Categorized | Commentary/Editorial

James DeLong: Crony Capitalism: Biggest Risk to the Nation

A reporter recently asked investor Bill Nasgovitz, head of the Heartland Value Fund, “what is our biggest risk as a nation?” 

His answer: 

To me, it’s crony capitalism – this incestuous relationship between regulators and the politicians and the big Wall Street investment banks.

. . . .

Here we as Americans are subsidizing this industry through the Federal Reserve. The Fed is fixing the price of money at this absurdly low rate so big banks’ cost of goods sold is close to zero. You could go to a bank or brokerage firm today and borrow at a very low rate. 

It’s dislocating our markets and making people do things they wouldn’t normally do. Then we’re still allowing the big banks to speculate in these derivatives.

. . . .

It’s a game that goes back to this vicious triangle between Wall Street investment banks, regulators and politicians, who get all this money from it. 

He did not have to limit his concern to the financial industry, because crony capitalism is flourishing everywhere, like a green bay tree (as in the Biblical “The wicked flourish like”).  The Crony Chronicles links to an unending series of outrages: $250,000 for federal popcorn promotions; Nevada’s efforts to bar competition in the moving industry; endless manipulations of the Internal Revenue Code. The Chronicle’s video “I want to be a crony” has collected 165,000 views on YouTube. 

Cronyism is especially irritating when used for an industry such as Hollywood, the current derider of every value that conservatives hold important. CC links to studies showing that film-making subsidies return 20% of their costs in Ohio, Louisiana, and North Carolina. California has just voted the film industry an annual $100 million in tax credits, and blogger Glenn Reynolds is on a campaign to curtail other Hollywood favoritisms. 

If still more is needed, another site in the same space, Against Crony Capitalism, has its own crop of horrors, such as the close links between telecom executives and the federal program that subsidizes cell phones for the poor. 

While stories about cronyism are common on conservative websites, they receive scant attention in the MSM. 

A few obvious facts explain this. A big one is that both major parties are mired in cronyism, so they face mutual assured destruction, and neither wants to raise the issue. Another reality is that government cronyism represents pork for the recipient, and no newspaper will say “Feds waste millions on local boondoggle.” The MAD rationale holds for geographic locations, congressional representatives, and special interests, too. No one wants to blow the whistle lest they be excluded. 

A final problem is that the issue is complicated. Laws that help producers be productive, that promote property rights, enhance contracts, reduce transaction costs, and foster necessary physical and institutional infrastructure, are good. These, naturally, benefit producers. So the line between constructiveness and corruption is not clear, and special interests play on this confusion. 

Despite the lack of attention, the problem is indeed crucial, especially as cronyism is taking over a rising chunk of the economy. The classic Gresham’s Law says that bad money drives out good. A comparable rule applies in other government affairs, where bad and venal policies drive out the good ones. 

One of the serious Gresham’s Law-like consequences is that destructive business lobbying drives out constructive. With a few honorable exceptions such as the Koch Brothers – the Koch Foundation supports Crony Chronicles and Charles Koch recently wrote a strong column on the topic — businesses have abandoned efforts to promote worthwhile pro-capitalist, pro-market policies. Their lobbying dollars go toward obtaining individual favors, and they are actively hostile to those who oppose their collective cronyism. 

Nasgovitz has it about right.

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