Crony Capitalism and Progressive Desperation

If you hang out at the intersection of Politics Avenue and Economics Boulevard, as I frequently do, you've noticed the ugly fusion of welfare state government and major corporations we have come to call "crony capitalism."  It was a mystery to me why progressives, who routinely castigate capitalist "greed," should bind themselves so closely to the corporations they revile.  Looking deeper what I found was that crony capitalism for progressives the world over is an act of desperation; an unmistakable signal that the welfare state they so cherish is failing.

I realized, for starters, that the benefits welfare state is inherently unstable, not because of its politics -- people will tolerate, even embrace an incredible level of regulatory coercion -- but because of its inherent economics.  Unlike dictatorial socialism built on bayonets, benefits socialism is built on redistributive entitlements.

The irresolvable economic paradox is that redistribution of wealth (in all its forms: money, jobs, credit, subsidies, and on and on) either requires the substantial creation of wealth or results in the substantial depletion of wealth.  Stability is not possible.  The redistributive state, borrowing Bob Dylan's lyrical phrase about life in general, is either "busy being born or busy dying."

As the political state is incapable of creating wealth, as wealth can only arise in the private sector, the very act of confiscation and redistribution of that private sector wealth severely inhibits the investment that sustains the private sector's creation of it.  The result is that the private sector's creative powers gradually decay.  The source of new wealth cut off, wealth depletes.  This degradation can only be delayed, not abated, by some sort of  crony capitalism in which the state attempts to force private investment either by mandates and penalties or giving special subsidies; by picking winners.

It is from this insight that one can begin to see crony capitalism as an act of progressive desperation; the unmistakable signal that wealth is being systemically depleted.

I've come to the conclusion that no matter how far left the political philosophy that guides political decisions, the net depletion of economic wealth to be distributed will always lead to some sort of crony capitalism.  As wealth depletion continues from weak private investment, confiscatory taxation, restrictive labor laws and the like, the welfare state relies ever more heavily upon coercion, both social and legal, and upon economic subsidies to favored firms to sustain itself.

The French exemplify this system.  The French have companies they protect and subsidize which they call “state champions.  As a means of funding the welfare state's entitlements, however, the “champions” version of crony capitalism has failed miserably.  The French economy is deteriorating as wealth destruction rots private productivity, and the social state so beloved by the French is rotting with it.

The level of French regulatory coercion of the private economy is now so great that closing a useless factory or laying off unproductive and unneeded workers is all but impossible.  Rot now goes by the euphemism "protecting jobs."  Even among the favored corporate “champions,” barely one-third of all new capital investment is made inside France.  Entrepreneurship in France is nil.  The highly skilled, ambitious young are voting with their feet.  As the new French Economic Minister noted recently, unless France changes its ways it is destined to become "Cuba without the sun."

While we in the US are not yet to the French level of corruption politically and economically, the Obama Administration is certainly moving rapidly in that direction.  One need only note that large lobbying organizations are standard fixtures on K Street for all major US corporations, with the sole purpose of welding together government rules with monopolistic profits to the greatest degree possible.  Entire industries that rely for special tax carve outs and regulatory protections -- finance, communications, agriculture, for example -- contribute predominantly to progressive politicians.  The use of government agencies to punish those who resist is well documented.

Quasi-entrepreneurs like Elon Musk, a brilliant man and founder of several firms, are masters of exploiting every subsidy and grant opportunity -- federal, state and local -- that exists.  Musk is a billionaire based on billions in subsidies alone.  This is how crony capitalism works in the era of hope and change.

Welfare states inherently self-destruct for economic reasons.  In Margaret Thatcher's immortal words, they always run out of other people's money.  In the 21st century we can augment that to say what they actually run out of is redistributable wealth.  One can't redistribute what does not exist, what is not being created.  Crony capitalism is progressive's last-ditch attempt to prevent the wealth destruction that condemns social dreams.  

That's the view from the corner of Politics Avenue and Economics Boulevard.  Draw from this what lessons you will about the future of our entitlement burdened welfare state in the US.  I've drawn mine, and it fuels my resistance to the mix of Federal Reserve policy, progressive politics, and Keynesian theory -- expressed in the cynical merger of government and corporation -- that characterizes America at present.

Michael Booth, often posting as Cato, lectured in finance and economics at the Univ. of Texas, and worked as a managerial finance trainer in the technology industry.