as a channel by which large Ultimately, however, the fruits of crony capitalism’s vested interests and deep pockets can legally subsidies can be recycled into campaign finance influence the legislative process to their advantage. in a self-perpetuating sclerotic loop that destroys the competition and innovation that American Neither campaign contributions nor lobbying is by capitalism needs to maintain international any means reprehensible in and of itself. Lobbying leadership, prosperity, and the public trust. is the constitutionally protected petitioning of the government by its citizens. Much of today’s The Motivation for Crony Capitalism: lobbying is the non-self-interested communication The Pervasive Role of Government of important information to busy non-specialist legislators, and argument for what the lobbying Crony deals between the private sector and organizations deeply believe to be the public government, of course, are as old as the Republic. interest. Business interests that compete with one In fact, they pre-date our Republic, and can be another need to express their perspectives, lest identified back to Rome and beyond. We do not only the other side be heard. At the same time, need contemporary mass communications and K
20 Figure40 2 Total Government Spending as a Percent of GDP 40%
3535%
3030%
25% Percent of GDP Percent 25
20% 20
15% | | | | | | | | | | | | | | 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 15 Year Federal Reserve Bank of St. Louis
Street lobbying shops to explain anti-market deals The most obvious indicator of the government’s between business and government, nor would ever-increasing impact on the U.S. economy has somehow eliminating those technologies and been the substantial growth in its size. Total U.S. institutions somehow render government always federal and local government spending rose from pristine and efficiency-enhancing. less than 25 percent of GDP in the mid-1960s to more than 35 percent today. Mere growth would However, a striking feature of the U.S. economy not necessarily matter, but in fact government has over the past several decades has been the growing expanded its reach through more of the economy, role of government. This has allowed elected and given the government substantially increased officials the means increasingly to influence influence over the allocation of resources in the economic outcomes in favor of those who economy. Some would argue that several important can most effectively petition the government. sources of increased spending — for example, Moreover, as Nobel Laureate Edmund Phelps has retirement and healthcare — are relatively observed, while the nexus between the private and politically neutral or benign. Even those narrow public sectors has become stronger, it has become points are arguable — for example, beneficiary far more invasive in a few particular industries like populations can seek to reduce their share of costs, health care and education.23 even though that level originally was believed to be fair. But still, that argument misses the point There are multiple ways by which this has become that even unimpeachable spending programs can possible. be manipulated to favor unfairly and inefficiently
21 Crony Capitalism: Unhealthy Relations Between Business and Government
some who provide the services. Also, those and innovation. Businesses also have to programs require higher taxes, which themselves contend with the uncertainty that a changing increase government’s intrusion into the economy regulatory environment engenders. Whereas and open the door to preferences that can favor in 1950 there were fewer than 20,000 pages of one interest over another and distort the economy. federal regulations, today there are in excess of (Alternatively, interests that seek spending 165,000 pages. These regulations contain rules programs can argue that their programs are so covering every conceivable aspect of commerce meritorious or beneficial that they should not be and society. By the regulatory agencies’ own paid for with higher taxes — which decision would estimates, the total cost of complying with their impose its own costs on the economy as a whole.) rules amounts to hundreds of billions of dollars, with each year’s new rules adding more than $10 The large relative increase in public spending billion to the total.25 has been accompanied almost directly by an explosion in government regulation, which Another form of public-private “deal” is the not only channels that government spending expansive use of patents and copyrights to protect but also controls and constrains private-sector an existing enterprise from fair competition, behavior in non-governmental activities. To or alternatively to poach on the returns to true be sure, for the success of capitalism some innovation with ambitious and speculative regulation is absolutely needed to keep markets claims of intellectual property rights. Edmund fair and open, to avoid unnecessary monopolies, Phelps notes that parallel to the increase in and to safeguard public health and safety. regulation there has been an explosion in patent However, excessive or poorly drawn regulation and copyright protection that has stifled both can act like sand in the gears of an economy’s innovation and competition. Phelps contends that efficiency. In some circumstances, influencing in the high-tech industry there is such a thicket government regulation — possibly to forestall of patents in force that a creator of a new method competition from innovators who threaten to might well require as many lawyers as engineers to unseat incumbent interests — can be a more move forward with his idea. profitable use of business funds than cutting costs or developing product. Or regulation can A clear indication of the ever-growing trend be a stealth tool used to hamstring business for towards more complex and intrusive government any reason. regulation is provided by the passage of the 2010 Dodd-Frank Wall Street Reform and Consumer The very rapid growth and complexity of Protection Act. In contrast to the 37-paged 1933 government regulation has fed Washington’s Glass-Steagall Act, which separated investment lobbying machine. Edmund Phelps notes, using banking from commercial banking, the Dodd- data from United Agenda, that regulation has Frank bill alone ran to more than a staggering mushroomed. Each year from 1997 to 2006 there 2,300 pages, with more implementing regulations were around 80 new “significant” regulations to follow. (defined as those costing around $100 million each).24 Beginning in 2007, there was a sharp Luigi Zingales has observed that, in view of their close increase in even that pace of regulation, reaching contact with the government, industries in which the 150 significant new regulations a year by 2011. government has become an important regulator or And these figures include only federal, not state protector are particularly liable to seek more extensive and local regulation. government aid.26 They take advantage of their close contacts not only to reduce government influence on Many observers contend that these regulations their activities in some respects, but also to mold it to are having a perceptible effect on both investment their advantage in others.
22 Figure 3 Number of Pages of Regulations Added to the Federal Register Each Year, 1936-2011
100,000
90,000
80,000
70,000
60,000
50,000
Pages Added Pages 40,000
30,000
20,000
10,000
0 | | | | | | | | | | 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Year
Source: https://www.federalregister.gov/blog/learn/tutorials
Even though regulators in theory are independent, of the U.S. population considers the tax system to they can be subject to the influences of money be unfair, and both individuals and businesses incur in the political system. Regulators’ budgets ever-increasing costs just to comply.27 often come through the appropriations process. Members of Congress can make their preferences In response to the 2008 financial crisis, the known, and regulators can perceive that it is in Administration responded with a $780 billion their long-term interest to give their funders what fiscal stimulus package, which was the largest they want. (Regulators can also be “captured” U.S. peace-time fiscal stimulus on record. It also through intimidation, if aggressive pursuit of their responded with the introduction of the Troubled missions would expose them to public attack, or if Asset Relief Program (TARP) whose purpose they could find themselves in court and would lose was to purchase assets and equity from financial stature if defeated in a trial.) institutions to strengthen the U.S. financial sector. The result was that many outlay programs and The U.S. tax code is yet another area where loan guarantees selected for inclusion in the lawmakers have found the means to favor special package benefited particular firms and industries. interest groups. Since the last major tax reform However necessary those measures might have in 1986, the U.S. tax system incrementally and been in the wake of the financial crisis, both the increasingly has become more complex and riddled fiscal stimulus package and TARP are generally with many tax expenditures and loopholes. Today perceived to have given the government great the U.S. tax code runs to more than 4 million words discretion to favor special interest groups like the and is understood by very few. As a result, a majority automakers and Wall Street.
