I understand that Charles Koch (of the Koch Brothers fame) is persona non grata in most liberal / progressive / Democratic Party circles; his op/ed published in today’s WSJ (“corporate cronyism harms America”) suggests that he has a great deal to offer the political left, if they would be willing to listen. The article also suggests that Koch has a lot to offer individuals on the political right who mindlessly assume they are being pro-market (and anti-big business) when they vote for the GOP.
As I’ve said before, both major parties are more fundamentally similar than different: they represent two sides of the same dysfunctional and insidious “big government” coin. We need a fundamental re-think of what the political center really means in America. I’d love to see a new mainstream political center develop out of a common interest in severing the insidious symbiotic ties that both major parties facilitate between big business and big government. The new center would be “for” unwinding the “Corporatist” system that has grown like a cancer in America benefiting political and private sector elites, but all the while slowly and ineluctably draining the vitality of our society and economy.
“We” need to re-learn and then to understand the difference between free markets and corporate cronyism (aka “corporatism”). We (or at least) I typically think of cronyism as being a central feature of less developed economies subject to systemic corruption such as Indonesia or India or China. But, cronyism can even take hold in systems that are not undermined by rampant corruption such as the United States. My preferred term for "cronyism" in a developed economy like the US is “Corporatism.” Corporatism is legalized “cronyism.” Corporatism is "cronyism" without the graft and personal payoffs and shady deals (or at least less of it). Corporatism looks like “free market capitalism” but it is not.
Corporatism is seductive and diabolical and self destructive.
Corporatism is seductive and diabolical and self destructive.
Corporatism looks like "healthy" free market capitalism because the system is based on rule of law and private property rights and companies largely remain under “private” ownership. What differentiates corporatism and capitalism is that in corporatism the government and big business work together in an effort to build mutual benefit which largely comes at the tax payers and consumers expense.
Adam Smith noticed way back in the 18th century that private business owners are not by nature pro free market. Adam Smith warned that businesses are pro-competitive advantage and pro-profit. If profits can be gained by influencing government policy and regulation and by winning public subsidies, then private enterprise is pro-government intervention and anti-free market! it really is as simple as that.
Business is naturally going to be anti-free market when it can influence public policy such that it provides competitive advantage leading to higher profit margins.
The bigger the business is and the more financial resources it controls, the more influence it may have on government policy via campaign finance donations. (and by the way, the answer to money politics is NOT campaign finance reform … the answer is getting government out of the business of choosing winners and losers in the economy. another important subject i've talked about in previous blog posts.)
When we look for a villain in the recent global credit boom and bust, it is easy to point a finger at “free markets,” and the sub human individuals who proliferate in them: the greedy Wall Street bankers, the unethical mortgage underwriters preying on widows and minorities, regulators asleep at the switch and private big business leaders selfishly pursuing profit at society’s expense.
The real villain, however, is “corporatism.” That is the insidious symbiotic relationship between government and business which underpinned and fueled all of the visible proximate causes of the crisis.
At the core of corporatism is the Federal Reserve which provides the easy money government needs to grease the wheels of corporatism as well as the massive bail out funds needed for financial sector elites. How many Wall Street executives have gone to jail since 2008? None. Jon Corzine is the poster boy for politically connected Wall Street financial elites who escaped scott free despite behavior that entails the worst of the transparently greedy, illegal, selfish, wealth destructing behavior on Wall Street during the boom. And the Democratic Party blames the GOP for blocking new regulations for Wall Street. If a Democratic administration can't prosecute even one Wall Street executive for criminal activity during a historic period of excess, how can we expect they will implement financial reform? forgetaboutit.
meantime, if the Republican Party doesn’t acknowledge its own complicity in promoting special interest subsidies and other “pro-business” regulations that undermine the effective workings of the “free market” the party risks turning the market into a bogey man forever.
After Lehman collapsed in 2008, the GOP in general and Senator McCain in particular had no available narrative to explain how government intervention – not greed or market failure – led to the cycle of boom and bust that engulfed the US and global economy and financial markets. This is because the GOP doesn’t realize itself the insidious effects of the massive subsidy programs it promotes for its business and upper income constituents. Romney cannot push meaningful tax reform unless he is willing to end tax subsidies on health insurance coverage and interest expense, which largely benefit upper income households – the higher the income the more the subsidy is worth!!!
