Crony Capitalism: America’s Cancer Epidemic
America has cancer.
I’m not talking about the various forms of deadly and debilitating biological cancer that many American’s suffer and die from, like those often related to years of smoking. No, I am talking about a cancer affecting the impersonal host that is our country, our government, and our economy. We have a cancer just as debilitating and dangerous, and just as difficult to treat, as any form of biological cancer. The cancer I speak of is crony capitalism.
At our recent Liberty Forum, Utah businessman Jonathan Johnson, an executive at Overstock.com, spoke of the debilitating effects of over-regulation and how the burden of compliance with government mandates threatens business at all levels, but is particularly deadly for small businesses.
Too often this debilitating regulation is by design—not the necessary function of government, but rather the tactic of private interests who have captured government power and wield it like a hammer to flatten their competitors. This nefarious use of government power is crony capitalism, a brand of capitalism that is anything but. Instead of free and fair competition in an open and level marketplace, the well connected few curry government favors, subsidies, and regulations to rig the game in favor of the influential.
Recently, Senator Mike Lee spoke before the Heritage Foundation about this pervasive force and its damaging effects on America. “America’s crisis of crony capitalism, corporate welfare, and political privilege in which government twists public policy to unfairly benefit favored special interests at the expense of everyone else,” he said, is a “uniquely malignant threat to American exceptionalism.” Senator Lee explained how the principles of freedom are not what divides us. He points out that big government is the true divisive influence because it “turns citizens into supplicants, capitalists into cronies, and cooperative communities into competing special interests.” Freedom, by contrast, unites us. It relies on the voluntary action of citizens which “draws us out of ourselves and into the lives of friends and neighbors.” Senator Lee believes “the free market and civil society are not things more Americans need protection from. They’re things more Americans need access to.”
Senator Lee drew a distinction between true free market capitalism and this corrupted crony version: “instead of venture capitalists we have venture socialists where politicians funnel taxpayer money to politically correct or connected businesses that cannot attract real investors. There is regulatory capture and rent seeking where industry leaders influence policy and regulatory agencies to protect their interests and hamstring innovative challengers.” The problem is that “cronyism turns the free enterprise system upside down, enriching the few by disenfranchising the many. Cronyism bends the economy toward the state shifting wealth and opportunity from the public to the policymakers.”
While some blame the influence of money in elections for this result, Lee countered that “the problem is not money in politics, it is politics in the economy.” If Congress did not have the ability to sneeze and decimate an industry with regulation, there would not be such a flood of special interests clamoring for influence in Washington or state capitols all across the country. An “economy built on connections instead of competitiveness” drives big business to political power centers instead of the marketplace and means less efficiency, less innovation, less opportunity, and less value for everyone.
A recent example of this crony capitalism has come in the form of proposed FDA regulations for the new electronic cigarette industry. E-cigarettes are a nicotine delivery device where a user, typically a former tobacco smoker, inhales flavored water vapor laced with specified levels of nicotine. Many users swear by it as a less harmful alternative to tobacco smoke and an effective smoking cessation device leading to eventual reduced levels of nicotine consumption. In just a few years it has turned into a booming new industry with expected sales topping two billion dollars and more than 200 different manufacturers from big tobacco producers like Phillip Morris and R.J. Reynolds to small entrepreneurial ventures pioneering new electronic technologies.
The proposed FDA regulations promise to topple many of these small businesses who will choke on new regulations and suffocate in bureaucratic red tape as they watch their entrepreneurial ventures go up in smoke. The regulations come at the urging of Congress after heavy lobbying by big pharmaceutical companies who fear competition with their own nicotine-based smoking cessation products. The proposed regulations are open for public comment until July 9th, 2014.
In Utah, this year’s legislative session saw a proposal to regulate e-cigarettes in the state. While the bill did not pass, a legislative committee is now looking at submitting public comments on behalf of the state to the FDA concerning the proposed federal regulations. During the May meeting of the Health and Human Services Interim Committee, members heard a report about the proposed federal regulation and directed staff to draft comments that they will review for approval next week during the June interim meeting. We would caution the committee against supporting increased federal regulation generally in all cases but particularly for such a new industry. Too often, the best way to kill competition is while it is still in its infancy; regulation is a perfect poison. While the use of tobacco—and perhaps even smokeless nicotine vapor—may be inadvisable and harmful, the use of government coercion is also highly dangerous.
