Cronyism 101

I wrote about my participation in the Koch brothers’ semi-annual seminar in Palm Springs two weekends ago here. Along with Peter Schweizer, I did a presentation on cronyism. My speech focused on corporate cronyism, while Peter’s centered on the sort of political cronyism that he detailed in his book Throw Them All Out. I included in that post a couple of the Power Point slides that accompanied my speech, and several readers wondered whether they could see the whole thing. So I fleshed out my outline into a complete text, and have interspersed the slides where I showed them in Palm Springs. Here it is, a pretty good introduction, I think, to the subject of corporatism in the Age of Obama:

Cronyism in government has been with us for a very long time. At the beginning of Plato’s Republic, the participants in the dialogue offer competing definitions of justice. One of them argues that justice means “doing good to your friends and harm to your enemies.” Socrates didn’t think much of it, but from that time until now, most politicians have believed that “help your friends and hurt your enemies” is a sound principle.

Cronyism has been found in one form or another in every kind of political system. In 19th century America, the term most often meant helping your supporters with public employment, or public contracts. For a time, one of the chief powers of the President of the United States was the right to appoint the Collector of Customs for the Port of New York, one of the country’s most lucrative jobs.

But that sort of cronyism–we can call it public sector cronyism–was dealt with quite effectively through civil service reform and laws governing public contracting. Today, if you are a major donor to a winning presidential campaign, you may find yourself Ambassador to the Seychelles, or some other desirable place, but that sort of cronyism is almost completely harmless.

What we have seen more recently, especially in the Obama administration, is something much more sinister — private sector, or corporate, cronyism — where the government uses its power to tax and spend, and its power to regulate, to help some companies and industries, making them artificially more profitable or keeping them in business, while using the same powers to disadvantage and potentially destroy other companies and industries that are not allied with the White House or with Congress.

Does being an Obama crony pay off? This graphic from Peter Schweizer’s book sums it up as well as anything: the members of Obama’s national finance committee have already recouped an average of around $25,000 in federal dollars for their companies, for every dollar they raised for Obama’s campaign. Is that a good investment, or what?

We can all tick off the familiar examples of corporate cronyism — a lot of them have to do with energy. Solyndra is probably the best known.

The Obama administration gave Solyndra a $535 million loan guarantee, after the Bush administration had turned down Solyndra’s original application. Emails show that political influence was exerted by the White House. The administration also agreed that repayment of the taxpayers would be subordinated to the claims of the original investors, so that the well-connected owners of the business got at least some of their money out, at the taxpayers’ expense.

The company wound up in bankruptcy, but still paid bonuses to its key employees, most of whom were contributors to the Democratic Party

But Solyndra was only a small part of the $38 billion federal loan guarantee program for green energy companies. Other recipients have also run into financial trouble.

One of them is BrightSource. BrightSource was $1.8 billion in debt, and was losing money hand over fist. The company lost $72 million on only $13.5 million in revenue. Nevertheless, BrightSource got a $1.4 billion loan guarantee from the Obama administration. The Investors had very strong political connections; one of them was Robert F. Kennedy, Jr. But the losses continue to mount up. This language is from the registration statement for the company’s IPO:

This offering involves a high degree of risk. … We have generated substantial net losses and negative operating cash flows since our inception and expect to continue to do so for the foreseeable future as part of the development and construction of solar thermal energy projects using our systems.

Now, how could a company with BrightSource’s record hope to attract investors? The registration statement explains the company’s business plan candidly:

What you see here is Democratic Party cronyism as a business plan.

This chart shows the bottom line, that is, the extent to which the federal government has its thumb on the scale in favor of politically favored “green” energy companies. The two bars on the right are wind and solar energy, which get around $25 for each megawatt hour of electricity generated:

Most people only consider government funding of companies like Solyndra and BrightSource to be scandals if the companies go broke and the taxpayers lose their money. I actually think the opposite is true. I think it is a good thing that some of the companies that benefit from cronyism go broke, because it exposes what it going on. It is worse, in my view, when government favoritism is successful–that is, when cronyism allows companies to compete successfully against industries and companies that are not politically favored, and thereby distorts the economy.

Now, remember from Plato’s Republic that the principle of cronyism is not just to help your friends, but also to hurt your enemies. That is the other side of cronyism when it comes to energy. The Obama administration not only uses taxpayer money to support so-called green energy, but also does what it can to impede the production of fossil fuels.

The Keystone pipeline is a great example; we all know that story.

