The Three Faces of Cronyism

There has been a lot said in recent years by Sarah Palin, Rush Limbaugh, and other conservatives about crony capitalism – or if you prefer, crony socialism, crony government, corporatism – or just plain cronyism. Whatever you call it, this conversation is increasingly vital as government grows and continues to pervert markets by picking winners and losers as a way to obtain wealth for powerful lawmakers and their fund-raisers and friends.

This rampant cronyism is one of the most insidious outgrowths of a government gone wild, and has become a swirling vortex of self sustaining and systemic corruption. Thus, the focus on cronyism is necessary -- but missing from the conversation seems to be a distinction among the three very different genres of cronyism. And there are at least three very different varieties.

I submit there is too much focus on what I’ll call the first type, that of tax breaks and other incentives for big industrial plants, or professional stadia expansion projects and the like. Government should not be involved in these issues, but at least there is a potentially redeeming cost/benefit outcome for the taxpayers. This is not to advocate for these schemes, but logic dictates that at least cities and/or states are bargaining on behalf of their citizens against other jurisdictions. If a deal is a good one, there are more winners than just the directly involved companies. These are critical distinctions. More on this shortly.

The other two forms of cronyism have no redemptive value whatsoever, and are purely diabolical corruptions of power and influence. As such, this is where the focus of wrath should be. The first of these fiendish varieties would be the GE Jeff Immelt model, where a company cozies up to government in order to get regulations and laws passed that punish their competitors.  We’ve also seen this recently with Costco and Walmart professing support for the minimum wage knowing that their smaller competitors would be squeezed by this.  There are thousands of examples like these, not only at the Federal level, but also in states. In these cases, the government is picking winners and losers within their own jurisdictions.

Under this category I should probably include the booming “compliance industry,” where certain professions ask to be regulated by government as a way to construct barriers to new competitors in their markets.  This often spawns the continuing education racket, not to mention the third party human resource industry, which has been boosted by ObamaCare forcing businesses to hire compliance specialists.

There are no winners in these models except for the companies and the lawmakers they have donated to. Shoppers and employees have fewer options – and naturally the direct competitors are the biggest losers of all. It is pure malignancy.

And yet – as ugly as it is, the version above is probably not as cancerous as the Solyndra model, where the crime is worse than just perverting a market. This is where a faux market is first fabricated out of utopian thin air, and vast sums of wealth are simply transferred to cronies as a way for them to painlessly enter these non-existent markets. This template generally fails by design because there is no real market -- and yet the initial owners, who are almost invariably big donors for the election winners, seem to always manage to walk away with millions they drew in salaries and consulting fees prior to bankruptcy. In this way, it’s nothing more than a money laundering scam.  CEO Brian Harrison almost admitted as much. Again, almost everybody loses except the handful of donors, candidates and phony entrepreneurs involved directly.

Which brings us back to the first type: tax breaks and other incentives for major companies to locate or re-locate new plants and/or corporate headquarters.  In the past number of years, very conservative South Carolina has aggressively used incentives to lure BMW to Greenville and Boeing’s Dreamliner plant to Charleston. Obviously, BMW and Boeing were winners in these situations. How about the politicians that pushed the incentives through? I would suspect they won also.

But so did all of Greenville. Two decades in, the plant has been even better for the area than anticipated. And Charleston, too. So did all of South Carolina. Citizens who had nothing to do with the crony recipes that landed these facilities still benefitted mightily, through jobs, property values, supporting small business opportunities and other spinoff activites.  The governments that gave the incentives win through a long-term stream of increased tax revenues due to the local economic growth. Maybe it was a bit stinky to get pushed through -- and again this is not a blanket endorsement of these situations – but often they do end up as win/win/win outcomes. The Solyndra model or the GE model never end up this way.

As such, the tax incentive packages, while they smack of cronyism to a degree, are far less of a blight on the economy than the other two iterations of cronyism. And I can guarantee you that many hard-core Tea Party conservatives in the Palmetto State are extremely happy that BMW and Boeing came to South Carolina. I don’t think they are being hypocritical either.

Conservatives should certainly keep the pressure up on exposing and stamping out cronyism wherever they can. But let’s not get distracted.  Our Founders charged us with establishing and maintaining a more perfect union, not a utopia.  Stamping out the worst of the crony deals would be a lot more perfect situation than we have now.

