• Tag Archives cronyism

  • Amazon Should Stick to Capitalism and Avoid the Crony Game

    Posted on by Azrael 1 Comment

    I explained back in 2013 that there is a big difference between being pro-market and being pro-business.

    Pro-market is a belief in genuine free enterprise, which means companies succeed or fail solely on the basis of whether they produce goods and services that consumers like.

    Pro-business, by contrast, is a concept that opens the door to inefficient and corrupt cronyism, such as bailouts and subsidies.

    It basically means big business and big government get in bed together. And that’s going to mean bad news for taxpayers and consumers.

    Washington specializes in this kind of cronyism. The Export-Import Bank, ethanol handouts, TARP, and Obamacare bailouts for big insurance firms are a few of my least-favorite examples.

    But state politicians also like giving money to rich insiders.

    State Governments Are Providing Incentives to Big Companies.

    A report in the Washington Post reveals how states are engaged in a bidding war to attract Amazon’s big new facility, dubbed HQ2.

    Maryland Gov. Larry Hogan (R) will offer more than $3 billion in tax breaks and grants and about $2 billion in transportation upgrades to persuade Amazon.com to bring its second headquarters and up to 50,000 jobs to Montgomery County. …It appears to be the second-most generous set of inducements among the 20 locations on Amazon’s shortlist. Of the offerings whose details have become public, either through government or local media accounts, only New Jersey’s is larger, at $7 billion.

    Richard Florida, a professor at the University of Toronto, explains to CNN why this approach is troubling.

    …there’s one part of Amazon’s HQ2 competition that is deeply disturbing — pitting city against city in a wasteful and economically unproductive bidding war for tax and other incentives. As one of the world’s most valuable companies, Amazon does not need — and should not be going after — taxpayer dollars… While Amazon may have the deck stacked in picking its HQ2 location, the mayors and elected leaders of these cities owe it to their tax payers and citizens to ensure they are not on the hook for hundreds of millions and in some cases as much as $7 billion in incentives to one of the world’s most valuable companies and richest men. …The truly progressive thing to do is to forge a pact to not give Amazon a penny in tax incentives or other handouts, thereby forcing the company to make its decision based on merit.

    It’s not just a problem with Amazon.

    Here’s are excerpts from a column in the L.A. Times on crony capitalism for Apple and other large firms.

    State and local officials in Iowa have been working hard to rationalize their handout of more than $208 million in tax benefits to Apple, one of the world’s richest companies, for a data facility that will host 50 permanent jobs. …the Apple deal shows the shortcomings of all such corporate handouts, nationwide. State and local governments seldom perform cost-benefit studies to determine their value — except in retrospect, when the money already has been paid out. They seldom explain why some industries should be favored over others — think about the film production incentives offered by Michigan, Louisiana, Georgia and, yes, Iowa, which never panned out as profit-makers for the states. …the handouts allow big companies to pit state against state and city against city in a competition that benefits corporate shareholders almost exclusively. Bizarrely, this process has been explicitly endorsed by Donald Trump. …politicians continue to shovel out the benefits, hoping to steer their economies in new directions and perhaps acquire a reputation for vision. Nevada was so eager to land a big battery factory from Tesla Motors’ Elon Musk that it offered him twice what Musk was seeking from the five states competing for the project. (In Las Vegas, this is known as “leaving money on the table.”) Wisconsin Gov. Scott Walker gave a big incentive deal to a furniture factory even though it was laying off half its workforce. He followed up last month with an astronomical $3 billion handout to electronics manufacturer Foxconn for a factory likely to employ a fraction of the workforce it forecasts.

    And here’s an editorial from Wisconsin about a bit of cronyism from the land of cheese.

    The Foxconn deal…should be opposed by Democrats and Republicans, liberals and conservatives. There are no partisan nor ideological “sides” in this debate. The division is between those who want to create jobs in a smart and responsible way that yields long-term benefits and those who propose to throw money at corporations that play states and nations against one another. The Foxconn deal represents the worst form of crony capitalism — an agreement to transfer billions of dollars in taxpayer funds to a foreign corporation. …Walker offered the company a massive giveaway — discussions included a commitment to hand the Taiwanese corporation nearly $3 billion in taxpayer funds (if it meets hazy investment and employment goals), at least $150 million in sales tax exemptions…the Legislative Fiscal Bureau, which analyzes bills with budget implications…pointed out that Foxconn would receive at least $1.35 billion and possibly as much as $2.9 billion in tax incentive payments even if it didn’t owe any Wisconsin tax… This is a horrible deal.