23 Crony Capitalism: Unhealthy Relations Between Business and Government
The Federal Reserve’s resort to extraordinary the House of Representatives had increased to monetary policy measures in response to the recent $1.5 million while the average cost of a successful recession has added fuel to the public perception Senate race had increased to almost $9 million.28 that Wall Street is favored at the expense of Main Street. Those aggressive measures have resulted in a Political scientists have advanced several plausible dramatic expansion in the size of the Fed’s balance reasons as to why U.S. elections costs have sheet to over $4 trillion. They have also resulted escalated: in the repression of long-term interest rates to record low levels that are perceived by many • The first is that following the Republicans’ as a tax on savers, especially small savers with capture of the House of Representatives in 1994 limited investment options, and a corresponding for the first time in over forty years, control of the subsidy to the equity markets, which have become Congress was no longer a foregone conclusion. relatively more attractive as investment vehicles. Supporters of the programs argue that they were • A second reason, as Robert Kaiser has noted, essential in light of the extraordinary stress on the is that campaigns dependent on pollsters, financial sector and the economy in general, and consultants, and television commercials were that it was impossible to protect the citizenry at many times more expensive than campaigns large from the fallout without also saving financial in the earlier eras before those inventions took institutions that might have played roles in the hold.29 So congressman and senators who used housing bubble and collapse. Still, the nation (or faced opposition using) those technologies struggles with the perception that some individuals quite suddenly needed — or thought or feared and organizations profited unfairly from the they needed — much more money than ever response to widespread hardship. before to run for re-election. With two candidates using such costly techniques, and with television The Tools of Crony Capitalism advertising rates responsive to demand and so total advertising costs potentially without limit, a The growth of government, and of the regulation to veritable “arms race” could easily (and often does) implement that growth, has increased the incentive ensue. Even early in an election cycle, before an to engage in public-private deals, and the potential incumbent faces a declared opponent, filling a reward from such deals. The private interests that big war chest can serve as a deterrent to potential perceive opportunity to pursue their own welfare challengers. If no challenger appears, the through the expanding role of government have incumbent can redistribute that money to earn at least two noteworthy tools to do so. Those two gratitude from more vulnerable colleagues and tools have become increasingly prominent — and thereby make a case for a position in the party’s troubling to many — in recent years. Politicians leadership. And arguably, if petitioners want to need money (or believe they do) to run for office, ingratiate themselves to elected officeholders, and and they are more likely to listen to those who choose to do so through campaign contributions, provide it. then those officeholders will find ways to spend the money, and still further innovations including a. The exorbitant cost of elections and beyond polls and television will follow that Since the mid-1990s, for a number of reasons, the money inevitably. cost of U.S. political elections has skyrocketed. Whereas in 2000 the total cost of the presidential • A third reason why campaign costs and the and congressional campaigns was a little over emphasis on fundraising have increased is the $3 billion, by 2012 the total cost had more rise of the permanent campaign. Campaigns are than doubled to almost $7 billion. By 2012, the no longer limited to a few months prior to an estimated average cost of winning an election to election. As the demand for money has grown,
24 Figure 4 Total Cost of US Elections, 1998-2012
2012
2010
2008
2006
Year 2004
2002 Congressional Races
2000 Presidential Race
1998
| | | | | | | | 0 $1B $2B $3B $4B $5B $6B $7B Billions of Dollars
Source: https://www.opensecrets.org/bigpicture/
fundraising and politicking have become a decision in Citizens United v. the Federal Election continuing necessity, leading candidates to begin Commission. While the fear was that these their campaigns earlier and earlier, and causing newly empowered entities (especially large incumbents to maintain their political operations corporations) would spend heavily, this has not throughout the election cycle. happened. Instead, wealthy individuals have been the primary source of this substantial increase in • Yet a fourth reason which has been advanced independent spending.30 Whether corporate or to explain the spike in total campaign spending union contributions to independent committees in recent elections has been the massive growth will increase from that low level in the future is in independent spending, that is, expenditures uncertain. A subsequent federal district court intended to advance the cause of a particular ruling based on Citizens United, Speechnow.org v. candidate for election but undertaken by an Federal Election Commission, fueled the surge in outside entity nominally without coordination spending by permitting political committees to with the candidate’s own campaign. From 1992 use unlimited contributions to make unlimited through 2012, independent expenditures have expenditures in support of a candidate, so long increased by a factor of 100 — from $10.9 million as these expenditures were independent of the in 1992, to $143.6 million in 2008, to $1.0 billion candidate supported. The Supreme Court has in 2012. Corporations and labor unions were now ruled in McCutcheon v. Federal Election allowed to make independent expenditures in Commission that aggregate limits on the total 2012 as a result of the Supreme Court’s 2010 contributions an individual gives to candidates,
25 Crony Capitalism: Unhealthy Relations Between Business and Government
parties, and political action committees (PACs) funded” candidates have exploited their natural are unconstitutional under the First Amendment advantages in electoral politics. This may make (although the limits on contributions to each those candidates’ funding more transparent, but individual candidate still stand). This most it also may make it impossible for people of more recent ruling is likely to increase the role of modest means to compete. More troubling yet, the wealthy donors and lobbyists in the financing of permanent campaign has turned politics into a federal campaigns — as such individuals, either relentless struggle for political power rather than by choice or because of irresistible demands by an attempt to solve the country’s problems. It also candidates, make contributions to increasing arguably has led to a meaningful deterioration in numbers of candidates. the quality of service that officeholders provide to their constituents, as they spend more and more Whatever the reason for the escalation in election of their time raising campaign funds rather than campaign costs, political candidates have become working on the nation’s problems — which is highly dependent on private sources of funding bound to have a bearing on the nation’s ability to to secure re-election. As a result, politicians are solve those problems. engaged in what has come to be referred to as a “permanent campaign.”31 Indeed, it is estimated b. Lobbying that most congressional incumbents spend Again, the Constitution protects the right of between one-quarter and one-third of their time citizens to petition their government, and lobbying in campaign fundraising activities. This makes can fulfill a legitimate need of lawmakers for them increasingly pressured — whether they bend information and perspective. Lobbying practiced to that pressure or not — to conform their views properly is an honorable profession. Much of and their voting patterns to the wishes of major lobbying, today as in the past, involves either the campaign donors. It may mean that candidates communication of necessary, useful information who are more willing to accept the requests of to non-specialist legislators, or the petitioning by donors are more likely to win election. It has individuals and groups that have no self-interest also contributed to at least a public perception of in the issues at hand but merely seek to pursue the politicians “owned” by large donors who ask for public interest as they see it. favors — “crony capitalism.” Our concern is that legitimate use of lobbying Yet another troubling development is the rise of so- can be subjected to pressure for abuse — by the called “independent committees” that can spend intersection of lobbying with the growing role of money to advance a candidate’s own campaign government in the economy, and the growing role so long as they do not overtly and precisely of money in elections. coordinate with that campaign. These conditions in practice are so lenient that an ambitious private Paralleling the escalation in election costs has interest can provide virtually unlimited and been an increase in the amount of money devoted undisclosed contributions with the full knowledge to lobbying. By official estimates, lobbying is the of a potentially grateful candidate. third largest enterprise in our nation’s capital, after government and tourism. There are an Long-time Congress-watchers like Norman estimated 11,781 professional lobbyists registered Ornstein and Thomas Mann have observed that the by Congress representing virtually every type of high cost of election campaigns has fundamentally interest in America; but it has been estimated corroded the U.S. political system.32 For example, that the total number of persons employed in higher campaign costs have contributed to a Washington who either are lobbyists or are steady rise in the number of wealthy men and associated with them in some way is well over women sitting in the House and Senate, as “self- 100,000. According to the Center for Responsive
26 Figure 5 Lobby Dollars Spent, 2001-2012 ($Bn)
$6
$5.3
$5
$4
$3
$2 Billionds of Dollars $1.8 $1.7 $1.5 $1.4 $1.4 $1.2 $1.2 $1.1 $1.0 $1.0 $1.0 $0.9 $1 $0.7 $0.7
$0 Pharma/ Insurance Electric Business Computers/ Oil & Education Misc TV/ Civil Securities & Real Air Automotive Telecom Healthcare/ Utilities Associa- Internet Gas Manufac- Movies/ Servants/ Investment Estate Transport Services & HMO tions turing & Music Public Equipment Distributing Officials
Source: Center for Responsive Politics
