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Crony Capitalism in America 2008 – 2012 by Hunter Lewis (AC2 Books 2013), 399 pages.

Ayn Rand called it “the aristocracy of pull.” That was her term for the political-economic system in which people can get ahead (and even become exceptionally wealthy) by virtue of their connections with those in power, rather than by their work, innovations, and risk-taking. Over the last several years, sales of Rand’s magnum opus, Atlas Shrugged, have surged as Americans increasingly realize that the nation is mimicking her novel, where success depends on whom you know rather than what you produce.

An excellent companion to Atlas Shrugged would be Crony Capitalism in America, by Hunter Lewis. Focusing on the years immediately after the bursting of the housing bubble, Lewis documents the vast array of sleazy relationships between politicians (and other government officials) and many business, professional, labor, and nonprofit entities that benefit from “you scratch my back and I’ll scratch yours” dealings. Lewis demonstrates that enormous amounts of wealth are funneled into organizations that could never pass the test of the market (earn their revenues through production and exchange) and that many special privileges are ladled out to interest groups in violation of a neutral, universal rule of law.

All of that makes the average American much worse off. It isn’t that the rich exploit the poor, but that the well-connected exploit everyone else.

The book’s great value is in Lewis’s relentless turning over of rocks so that we can see the creepy things that prefer to dwell in darkness. Readers will remember his big message because it is so well-supported with particulars. The book’s weakness, however, is that much of the nasty stuff Lewis reveals doesn’t exactly fit the term “crony capitalism.” More on that point later.

The cronies

Lewis doesn’t provide a precise definition of crony capitalism, so I will, by contrasting it with real free markets. When markets are free, individuals or groups invest money obtained through voluntary means so they can produce goods or services they hope to sell at a profit. If they do earn profits, they’re entitled to keep them, but if they incur losses, the losses come at their expense. Government’s role is limited to enforcing the law in an even-handed way.

Crony capitalism, per contra, involves government in various ways, for example, in providing start-up capital, guaranteeing profits or covering losses, and restricting competition. In return for those favors, crony capitalists support “friendly” politicians with campaign contributions and lucrative business opportunities, or treating them to lavish parties and junkets. Much of the book shows how prevalent that has become.

For example, the key players in the housing bubble, Fannie Mae and Freddie Mac, were (and, sad to say, still are) government-sponsored enterprises whose shareholders and managers had long benefited from government favors. For example, the two could borrow at artificially low interest rates, thereby enjoying a competitive advantage over private firms. Fannie and Freddie had cultivated their political relationships carefully, and when the housing bubble (which we might call a Government-Sponsored Calamity) burst, leaving the two on the verge of bankruptcy, their political angels flew in with billions of tax dollars to bail them out — just as expected. The political angels also protected them against efforts by advocates of free markets to get the government out of the housing market entirely.

Another famous instance of pure crony capitalism was the federal government’s support for the solar-cell manufacturer Solyndra. Under the Energy Policy Act of 2005, federal officials gave the firm a loan guarantee of $535 million in 2009. Not coincidentally, the main investor in Solyndra was a huge supporter of Barack Obama’s 2008 presidential campaign. Investors with their own funds at risk wouldn’t have put $5 into the shaky firm, but government bureaucrats, who never stand to lose personally from bad decisions with Americans’ tax dollars, did not hesitate. When the company went bankrupt in 2012, the taxpayers took the hit.

And in a final slap at the taxpayers, Solyndra workers were declared eligible for $13,000 each under a law that assists workers who lose their jobs owing to foreign trade — in this case, alleged unfair competition from Chinese solar panels.

Goldman Sachs is another prime illustration of the harms resulting from crony capitalism. This financial giant, which makes much of its profit from selling federal bonds, enjoys a cozy relationship with the high and the mighty in Washington, D.C. When the housing bubble burst and the firm was consequently left with gigantic losses, its political friends parroted its “but we’re too big to fail” line and delivered a huge bailout package to “save” Goldman.

