Note: Later today at the Faith & Freedom conference I’ll be speaking on a panel titled, “A Cronyism Crisis: How Corporate Welfare Undermines Markets and Human Flourishing.” If you’re at the conference please stop by this session.
The Term: Crony capitalism (sometimes referred to as cronyism or corporatism)
What it means: Crony capitalism is a general term for the range of activities in which particular individuals or businesses in a market economy receive government-granted privileges over their customers and/or competitors.
Why it Matters: For as long as there have been government officials, there have been economic cronies—friends, family, and associates who use their connections for their own financial gain.
In ancient Israel, for example, when the prophet Samuel appointed his own sons as leaders, they began to engage in cronyism: “[Samuel’s] sons did not follow his ways. They turned aside after dishonest gain and accepted bribes and perverted justice.” (1 Samuel 8:3).
Unsatisfied with these corrupt leaders, the elders of Israel asked Samuel to appoint a king over them. God told Samuel to warn the people of the consequences, which included even worse forms of economic cronyism: “[The king] will take the best of your fields and vineyards and olive groves and give them to his attendants. He will take a tenth of your grain and of your vintage and give it to his officials and attendants” (1 Samuel 8:14-15).
We read passages like that and instantly recognize this as unfair and unjust, a corrupting influence on both the people and the government. Yet we tend note to even notice the cronyism that occurs in our own economic system. Because the “dishonest gain” is often more subtle than the examples found in the Bible, we often do not recognize cronyism because we don’t know what to look for.
To help in the identification process, here are nine of the most common types of government-granted privileges individuals and businesses receive that give them an unfair advantage (click on this link for detailed explanations of each):
Monopoly privilege — Government uses its power to directly protect certain firms or industries from competition by limiting or keeping other firms out of the market. This type of direct cronyism is relatively rare. (Examples: cable companies, utilities, the USPS)
Regulatory privilege — Large corporations used to lobby government to reduce the regulatory burden on their industries. But many corporation realized they could gain a competitive advantage by lobbying for specific regulations that benefit their firm and hamstring their competitors. (Examples: Obamacare’s mandate requiring insurance companies to buy contraceptives, a regulation that benefits the pharmaceutical companies that make them.)
Subsides – Subsidies, which are sometimes referred to as “corporate welfare”, occur when the government gives taxpayer money directly to a business or industry. According to a report by Philip Mattera and Kasia Tarczynska, “two-thirds of the $68 billion in business grants and special tax credits awarded by the federal government over the past 15 years have gone to large corporations.” The largest recipient is the Spanish energy company Iberdrola, which has collected about $2.2 billion in subsidies “by investing heavily in U.S. power generation facilities, including wind farms that have made use of a renewable energy provision of the 2009 Recovery Act.”
The other five most common types of government-granted privileges are: Loan Guarantees, Tax Privileges, Bailouts (and expected bailouts), Tariffs and Quotas on Foreign Competition, Noncompetitive Bidding, and Occupational Licensing.
So what’s wrong with some firms getting special privileges? The main reason we should oppose crony capitalism is because it circumvents the moral process involved in a free exchange of goods and services.
In a free exchange, the one who most often benefits is the individual consumer. As Frederick Bastiat argued,
consumption [i.e.,the use of goods and services by households] is the great end and purpose of political economy; that good and evil, morality and immorality, harmony and discord, everything finds its meaning in the consumer, for he represents mankind.
He summarizes his argument for the consumer and against cronyism as follows:
There is a fundamental antagonism between the seller and the buyer.
The former wants the goods on the market to be scarce, in short supply, and expensive.
The latter wants them abundant, in plentiful supply, and cheap.
Our laws, which should at least be neutral, take the side of the seller against the buyer, of the producer against the consumer, of high prices against low prices, of scarcity against abundance.
They operate, if not intentionally, at least logically, on the assumption that a nation is rich when it is lacking in everything.
Bastiat uses this as the basis of his argument that the interests of the consumer, rather than the producer, align more closely with the interests of mankind (you should read his essay to fully appreciate the connection). The producer tends to have their own self-interest in mind, and so has a strong incentive to get the government to use its force and power to help them gain an economic benefit over the consumer. This causes goods to be either more expensive and/or more scarce than they normally would be without government intervention. The result is that cronies get richer, while everyone else is made poorer.
Other stuff you should know:
• Increasing the power of the government is often posited as a way to keep “Big Business” in check. But as Randall G. Holcombe notes, “The substantial and well-established economic literature on the components of crony capitalism shows that big government is the cause of crony capitalism, not the solution.”
• Cronyism often leads to corruption, though it can be rather subtle. Take, for example, intertemporal corruption. An intertemporal choice occurs when a choice at one time influences the possibilities available at other points in time. For example, you may decide to spend less money today in order to save and be able to spend more at a future point in time, such as during retirement. When combined with cronyism, such intertemporal choices can lead to intertemporal corruption. As economist Bryan Caplan explains,
If a major corporation gives a U.S. Senator a ten-million-dollar “gift,” it’s likely to be punished as corruption. It doesn’t matter if the corporation protests, “We’re only expressing our affection for this fine Senator” or if the Senator bellows, “How dare you claim my vote is for sale!” However, if the same Senator retires, and the major corporation gives him a ten-million-dollar sinecure on its Board of Directors, it’s perfectly legal – and few demur.
The painfully obvious flaw with both norms: Intertemporal corruption is a wonderful substitute for ordinary corruption. A professor is unlikely to give an F to his current girlfriend; but he’s also unlikely to give an F to his future girlfriend. A Senator is unlikely to vote against a corporation that gives him millions of dollars; but he’s also unlikely to vote against a corporation that’s going to give him millions of dollars. What comes around, goes around.