    Amazon Gets Priority with the Postal Service.

    Let’s now circle back to Amazon and consider how it gets preferential treatment from the Post Office.

    I don’t feel guilty ordering most of my family’s household goods on Amazon. …But when a mail truck pulls up filled to the top with Amazon boxes for my neighbors and me, I do feel some guilt. Like many close observers of the shipping business, I know a secret about the federal government’s relationship with Amazon: The U.S. Postal Service delivers the company’s boxes well below its own costs. Like an accelerant added to a fire, this subsidy is speeding up the collapse of traditional retailers in the U.S. and providing an unfair advantage for Amazon. …First-class mail effectively subsidizes the national network, and the packages get a free ride. An April analysis from Citigroup estimates that if costs were fairly allocated, on average parcels would cost $1.46 more to deliver. It is as if every Amazon box comes with a dollar or two stapled to the packing slip—a gift card from Uncle Sam. Amazon is big enough to take full advantage of “postal injection,” and that has tipped the scales in the internet giant’s favor. …around two-thirds of Amazon’s domestic deliveries are made by the Postal Service. It’s as if Amazon gets a subsidized space on every mail truck.

    Privatization Is the Key to Removing Subsidies.

    In this last example, the real problem is that we’ve fallen behind other nations and still have a government-run postal system.

    The way to avoid perverse subsidies is privatization. That way, Amazon deliveries will be based on market prices and we won’t have to worry about a tilted playing field.

    And that last point is critical.

    Cronyism and Corporate Welfare Is an Economic Issue.

    Yes, cronyism and corporate welfare are an economic issue. It is bad for long-run growth when political favors distort the allocation of capital.

    But an unlevel playing field is also a moral issue. It simply isn’t fair nor right for politicians to give their buddies special advantages.

    And it’s both economically harmful and morally harmful to create a system where the business community views Washington as a handy source of unearned wealth.

    For what it’s worth, I also think it should be a legal issue. For those of us who believe in the rule of law, a key principle is that everyone should be treated equally. Heck, that principle is enshrined in the Constitution.

    So I’ve always wondered why courts haven’t rejected special deals for specific companies because of the equal-protection clause?

    Then again, maybe I shouldn’t wonder. After all, the Supreme Court twisted itself into a pretzel to miraculously rationalize Obamacare.

    But none of this changes the fact that it’s time to wean big business off corporate welfare.

    P.S. Just in case you harbor unwarranted sympathy for big companies, remember that these are the folks who are often keen to undermine support for the entire capitalist system.

    Reprinted from International Liberty.


    Daniel J. Mitchell

    Daniel J. Mitchell is a Washington-based economist who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

    This article was originally published on FEE.org. Read the original article.




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  • To Fight Cronyism, We Need a Separation of Business and State

    Posted on by Azrael 1 Comment

    In my 30-plus years in Washington, I’ve lived through some very bad pieces of legislation.

    But the most depressing experience was probably the TARP bailout. In part, it was depressing because bad government policy created the conditions for the crisis, so it was frustrating to see the crowd in Washington blame capitalism (in effect, a repeat of what happened in the 1930s).

    Far more depressing, however, was the policy response. Thanks largely to the influence of Treasury Secretary Hank Paulson, the Bush Administration decided to bail out the big firms on Wall Street rather than use “FDIC resolution,” which would have bailed out depositors but at least shut down big institutions that were insolvent.

    Creative Destruction

    In other words, TARP was pure cronyism. Wall Street firms had “invested” in Washington by giving lots of contributions to politicians and TARP was their payoff.

    With this background, you’ll understand why I asserted in this interview that the dissolution of two business advisory councils is the silver lining to the black cloud of Charlottesville.

    Since that was just one segment of a longer interview and I didn’t get a chance to elaborate, here are some excerpts from an article in Harvard Business Review by Robert Litan and Ian Hathaway about the connection between anemic productivity numbers (which I wrote about last week) and cronyism.