Under the Obama administration, the EPA plays a major role in suppressing competition with the administration’s favored business enterprises. New emissions standards for coal-fired power plants are one instance. A number of coal-fired power plants have been shut down as a result of the EPA’s initiatives, consistent with President Obama’s pledge to make electricity costs “skyrocket.”

The EPA’s “environmental justice” initiative is one I’d love to have more time to talk about. The Agency is trying to use the vague concept of “environmental justice” to force refineries to take measures that are nowhere authorized by statute — for example, by trying to make oil companies buy new homes, somewhere else, for the people who live near refineries.

Yet another example is the Obama administration’s refusal to lease federal lands for oil exploration. The administration is highly deceptive on this point. President Obama now tries to take credit for the private development of oil and natural gas, but this chart from the Institute for Energy Research shows what is actually going on. Oil production on private and state lands is increasing rapidly, while production on lands controlled by the federal government is dropping:

The cronyism of the Obama administration is most obvious with respect to energy, but it extends much more broadly than that.
The auto bailouts of General Motors and Chrysler are another good example. GM got $50 billion from the taxpayers and a $20 billion tax break. The taxpayers’ investment is currently under water by $24 billion.

But again, that isn’t the worst of it. There is no such thing as a “clean” partnership between government and industry, where the only question is whether the taxpayers make money or lose money. Corporate cronyism inevitably involves corruption of some kind.

In the case of the Chrysler bailout, the Obama administration strong-armed bondholders into subordinating their debt position to the unsecured claims of union retirees. This was completely illegal, but the bondholders didn’t want to become the administration’s enemies. It was this cramdown of the bondholders that first led Michael Barone to refer to the Obama administration as “gangster government.”

The United Auto Workers also got 17% of the equity in “new” General Motors. When the Obama administration bailed out GM and Chrysler, it said it was saving the American auto industry. But at least 13 automobile companies have factories in the United States. What is different about GM and Chrysler, along with Ford, is not that they make cars in the U.S., but that they are unionized. Many observers have said that the administration didn’t bail out GM and Chrysler, it bailed out the UAW. So corporate cronyism isn’t always about the company, it may also be about the union.

The stimulus bill was also a cornucopia of cronyism. It contained more than $80 billion in “clean energy” subsidies. But much more of the $900 billion went to cronies of the Obama administration and the Democratic Party. My favorite example is a “stimulus” grant that went to a Communist puppet theater in St. Paul, Minnesota.

Obamacare, and the hundreds of waivers the administration continues to issue, represents a new form of corruption, as well as cronyism, that I believe was invented by the Obama administration. The idea is to pass a terrible piece of legislation, and then exempt your friends from it, so that only those without political influence have to suffer from the lousy statute you imposed on them.

So that is a very quick overview of the kinds of corporate cronyism that have emerged during the Obama administration. This private sector cronyism is, I think, much more damaging than the public sector cronyism of the 19th century. Why? Because it doesn’t just waste money, it distorts the entire private economy. It is notable that the era when traditional cronyism flourished was also the time when the United States experienced its most explosive economic growth.

Why is that? Because in the 19th century, the federal government had little power over the private sector. No doubt politicians would have engaged in corporate cronyism if they could have, helping their friends and hurting their enemies, but with the occasional exception of a transcontinental railroad, they had little opportunity to impact the private sector.
Now, that has completely changed. Major companies can do almost nothing without the permission of one or more federal agencies, and the federal budget is so vast that it impacts nearly every nook and cranny of the private sector. The result is that corporate cronyism has the potential to distort the entire economy.

The second reason why corporate cronyism is so corrosive is that it undermines confidence not just in our economy, but in our society. Today, to an unprecedented degree, political influence really is, in many cases, the best road to economic success. Which is another way of saying that our society is fundamentally unfair. The sort of trust and confidence that are necessary not just for a free economy but for a free country are eroded by corporate cronyism. The graphic on the screen is a Horatio Alger book, Strive To Succeed, that represents the spirit of private enterprise as a noble and moral undertaking that may be fatally undermined by cronyism.

One final observation: tomorrow’s program will focus on what we can do to combat cronyism, but we have our work cut out for us. Principled opposition to corporatism may well be a minority view. This is from a Rasmussen Reports survey that came out last Thursday. When asked the question, “Should government funds be used to subsidize manufacturers in this country through tax credits and other incentives?” 55% said Yes, only 31% said No.

One fundamental point that I only had time to hint at in this presentation is that cronyism is the inevitable result of big government. If we give the federal government power over virtually every single thing that every private business does, what can we expect? Obviously, politicians will use that power to reward their allies and punish their enemies so as to enhance their own power. Corruption, in other words, is not a byproduct of big government; it is its essence.

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