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Feb 22, 2016
Presented by
Jay Cost

This election season there's a lot of talk about corruption, about politicians being "bought and sold", and about "crony capitalism". What do those terms mean? Why should we care? Is there a way to reduce corruption and restore our trust in government? Author Jay Cost, staff writer at The Weekly Standard, answers these questions and proposes a solution that every society could benefit from.

While capitalism produces goods & services that serve the common good, crony capitalism just serves politicians & their crony pals.

  • Capitalism requires that we each produce goods that are useful and desired by others. The free market has drastically raised the standard of living for the poor and rich alike.View Source
  • Crony capitalism, on the other hand, involves government actors picking winners and losers based on their political of personal affiliation rather than through free market forces.View Source
  • Related reading: “What's So Bad About Cronyism?” – Jay CostView Source
  • WATCH: “Is Capitalism Moral?” – Walter Williams, PragerUView Source

In crony capitalism, politicians spend the public’s money not for the public interest but to reward friends, supporters, or themselves.

  • In crony capitalism, government officials use taxpayer dollars to benefit their friends, supporters, or themselves, rather than using that money for the public interest as it is intended.View Source
  • Related reading: “It's Time Conservatives Fight Corruption”– Jay Cost, National ReviewView Source
  • Related reading: “Capitalism and the Common Man” – Foundation for Economic EducationView Source
  • Related reading: “A Republic No More: Big Government and the Rise of American Political Corruption” – Jay CostView Source

Capitalism is moral because it’s voluntary. Crony capitalism is inherently immoral as it involves abusing government for personal gain.

  • Capitalism is founded on the moral premise of the free exchange of good or services between independent agents.View Source
  • Crony capitalism, on the other hand, uses taxpayer dollars to benefit the associates of politicians, which is inherently selfish, unfair, and breeds corruption.View Source
  • Crony capitalism leads to “corporate welfare,” in which favored businesses are given special loans or subsidies, or received preferred treatment through regulation that keeps out competition, undermining the free market.View Source
  • WATCH: “Is Capitalism Moral?” – Walter Williams, PragerUView Source
  • Related reading: “Spoiled Rotten: How the Politics of Patronage Corrupted the Once Noble Democratic Party and Now Threatens the American Republic” – Jay CostView Source

Crony capitalism subverts the natural supply and demand forces of the free market, hurting businesses and consumers alike.

  • Crony capitalism occurs when government actors pick winners and losers based on their political or personal affiliation rather than through market forces.View Source
  • An example of the value of crony connections can be seen in the stock price of firms connected to Tim Geithner, the former Treasury Secretary, which jumped 12% in value upon news that Geithner would be appointed as Treasury Secretary.View Source
  • Related reading: “Capitalism and the Common Man” – Foundation for Economic EducationView Source
  • Related reading: “What's So Bad About Cronyism?” – Jay CostView Source

In addition to being immoral, crony capitalism is incredibly wasteful, encouraging massive amounts of money devoted to lobbying. 

  • Crony capitalism wastes hard-earned tax dollars to reward lobbyists and associates of politicians rather than being put to public use. The unfair distortion of capitalism creates a negative opportunity cost since those wasted dollars could have been spent productively elsewhere.View Source
  • Related reading: “The Economics and History of Cronyism” – The Mercatus InstituteView Source
  • Related reading: “Spoiled Rotten: How the Politics of Patronage Corrupted the Once Noble Democratic Party and Now Threatens the American Republic” – Jay CostView Source

Crony capitalism flies in the face of the U.S. Constitution. A limited government committed to equal protection can’t play favorites. 

  • While the free market of capitalism is inherently fair—as it is based on voluntary transactions with no predetermined winners and losers—crony capitalism uses taxpayer dollars to benefit the friends and supporters of politicians, which is inherently unfair.View Source
  • Corporate welfare is a type of crony capitalism, in which favored businesses are given special loans or subsidies, or received preferred treatment through regulation that keeps out competition.View Source
  • A recent example of corporate welfare: the government’s protection of the EpiPen from market forces.View Source
  • Related reading: “A Republic No More: Big Government and the Rise of American Political Corruption” – Jay CostView Source

Crony capitalism. What is it? Why is it so bad?

