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The way to crush the middle class is to grind them between the millstones of taxation and inflation. – Vladimir Lenin

Crony Capitalism – Obama’s Legacy

Posted by iusbvision on July 7, 2009

What is Crony Capitalism? It has several names like corporatism and like “political market economics” and what does it mean?

Corporatism is political market economics on steroids. Political market economics is not like regular market economics which is a meritocracy (where you make the best product at the best price for consumers), in political market economics the goal is to manipulate and lobby regulators and politicians to tilt the rules in your favor, which in turn enriches politicians by donations.

This is partially explained by Norton’s First Law:

Big business loves big government, which is why big business loves domestic taxes and regulation because it keeps the small and medium sized competition out of the competition. It also causes inflation, so ultimately it is you who pays and the poor who are hardest hit. (Big business often gets loopholes written in the laws for themselves such as Nancy Pelosi trying to get a part of the tuna industry exempted from the minimum wage law).

We have written about the dangers of crony capitalism many times and how it leads to more and more government corruption (1, 2, 3, 4,).

Which leads us to this article in The Weekly Standard:

The Triumph of Crony Capitalism

Want to get ahead in business? Make friends in Washington.

by Fred Barnes

First President Bush, then President Obama poured billions into General Motors and Chrysler to keep the companies alive but barely breathing. That was just for starters. Next came Obama’s creation of an Auto Task Force to oversee the auto companies. To head the task force, the president picked Steve Rattner, a Wall Street investor with no experience in automaking but lots in raising campaign money for Obama and Democrats.

GM and Chrysler were quickly restructured, mostly to the benefit of the United Auto Workers, the union which spent millions in 2008 to elect Obama and Democrats. The UAW now owns 17.5 percent of GM and 55 percent of Chrysler–quite a return on an investment of zero dollars. Obama said all parties should “sacrifice,” but only bondholders did. They got a fraction of what they were legally entitled to receive. UAW retirees, in contrast, got a gift of $9.5 billion at GM and $14.2 billion at Chrysler.

There’s an epilogue. Delphi, the auto parts manufacturer once owned by GM and still its biggest supplier, has been in bankruptcy for four years. To acquire its assets and run the company, Delphi and Obama’s Auto Task Force picked an affiliate of the private equity firm Platinum Equity. There was no auction or competitive bidding, though Platinum stands to make millions in the deal. Why Platinum? The UAW favored it, sources said.

There’s a name for all this: crony capitalism. Obama insists he believes in capitalism, but it’s not the free market variety that he’s been promoting since he became president. Obamanomics is a different strain entirely.

Crony capitalism is usually identified with Third World despots, like Hugo Chávez, who reward their friends and allies in the business and financial communities. Some might be appointed to top government jobs, as Rattner was. But the chief characteristic of crony capitalism is favoritism for some companies or organizations (unions, for example)–in loans, grants, giveaways, and specific policies.

There’s another aspect. Obama isn’t merely rewarding a few cronies, he’s seeking more and more favored groups to reward. One way he’s doing this is through his energy, health care, and other policies, which would boost certain companies and industries over others. Another way is by providing cheap capital, which gives firms an advantage over competitors who must acquire capital at higher interest rates in private markets. The Federal Reserve, along with Obama’s Treasury Department, plays a big role here.

The effect of Obama’s approach to business has been enormous. In less than six months, he’s changed the relationship between the private sector and Washington. Companies increasingly “compete for government favoritism, not for consumer choice or preferences,” says Republican representative Paul Ryan of Wisconsin.

“Members of Congress are being besieged with calls from businesses who have an expectation of getting a check from Washington,” Ryan says. “The business mindset is, if the government is going to pick winners and losers, I want to be a winner. What it means is all roads lead to Washington.”

2 Responses to “Crony Capitalism – Obama’s Legacy”

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