Politics (CRP), over the past fifteen years the regularities in U.S. lobbying activities:35 amount of money spent on lobbying has more than doubled to reach its present level of around $3.2 • First, lobbying expenditure is pervasive in the billion. The CRP has reported also that between American political system and it substantially 1998 and 2011, the top ten clients of lobbying firms dwarfs interest groups’ campaign contributions. alone spent over $3.1 billion.33 But that includes In 2012, the amount spent by organized only what is reported by registered lobbyists in interests on lobbying the federal government public records. It does not include money spent amounted to $3.5 billion. This compares with the for grassroots organizing; coalition building; issue approximately $750 million annual expenditure advertising on television, radio, and in the print on campaign contributions in the 2011-2012 media; and advocacy on the Internet, which do not election cycle by interest groups’ PACs, super- fit the legal definition of lobbying. Some estimate PACs, and 527 organizations. that total spending to influence public policy in Washington is close to four times the officially • Second, expenditures by corporations and reported amount.34 trade associations, which comprise the vast majority of lobbying expenditure, account for Since the mid-1990s, U.S. law has required public around 85 percent of total federal and state- disclosure of all lobbying activity. This has allowed level government lobbying. In addition, large a more-informed analysis of the lobbying industry. organized interest groups and groups that are Recent academic research reveals a number of supported by large corporations are very much
27 Crony Capitalism: Unhealthy Relations Between Business and Government
more likely to lobby on their own behalf than former Senators lobby. The same is true of former smaller groups (although smaller interests are senior House and Senate staffers. It is also reported represented collectively by trade or industry that an increasing number of former (and perhaps associations). also future) lobbyists are to be found in senior congressional staff positions, and senior positions • Third, the returns from targeted lobbying can in the Executive Branch (subject to some recent be very high, which may be one reason (beyond restraints). the increasingly pervasive role of government, discussed above) why lobbying has become so In a much cited 2006 study, Richard Hall and Alan widespread.36 For example, a Sunlight Foundation Deardorff found that lobbyists tend to concentrate analysis of 200 corporations found that between their efforts on politicians who are already most 2007 and 2010 companies investing heavily in convinced of their positions.39 They argued lobbying paid significantly lower effective federal that lobbying was in effect a matching grant of tax rates than those that did not.37 According to costly policy information, political intelligence the study, six of the eight companies that invested and labor to strategically selected legislators. the most in lobbying between 2007 and 2009 The proximate objective of this strategy is not saw effective-tax-rate declines of at least seven so much to change legislators’ minds as to assist percentage points — in contrast to the median natural allies in achieving their own coincident tax rate decline among all 200 companies of objectives. This pattern would suggest that the 0.6 percentage points.38 Meanwhile, recent data unimpeachable information function of lobbying, a assembled by the United Republic, a liberal- raising of general knowledge levels among a broad leaning campaign reform organization, suggest population of policymakers, might have become that lobbying returns have been particularly large less common than this boutique support of a for multinational companies and those in the narrow group of like minds. pharmaceutical and oil industries. For their part, a number of lobbying firms themselves advertise For his part, Lawrence Lessig considers the that $1 invested in lobbying can yield as much as intersection of lobbying, campaign finance $100 in benefits. and economically invasive government to be a fundamental part of a “gift economy.”40 While • Fourth, large corporations and well-funded there might be no formal quid pro quo between groups are more likely to lobby independently Congressmen and lobbyists, Congressmen are than smaller groups, which are more likely under increasing pressure to bend their views to lobby using trade associations. Lobbying to satisfy lobbyists who choose to offer ongoing also increases when particular issues are more support and help in raising campaign finance. relevant and salient and when there are big stakes Several well respected politicians, including for the organized interest. John McCain and Chuck Hagel, have described lobbying in less flattering terms. In their words, the With the growth of lobbying, perhaps predictably, confluence of U.S. campaign finance and lobbying has come an increasing recruitment of well-placed has effectively become a system of legalized policymakers into lobbying as a second career. bribery. We believe that it contributes to an at Whereas prior to 1973 barely 3 percent of former least perceived unhealthy co-dependence between congressmen or senators took up employment government and private interest groups, including as lobbyists upon leaving office, today around 40 but not limited to business. percent of former Congressman and 50 percent of
28 The Economic Cost of Crony Capitalism
Economists dating as far back as Adam Smith particular commodity makes trade have emphasized how costly such crony capitalism regulation more complex than if there can be. They have warned that it can impose an were a uniform tariff on all imports and effective tax on the public in that it distorts the more complex than it would be if there proper functioning of the market economy for the would be no tariff at all.42 benefit of the few. While the costs of crony capitalism on the U.S. As Adam Smith famously observed in 1776 in The economy are intrinsically difficult to measure, Wealth of Nations: there can be little doubt that they are substantial. This becomes all the more clear when one People of the same trade seldom meet considers the following specific costs: together, even for merriment and diversion, but the conversation ends a. Crony capitalism reduces the overall degree in a conspiracy against the public, or of competitiveness of the U.S. economy. It in some contrivance to raise prices. It does so by impeding new entrants through is impossible indeed to prevent such tax exemptions or spending or low-cost credit meetings, by any law which either could for established firms, or through a complex be executed, or would be consistent regulatory environment. Those measures favor with liberty and justice. But though the incumbents at the expense of new entrants, and law cannot hinder people of the same contribute to increased market concentration trade from sometimes assembling that makes for a less competitive economy. together, it ought to do nothing to facilitate such assemblies; much less to a. To some degree because of crony capitalism, render them necessary.41 and to some degree reinforcing it, there is strong evidence of a substantial increase in industrial More recently, this point has been well articulated concentration in the American economy over by Mancur Olson who has argued as follows: the past six decades. This concentration has been detrimental to both competition and An increase in the payoffs from lobbying innovation. In the financial sector, big banks and cartel activity as compared with have become behemoths while the small banks the payoffs from production means have disappeared or shrunk. In the non-financial that more resources are devoted to sector too, economic activity has moved politics and cartel activity and fewer dramatically away from small- and medium- resources are devoted to production. sized enterprises to large corporations.43 This in turn influences the attitudes and culture that evolve in society. Lobbying b. Crony capitalism results in rent-seeking through increases the complexity of regulation subsidies or taxes that benefit vested interests and the scope of government. It does at the expense of others, rather than the pursuit so by creating special provisions and of profit through socially and economically exceptions. A lobby that wins a tax productive behavior. It reduces the drive for reduction for income of a certain source innovation and for minimizing costs and or type makes the tax code longer and maximizing consumer benefits. A most notable more complicated; a lobby that gets a example of such market-distorting behavior tariff increase for the producers of a is the subsidies for corn production and the
29 Crony Capitalism: Unhealthy Relations Between Business and Government
taxation of sugar imports. Those policies Combating crony capitalism result in large increases in the prices that the U.S. public has to pay for gasoline, for food If left unchecked both in fact and in the court of sweeteners, and for food in general. Although public opinion, crony capitalism must be expected this is perhaps the most glaring example of an to continue to sap vitality out of the U.S. economy adverse public-private deal, many more were and to undermine public support for the American cited earlier. model of capitalism. This adds urgency to the task of finding ways to combat crony capitalism. c. Crony capitalism impedes fundamental This challenge is considerable. The roots of crony economic reforms which might be expected capitalism are deep, and no single silver bullet to yield substantial efficiency and equity gains will solve the problem. Every crony private- to the economy and for which there might sector deal exists because it was appropriated by a be widespread bipartisan public support. An majority of legislators and signed by a president, or egregious case is tax reform, where special because it was approved by regulators or contract interest groups oppose the simplification of the administrators with independent authority. The tax code and the elimination of tax expenditures forces benefiting from those deals and the present that might make possible a simpler tax system system, including potentially the Congress itself, with substantially lower marginal tax rates on all each have much to gain or lose. They therefore taxpayers. Other much needed reforms arguably are stronger and more united in defending those thwarted by special interest groups could benefit deals and the system than is the loose collection policy relating to entitlement spending, tort law, of private citizens, each of whom through reform immigration policy, and student loans. would gain only a small share of the very large cost of the deals and the system.