    Baumol’s writing raises the possibility that U.S. productivity is low because would-be entrepreneurs are focused on the wrong kind of work. In a 1990 paper, “Entrepreneurship: Productive, Unproductive, and Destructive,” Baumol argued that the level of entrepreneurial ambition in a country is essentially fixed over time, and that what determines a nation’s entrepreneurial output is the incentive structure that governs and directs entrepreneurial efforts between “productive” and “unproductive” endeavors. Most people think of entrepreneurship as being the “productive” kind, as Baumol referred to it, where the companies that founders launch commercialize something new or better, benefiting society and themselves in the process.

    A sizable body of research establishes that these “Schumpeterian” entrepreneurs, those that are “creatively destroying” the old in favor of the new, are critical for breakthrough innovations and rapid advances in productivity and standards of living. Baumol was worried, however, by a very different sort of entrepreneur: the “unproductive” ones, who exploit special relationships with the government to construct regulatory moats, secure public spending for their own benefit, or bend specific rules to their will, in the process stifling competition to create advantage for their firms. Economists call this rent-seeking behavior.

    That’s the theory.

    What about Evidence?

    Well, Obamacare could be considered a case study since it basically was a giveaway to big pharmaceutical firms and big health insurance companies.

    But the authors look at the issue more broadly to see if there is an economy-wide problem.

    Do we…see a rise in unproductive entrepreneurship, as Baumol theorized? …James Bessen of Boston University has provided suggestive evidence that rent-seeking behavior has been increasing.

    In a 2016 paper Bessen demonstrates that, since 2000, “political factors” account for a substantial part of the increase in corporate profits. This occurs through expanded regulation that favors incumbent firms. Similarly, economists Jeffrey Brown and Jiekun Huang of the University of Illinois have found that companies that have executives with close ties to key policy makers have abnormally high stock returns.

    This is very depressing.

    I don’t want companies to do well because the CEOs cozy up to politicians. If entrepreneurs and corporations are going to be rolling in money, I want that to happen because they are providing valued goods and services to consumers.

    I wrote about Bessen’s research last year. It’s very unsettling to think that companies make more money because of political connections than they do from research and development.

    There are two reasons this is troubling.

    First, it means slower growth because government intervention is undermining the efficient allocation of labor and capital that occurs with productive entrepreneurship.

    Second, cronyism is very corrosive because people equate business with capitalism, so their support for capitalism declines when they see companies getting special favors.

    I wish ordinary people understood that big business and free enterprise are not the same thing.

    Though I fully understand their disdain for certain big companies. Consider the way a select handful of big companies use the Export-Import Bank to obtain undeserved profits. How about the way big agri-businesses rip off consumers with the ethanol scam. Don’t forget H&R Block is trying to get the IRS to drive competitors out of the market.

    Big Sugar also gets a sweet deal by investing in politicians. Another example is the way major electronics firms enriched themselves by getting Washington to ban incandescent light bulbs. Needless to say, we can’t overlook Obama’s corrupt green-energy programs that fattened the wallets of well-connected donors. And General Motors became Government Motors thanks to politicians fleecing ordinary Americans.

    The bottom line is that it’s time to save capitalism from the rent seekers in the business community.

    Reprinted from International Liberty. 


    Daniel J. Mitchell

    Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review.

    This article was originally published on FEE.org. Read the original article.




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  • What Is Cronyism and Why Is It a Cancer?

    Posted on by Azrael 1 Comment

    What Is Cronyism and Why Is It a Cancer?

    It’s easy to define and/or understand most statist policies.

    • We know that a tax increase is when politicians take (or, given the Laffer Curve, try to take) more of your money based on your decisions to work, save, shop, or invest.
    • We know that protectionism is when politicians use taxes and other policies to restrict your freedom to buy goods and services produced in other nations.
    • We know that a minimum wage mandate is when politicians criminalize employment contracts between consenting adults, thus harming low-skilled workers.
    • We know that Keynesian “stimulus” is when politicians borrow from one part of the economy and spend in another part of the economy and pretend there’s more money.

    The list is potentially endless, but there’s one statist policy – cronyism – that I haven’t added to the list because I haven’t thought of a simple definition.

    Are bailouts cronyism? Yes, but it’s more than that. Are subsidies cronyism? Yes, but it’s more than that. Are favors in the tax code cronyism? Yes, but it’s more than that. Are trade barriers cronyism? Yes, but it’s more than that.