Each party has its favored special interest subsidy targets: The Dems have public unions and the welfare industrial complex and the green energy sector to name a few. The GOP tends to favor subsidies to the military industrial complex. Both parties support subsidies to the housing sector, to secondary education, to the health care sector, to Agriculture and to the banking and financial sector – all of which ends up enriching BIG business in all of these major sectors of our economy at the expense of Joe Sixpack.
Until we identify and reverse the massive subsidies that distort our so called “free market” the further away we will find ourselves from the founding principles of our country aimed at maximizing individual freedom and social welfare.
We don’t need bi partisan cooperation to engineer new government programs aimed at fixing what we are told over and over is an inherently flawed “free market,” as Obama claims is the case. What we need is the unwinding of the “corporatist” nexus that has hijacked public policy making in both major parties, Dem and GOP.
if we unwind subsidies and regulations, will we end up with a perfect world where all of our problems disappear? Markets are inherently imperfect. We will always have income inequality and business cycles and asset bubbles and busts, and industrial accidents and we will have uncertainty and tragedy and we will struggle trying to design a safety net that goes far enough but not too far. Free markets are the best we can do. they are far from perfect. Trying to "fix" them with enlightened public policy sets in motion the law of unintended consequences, which necessarily turns good intentions into self destructive outcomes.
Wall Street has traditionally been assumed by modern popular culture to be both supporter and supported primarily by the GOP. This is nonsense. The influence of big Wall Street on the Democratic Party has been evident for decades, and in modern memory we saw this in spades when Clinton picked ex Goldman CEO Robert Rubin as his Treasury Secretary and then with Larry Summers who pushed the unwinding of Glass-Stegal!!! funny how George Bush is supposed to be the one who engineered the de-regulatation of Wall St that led to real estate bubbles and financial excess and bust.
Chuck Schumer wooed massive Wall Street donations to help the Dems win the 2006 mid term Congressional elections and Obama built on many those same Wall Street donors to win in 2008. Obama’s Wall Street connections seemed to revolt a bit after Dodd Frank, but really at the end of the day Dodd-Frank has turned out to be largely toothless where it matters and Obama continues to woo Big Wall Street. Meantime, Obama’s policy has largely been to bail out Wall St first and ask questions later. We knew this would be the Obama administration’s modus operandi when Obama tapped Wall Street insider Tim Geithner as his Treasury Secretary. It was Geithner who convinced Obama to ignore Larry Summer’s advice to break up the big banks in a public takeover – an idea that ironically is generating a new wave of supporters among academics on both the right and the left. It is silly to think of the GOP as the party of big Wall Street. It is also just as silly to think of the GOP as the party of free markets.
Both parties are parties of “scratch my back and I’ll scratch yours” special interest corporatism.
Understand corporatism or be prepared to see the free market continue to come under attack by a party unable to defend it and another party equally eager to snuff it out (of course claiming it has no choice with well intended public intervention).
The market is an easy bogey man ... and an easy excuse for human failure.
Bottom line, markets haven’t let us down. it is us humans who have let markets down. Markets don’t “do” anything. They don’t possess human agency. Whenever we humans claim that it is the markets that “failed” it is time to look in the mirror. We have let down markets by injecting them with politically expedient subsidies and regulations – and then we’ve let them down again by blaming them for our own political and personal and human failures.
good intentions don't mean good policy. the road to hell is paved with good intentions.
Please read this article.
September 9, 2012, 6:55 p.m. ET
Charles G. Koch: Corporate Cronyism Harms America
When businesses feed at the federal trough, they threaten public support for business and free markets.
So reads a sign outside a small roadside craft store in Utah. The message is clearly tongue-in-cheek. But if it hung next to the corporate offices of some of our nation's big financial institutions or auto makers, there would be no irony in the message at all.
It shouldn't surprise us that the role of American business is increasingly vilified or viewed with skepticism. In a Rasmussen poll conducted this year, 68% of voters said they "believe government and big business work together against the rest of us."