30 Policy Options for Combating Crony Capitalism
Thus, the roots of crony capitalism are dug deeply business leaders must make the case factually and into the U.S. political system. The potential fruits fairly, understanding that deteriorating standards of anticompetitive deals are many, and given that of policymaking will in the end bring low all motivation — as in campaign finance, narrowly enterprises — including the apparent early-round considered — the availability of money creates a winners in the influence game. strong predisposition toward its use. Beyond leadership from business, the nation We believe that the business community can help. needs leadership in Washington. An example can Business has a special role and responsibility to be found in the elimination of a mass of crony communicate to both policymakers and the public, public-private deals — veritable price-fixing — in and to set standards of discourse and behavior. the transportation industry in the 1970s. President Gerald Ford made a public case to eliminate By all evidence, including public opinion polls industry regulation to which the nation had become and press accounts, many Americans believe that inured, even though it cost consumers billions most or all of the business community is complicit of dollars.45 Challenging it created a fear of the in crony capitalism.44 Crony capitalism has given unknown among many, even as it aroused primal business a bad reputation — and to some degree and opposition from the interests that it protected and in some instances, that bad reputation is deserved. profited. And yet today it is unimaginable that the nation would climb back into such a regulatory Thus, the vast majority of business leaders who straitjacket that we now realize limited innovation compete every day to provide jobs to their in a foundational industry for our entire economy. employees, investment opportunities to pension We need to build on this precedent to weed out old contributors and retirees, and high-value goods crony deals and avoid new ones. and services to all Americans and persons around the world, need to tell — and often to explain — That requires leadership. Leaders would refuse to the complex truth to their fellow citizens and their accept a campaign-finance money game that forces elected policymakers. We hope that this policy them to spend more time seeking contributions statement contributes to that effort. than solving public problems. Leaders would explain to their contributors that those And further, business leaders need to practice the contributions bought their independent judgment, gospel of fair competition that they preach. As not their fealty. Alan Greenspan once said, we all want the fruits of vigorous competition among our suppliers and the The first line of defense, of course, is awareness — providers of the goods and services we buy; we just and an attitude of “just don’t do it.” We need to don’t want competition to apply to us. But if we all make the case so strongly that our society builds an get the latter wish, there will be no competition, and ingrained aversion to crony deals. Now that it has our fate will be much attenuated innovation and become so clear just how riddled with distorting productivity and economic growth. There are ill- deals public policy has become, our elected advised and counterproductive attacks on business, policymakers should put a high hurdle in the way which must be answered. And a complex world of enacting additional deals — and should put a does require some government intervention in the premium on efforts to reverse existing ones. workings of the economy. But business leaders must accept the need for competition everywhere in the Each deal has its advocates — else it would economy; and when government must intervene, not have been enacted in the first place. And
31 Crony Capitalism: Unhealthy Relations Between Business and Government
in the age-old dictum of political science, the a. Limiting the size and scope of government. “disinterested majority,” there always is a greater reward for policymakers to providing a benefit to The smaller the reach of government and the less a narrow interest than to rejecting it in the interest involved it is in the functioning the economy, of the broader public — because the typical citizen the less leverage there is for crony capitalism to is far less aware of any such issue, and would undermine the proper functioning of the free benefit less from the denial of the benefit than market, and the less potential gain from deals would each of the very small group of petitioners between government and private interests. The from its creation. Such deals quickly can become challenge and the complexity arise because there a snowballing problem, through the widely are market failures that need to be addressed, and recognized “logrolling” process: Once one deal so government involvement in the economy at is on the table, it can attract support from other some level is inevitable and necessary. The keys are policymakers in exchange for support for their balance and judgment. proposed deals. Thus, it is the responsibility of the informed public, aided by the press, to follow the Solutions along these lines might include: progress of any deals and to hold the responsible policymakers to account. • Limit the size of both public spending and the public deficit (which are most meaningfully Several analysts have emphasized the distinction measured in relation to gross domestic product). between “pro-business” and “pro-market” Along these lines, recommendations of the CED, policies.46 Supporting existing businesses through the Bipartisan Policy Center Domenici-Rivlin subsidies and preferential regulation — to the Debt Reduction Task Force,47 and the Bowles- exclusion of new businesses and innovators — Simpson Commission Report48 include the inhibits the working of the market and does not following suggested reforms: serve long-term prosperity or economic growth. Truly pro-market policy is pro-society policy — Demand additional efficiency from — which in the long term serves the interest of Washington by tightening and strengthening business and every other segment of our nation discretionary expenditure caps, rather than — because it allows competition and markets to imposing further abrupt across-the-board determine success or failure, and the ultimate cuts. A rough guideline would be limiting allocation of resources. the growth of both defense and non-defense spending to the rate of inflation through 2025. Again, the inevitable difference of judgment on the merits of any individual public-private deal makes — Reform the healthcare system to incorporate it impossible to create some general rule that competition among private healthcare plans automatically will screen out all bad deals (though based on cost-conscious consumer choice. a sound cost-benefit analysis is the nearest thing to Extend this basic system to embrace Medicare a common denominator). However, the following and (with modifications appropriate to a low- menu of policy measures might be effective in income population) the non-disabled portion minimizing the scope of crony capitalism. of Medicaid as well.
Conceptually these solutions fall into four distinct • Fundamentally reform the tax system. categories: (a) limiting the size and scope of Substantially simplify it and leave few loopholes government; (b) reforming campaign financing; that can be exploited. In this respect, one could (c) reforming the lobbying industry; and (d) again build on the recommendations of the CED, reforming the policy-making process. the Domenici-Rivlin Task Force, and the bi- partisan Bowles-Simpson Commission report:
32 — Eliminate virtually all tax expenditures for — Germany has an interesting practice under both income and payroll taxes. Simplify and which its federal government periodically streamline other provisions and the system as engages two reputable private research a whole (see the Domenici-Rivlin report). institutions to evaluate separately every preferential tax law. Having two separate — Use some of the revenue proceeds of the reviews motivates each reviewer to be elimination of tax expenditures to reduce thorough and unbiased, because if one and simplify the tax rate schedules. Use the reviewer submits poor work, the other will remainder for deficit reduction. take advantage by doing better work and will solicit additional future government business — Eliminate tax preferences to reduce the on that basis. In addition, the contract corporate tax rate to a level that would restore researchers would be less likely to submit an U.S. international competitiveness. apologist evaluation that merely protects the position of one political side or the other, — As a part of tax reform, eliminate the because the disagreeing side will be more than complex and economically distorting happy to point that out, to the detriment of alternative minimum taxes on individuals and the reputation of the reporting institution. corporations. Private institutions would also be less likely than governmental bodies to make their • Subject all existing tax and spending deals to own calculation that policy action would be review. unlikely, and that that the evaluations do not merit any serious effort. Private institutions — Schedule all existing tax and mandatory would want to fulfill all obligations under spending deals to an objective review, their terms of engagement, so that they would including a cost-benefit analysis. In general, be paid for their work. Subjecting existing tax and entitlement spending programs provisions to a “sunset” — a scheduled remain in effect until the law is changed. In expiration at some point in the future — may practical terms and in recent years, this has or may not force serious review, and may meant that past deals have been continued create a “must pass” legislative vehicle upon without question or evaluation. That is clearly which undeserving deals can ride (see the unacceptable, because the world changes, and frequent discussion of the “tax extenders” in even a fully justified provision today might not the current law).50 be five years from now. One issue is which legal provisions would be made subject to review; we • Substantially streamline regulatory policy believe that the list should be expansive. One and make such policy more transparent and option would be to subject all such provisions accountable. Some ideas include: to expiration (commonly called a “sunset”) when they are selected for review. We would — Amend the Administrative Procedure Act not choose to do so lightly, because as noted to make cost-benefit analysis of regulatory above (in the discussion of temporary tax law measures as applied by the White House provisions) the periodic expiration of such review programs since 1981 a matter of provisions can occasion considerable mischief statutory law subject to judicial review. Under each time — including the loss of predictability this proposal, a regulatory rule could be that is essential to business planning and challenged in court, not only as “arbitrary, investment. Others believe, however, that capricious or an abuse of discretion” but also without a hard sunset provision reviews will based on whether the agency in question had not be undertaken at all.49 made a reasonable demonstration that the
33 Crony Capitalism: Unhealthy Relations Between Business and Government
rule met the cost-benefit standard.51 — Per the recommendation of the National Commission on the Public Service (the — Maintain a “regulatory budget” to highlight “Volcker Commission”), recognize and accept trade-offs among the seemingly limitless the importance of skilled and experienced regulatory proposals that keep surfacing and regulators, and pay them market-based that overburden businesses and the economy. salaries.52 In fields where private-sector Some would create a hard-and-fast ceiling pay far exceeds civil-service salary caps, on the total estimated cost of regulations, incentives drive regulators to consider their perhaps as a percentage of the GDP, with a public service as mere training for moves into kind of “pay-as-you-go” provision whereby more-lucrative private employment with the enactment of a new rule would require repeal very firms they are charged to regulate. Even of another. However, if regulations are subject assuming that such regulators behave with to a rigorous and fair cost-benefit test, then the utmost integrity in their public positions rejection of a proposed regulation to avoid — and the incentive could be very much to its cost would deny the public its greater the contrary — the best and the brightest civil benefit. Furthermore, a percentage-of-GDP servants will have every reason to move on limit would suggest that regulations could at the first opportunity. And good regulation, be expanded when the economy grows, and as practiced by those with the best judgment, then somehow must be cut back when the will not be excessive or counterproductive economy is beset with a recession. We believe regulation. (The same principle would that the key is cost-benefit analysis, rather apply to, for example, contracting officers at than any rule based solely on cost. the Department of Defense — who might negotiate and administer multi-billion-dollar — Create a systematic process for the review of programs against industry personnel hand- existing regulations, with the aim of repeal picked from among the public servants’ more- of obsolete regulations and the simplification experienced predecessors.) of those that are excessively complex. This will be a massive, multi-year task. However, While such reforms would go a long way to the very mass of regulation, even if some are curbing crony capitalism, they are more than likely obsolete, creates cost for the economy. Repeals to meet with fierce opposition from the powerful and simplifications will make the entire body interest groups that benefit from the present of regulation easier to comprehend, improve system. They will also be subject to the strong compliance, and reemphasize the legitimacy spirit of partisanship that currently characterizes of the rule of law. Washington politics and that impedes serious economic or political reform. However, the — Require that new major regulatory rules alternative to taking on these forces is to do be approved by a joint resolution of nothing — and that course is unacceptable. Congress and signed by the president before taking effect. Under this proposal, if the b. Reforming the system of campaign financing Environmental Protection Agency or the Securities and Exchange Commission issued Campaign finance reform could free elected a costly new corporate reporting rule, the rule officials from their dependence on private would in effect be a legislative proposal. This campaign funding. Such funding is seen as an reform would require Congress to approve important reason why elected officials might bend directly all decisions that could cost more their views on policy issues away from the public than some minimum threshold. interest.
