New Book Identifies Cronyism as Outcome of Big Government, Source of Corruption

book coverAll too often, maintaining an enterprise, especially a new one, depends on knowing the right people in government from whom to acquire favors. Such an arrangement has come to be known as “cronyism.” And it justifiably has its critics. Among them are Randall Holcombe and Andrea Castillo, authors of a brief, but potent and timely new book, “Liberalism and Cronyism: Two Rival Political and Economic Systems,” published by the Mercatus Center, a think tank affiliated with George Mason University. Holcombe, a Florida State University economics professor, and Castillo, a Mercatus associate, view cronyism as the antithesis of liberalism. Rather than establish clearly- defined and evenly-enforced rules of behavior (as liberalism does), cronyism subordinates business decisions to political ambition and connections. It’s a science that the Obama administration in particular has taken to a new level.

To understand cronyism requires an understanding of its putative antidote: liberalism. The authors use “liberalism” in its classic Lockean sense: an affirmation of individual self-ownership grounded in moral self-regulation. While not denying the significance of families, communities and nations, the classical liberal views the State’s primary role as protecting each person from acts of violence and theft, favoring no class of citizens over another. Friedrich Hayek restated this principle in his defense of classical liberalism nearly 70 years ago in “The Road to Serfdom“: “(I)n the ordering of our affairs we should make as much use as possible of the spontaneous forces of society, and resort as little as possible to coercion.” The old liberalism – or what we now commonly call “libertarianism” – promotes equality as a set of procedural rules (“rule of law”), applicable to one and all. By the same token it rejects equality when expressed as a set of idealized goals forcibly imposed upon society, most of all upon people who might object.

Individualist liberalism, more than any other body of thought, lay at the foundation of our nation. And it implicitly defines much of our business culture. This on the whole has been advantageous, something to which even advocates of large-scale government intervention admit. Nearly three years ago President Barack Obama, speaking before a group of CEOs representing Google, General Electric, American Express and other companies, stated: “I want to dispel any notion that we want to inhibit your success. I believe that the primary engine of America’s economic success is not government. It’s the ingenuity of America’s entrepreneurs; it’s the dynamism of our markets.” Such words seem well out of character for him. Yet the context of the meeting was cronyism. The business community over the years has gotten comfortable with the idea of government as a backstop – that’s how Obama managed to organize the gathering in the first place. While businessmen have been requesting favors from government since the early years of our Republic, they have done so with much greater frequency in the decades since the Depression. This, the authors argue, is contrary to liberalism.

But liberals are the ones in power, right? That depends on one’s definition of terms. Liberalism in America today is actually a hybrid of capitalism, corporatism and income redistribution, with a heavy dose of racial intimidation and guilt applied for shakedowns. We have constructed a large welfare state for the benefit of those who are hardly working, as opposed to working hard; rewritten law to favor certain classes of persons over others, especially nonwhites over whites; and established government-business partnerships to achieve ostensibly socially desirable outcomes (i.e., corporatism). This isn’t really socialism. But taken as a whole, these traits have eroded our contractual liberties. And they’ve made the American public more than a little cynical about what it takes to acquire wealth and power. A more appropriate term is “cronyism.”

Cronyism always has been around. And to a certain extent, this is inevitable. All major undertakings, public or private, require some measure of discretionary decision-making that goes beyond objective criteria and reflects the input of family, friends and allies. It’s a fact of human nature: Those persons closest to decision-makers stand the best chance of wielding influence and getting what they want. But not all cronyism is created equal in either type or pervasiveness. And today’s brand of cronyism in very much ingrained in our economic and political life, going well beyond trade association lobbying and “old boy” networks pulling strings on behalf of family and friends. It is becoming a dominant business model. And directly or indirectly, government coercion stands behind it. The potential for corruption has risen accordingly.

Holcombe and Castillo believe this to be ominous. Their book, available from the Mercatus Center (list price $11.95), argues that centralized power and cronyism are mutually reinforcing – and that they occur at the expense of liberty and public integrity. The authors argue (pp. 3-4): “Liberalism is a political philosophy that rests on the protection of individual rights and voluntary agreement when dealing with others. Cronyism is a system in which people we call ‘cronies’ receive benefits from personal connections that are not available to others who are outside that group…When some people have the power to coerce others to undertake actions that they would not voluntarily agree to, personal connections inevitably creep in to benefit those who are cronies of the people who hold power.”

It is in our nature, whether as individuals, small groups or institutions, to exercise coercion. Sometimes coercion is justifiable. Examples of justifable coercion include parents instructing their children to clean their room or a department store security guard tackling a shoplifter trying to run from the store. But does cronyism fit here? One would have to argue not. On the surface, there is little harmful about a group of friends working out a deal. Yet it is the State, remember, that dispenses with the benefits, in the process imposing a fiscal burden on the general public. Moreover, such deals, whether or not by intent, discourage “outside” enterprises from competing for the same set of rewards. Government officials, knowing they have a monopoly on the legal use of force, have every incentive to use their respective positions to decide which enterprises are beneficial to society – and which aren’t.

In response to such a situation, enterprises have an extra incentive to use the State to realize advantageous outcomes unavailable in a competitive market. Economists have a term for this: “rent-seeking behavior.” This rent-seeking in turn has a by-product: “free riders.” In other words, people are far less likely to play by established rules if they perceive almost everybody else to be breaking them. Put another way, more people, including believers in the “free market,” will seek help from the State if they think everyone else is getting help.  

