The views expressed in any article published in this blog are the author's own and do not necessarily reflect the views of Joseph Foster or Bob Lupoli.

Monday, March 14, 2011

Evil Capitalism: Boeing, GE, Immigration, Bailouts, etc.

Joe: this is a very interesting article. It is explaining a corrupt financial & business system featuring your favorite enemy the lobbyists. Of course these creatures exist only as the law allows and the politicians profit. I suppose we can make the case that they have become vedry good at what they do. He explains how GE is benefitting from the light bulb push to flourescents (a technology that has been around a long time but more profitable for GE) the so called "energy efficient" electrical applianes (which are not) and illegal immigration (labor market below cost), and health care corruption. I'm not sure how corrupt the Boeing deal is, I tend to think all large deals like this are corrupt in some way, so I'm not sure if it's a normal corrupt deal or extra special. I do know that the buying criteria was changed for a more fuel efficient Boeing could win. Anyhow a very intersting and comprehensive case against a corrupted American System. -Bob

March 07, 2011
The awarding of a $36-billion tanker contract to Boeing illustrated the well-known difficulties caused by crony capitalism in the awarding of government contracts. However what is less well appreciated is the damaging effect crony capitalism has in a number of other ways, making the economy less efficient and providing rent-seeking opportunities that are both morally and economically repugnant.

Let’s begin with a definition of crony capitalism. In a truly free market, government is small, so gives out few contracts. It also passes few laws that affect business, so for even large corporations there is no point in hiring lobbyists. This was the position in Calvin Coolidge’s America. It still appeared sufficiently true even in the 1990s that Microsoft spent no management attention on Washington lobbying “virtually ignoring the Washington power game” according to the New York Times – and was surprised in 1998 by a massive antitrust suit.

As Microsoft found to its cost (though it survived the antitrust suit and has made up for it since with massive lobbying activities), that is not the America – or world – in which we now live. Crony capitalist companies seek through campaign contributions and strategic placement of their alumni to produce legislation favoring their business, to get access to lucrative government contacts, to rewrite the tax laws in their favor and to create rent-seeking mechanisms whereby their profits (and management bonuses) can be enlarged at public expense.
The costs of crony capitalism became apparent in the 2008 financial crash and bailout. Two episodes stand out in particular. In the rescue of AIG, $62.1 billion of credit default swaps were paid out to counterparties such as Goldman Sachs, who also profited from its holdings of CDS against the credit of AIG itself. Goldman Sachs alumnus Hank Paulson was Treasury Secretary at the time, and appears to have given no significant thought to the possibility of killing the pernicious CDS market by allowing the $62.1 billion in losses to be levied on its major participants.

Second, the banking industry as a whole was energetic in encouraging Fed chairman Ben Bernanke and his colleagues to lower interest rates to zero and to buy over $2 trillion of Treasury and agency securities – decisions that ran directly against Walter Bagehot’s advice for a financial crisis, to lend freely, but at penally HIGH rates. We have not yet seen the full cost of this decision, which has reduced job creation in the recovery to a painfully slow rate (through making labor-saving capital investment artificially cheap), while very probably leading to a major inflationary collapse – and tangentially to the current Middle East turmoil, through the mechanism of excessively inflated commodity prices. Wall Street wanted low interest rates, to bail it out of the mess it had created, so that’s what it got, without regard to the needs of the rest of the economy, the losses to America’s beleaguered savers or the disruption it imposed on the world as a whole. Wall Street alumni being scattered liberally throughout the decision-making process in both the Bush and Obama administrations, it was a classic case of crony capitalism. Again, no proper consideration was given to the Bagehotian alternative

The longest-standing and most entrenched area of U.S. crony capitalism is agriculture. Farm subsidies were introduced in the 1930s and have remained important ever since, with a modest attempt to reduce them in 1996 being reversed by the Bush administration in 2002. In recent years an additional gigantic farm subsidy has been introduced, the corn-based ethanol fuel program. This subsidizes an especially inefficient method of fuel production, which offers no net benefit in terms of carbon emissions – it is a pure handout to the farm lobby, strengthened by the political salience of the Iowa presidential caucuses. Today much of U.S. agriculture is dependent on crony-capitalism controls and subsidies, at enormous cost to the food consumer and the world economy.

The global warming hysteria, as it played out, gave massive opportunities to crony capitalists (whether or not some modest measure of global warming is in fact occurring). Global warming, once it emerged from the academy, was a project of extreme socialist environmentalists to increase government control of the economy. (The academicians themselves became “useful idiots” rewarded with tenure and massive grants in return for proclaiming the global warming religion, adjusting the facts where necessary to justify the theory.) However the movement would not have got far, at least in the United States, without the assistance of crony capitalists.