34 • The Committee for Economic Development’s legislative process. These reforms might include proposed reform for national elections would any of the following: aim at leveling the playing field between small and large campaign contributions through a • Very much stricter prohibitions on Members system of matching funds. Government might of Congress and their staffs from seeking match the first $250 of every campaign donation, employment in lobbying firms upon leaving perhaps by a multiple of as much as four to the Hill. This might lengthen to two years the one. This would have the effect of making small cooling-off period between the time someone donations more valuable to a campaign, which leaves the House and the time that they may might induce candidates to put more effort into engage in any form of lobbying (which has been pursuing small donations. It might also allow a the rule in the Senate). The same restrictions candidate to achieve a competitive level of finance could apply to employees of government agencies solely through benign small contributions. or regulatory authorities.
• An alternative proposal is a “voting with • Congress could ban any registered lobbyist and dollars” plan which was first proposed by Yale any institution that hires registered lobbyists law professors Bruce Ackerman and Ian Ayres from raising or soliciting contributions for in 2002.53 The plan includes two components. federal candidates and officeholders, or from The first would give each voter a $50 voucher serving as treasurers of Leadership PACs and each four years, which they could donate to the other campaign fundraising organizations. federal campaigns of their choice. The second Substantially reduced limits to a nominal amount would require that all donations, including could also be placed on the amount that a those through vouchers and additional private lobbyist might give personally for any campaign campaign contributions, must be made to a federal office. anonymously through the Federal Election Commission. Yet another approach, which • The loophole that allows congressional travel on supporters refer to as a “clean money-clean non-commercial, company- and individually elections” proposal, would involve giving each owned aircraft for purposes of campaign candidate who chooses to participate in the fundraising events should be closed. scheme a certain set amount of campaign finance money. Those candidates accepting public • Lobbying reform should strengthen the funding would not be allowed to accept private enforcement of laws and ethics rules that cover contributions (beyond some minimal amount Members of Congress, staff and lobbyists. of seed money or qualifying funds) or use their The Committees that currently are assigned own personal money. Candidates who face the responsibility for ethics (the House privately funded candidates who exceed public Committee on Standards of Official Conduct, funding spending limits or are forced to compete and the Senate Select Committee on Ethics) against spending by independent groups would have not fulfilled their responsibilities. Some be allowed to raise additional amounts of money would argue that Congress needs a strong and from small private donations. independent enforcement authority to help it to punish and deter ethical violations by lobbyists c. Reforming the lobbying system and Members, and that the Congress is not capable of policing itself. They believe that a As a complement to electoral campaign finance nonpartisan ethics enforcement authority, of a reforms, the lobbying system itself might be stature equivalent to the Congressional Budget reformed to reduce the use of lobbying along Office or the Government Accountability Office, with campaign finance to exert leverage over the could be led by persons of distinction such
35 Crony Capitalism: Unhealthy Relations Between Business and Government
as former Members of Congress and retired least make their cost be paid through other judges, insulated from political pressure. It spending reductions or tax increases. Ideally, the should have a professional and independent requirement to reduce other justified programs staff, and adequate funding. It should be free to or to increase revenues will deter proposals for initiate its own investigations, and empowered special-interest deals. to receive complaints from Members and from the general public. It should see its investigations • Follow the regular order. Provide adequate time through to completion, not merely pass non- for consideration and review of legislation. Avoid frivolous complaints on to the Congress itself. Its omnibus “must-pass” bills, which provide the conclusions should go to the Ethics Committees greatest opportunity for special-interest deals to of the Congress or to the Department of Justice ride unseen into law. as befits the findings. It should be empowered to dismiss frivolous complaints, to bar subsequent • Revive the concept of “scope” in conference filings by those who submitted them, and to committees. The best way for the Congress to charge the filers of frivolous complaints for the evaluate the merit of potential public-private cost of their investigation. The Ethics Committees relationships is through hearings. The easiest way should make financial disclosures by Members, to slide a public-private deal into law without staff and lobbyists easily accessible to the public. proper review is to add it not to a House or Others would contend that such an authority a Senate bill, but in a conference committee would be fundamentally unaccountable and reconciling a bill already passed in differing could do considerable harm in pursuing its own versions by the House and the Senate. Such politically partisan agenda. A decision would a conference amendment would go with the hinge on the degree of confidence in the ultimate reconciled version of the House and Senate bills integrity of such an independent organization. directly to the floors of the two chambers, and would not be subject to hearings. Some years ago, • Stricter limits might be placed on the number there was an informal rule that every provision of political appointees that each successive of a conference committee bill must relate to a administration can make in favor of a provision in either the House bill or the Senate strengthened civil service (understanding that bill — that is, it must be “in scope.” But in recent potential appointees with necessary experience years, some of the most alarming stories about will sometimes have backgrounds in the private enacted legislation have arisen because a totally sector, and that such individuals can truly aspire new provision was inserted into the conference to pursuing the public interest). In addition, a committee report without any serious review longer cooling-off period could be placed on — and on a few occasions apparently inserted the revolving door between government and the by staff, without any Member of Congress private sector. acknowledging responsibility for the provision. The Congress should return to the sound practice d. Improve and Comply with the Rules of the that every provision in a conference committee Legislative Process report must be within the scope of the House and Senate bills. Many of crony capitalism’s deals are created in law. • Make true “oversight” a legislative priority again. Improving the legislative process could minimize As was noted earlier, one of the most painful ill the creation of new crony deals. effects of the campaign-finance “arms race” is the amount of time that Members of Congress • Create and follow pay-as-you-go standards in feel compelled to spend on fundraising. Those the budget process. If deals are to be enacted — Members cannot engage in the (sadly) thankless through either spending or tax preferences — at task of review of existing programs and tax-
36 law provisions when they are on the telephone written into permanent law, and therefore “dialing for dollars.” Some believe that “biennial generally are less likely to receive oversight budgeting” will free time for program oversight, and review (although again the Congress but a two-year budget cycle will not free unquestionably should do its job). An alternative Members to spend all of their time raising funds would be to write explicit sunset provisions for the “permanent campaign” only every other into every new potentially questionable piece of year. If the nation should succeed in reforming legislation. But such sunsets, again, come at a campaign finance, it should take the next logical price, because they can become periodic must- step and demand that its elected policymakers pass legislation that provides a vehicle for still use their new-found time to review all of the more questionable deals. Better would be a new entitlement and tax programs that are written consciousness and mindset under which the in permanent law, to exercise due diligence Congress passes no new crony deals, and reviews when other programs come up for multi-year all past deals periodically to be sure that they reauthorization, and to write serious annual remain justified as circumstances change. appropriations bills with program reforms rather than punting from year to year through omnibus • Consider funding of regulation through fees continuing resolutions that simply fund all rather than discretionary appropriations. There is programs at the previous year’s level (or some a downside to providing agencies with their own fraction or multiple thereof). Limiting the size independent sources of funds, in that they can of government should not mean government become sloppy and inefficient, and might appear without change (which would therefore be immune to congressional oversight and review. government without improvement, designed to On the other hand, making funding dependent address yesterday’s challenges). upon pleasing elected representatives can pass the influence of money through the electoral • Enact any new public-private interventions process and into regulation, as appropriators that might be questionable as annually communicate their wishes to the agencies that appropriated spending programs, rather than they fund. Ultimately, there is no substitute for as tax expenditures or entitlement programs. honest and dedicated elected policymakers and Annually appropriated programs are subject to regulators, but institutional processes can make a annual review, if the Congress deigns to do its difference. job. In contrast, tax provisions or entitlement (mandatory) spending programs are generally
37 Crony Capitalism: Unhealthy Relations Between Business and Government
Notes
1 See, for example, Globescan, “Sharp Drop in Ameri- Basic and Applied Research Toward Development,” can Enthusiasm for Free Market, Poll Shows,” April 6, http://economics.stanford.edu/files/Theses/SamShapiro- 2011 (http://www.globescan.com/news-and-analysis/ HonorsThesis-May2013.pdf. press-releases/press-releases-2011/94-press-releases- 2011/150-sharp-drop-in-american-enthusiasm-for- 7 Matthew Mitchell, “The Pathology of Privilege—The free-market-poll-shows.html); Pew Research Center, Economic Consequences of Government Favoritism,” “Pervasive Gloom About the World Economy,” July 12, Mercatus Center, 2012.