Businesses have failed to make the case that government policy—not business greed—has caused many of our current problems. To understand the dreadful condition of our economy, look no further than mandates such as the Fannie Mae and Freddie Mac "affordable housing" quotas, directives such as the Community Reinvestment Act, and the Federal Reserve's artificial, below-market interest-rate policy.
Far too many businesses have been all too eager to lobby for maintaining and increasing subsidies and mandates paid by taxpayers and consumers. This growing partnership between business and government is a destructive force, undermining not just our economy and our political system, but the very foundations of our culture.
With partisan rhetoric on the rise this election season, it's important to remind ourselves of what the role of business in a free society really is—and even more important, what it is not.
The role of business is to provide products and services that make people's lives better—while using fewer resources—and to act lawfully and with integrity. Businesses that do this through voluntary exchanges not only benefit through increased profits, they bring better and more competitively priced goods and services to market. This creates a win-win situation for customers and companies alike.
Only societies with a system of economic freedom create widespread prosperity. Studies show that the poorest people in the most-free societies are 10 times better off than the poorest in the least-free. Free societies also bring about greatly improved outcomes in life expectancy, literacy, health, the environment and other important dimensions.
So why isn't economic freedom the "default setting" for our economy? What upsets this productive state of affairs? Trouble begins whenever businesses take their eyes off the needs and wants of consumers—and instead cast longing glances on government and the favors it can bestow. When currying favor with Washington is seen as a much easier way to make money, businesses inevitably begin to compete with rivals in securing government largess, rather than in winning customers.
We have a term for this kind of collusion between business and government. It used to be known as rent-seeking. Now we call it cronyism.
Rampant cronyism threatens the economic foundations that have made this the most prosperous country in the world.
We are on dangerous terrain when government picks winners and losers in the economy by subsidizing favored products and industries. There are now businesses and entire industries that exist solely as a result of federal patronage. Profiting from government instead of earning profits in the economy, such businesses can continue to succeed even if they are squandering resources and making products that people wouldn't ordinarily buy.
Because they have the advantage of an uneven playing field, crony businesses can drive their legitimate competitors out of business. But in the longer run, they are unsustainable and unable to compete internationally (unless, of course, the government handouts are big enough). At least the Solyndra boondoggle ended when it went out of business.
By subsidizing and mandating politically favored products in the energy sector (solar, wind and biofuels, some of which benefit Koch Industries), the government is pushing up energy prices for all of us—five times as much in the case of wind-generated electricity. And by putting resources to less-efficient use, cronyism actually kills jobs rather than creating them. Put simply, cronyism is remaking American business to be more like government. It is taking our most productive sectors and making them some of our least.
The effects on government are equally distorting—and corrupting. Instead of protecting our liberty and property, government officials are determining where to send resources based on the political influence of their cronies. In the process, government gains even more power and the ranks of bureaucrats continue to swell.
Subsidies and mandates are just two of the privileges that government can bestow on politically connected friends. Others include grants, loans, tax credits, favorable regulations, bailouts, loan guarantees, targeted tax breaks and no-bid contracts. Government can also grant monopoly status, barriers to entry and protection from foreign competition.
Whatever form these privileges take, Americans are rightly suspicious of the cronyism that substitutes political influence for free markets. According to Rasmussen, two-thirds of the electorate are convinced that crony connections explain most government contracts—and that federal money will be wasted "if the government provides funding for a project that private investors refuse to back." Some 71% think "private sector companies and investors are better than government officials at determining the long-term benefits and potential of new technologies." Only 11% believe "government officials have a better eye for future value."
To end cronyism we must end government's ability to dole out favors and rig the market. Far too many well-connected businesses are feeding at the federal trough. By addressing corporate welfare as well as other forms of welfare, we would add a whole new level of understanding to the notion of entitlement reform.
If America re-establishes the proper role of business in society, all kinds of benefits will accrue. Our economy will rebound. Our liberties will be restored. And when President Obama tells an entrepreneur "You didn't build that," everyone will know better.
Mr. Koch is chairman and CEO of Koch Industries, Inc., which includes manufacturing and energy-related businesses.
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