Lewis rightly criticizes the “too big to fail” claim, noting that when any company goes bankrupt, it doesn’t disappear; instead its assets are purchased cheaply and then put to more efficient use. But a key part of crony capitalism is having political supporters who will drown out commonsense arguments against favoritism.

With its losses covered by taxpayers, Goldman Sachs was able to continue with business as usual — with a new headquarters in Manhattan near the old World Trade Center site and therefore eligible for tax-free financing with “Liberty Bonds.”

Skullduggery

Those and other instances show how crony capitalists rely on government to fatten their bottom lines or wipe out their losses. Quite a lot of the book is devoted, however, to political skullduggery that I don’t think of as exemplifying crony capitalism. What Lewis documents instead is the profusion of undesirable results that stem from America’s leviathan state.

For example, Americans suffer from regulatory inertia that has little or nothing to do with efforts by crony capitalists to benefit from their “pull.” The Food and Drug Administration, for instance, is slow to approve new drugs and innovations, such as cell-phone apps that would help doctors diagnose illnesses more promptly. Bureaucrats have nothing to lose by being overly cautious. But that is not crony capitalism — just a bad consequence of having politicized decision-making in the health-care field.

Lewis also includes many instances of the harms done by special-interest-group politics that don’t embody crony capitalism either. The Obama administration has, for example, done some huge favors for its allies in big labor, including trampling on the rule of law to reward the United Auto Workers the lion’s share in the Chrysler bailout at the expense of secured creditors who were expropriated. Another blatant case of favoritism was the effort by the Obama-stacked National Labor Relations Board to prevent Boeing from shifting production of its new 787 Dreamliner plane from Washington state to South Carolina. Those were cases of special-interest-group politics but not, in my view, crony capitalism.

A third category of harms that Lewis attributes to crony capitalism is the phenomenon of unintended consequences from laws and regulations. He points out, for example, some of the bad side effects that the atrociously misnamed Affordable Care Act is visiting on Americans. Although there were crony capitalist aspects to the drafting of the law, I don’t see how the manifold unintended consequences can be classified under “crony capitalism.”

Crony capitalism is undoubtedly a bad thing, but we shouldn’t throw every bad result of excessive government into its cart.

Clearing the crony banquet table

Lewis sums up the problem America faces, writing, “Elite crony capitalists will try to ‘buy’ the electorate by offering them small crumbs from the crony banquet table. They may succeed for a time. But like all parasites, they depend on the continuing health of their host, in this case the economy. As crony-capitalist policies sicken the economy, the money with which to try to buy the electorate becomes scarcer.” He envisions a future where the government tries to keep the crony enterprise going by printing money faster and faster. That can’t work for long, but will inflict “untold damage” on nearly all of us.

The solution? Lewis devotes his final chapter to that crucial question. Although I don’t agree with everything on his list (e.g., I don’t think that mandating disclosure of political contributions would be helpful; it could even backfire against those who donate to campaigns the crony establishment doesn’t like), almost all his recommendations are consistent with the libertarian goal of separating economy and state. If we could do that, the conditions necessary for crony capitalism (and other governmental evils) would vanish.

Before closing, I must say that the book could have used more careful fact-checking. Among the errors that should have been caught: misspelling of journalist Matt Taibbi’s name, incorrectly giving the year of the Supreme Court’s decision in the Beck case (1976, not 1966), and referring to South Carolina as a “non-union” state. (South Carolina does have a right-to-work statute that disallows union-shop contracts, but that does not mean that there can be no unions.)

All in all, this is a fine, well-researched, and cogently argued book. It makes a strong case that the United States is paying a heavy price for having allowed politics to dominate in place of freedom and peaceful cooperation. Crony capitalism is certainly a big part of that, but not the only part.

This article was originally published in the September 2014 edition of Future of Freedom.

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    George C. Leef is the research director of the John W. Pope Center for Higher Education Policy in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.