When lawmakers yield to the interest of powerful industries in regulating competitors out of the marketplace the effects can be long lasting and devastating. Just like a growing cancer deprives the body of necessary nutrients and interferes with core biological functions, favoritism and protectionism in government regulation deprives consumers from useful and even life-saving products and interferes with innovation. This is a story with many examples, unfortunately, such as industrial hemp‘s demise as the timber, paper, and chemical industries all combined to kill competition from diverse products derived from inexpensive hemp materials by taxing and ultimately banning the plant altogether. Generations later, America lags behind the international hemp industry and has lost the opportunity to utilize environmentally friendly building materials like hempcrete. This same principle is true for the pharmaceutical drug industry where drug approvals take extreme amounts of money and time, and laws have precluded people from trying potentially life-saving alternatives imported from abroad.
Crony capitalism is also the story of state regulation banning direct sales of Tesla cars where some states have sought to protect dealerships by prohibiting the innovative Tesla sales model. The same force is at play in the ongoing war between banks and credit unions who swap blows in their race to the regulatory table to impose restrictions on each other in the already heavily regulated financial services sector. In some states the taxi industry has effectively used government bureaucracy to crush competition from popular innovative ride sharing apps like Lyft and Uber. In Utah there are even regulations that limit the weekend sale of cars so as to protect dealerships that close on Sunday from national competitors that don’t.
Business licensure is an example of regulation used to protect powerful industries from competition that affects almost everyone. One third of Americans work in a profession that requires a government permission slip. In each case lawmakers yield to the appeals of the powerful industry insiders who claim to be “playing by the rules”—rules often proposed and drafted by industry leaders—to crack down on outsiders. Just like a cancer, the host system is asked to grow an unproductive and threatening mass of regulation that hampers efficiency, siphons productivity, impedes innovation, and can eventually strangle the entire economy.
Regulation isn’t the only carcinogen that fuels the cancer of crony capitalism. Other government market interventions including direct and indirect subsidies are often used to redistribute wealth from the taxpayers to the well-connected. Senator Lee explained that “cronyism simultaneously corrupts our economy and our government, turning both against the American people. It forces American families who work hard and play by the rules to prop up, bail out, and subsidize elite special interests that don’t.” Lee explains that farm subsidies are a perfect example of this: “every year, 75 percent of the $24 billion we spend on agriculture handouts goes to the top 10 percent of recipients. The bulk of these subsidies aren’t going to the Little House on the Prairie; they’re going to The Wolf of Wall Street.”
From the social engineering created by the tax code to bailouts and special loan guarantees, the government has become artful at rewarding its chosen crony class. Not all subsidies go to the oft-vilified, pinstriped financiers, though. There are sugar subsidies, health care subsidies, green energy subsidies, telecom subsidies, oil and gas subsidies, manufacturing subsidies, pharmaceutical subsidies, transit subsidies, and a host of other subsidies each for the largest corporate players in the economy. While many on the political right are quick to chaff at social welfare programs in America, the corporate welfare state today would have made even the Politburo proud. Utah is not free from this affliction either. In Utah our local governments have chained their taxpayers with bonds for public telecom utility infrastructure investments in the form of fiberoptic networks like UTOPIA that were supposed to pay for themselves with user revenue. Instead, years later, some are now considering mandatory internet service in order to repay the bonds.
Unfortunately, crony capitalism is not benign and has metastasized to every level of government power and infected every jurisdiction. The prognosis for America is not good if we don’t make serious changes. Just as a doctor would counsel a patient to quit smoking, we must quit our dependence on government as the solution to every problem and the benefactor for every cause. While biological cancer is a serious threat to many, crony capitalism is a threat to us all.
Often the sunshine of public scrutiny is just the radiation that is needed to keep cronyism in remission. From more transparency in government to an engaged citizenry, everyone is responsible for protecting freedom and free enterprise from the government carcinogen of coercive authority. This is why Libertas Institute advocates for a voluntary civil society with robust competition in a free market that rewards hard work and innovation and protects the fruits of that work by respecting private property rights. Crony capitalism is anathema to this vision and fundamentally undermines both the responsibility and blessings of liberty. We believe in Utah’s motto of “industry” and hope for the reality of Utah’s tourism slogan “Life Elevated.” When we aren’t weighed down by the burden of regulation and hampered by cronyism protections we can truly live up to our human potential and elevate human achievement.