    You’re probably noticing a pattern, which is why this new visual from the Mercatus Center is helpful. It illustrates that there are many policies that should be considered cronyism.

    And Mercatus comes up with a definition that we can add to our list.

    • We know that cronyism is when politicians create “privileges that governments give to particular businesses and industries.”

    Capitalism Dragged Through the Mud

    Speaking of which, one of the most damaging features of cronyism is the way that it gives capitalism a bad name.

    Many people equate free markets with “business.” So when people in the business sector get special favors, regular folks conclude that capitalism is a “rigged” system.

    In theory, this false impression could be offset by an aggressive educational campaign by those who support free enterprise. Unfortunately, that task is rather difficult since many people assume Republicans are the pro-capitalism party. So when they see the GOP favoring corrupt handouts to business such as the Export-Import Bank and the sleazy ethanol program, they conclude – once again – that capitalism is rigged for the politically powerful.

    Cronyism is a cancer that compromises and erodes genuine capitalism.

    And the battle to separate capitalism from cronyism is further hindered when major figures in the business world (such as Warren Buffett) get in bed with government.

    Another example is Elon Musk, the head of Tesla, Solar City, and SpaceX. He is known as a visionary entrepreneur, which is good. But Andy Quinlan of the Center for Freedom and Prosperity explains that he also has put taxpayers on the hook to underwrite and prop up much of his business activities.

    It was announced this week that one of Elon Musk’s companies, Tesla Motors, will buy one of his other companies, SolarCity, for an all-stock deal worth $2.6 billion. …With the amount of taxpayer support both companies have received, perhaps the rest of us should get a vote… The deal comes as SolarCity has floundered despite significant taxpayer support through a bevy of state and federal tax credits and subsidies. Nevertheless, the solar energy company’s stock has been in long term decline as the company struggles to develop a profitable market not reliant on generous helpings of taxpayer support. Tesla, too, has fed repeatedly at the government trough. The government provided federal loan guarantees and tax credits to help manufacture its electric vehicles. It also subsidized the purchase of those same vehicles to increase sales. Even still, the company makes more money selling “carbon credits” to other manufacturers than it does electric vehicles. …Musk’s other endeavor, SpaceX, also relies heavily on government. Obviously much of its business comes from government contracts, but more interesting is how those contracts are apparently obtained. …this year’s National Defense Authorization Act contains an amendment from Senator John McCain designed to eliminate from competition the Defense Department’s current supplier of rockets and pave the way for SpaceX to take over, despite the fact that its rockets aren’t yet powerful enough for the job.

    Writing for Reason, Veronique de Rugy adds her insight

    Elon Musk delivered a much-anticipated speech…where he laid out his vision for colonizing Mars…a testament to human innovation and determination. …it might be more impressive if Musk could provide a vision for how his companies can succeed here on Earth first, especially without heavy reliance on taxpayer support. …Musk is no stranger to cozy relations with federal and state governments. All three of his companies have benefited heavily from taxpayers. Yet despite generous green energy handouts, his SolarCity is heavily indebted. He now wants to merge it with his electric car company, Tesla Motors, which also benefited from almost $1.3 billion in subsidies. Solidifying his crony credentials, the epitome of crony capitalism itself, the Export-Import Bank of the United States, has subsidized the payloads for numerous SpaceX launches. The Ex-Im Bank’s chairman misrepresented this as support for “small business.” …There’s no doubt that Musk is an impressive salesman and innovator. …Now that he has set his sights on Mars, let’s hope—for the future of science and exploration—that he…has the courtesy to leave taxpayers out of it.

    Amen.

    It’s great when entrepreneurs are successful. And I don’t resent their wealth in the slightest.

    But only if they earn their money honestly, in a genuinely free and competitive market.

    Cronyism, by contrast, is a cancer that compromises and erodes genuine capitalism.

    Republished from Dan Mitchell’s blog.


    Daniel J. Mitchell

    Daniel J. Mitchell is a senior fellow at the Cato Institute who specializes in fiscal policy, particularly tax reform, international tax competition, and the economic burden of government spending. He also serves on the editorial board of the Cayman Financial Review. 

    This article was originally published on FEE.org. Read the original article.


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