There has been a lot said in recent years by Sarah Palin, Rush Limbaugh, and other conservatives about crony capitalism – or if you prefer, crony socialism, crony government, corporatism – or just plain cronyism. Whatever you call it, this conversation is increasingly vital as government grows and continues to pervert markets by picking winners and losers as a way to obtain wealth for powerful lawmakers and their fund-raisers and friends.

This rampant cronyism is one of the most insidious outgrowths of a government gone wild, and has become a swirling vortex of self sustaining and systemic corruption. Thus, the focus on cronyism is necessary -- but missing from the conversation seems to be a distinction among the three very different genres of cronyism. And there are at least three very different varieties.

I submit there is too much focus on what I’ll call the first type, that of tax breaks and other incentives for big industrial plants, or professional stadia expansion projects and the like. Government should not be involved in these issues, but at least there is a potentially redeeming cost/benefit outcome for the taxpayers. This is not to advocate for these schemes, but logic dictates that at least cities and/or states are bargaining on behalf of their citizens against other jurisdictions. If a deal is a good one, there are more winners than just the directly involved companies. These are critical distinctions. More on this shortly.

The other two forms of cronyism have no redemptive value whatsoever, and are purely diabolical corruptions of power and influence. As such, this is where the focus of wrath should be. The first of these fiendish varieties would be the GE Jeff Immelt model, where a company cozies up to government in order to get regulations and laws passed that punish their competitors.  We’ve also seen this recently with Costco and Walmart professing support for the minimum wage knowing that their smaller competitors would be squeezed by this.  There are thousands of examples like these, not only at the Federal level, but also in states. In these cases, the government is picking winners and losers within their own jurisdictions.

Under this category I should probably include the booming “compliance industry,” where certain professions ask to be regulated by government as a way to construct barriers to new competitors in their markets.  This often spawns the continuing education racket, not to mention the third party human resource industry, which has been boosted by ObamaCare forcing businesses to hire compliance specialists.

There are no winners in these models except for the companies and the lawmakers they have donated to. Shoppers and employees have fewer options – and naturally the direct competitors are the biggest losers of all. It is pure malignancy.

And yet – as ugly as it is, the version above is probably not as cancerous as the Solyndra model, where the crime is worse than just perverting a market. This is where a faux market is first fabricated out of utopian thin air, and vast sums of wealth are simply transferred to cronies as a way for them to painlessly enter these non-existent markets. This template generally fails by design because there is no real market -- and yet the initial owners, who are almost invariably big donors for the election winners, seem to always manage to walk away with millions they drew in salaries and consulting fees prior to bankruptcy. In this way, it’s nothing more than a money laundering scam.  CEO Brian Harrison almost admitted as much. Again, almost everybody loses except the handful of donors, candidates and phony entrepreneurs involved directly.

Which brings us back to the first type: tax breaks and other incentives for major companies to locate or re-locate new plants and/or corporate headquarters.  In the past number of years, very conservative South Carolina has aggressively used incentives to lure BMW to Greenville and Boeing’s Dreamliner plant to Charleston. Obviously, BMW and Boeing were winners in these situations. How about the politicians that pushed the incentives through? I would suspect they won also.

But so did all of Greenville. Two decades in, the plant has been even better for the area than anticipated. And Charleston, too. So did all of South Carolina. Citizens who had nothing to do with the crony recipes that landed these facilities still benefitted mightily, through jobs, property values, supporting small business opportunities and other spinoff activites.  The governments that gave the incentives win through a long-term stream of increased tax revenues due to the local economic growth. Maybe it was a bit stinky to get pushed through -- and again this is not a blanket endorsement of these situations – but often they do end up as win/win/win outcomes. The Solyndra model or the GE model never end up this way.

As such, the tax incentive packages, while they smack of cronyism to a degree, are far less of a blight on the economy than the other two iterations of cronyism. And I can guarantee you that many hard-core Tea Party conservatives in the Palmetto State are extremely happy that BMW and Boeing came to South Carolina. I don’t think they are being hypocritical either.

Conservatives should certainly keep the pressure up on exposing and stamping out cronyism wherever they can. But let’s not get distracted.  Our Founders charged us with establishing and maintaining a more perfect union, not a utopia.  Stamping out the worst of the crony deals would be a lot more perfect situation than we have now.