2012 (http://www.pewglobal.org/2012/07/12/pervasive- 8 gloom-about-the-world-economy/). See Lawrence Lessig, Republic Lost, How Money Cor- rupts Congress And A Plan To Stop It, 2011.
2 Pew Research Center, ibid; Andrew Ross Sorkin and 9 Megan Thee-Brenan, “Many Feel American Dream See the following chart with respect to the sugar indus- Is Out of Reach, Poll Shows,” New York Times, De- try. cember 11, 2014, p. B1 (http://dealbook.nytimes. 10 John Beghin and Amani Elbeid, “The Impact of the com/2014/12/10/many-feel-the-american-dream-is- U.S. Sugar Program,” November 17, 2011. Cameron out-of-reach-poll-shows/?ref=business&_r=0). Stokes, “Artificial Sweetness: A Survey of the Harmful 3 CED will issue a policy statement on rising income Effects Caused by the U.S. Sugar Program and Possi- inequality. bilities for Reform,” cites an estimate from the National Confectioners Association of 112,000 jobs lost in sug- 4 Andrew Ross Sorkin and and Megan Thee-Brenan, ar-using industries between 1997 and 2009.
“Many Feel American Dream Is Out of Reach, Poll 11 Shows,” op.cit. “U.S. Sugar Policy,” American Sugar Alliance, http:// www.sugaralliance.org/us-sugar-policy/. 5 Department of the Treasury Office of Economic Policy, 12 Council of Economic Advisers, and Department of Sallie James, “Time to X Out the Ex-Im Bank,” Cato Labor, “Occupational Licensing: A Framework For Poli- Institute, July 6, 2011 (http://object.cato.org/sites/cato. cymakers,” July 2015 (https://www.whitehouse.gov/sites/ org/files/pubs/pdf/tpa-047.pdf) default/files/docs/licensing_report_final_nonembargo. 13 U.S. Department of Justice, “Boeing to Pay United pdf). States Record $615 Million to Resolve Fraud Allega- 6 “Basic,” as opposed to “applied,” research does not tions,” http://www.justice.gov/archive/opa/pr/2006/ provide short-term payback and is not “appropriable” June/06_civ_412.html; New York Times, “Ex-Pentagon by any one organization. That is, its outcome is uncer- Official Gets 9 Months for Conspiring to Favor Boeing,” tain and some distance in the future, and it has broad http://www.nytimes.com/2004/10/02/business/02boe- application rather than contributing to taking a specific ing.html. product to market. Basic research sometimes is so ex- 14 Article 1 of the Constitution requires that all expen- pensive that it is out of the financial reach of the private ditures must be appropriated by the Congress. Note sector. The classic reference on this subject is Richard that this requirement possibly could be finessed with R. Nelson, “The Simple Economics of Basic Scientific decisions by a commission subject to congressional veto. Research,” Journal of Political Economy 67 (1959), 297- 306. See also Committee for Economic Development, 15 A side issue is worth mention. The U.S. defense pro- America’s Basic Research: Prosperity Through Discovery gram often is cited by our foreign competitors in mar- (Washington, D.C., 1998), especially pages 1-5 and 12- kets for civil aircraft as a gigantic R&D and manufactur- 13. Kenneth W. Dam, The Rules of the Global Game: A ing subsidy. Of course, U.S. taxpayers pay through the New Look at US International Economic Policymaking defense program for the protection of these competitors (University of Chicago Press, 2004), p. 256, documents and their countrymen, who get their national security that this understanding is accepted throughout the for free, or at least at a steep discount. developed world. However, some economists fear that the policymaking focus has shifted away from basic 16 “Solar Firm Aided by Federal Loans Shuts Doors.” research to product development, yielding waste and in- New York Times (http://www.nytimes.com/2011/09/01/ efficiency; see the discussion of energy policy below, and business/energy-environment/solyndra-solar-firm-aid- Sam Shapiro, “Federal R&D: Analyzing the Shift From ed-by-federal-loans-shuts-doors.html); “F.B.I. Raids So-
38 lar Firm That Got U.S. Loans,” New York Times (http:// 25 Christopher De Muth, “The Regulatory State”, www.nytimes.com/2011/09/09/business/solar-company- National Affairs, 2012. De Muth makes the important is-searched-by-fbi.html); “Solyndra Scandal Timeline,” point that the modern regulatory state is a bipartisan Washington Post (http://www.washingtonpost.com/wp- enterprise. He argues that during the half century srv/special/politics/solyndra-scandal-timeline/#docu- before President Obama’s election, the greatest growth ment/p1/). in regulation came under Presidents Richard Nixon and George W. Bush, and that the latter set the stage for 17 “Congressman Admits Taking Bribes, Resigns,” Wash- many of the subsequent Obama Administration regula- ington Post (http://www.washingtonpost.com/wp-dyn/ tory initiatives. content/article/2005/11/28/AR2005112801827.html). 26 Luigi Zingales, A Capitalism for the People, Basic 18 Alan S. Blinder, After The Music Stopped, New York: Books, 2012. Penguin Press, 2013. 27 A Pew Research Center for the People & the Press 19 Peter J. Wallison, “Dissenting Statement,” The Finan- Political Survey (December 2011), found that 3 percent cial Crisis Inquiry Report: Final Report of the National of respondents said that the tax system was “very fair” Commission on the Causes of the Financial and Economic and 40 percent said “moderately fair,” against 24 percent Crisis in the United States, U.S. Government Printing who said it was “not fair at all” and 31 percent “not too Office, http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/ fair” (http://www.people-press.org/2011/12/20/tax-sys- GPO-FCIC.pdf. tem-seen-as-unfair-in-need-of-overhaul/). In answer to a Tax Foundation 2009 survey, only 2 percent said that 20 Alain C. Enthoven, To Reform Medicare, Reform the federal income tax is “fine as it is” and 12 percent Incentives and Organization, Committee for Economic said “it needs minor changes,” while 40 percent said it Development, 2011. “needs major changes” and 42 percent said it “should be completely overhauled” (http://taxfoundation.org/ 21 Martin S. Feldstein, Chair of the Council of Economic article/topline-results-tax-foundations-2009-survey-us- Advisers under President Ronald Reagan, defines “tax attitudes-taxes-government-spending-and-wealth). expenditures” as “those features of the tax code that 28 are a substitute for direct government spending.” See Expressed as a percentage of GDP, some historical Feldstein, “A Simple Route to Major Deficit Reduction,” elections – in the economic crises of 1896 and 1932, and Wall Street Journal, February 20, 2013 (http://www.wsj. during the Vietnam war in 1968 – have elicited extraor- com/articles/SB100014241278873248805045782969 dinary levels of campaign spending. Matthew O’Brien, 20278921676), and “Raise Taxes, but Not Tax Rates,” “The Most Expensive Election Ever: …1896? Atlantic, New York Times, May 5, 2011 (http://www.nytimes. November 6, 2012 (http://www.theatlantic.com/busi- ness/archive/2012/11/the-most-expensive-election-ev- com/2011/05/05/opinion/05feldstein.html?_r=0). er-1896/264649/). However, there has been a consistent 22 Department of the Treasury Office of Economic Pol- upward trend even using this metric since 1996 (when icy, Council of Economic Advisers, and Department of spending was only slightly below 1992). Over those Labor, op.cit. 16 years (five presidential election cycles inclusive), spending as a percentage of GDP has about tripled, 23 In a recent paper, “The New Commanding Heights,” and in 2012 was not far short of the post-World War II Arnold King and Nick Schulz observe that health peak at the height of the Vietnam engagement in 1968. care and education have become increasingly gov- Measured in constant dollars rather than as a percentage ernment-dominated industries. They also note that of GDP, campaign spending has increased even more this domination has produced two ill effects that have markedly. exacerbated the changes that these sectors are already 29 Robert Kaiser, So Damn Much Money, Vintage, 2010. undergoing: Government influence has (a) artificially increased the demand for both health care and educa- 30 Scott Blackburn, “Dire predictions about Citizens tion, and (b) made these sectors less efficient than they United prove false,” Washington Times, January 29, 2015 would otherwise have been by shielding them from (http://www.washingtontimes.com/news/2015/jan/29/ market forces. scott-blackburn-dire-predictions-about-citizens-un/#ix- zz3SKTv0XPZ). 24 Edmund Phelps, “Mass Flourishing,” 2013. “Signifi- cant” here is defined in Executive Order 12866, issued 31 The term “permanent campaign” was coined in 1980 September 30, 1993, which was intended to streamline by the journalist Sydney Blumenthal in his book The the regulatory process. Permanent Campaign. He contended that the perma-
39 Crony Capitalism: Unhealthy Relations Between Business and Government
nent campaign had become the political ideology of our 42 Mancur Olson, The Rise and Decline of Nations: Eco- age and that it made government into an instrument nomic Growth, Stagflation, and Social Rigidities, 1984. designed to sustain an elected official’s popularity. 43 See John Foster, Robert McChesney, and Jamil Jona, 32 See Norman Ornstein and Thomas Mann, The Broken “Monopoly and Competition in Twenty First Century Branch: How Congress Is Failing America and How to Get Capitalism.” It Back on Track, 2006. 44 Andrew Ross Sorkin and Megan Thee-Brenan, “Many 33 This list was led by the Chamber of Commerce and Feel American Dream Is Out of Reach, Poll Shows,” was followed by the American Medical Association, op.cit. General Electric, the American Hospital Association, the Pharmaceutical Research and Manufacturers of 45 Roderick M. Hills, obituary of President Gerald R. America, the AARP, Blue Cross/ Blue Shield, the na- Ford, Fortune magazine.