GE saw the opportunity to close high-labor-cost U.S. light bulb manufacturing plants, relocating production to China, and to reap rewards from manufacturing higher-cost fluorescent light bulbs.  Hence it worked with allies in Congress to institute in December 2007 an outright ban on incandescent light bulbs, effective 2012-2014. This measure was costly economically and damaging environmentally, since it failed to solve the disposal problem of the toxic CFL bulbs, which contain mercury.

Crony capitalism also reared its head in the abortive Waxman-Markey cap-and-trade environmental legislation of 2009.  Cap-and-trade as a mechanism for controlling carbon emissions is highly subject to capture by crony capitalists, because it inserts the government into an entirely new area of economic activity, and allows it to give out emission permits to favored interest groups. The Waxman-Markey legislation was particularly unattractive in this respect: it imposed a huge new cost on the economy and then managed to lose over 80% of the revenue that should have been received by government through giving handouts to crony capitalists.

Immigration is another area in which crony capitalism is rife; in this case the crony capitalists seek to block proper enforcement of U.S. immigration laws in order to ensure themselves a labor supply at below-market costs. As with the “cap-and-trade” scheme the crony capitalists are here seeking to distort the legal system and the market mechanism to achieve self-enrichment through government manipulation. The current dispute in Georgia is a case in point; Governor Nathan Deal, elected on a platform of enforcing the e-verify employment verification program, appears to have bowed to crony capitalists among his campaign donors and is now seeking to block the appropriate state legislation.

Crony capitalism is rife in the taxation system, as businesses seek special exemptions from taxes that apply to the remainder of their countrymen. The subsidies to GE and Whirlpool for making energy efficient washing machines, which appear to have wiped out a decade or so of the latter company’s tax liability, are a case in point. Another example is the “carried interest” taxation of private equity funds, whereby the tax code deems their bonus remuneration to be a capital gain, even though no capital has been invested.

Of all areas in the U.S. economy, crony capitalism is most rife in the health system, which is why healthcare costs 50% more in the United States than elsewhere in the world. Hospitals are encouraged to load their non-insured customer with additional costs arising from their enforced mandate of providing free care in emergency rooms. An entire industry of medical care trial lawyers exists solely to leech off the medical system, using their political connections to ensure their protection rackets are preserved unharmed. The pharmaceutical companies load their drug development costs onto U.S. consumers, protected by legislation prohibiting drug purchases from abroad. The examples are innumerable; the costs loaded onto the healthcare dollar are becoming unsustainable. Needless to say, President Obama’s healthcare legislation, heavily supported by many producer interests in the healthcare sector, made none of the cost reductions that had been promised, simply adding a new layer of bureaucracy, cost and controls to an already overloaded system.

The above examples should indicate that crony capitalism has become a major burden on the U.S. economy. Through it, government meddling is proliferated, spurious costs are added and politically connected producer interests are given windfall profits. The problem has steadily worsened since the abandonment of small-government free enterprise in the Great Depression, and the proliferation of new excuses for regulation in the last few decades has provided endless new opportunities for crony capitalists, greatly increasing their burden on the economy.

The solution is not merely smaller government but less intrusive government. To the extent that laws are simple, comprehensible and properly enforced, the opportunities for crony capitalism are limited. Environmental controls need to be cut back to those that truly produce a net economic benefit, after taking into account the health and other costs of pollution. Immigration laws need to be simplified, with fewer loopholes such as H1B visas and the lottery program, and enforced strongly and equitably. The financial system needs to control excessive speculative activity, through a modest “Tobin tax” on fast trading and a bank regulatory system that enforces proper risk management as well as simply capital standards. Frivolous lawsuits, cross-subsidization and excessive regulation need to be removed from the healthcare system so the free market can operate in medical services, while the poorest are protected through handouts. Loopholes must be removed from the tax system, not only in corporate tax but also in individual tax – the “sacred cows” of the mortgage interest deduction and the charitable contributions deduction must be abolished.

The necessary changes will provoke immense squawking from the interests concerned. But in economic legislation there is a universal aphorism: the loudest squawks come from those whose unjustified privileges are to be abolished.

The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005) – details can be found on the website www.greatconservatives.com – and co-author with Professor Kevin Dowd of “Alchemists of Loss” (Wiley – 2010). Both are now available on Amazon.com, “Great Conservatives” only in a Kindle edition, "Alchemists of Loss” in both Kindle and print editions.

2 comments:

  1. First, let me say that I agree that Crony Capitalism not only exists, but harms US citizens and prohibits the very free market principles many of the "CC" practitioners supposedly espouse. However, I also believe that the call for "small government" is a misnomer; rather the desire should be for 'efficient' government.