As government grows, the business sector increasingly becomes an appendage to government – and vice versa. More businessmen become free riders. It’s worth quoting the authors at length on this score (pp. 103-04):

The feature that unites all forms of cronyism is that the power of government enables them. The bigger the government, measured both in its expenditures and its regulatory power, the bigger the potential for cronyism. The larger the government’s budget, the more influence its tax and expenditure policies will have on business profitability and the prosperity of individuals. The larger the government’s regulatory footprint, the more profitability and prosperity will be determined by regulatory favors rather than by productive activity. In this environment, people must become rent-seekers as a matter of economic survival. No matter how well-intentioned regulations are at their creation, over time regulatory agencies become “captured” by those they regulate so that regulations benefit the regulated rather than the general public.

Big government not only steers businesses toward seeking political benefits, it often gives them no alternative but to engage in the political process to protect themselves from harm. The government often threatens to impose taxes or regulatory costs on businesses, pushing even those that want to avoid the political process to get involved in lobbying to protect themselves from predatory policies. Businesses are then presented with two alternatives: either attempt to compete against cronies that have an unfair advantage, or become a crony to stay afloat. Those who don’t engage in cronyism must bear the costs that cronies impose on them through government force.

This is precisely what National Legal and Policy Center has been arguing for years. In numerous articles, NLPC has documented how the Clinton, Bush and Obama administrations have cultivated close and ethically questionable relationships with politically supportive industry figures. This cronyism has been realized through grants, loans/loan guarantees, regulatory waivers and tax credits that benefit startup and established forms alike. Startups include A123 Systems, Ecototality, Fisker Automotive, Smith Electric Vehicles, and Solyndra; established companies include Duke Energy, Chrysler and General Motors. In each case, the State supports enterprises which, for a variety of reasons, are likely to be unsuccessful if left to their own devices. In this “bailout culture,” firms are shielded from the consequences of poor decisions.

At best, this latter-day corporatism has produced qualified successes; at worst, it has produced a good number of boondoggles. The beneficiaries were solvent from the start, in which case they don’t need any government money. Or they were  insolvent, in which case they don’t deserve any government money. Undoubtedly, some people have been made better off through such transactions. But which people? Primarily, they are: 1) those holding political power; and 2) those who can afford to buy political favors.

Holcombe and Castillo argue this centralizing tendency has corrupted business and government alike. It induces firms to ramp up political donations and lobbying activity, while increasingly making it harder for public officials, and candidates for public office, to say “no” to requests for aid. The authors cite as an example the case of Solyndra. Back in May 2009 the Department of Energy awarded a $535 million loan guarantee to the Fremont, Calif.-based cylindrical photovoltaic solar panel manufacturer. It seemed like a good idea. Here was an investment in a cutting-edge “green energy” technology. Yet as it turned out, one of the main investors in Solyndra, multibillionaire George Kaiser, had contributed about $50,000 of his personal funds to Barack Obama’s 2008 presidential campaign and bundled another $50,000 to $100,000 from outside donors. He also had been a regular White House guest in the months preceding the award. Political influence, unfortunately, couldn’t mask shaky balance sheets. Solyndra filed for bankruptcy at the end of August 2011 and its offices were raided by the FBI a week later. This was hardly an isolated case. The authors cite a Washington Post investigation of early 2012 concluding that the Obama administration had directed nearly $4 billion in grants and loan guarantees to 21 companies with political connections to the administration. Obtaining political access is nice work if you can buy it.

Cronyism, the authors emphasize, can assume many forms. And while they can and do allow for economic and political liberties, they are capable of eroding them anyway. Holcombe and Castillo, in separate chapters, identify “corporatism,” “progressivism,” “majoritarianism,” “progressivism,” “social justice” and “industrial policy” as common, often overlapping manifestations. Each of these arrangements rests on the flawed assumption that government officials are more selfless and far-sighted than other economic actors and hence are positioned to objectively assess social defects created or ignored by market behavior. Yet in practice, the authors note, public officials very often act out of self-interest, and do so by exacting quid pro quo tradeoffs. “The public interest” has a noble ring to it, but it remains an abstraction. Even if it were possible to determine in advance an optimal set of social outcomes, there is no guarantee that political leaders would select it as a course of action. Moreover, while certain forms of favoritism may be initially successful, they often have built-in deficiencies that take years, if not decades, to recognize; the authors cite corporatist industrial policy, Japanese and South Korean-style, as a prominent example.

When the State takes the form of an outright political dictatorship – as in fascism and Communism – cronyism can become a means of survival. Everyone, not just the powerful, has an incentive to go through irregular or “underground” networks through which to receive cash, goods or services. This is especially true when store shelves are empty, a phenomenon all too common under Communism. In such cases, corruption defines daily life. Bribery and fraud are not scandals; they are accepted ways of doing business. Only suckers decline to play. Many people are apt to feign loyalty to political leaders in order to feed their own families or find an apartment. Political leaders, knowing this, are as corrupt as anyone. Nobody is going to punish them unless they visibly challenge the system. Cynicism rules the day.

Present-day America is long way off from a police state or mass poverty, though certain overheated and obnoxious pundits on the Right and Left insist otherwise. But such a descent is a looming possibility. If and when the new Affordable Care Act (“Obamacare”) takes full effect, for example, one almost can expect to see a surge in graft and bribery. Political control over the economy may be sold as “reform,” “investment” or “compassion,” but in the end, it corrodes accountability and prosperity. A return to old-style liberalism would seem the best corrective. “Liberalism and Cronyism” is only 136 pages long. But it’s a good layman’s guide to why certain forms of friendship should be avoided if one wishes to preserve the integrity of business and government.

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