tional Association of Realtors, Northrop Grumman, and 46 Exxon Mobil. Luigi Zingales, A Capitalism For The People. 47 34 https://www.opensecrets.org/lobby/top.php?show- Senator Pete Domenici and Alice Rivlin, Restoring Year=a&indexType=s.. America’s Future: Reviving the Economy, Cutting Spend- ing and Debt, and Creating a Simple Pro-growth Tax 35 See John Figueiredo and Brian Richter, “Advancing System, November 2010.
the Empirical Research on Lobbying,” National Bureau 48 of Economic Research. Report of the National Commission on Fiscal Responsi- bility and Reform, December 2010. 36 However, lobbying may be “defensive” rather than 49 “offensive.” That is, rather than pursuing preferential Timothy P. Carney, “Corporate welfare takes a blow,” deals, firms may need to explain market conditions to Washington Examiner, July 1, 2015 (http://www.aei.org/ policymakers or regulators to avoid bad public policy, publication/corporate-welfare-takes-a-blow/) or to protect themselves from ideologically or competi- 50 Joseph J. Minarik, “Tax Expenditures in OECD Coun- tively driven challenges from government or from other tries,” Organisation for Economic Cooperation and private entities. Development, June, 2008. 37 “Lobbying and declining corporate tax burdens,” by 51 See Christopher de Muth, “The Regulatory State,” Lee Drutman, March 2013. National Affairs, 2012. Note that regulators can face a 38 Similarly, Richter, Samphantharak, and Timmons, “Catch-22” dilemma if they are required by one law found in their 2008 study on “Lobbying and Taxes” that to subject all regulations to a cost-benefit test and are firms that spend more on lobbying in a given year pay required by another law to create and issue a specific lower effective tax rates in the next year. According to regulation, but that regulation cannot be made to pass their study, increasing registered lobbying expenditures the cost-benefit test. Legal clarity will be essential. by 1 percent appears to lower effective tax rates by 52 Urgent Business for America: Revitalizing the Federal somewhere in the range of 0.5 to 1.6 percentage points Government for the 21st Century, Report of the National for the average firm that lobbies. Commission on the Public Service, January, 2003, Rec- 39 Richard Hall and Alan Deardoff, “Lobbying as legisla- ommendation 13, pages 30-31. tive subsidy,” American Political Science Review, 2006. 53 Bruce Ackerman and Ian Ayres, “Voting with dollars: 40 Lawrence Lessig, Republic, Lost, 2011. A new paradigm for campaign finance,” 2002. 41 Adam Smith, The Wealth of Nations, 1776.
40 CED Members
Linda L. Addison David L. Bere Cynthia Cleveland Managing Partner, United States Chairman and CEO CEO and Founder Norton Rose Fulbright Nonni’s Foods, LLC BroadThink Michael G. Archbold Andrea Bierce Shelby Coffey III Chief Executive Officer Managing Director Vice Chair, Newseum GNC Holdings, Inc. Gupton Marrs International, Inc. Newseum Tom Armstrong Shideh Bina Douglas R. Conant Chief Executive Officer Partner President and CEO (Ret.) Duer Carolina Coil, Inc. Insigniam Campbell Soup Company Ian Arnof Angela Braly W. Bowman Cutter Senior Fellow and Director, Economic Chairman President & Founder Policy Initiative Arnof Family Foundation The Braly Group, LLC The Roosevelt Institute Paul Atkins* Sean Bratches Alan M. Dachs Chief Executive Officer Executive Vice President, Sales and Patomak Global Partners, LLC President and Chief Executive Officer Marketing Fremont Group James Bacchus ESPN Kenneth W. Dam Partner Beth A. Brooke-Marciniak Greenberg Traurig, LLP Max Pam Professor Emeritus of Global Vice Chair, Public Policy American & Foreign Law & Senior Bernard C. Bailey EY Lecturer Chairman and CEO Neri Bukspan University of Chicago Law School Authentix Partner, Financial Accounting Mitch Daniels Barbara M. Barrett Advisory Services President President and Chief Executive Officer EY Purdue University Triple Creek Guest Ranch Dave Burwick Julie Hembrock Daum George S. Barrett President & CEO Partner and Head of the North Chairman and Chief Executive Officer Peet’s Coffee & Tea, Inc. American Board Practice Cardinal Health Spencer Stuart Michael M. Byram Anthony A. Barrueta CEO (Retired) William H. Donaldson Senior Vice President, Government University of Colorado Foundation Chairman Relations Donaldson Enterprises Kaiser Foundation Health Plan, Inc Carl T. Camden President and Chief Executive Officer Robert H. Dugger Founder and Managing Partner Chris Bart Kelly Services, Inc. Founder and Lead Faculty, The Hanover Provident Capital LLC Teresa Carlson Directors College; Wade Dyke CEO, Corporate Missions Inc. Vice President, General Public Sector President The Directors College Amazon Web Services Kaplan, Inc. Bruce Batkin John J. Castellani Janice Ellig Chief Executive Officer President and Chief Executive Officer Co-Chief Executive Officer Terra Capital Partners PhRMA Chadick Ellig Lydia I. Beebe Michael Chesser Roger W. Ferguson, Jr. Corporate Secretary (Ret.) Chairman and CEO (Ret.) President & CEO Chevron Corporation Great Plains Energy, Inc. TIAA-CREF Peter A. Benoliel David Chun Robin A. Ferracone Chairman Emeritus CEO and Founder Chief Executive Officer Quaker Chemical Corporation Equilar, Inc. Farient Advisors
*opposed 41 Crony Capitalism: Unhealthy Relations Between Business and Government
Debra Fine Bill Goodwyn Lou Jacobs Chief Executive Officer President & CEO Co-Chief Executive Officer I Have A Dream Foundation - Los Discovery Education Delaware North Companies Angeles Earl G. Graves Jr. Larry Jensen Itzhak Fisher President & CEO President & CEO Chief Executive Officer Black Enterprise Cushman & Wakefield/Commercial Harland Clarke Enterprise Barbara B. Grogan Advisors Howard Fluhr Chairman Emeritus Jeffrey A. Joerres Chairman Western Industrial Contractors Executive Chairman The Segal Group Pat W. Gross ManpowerGroup Chairman Pramod John Margaret Foran The Lovell Group Chief Executive Officer Vice President, Chief Governance Oration Officer and Secretary Robert P. Haney Jr. Prudential Financial Partner D. Bryan Jordan Covington & Burling LLP Chairman, President and CEO Henrietta H. Fore First Horizon National Corp. Chairman Kathy Hopinkah Hannan Holsman International National Managing Partner, Global Andrea Jung Lead Partner President and CEO Barbara Hackman Franklin KPMG LLP Grameen America, Inc. President & CEO and Former U.S. Hollis W. Hart Pres Kabacoff Secretary of Commerce President, International Franchise Co-Chairman of the Board of Barbara Franklin Enterprises Management Directors & Chief Executive Officer Susan H. Fuhrman Citi HRI Properties President, Ben W. Heineman Jr. Laura Karet Teachers College Senior Fellow, Schools of Law & Chief Executive Officer Columbia University Government Giant Eagle, Inc. Dan Fulton Harvard University Joseph E. Kasputys Chief Executive Officer (Ret.) Alan D. Hilliker Chief Executive Officer Weyerhaeuser Managing Partner Economic Ventures LLC Troy Gayeski Egon Zehnder Brian Kelley Partner and Senior Portfolio Manager Jack A. Hockema President and Chief Executive Officer