To answer these questions, let’s think about good, old-fashioned capitalism. It is premised on the free exchange of goods or services between independent agents.

Let’s say I want to buy some cereal. Steve’s Grocery is selling my brand for $4. Ted’s Grocery has it for $5. I buy from Steve, which creates the most value for both me and him. Meanwhile, Ted now has an incentive to cut his costs so he can compete better. Replicate this kind of transaction billions of times a day, 365 days a year, and that is how our economy functions and grows. Or at least how it’s supposed to.

Now, what about crony capitalism? Let’s say it’s the government that wants to buy some cereal. More specifically, the House of Representatives’ Committee for Cereal Acquisition is put in charge of the task. Steve still sells it for $4. Ted for $5. I buy from Steve. He’s the low price man. But the Committee for Cereal Acquisition buys from Ted. Why?

Because Ted lobbied the committee. Because his corporate headquarters is in the chairman’s district. Because he gave more campaign contributions. Because he promised a lobbying gig to an undecided committee member who plans to retire next year. That is how crony capitalism works.

And it happens all throughout the government—from defense contracting, to farm subsidies, clean energy programs, infrastructure spending, affordable housing, food stamps, Medicare, Obamacare, tax policy. You pretty much name it. Crony capitalism is there.  

Capitalism is moral because it is premised on a voluntary exchange between independent parties – who agree to the deal only because it creates value for everybody. Crony capitalism is immoral because one of the parties—the government—has been bought off.

This creates three problems. First, it is unfair. Politicians are spending the public’s money, but not for the public interest. Instead, they reward friends, supporters, or themselves. Our Constitution grants Congress the power to provide for the general welfare. Crony capitalism violates this sacred principle.

Second, it is incredibly wasteful. In our cereal example, the government overpaid by going with Ted instead of Steve. That’s obviously a waste of taxpayer money. In fact, it is really stealing from the taxpayer. Here’s more waste. Ted had to spend money to lobby the government to get the contract. So, he didn’t get all of that dollar out of the transaction. That’s money that could have been spent making a better product or used in some other constructive way. Economists call this deadweight loss. And it can be substantial.

Moreover, crony capitalism distorts the broader economy. In some industries—like healthcare, student loans, home mortgages, and aerospace—the government is one of the biggest purchasers of goods or services. So its politicized decisions can have wide-ranging and detrimental effects. An entire industry can become, in effect, a client of the government. When that happens its goal is not to build a better mousetrap, but to keep politicians happy. How much does crony capitalism cost society per year? It is hard to say precisely, but the number reaches into the tens of billions of dollars, maybe beyond.

Third, it tempts politicians to break the law. Once politicians feel free to spend the public’s money for their own political purposes, they are just a hop-skip-and-a-jump away from doing so to line their own pockets or pump up their campaign funds or both.

So what can we do? Our first task is to recognize that government must have limits. Of course, there has to be a national authority to set the parameters for society; that establishes the rules of the game and enforces them. But when we expect the government to promote an industry, tinker with some sector of the economy, help some important voter group, we create the groundwork for crony capitalism and all the bad things that come with it–favoritism, waste, theft, and other forms of corruption. 

America’s seventh President, Andrew Jackson, had a very useful perspective on this issue. “There are no necessary evils in government,” he said. “Its evils exist only in its abuses. If it would confine itself to equal protection, and, as Heaven does its rains, shower its favors alike on the high and the low, the rich and the poor, it would be an unqualified blessing.”

Jackson had it right. A limited government confined to equal protection can’t play favorites. Limited government. If getting rid of crony capitalism is the goal, it all starts there.

I’m Jay Cost of the Weekly Standard for Prager University.

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