WASHINGTON, May 12, 2014 – Crony capitalism, the close alliance of big business with government, leads not to free enterprise, but its opposite, a form of socialism for big business, in which the government, not the market, chooses winners and losers through subsidies, bailouts, and other forms of government largess.
Adam Smith, the great philosopher of capitalism, understood that businessmen want to maximize profits, and how it is done is of secondary interest. Indeed, he once said that when two businessmen get together, the subject of discussion is how to keep the third out of the market.
Adam Smith, and more recently philosophers of the free market such as Hayek, Ludwig Von Mises, and Milton Friedman, believe deeply in capitalism. Many businessmen, and many on Wall Street do not.
Consider some recent manifestations of this phenomenon.
The U.S. Government guaranteed a $535 million loan for Solyndra, LLC, the now bankrupt California company that was the centerpiece of President Obama’s “clean energy” future. There are at least 16 more such loan guarantees worth in excess of $10 billion. From material made public by the House Energy and Commerce subcommittee on Oversight and Investigation, it is clear that key Solyndra loan decisions were guided primarily by political considerations.
President Obama was not in the White House when the proposal to back the company initially appeared in Washington, but two weeks before President George W. Bush left office, an Energy Department review panel unanimously recommended against making the loan. Even after Obama decided to support the proposal, career employees at the Office of Management and Budget cautioned against doing so. One predicted that Solyndra would run out of money and file for bankruptcy by September 2011.
A Government Accountability Office report said that the Energy Department had circumvented its own rules at least five times to make the loan. The leading investors in Solyndra were two investment funds with ties to George B. Kaiser, a major fundraising “bundler” for Obama.
Both Republicans and Democrats supported the loan guarantee program, which was approved by the Republican-controlled Congress in 2005. The loan guarantee program for alternative energy companies was created as part of the Energy Policy Act of 2005, sponsored by Rep. Joe Barton (R-TX), who later became a leader in the congressional probe of Solyndra’s ties to the Obama administration.
Similarly, Senator Jim DeMint, who now heads the Heritage Foundation, said in the Senate that the Solyndra case exposed the “unintended results when our government tries to pick winners and losers.” This, of course, is quite true. Yet DeMint himself had been a supporter of the loan-guarantee legislation in 2005.
The fact is that solar companies are not the only energy companies getting federal loan guarantees. The power giant Southern Co. won a $3.4 billion loan guarantee from the Energy Department in 2011. Yet, even some Republican critics of big government have supported this huge expenditure. Rep. Phil Gingrey (R-GA) declared that it was wrong to compare Southern to Solyndra because “Southern Co. owns Mississippi Power, Alabama Power, and Georgia Power, among others, and employs literally thousands of people.”
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Members of both parties have voted to bail out failed banks, auto manufacturers and other enterprises considered “too big to fail.” Or consider the Export-Import Bank, supported by both Republicans and Democrats, which is a government agency that subsidizes U.S. exporters.
In 2012, President Obama re authorized the Export-Import Bank, raising its lending authority 40 per cent to $140 billion by 2014.
He acted one day before the 78-year-old federal bank would have been shut down if he had not signed the bill. During the 2008 presidential campaign, Obama called the bank “little more than a fund for corporate welfare.”
Despite President Obama’s frequent criticism of corporate jets, the bill includes $1 billion in subsidies for jet manufacturers, which have experienced a steep decline in demand in recent years. Export-Import Bank supporters in the business community—who pay lip service to “free markets” but campaign vigorously for government subsidies——welcomed the president’s support. John Murphy, Vice President for international affairs at the U.S. Chamber of Commerce, said the president’s action was “great news for thousands of American workers and businesses of all sizes.” The National Association of Manufacturers—and both Republicans and Democrats in Congress—supported the bank’s re-authorization.
Tim Phillips, president of Americans for Prosperity, described the bank in these terms: “In (its) nearly 80 years, the official credit export agency of the United States has financed over $450 billion in purchases. Ex-Im allows the federal government to pick winners and losers in the market, and all too often, that leads to back room deals and government cronyism…It is a heinous practice that gives money to a small number of politically connected companies while leaving taxpayers with the risk…The American taxpayer does not exist to keep businesses from failing.”
By September, lawmakers must decide the bank’s future. The fact is that the vast majority of loans go to a handful of corporate giants such as Boeing and General Electric. In 2013, out of over $19 billion in loans and guarantees, almost $8.3 billion, or 44 per cent, went solely to Boeing products. More than $1 billion in loans and/or guarantees went to three other companies, $1.8 billion to Bechtel and $1.64 billion to Fluor, both engineering and construction companies, and $1.5 billion to Pemex, a Mexican oil firm that must use its loans and/or guarantees to purchase U.S. goods and services.
A number of groups, including Americans for Tax Reform, the Club for Growth, and Citizens Against Government Waste, oppose re authorizing the bank. But it seems that, with a handful of exceptions, Republicans and Democrats are co-conspirators in this enterprise. The incentive structure for both parties is precisely the same. Republicans may talk of the “free market” and argue that Democrats are against it, but both parties raise their funds on Wall Street and in corporate boardrooms, and both parties have supported bailouts of failed businesses and subsidies for others.
Sadly, free markets are genuinely embraced more often by intellectuals than businessmen. All too often business seeks subsidization by government, or bailout and intervention to keep competitors out of the market. When Congress acted to eliminate the Civil Aeronautics Board and the Interstate Commerce Commission and open up the airline and trucking industries to real competition, it was the industries themselves that opposed deregulation, for they had found a way to control the government agencies in their own behalf.
If each group were to curb its demands on government, it would be possible to restore health to our economy. Human nature, however leads to the unfortunate situation in which, under representative government, people have learned that through political pressure, they can vote funds for themselves that have, in fact, been earned by the hard work of others.
This point was made more than 200 years ago by the British historian Alexander Tytler: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover they can vote themselves largesse out of the public treasury. From that moment on, the majority always votes for candidates promising the most benefits from the public treasury—with the result that democracy collapses over a loose fiscal policy…”
The old warning by the economist Friedrich Hayek that socialism in its radical form is not nearly as dangerous as socialism in its conservative form is worthy of serious reconsideration. When the advocates of state power and the advocates of corporate bigness become allies, government involvement in the economy, a form of socialism, is inevitable.
The result is the crony capitalism we now face.