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 Lydia I. Beebe Robert H. Dugger Timothy B. Goodell Corporate Secretary Founder and Managing W. Bowman Cutter General Counsel (Ret.) Partner Senior Fellow and Hess Corporation Hanover Provident Director, Economic Chevron Corporation Capital LLC Policy Initiative Bill Goodwyn The Roosevelt Institute David L. Bere President & CEO Chairman and CEO Debra Fine Discovery Education Chief Executive Officer Larry D. Thompson Nonni’s Foods, LLC I Have A Dream EVP Government Kathy Hopinkah Hannan Foundation - Los Angeles Affairs, General Counsel Shideh Bina National Managing & Corporate Secretary Partner Partner, Global Lead Howard Fluhr (Ret.) Insigniam Partner Chairman PepsiCo, Inc. KPMG LLP Angela Braly The Segal Group Patrick W. Gross President & Founder Margaret Foran Hollis W. Hart Chairman The Braly Group, LLC Vice President, Chief President, International The Lovell Group Franchise Management Neri Bukspan Governance Officer and Secretary Citi Partner, Financial Prudential Financial Members Accounting Advisory Ben W. Heineman Services Michael G. Archbold Henrietta H. Fore Senior Fellow, Schools of EY Chief Executive Officer Chairman Law & Government GNC Holdings, Inc. Holsman International Harvard University Michael Chesser Chairman and CEO James Bacchus Barbara Hackman Jack A. Hockema Partner (Ret.) Franklin Great Plains Energy, Inc. Chairman, President & Greenberg Traurig, LLP President & CEO and CEO Former U.S. Secretary of Kaiser Aluminum Bernard C. Bailey David Chun Commerce Chairman and CEO CEO and Founder Barbara Franklin Lisa A. Hook Authentix Equilar, Inc. Enterprises President and CEO Neustar Chris Bart Kenneth W. Dam Thomas P. Gerrity Founder and Lead Max Pam Professor Joseph J. Aresty Professor Faculty, The Directors Emeritus of American of Management Lloyd W. Howell College; & Foreign Law & Senior The Wharton School Executive Vice President CEO, Corporate Missions Lecturer of the University of Booz Allen Hamilton Inc., The Directors University of Chicago Pennsylvania Inc. College Law School Raymond V. Gilmartin Larry Jensen Bruce Batkin William H. Donaldson Chairman, President & President & CEO Chief Executive Officer Chairman CEO (Ret.) Cushman & Wakefield/ Terra Capital Partners Donaldson Enterprises Merck & Co., Inc. Commercial Advisors 2 D. Bryan Jordan Patricia A. McKay R. Timothy Rice Jeffrey Sonnenfeld Chairman, President and Partner Chief Executive Officer Senior Associate CEO Templeton & Co. (Ret.) Dean, Yale School of First Horizon National Cone Health Management Corp. Linda E. McMahon Yale University Co-founder and former Alice M. Rivlin CEO Andrea Jung Senior Fellow, Economic Robert J. Stanzione WWE President and CEO Studies Chairman, President and Grameen America, Inc. Chief Executive Officer Lenny Mendonca The Brookings Institution ARRIS Group, Inc. Theo Killion Director Emeritus Nathan O. Rosenberg Vice Chairman McKinsey & Company Founding Partner - Paula Stern Herbert Mines Associates Brian A. Murdock California Chairwoman The Stern Group Ronald J. Klein Chief Executive Officer Insigniam Strategic Investment Partner Frederick W. Telling Holland & Knight LLP Group Landon H. Rowland Chairman of Lead Bank Vice President, John F. Olson Corporate Policy & Robert J. Kueppers Ever Glades Financial Partner Strategic Management Senior Partner - Global Gibson Dunn & Crutcher (Ret.) Regulatory & Public Patricia F. Russo Pfizer Inc. Policy (Ret.) Chief Executive Officer Jane Palmieri Deloitte (Ret.) Business President, Dow Davia B. Temin Alcatel-Lucent Building & Construction President and Chief David H. Langstaff Technologies, Inc. The Dow Chemical Executive Officer President Company Temin and Company Argotyche, Inc. Mary Schapiro Donald K. Peterson Advisory Board Vice Mark Leiter Scott Wieler Chairman and Chief Chair Chairman Chief Strategy Officer Executive Officer (Ret.) Promontory Financial Nielsen Signal Hill Avaya Group, LLC Daniel J. McCarthy John C. Wilcox Todd E. Petzel Elliot S. Schreiber President and Chief Chairman Managing Director and Chairman Executive Officer Chief Investment Officer Sodali Ltd. Schreiber Paris, LLC Frontier Offit Capital Advisors LLC Communications Keith Williams Catherine Reynolds Larraine Segil President and Chief Martha McGarry President & CEO Chief Executive Officer Executive Officer Partner Catherine B. Reynolds The Little Farm Underwriters Skadden Arps Foundation Company Laboratories Inc. 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