SkyBridge Capital Chairman, President & CEO Keurig Green Mountain, Inc. Kaiser Aluminum E. Gordon Gee Theo Killion President Lisa A. Hook Vice Chairman West Virginia University President and CEO Herbert Mines Associates Neustar Thomas P. Gerrity Jr. Ronald J. Klein Joseph J. Aresty Professor of Lloyd W. Howell Jr. Partner Management Executive Vice President Holland & Knight LLP Booz Allen Hamilton Inc. The Wharton School of the University Richard J. Kramer of Pennsylvania R. Glenn Hubbard Chairman, President & CEO Dean and Russell L. Carson Professor The Goodyear Tire & Rubber Raymond V. Gilmartin of Finance and Economics Company Chairman, President & CEO (Ret.) Columbia University Merck & Co., Inc. Bob J. Kueppers Henry G. Jackson Senior Partner - Global Regulatory & Alfred G. Goldstein President and Chief Executive Officer Public Policy (Ret.) President and CEO Society for Human Resource Deloitte AG Associates Management Tom F. Lamb Jr. Timothy B. Goodell Jeremy M. Jacobs Jr. Senior Vice President, Government General Counsel Co-Chief Executive Officer Affairs Hess Corporation Delaware North Companies PNC
42 David H. Langstaff Steve Messinger Jane Palmieri President President Business President, Dow Building & Argotyche, Inc. ECG Management Consultants Construction The Dow Chemical Company Gregory E. Lau Paul M. Montrone Managing Director - Board of Chairman Carol J. Parry Directors Practice Liberty Lane Partners President RSR Partners Pablo Muñoz Corporate Social Responsibility Associates Jim A. Lawrence Senior Vice President & President Chairman North America William C. Pate Great North Star Avon Products, Inc. Co-President Equity Group Investments, LLC Mark Leiter Brian A. Murdock Chief Executive Officer Debra J. Perry Chief Strategy Officer Strategic Investment Group Non-Executive Director Nielsen Joel N. Myers Korn Ferry Dawn G. Lepore Founder, Chairman and President Gregg Petersmeyer Former Chairman and Chief AccuWeather Chairman and CEO Executive Officer Personal Pathways Drugstore.com, Inc. Jennifer Nason Global Chairman, Technology, Media Donald K. Peterson David M. Lockton and Telecommunications Investment Chairman and Chief Executive Officer Chairman of the Board Banking (Ret.) Lockton Companies J.P. Morgan Chase & Co. Avaya Bruce K. MacLaury Diana S. Natalicio Peter G. Peterson President Emeritus President Founder and Chairman The Brookings Institution The University of Texas at El Paso Peter G. Peterson Foundation T. Allan McArtor Thomas C. Nelson Todd E. Petzel Chairman Chairman, President & CEO Managing Director and Chief Airbus Americas, Inc. National Gypsum Investment Officer Offit Capital Advisors LLC Daniel J. McCarthy Takeshi Niinami President and Chief Executive Officer President & CEO Sally Phipps Frontier Communications Suntory Holdings Limited Director, Global Contributions Colgate-Palmolive Company Martha McGarry Laurie B. Nordquist Partner Head of Personal & Small Business Glen Post III Skadden Arps Insurance President & CEO Wells Fargo & Co. Century Link Thomas McInerney President and Chief Executive Officer Justus J. O’Brien Thomas J. Quinlan III Managing Director President and CEO Genworth Financial, Inc. Russell Reynolds Associates RR Donnelley Patricia A. McKay Hilda Ochoa-Brillembourg Matthew Randazzo Partner Founder & Chairman Chief Executive Officer Templeton & Co. Strategic Investment Group National Math + Science Initiative Linda E. McMahon Ron P. O’Hanley Catherine Reynolds Co-founder and former CEO President and Chief Executive Officer President & CEO WWE State Street Global Advisors Catherine B. Reynolds Foundation Bob W. Mendenhall Ph.D. John F. Olson R. Timothy Rice President Partner Chief Executive Officer (Ret.) Western Governors University Gibson Dunn & Crutcher Cone Health Lenny Mendonca Steffen E. Palko Bill Richards Director Emeritus President and Vice Chairman (Ret.) President (Ret.) McKinsey & Company XTO Energy Inc. SUNY Orange
43 Crony Capitalism: Unhealthy Relations Between Business and Government
Alice M. Rivlin Gary Shorb Myron E. Ullman, III Senior Fellow, Economic Studies President and CEO Chief Executive Officer The Brookings Institution Methodist Healthcare Corporation JCPenney Company, Inc. Michael Robinson Frederick W. Smith Daisy Vanderlinde Chief Executive Officer Chairman, President and CEO Chief Human Resource Officer Broadview Networks FedEx Corporation GNC Holdings Daniel Rose Chairman Jeffrey Sonnenfeld Edward F. Voboril Rose Associates, Inc. Senior Associate Dean, Yale School of Chairman Management Nathan O. Rosenberg Analogic Corporation Yale University Founding Partner — California Robert S. Walker Insigniam Robert J. Stanzione Executive Chairman Landon H. Rowland Chairman, President and Chief Wexler|Walker Chairman of Lead Bank Executive Officer Ben Walter Ever Glades Financial ARRIS Group, Inc. Chief Executive Officer Patricia F. Russo Paula Stern Hiscox USA Chief Executive Officer (Ret.) Chairwoman Alcatel-Lucent Technologies, Inc. Jon Whitmore The Stern Group Edward B. Rust Jr. Chief Executive Officer Chairman and former CEO Jane Stevenson ACT State Farm Insurance Companies Vice Chairman, Board & CEO Services Scott Wieler Stephen W. Sanger Korn Ferry Chairman Former Chairman and Chief Signal Hill Executive Officer Roger W. Stone General Mills, Inc. Chairman and CEO John C. Wilcox Maria A Sastre KapStone Paper and Packaging Corp. Chairman Sodali Ltd. President and Chief Operating Officer Frederick W. Telling Ph.D. Signature Flight Support Vice President, Corporate Policy & Maggie Wilderotter Mary Schapiro Strategic Management (Ret.) Executive Chairman Advisory Board Vice Chair Pfizer Inc. Frontier Communications Promontory Financial Group, LLC Davia B. Temin David S. Williams George Schindler Managing Principal Government President, U.S. and Canada President and Chief Executive Officer Affairs, Public Policy and Corporate CGI Temin and Company Citizenship G. Richard Thoman Elliot S. Schreiber Ph.D. Deloitte Chairman Chairman Schreiber Paris, LLC Corporate Acquirers, Inc. Keith Williams President and Chief Executive Officer Larraine Segil Larry D. Thompson Underwriters Laboratories Inc. Chief Executive Officer EVP Government Affairs, General The Little Farm Company Counsel & Corporate Secretary (Ret.) Ronald A. Williams John E. Sexton Ph.D. PepsiCo, Inc. Chairman and Chief Executive Officer President RW2 Enterprises New York University Tallman Trask III Executive Vice President Jay J. Worenklein Esq. Jane Sherburne Duke University Chairman & CEO Principal US Grid Company (USGRDCO) Sherburne PLLC James S. Turley Gregg Sherrill Chairman and Global Chief Executive David R. Young Chairman and CEO (Ret.) Executive Chairman Tenneco, Inc. EY Oxford Analytica
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Crony Capitalism: Unhealthy Relations Between Business and Government
First printing: October 2015 Printed in the United States of America
Committee For Economic Development of The Conference Board 1530 Wilson Blvd Suite 400 Arlington, VA 22209 202.296.5860
www.ced.org Stock Photo Willett / Alamy photo: A. T. Cover