    Certainly, an efficient government would be smaller, but its reach would not be lessened, so much as 'fine-tuned.' The power of lobbies must certainly be reduced. There existence has created an end-run around the legal system for big business by enabling ex post facto alterations to legal rulings and penalization.

    Microsoft is a perfect example of this. While the article points out that MS ramped up its lobbying efforts after the monopoly action, I infer that the author believes the the government action to be excessive. In fact, Microsoft used its size on numerous occasions to force smaller tech companies either entirely or nearly out of business. Not only did it bully the free market and force competitors from the market, but coined the term 'vaporware' to describe software yet to be produced and announced as a measure to influence smaller businesses from attempting to compete.

    A good example of this is Netscape -- the for-profit extension of the Mozilla project, which provided free browsers to individuals, but charged business for its software. Late to the game, Microsoft steps in to offer a free web browser, severely hampering Netscape's profitability -- and questionably flouting Copyright Law. Additionally, MS used its near exclusivity in the PC market to influence the creation and viewability of Web sites.

    I also take exception with your characterization of the phase-out of incandescent bulbs: In fact, it is NOT a ban, but rather the institution of energy-saving regulations. Incandescent bulbs may still be produced, but must now meet new energy-saving regulations.

    While I agree that the relocation of labor to foreign countries is a detriment to the U.S. and it's GDP, tying it to a movement to a more energy efficient method of lighting is disingenuous at least.

    Additionally, the continued debate over Global Warming is also becoming tiresome. The scientific community is in agreement regarding the effects of of pollutants and various emissions. Describing it as 'hysteria' is a failure to separate the problem from the opportunists.

    Again, I would like to state that I fully agree with the main point of this article and it's contempt for Crony Capitalism; however, rather than looking upon the issues themselves with contempt, it makes more sense to be on guard against the predators (on the Capitalist side) and parasites (on the Socialist side).

    In an era of rampant technology, the socio-economic phenomenon of "specialization" allows for greater advancement, but has the drawback of making it difficult to acquire sufficient and accurate information to gird the consumer from those that would take advantage. It therefore falls upon the government to balance the extremes of "laissez faire" and "caveat emptier" practices -- making it possible for the American consumer to make the an educated and fair decision with its "dollar votes".

    I also believe that in a free market, the creation of incentives to motivate business practices and production is not harmful, but rather a fair method of offsetting the costs of retooling, etc. The use of such practices must only be wielded fairly and with intelligent usage. While the government has shown it has difficulty with such things, that does not change the necessity for such an exercise.

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  2. By Joseph Foster

    Email Joseph Foster at jfoste3@aol.com My book, ‘’Destruction of America", subtitled "Stand up for America” will be available September 2011 at all major bookstores. Visit my blog Stand Up for America! for more articles.

    Mike: stimulating article by M Hutchinson I find it compelling as you do. I appreciate your the astute comments.

    Mike said, in effect that cronyism has now become part of the U.S government culture and will never stop, until lobbyist activity is made illegal. The majority of our senators and members of congress thrive on lobbyist activity for it is this activity that enrich them and provide them the necessary funds to be reelected time and time again. Lobbying is a form of cancer that has afflicted the American political system and for this reason we now have a corrupt government that does not function for the common good of America and its citizens. Lobbying should be allowed as to the voter not by corporate entity or foreign governments.It is illegal to offer a government official a bribe, to circumvent the law a different approach was used to make it legal; it is name lobbying, the lobbyist is hired by big money to influence the government to adopt laws that will benefit the donor.

    Now you may ask how do we abolish lobbying and make it illegal, how do we abolish discrimination that was part of the American culture from the date when slavery was made illegal and it remained until 1964.
    You need a powerful leader of the likes of LBJ, or perhaps FDR or President Reagan. America last powerful leader was Reagan thereafter all Presidents elected to this date are not considered powerful leaders, and for this reason American has been on a decline, and will continue to decline until God bestows a powerful leader on America. One hundred senators and over 600 members of congress are like a flock of sheep and must be led by the President of the United States. History will bear me out that it only takes one person to change a country either for evil or for good. I shall now identify some of the greatest leaders on earth;
    Religion: Moses, Christ, and the last religious leader Mohammed today Islam has over 1.2 billion followers.

    U.S. George Washington, Lincoln, FDR, LBJ, Truman, Kennedy short lived, Reagan.
    Britain Churchill, Margaret Thatcher.
    France Charles De Gaulle. Russia Lenin, China Chairman Moa and Deng Xiaoping.
    Germany Hitler yes, he was evil but his economic accomplishment cannot be denied. There are others but those that I have mentioned came to my mind.

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