Crony Capitalism and Economists

The Grumpy Economist has a great post on the economic effects of crony capitalism. Some quotes:

Economists tend not to pay enough attention to this sort of thing, in part because it's hard to measure. We argue about taxes and government spending because we can at least try to measure them. We acknowledge that government mandates are the same as taxing and spending, but tend to leave them out because it's hard to get numbers. Intrusive regulation, just as damaging, is even harder to quantify. And pervasive corruption harder still. Yet it's just as much, maybe more, sand in the gears as are headline taxing and spending.

It just looks like mysterious "low productivity." Keynesians see low output and employment and ask for more stimulus. That's not the problem.

Local Republican Crony Capitalism

Mayor Sanders performs a nice little feat of local crony capitalism, as first reported by the San Diego Reader. From the U-T.

San Diego Mayor Jerry Sanders allowed Qualcomm Stadium to be temporarily renamed Snapdragon Stadium to promote the wireless chip giant’s smartphone processor during three nationally televised football games despite advice from the City Attorney’s Office that the move wasn’t legally permissible and amounted to free advertising.

The Dec. 7 memo from City Attorney Jan Goldsmith said the terms of the naming rights agreement with Qualcomm don’t allow the company to make any changes, even on a temporary basis, without written consent authorized by the City Council, which never happened. The change also appears to have violated the city’s sign ordinance which generally prohibits off-site advertising, such as billboards and signs, for products that aren’t sold on the premises.

“Qualcomm’s proposal seeks to use the identifying signage to promote its new product without paying any additional consideration to which the city would otherwise be entitled,” the memo said. “Qualcomm does not have that right under the agreement. Per the agreement, the content of the identifying signs is clearly limited to the name of the stadium as ‘Qualcomm Stadium’ and not subject to use for advertising.”

The temporary name change of Jack Murphy Qualcomm Stadium to Snapdragon, despite a memo from City Attorney Jan Goldsmith that the name change was not authorized unless approved by the City Council just disgusts me. The city loses money every year on the stadium, undermining public support for everything else that Mayor Sanders has proposed, including a new City Hall. Why would the mayor engage in such an egregious display of crony capitalism, in effect donating millions of dollars of free advertising revenue to Qualcomm? What is the value of exposure to the approximately 30 million viewers that watched the three games during the temporary name change? The mayor seems totally insensitive to taxpayer sentiment, his false claims of calamity in support of Prop D come to mind. Why elect Republicans if they are just going to gouge taxpayers on behalf of big business, as opposed to Democrats gouging the taxpayers on behalf of the employees unions. This is an example of why we shouldn't put government in charge of anything intended to make money. It's also why I plan to vote for Carl DeMaio, because I believe he is the Republican least likely to engage in such shenanigans in the future.

The Quote to Start the New Year. . .

. . . comes from Chrystia Freeland, right, (H/T HotAir) who looks at the unrest the world over and comes to this conclusion.

The unifying complaint is crony capitalism. That’s a broad term, to be sure, and its bloody Libyan manifestation bears little resemblance to complaints about the Troubled Asset Relief Program in the United States or allegations of corrupt auctions for telecommunications licenses in India. But the notion that the rules of the economic game are rigged to benefit the elites at the expense of the middle class has had remarkable resonance this year around the world and across the political spectrum.

Indeed, it is a call for a measure of justice, a universal feeling among human beings of all cultures. Here in the United States the issue has propelled the tea party movement, and to a lesser extent the coffee party (to the extent that it is a movement) and occupy. The issue resonates with left, right and center. Freeland is hopeful for the western democracies on this score.

As for crony capitalism, this slogan of the street is both a challenge for the state and an opportunity. For some regimes, of course, crony capitalism, with a side order of repression, is the only dish on the menu. For them, the trends of 2011 do not bode well.

But most of today’s troubled market democracies don’t need a revolution to sweep away their cronies. What they do need is a new version of capitalism, designed for the 21st century. That is what the world’s protesters, in their different ways, are all asking for. Here’s hoping that 2012 provides some politicians with some answers.

The left sees crony capitalism and concludes that more regulation of business is required to prevent business from seeking ill gotten gains from government intervention. They forget problems of regulatory capture and the fact that regulation favors the entrenched business interests of today, against the entrepreneurs of tomorrow.

The right calls for less regulation, forgetting to tackle the problem that government is enriching corporations in the first place. The tea party answer, is for government to be stripped of the power to enrich corporations in the first place. In my opinion, such a theory is incomplete, because some opportunities for mischief, especially in financial markets are so great that after the fact prosecution is an insufficient deterrent. See some of the danger in The War on Terabytes from the Economist. The answer has to be transparent and simpler regulation. I will post on this more extensively later, but in summary, financial regulation is too complex to be understood or to be effective. Further, given the wide discretion given regulators, made worse by Dodd-Frank, the danger of regulatory capture is increased. Protecting our financial markets from a recession causing melt down requires fewer regulations of a well understood nature.

Meanwhile, crony capitalism must be put to shame. The Obama administration has been making a very good case, in the negative sense, through Solyndra, Fisker, and the GM and Chrysler bailouts.

Picture of Chrystia Freeland from wikipedia.org.

Payroll Tax Fiasco

Pillars of the economy meet with members of Congress.

Today's WSJ editorial excoriates House Republicans for their mishandling the payroll tax debate. While there is plenty of tactical political blame to be shared by Boehner and McConnell, the real crime is that we are debating this at all. The tax holiday on payroll taxes that temporarily cut the rate from 6.2% to 4.2%, is never going to be made permanent. Everyone knows it, so any impact on hiring is already discounted. The current tax holiday has done nothing for unemployment, which remains stubbornly high. Worse it is blowing a hole in the social security accounting, bringing the day of bankruptcy closer, much faster.

A better approach comes from John B. Taylor, on the opposite page from the editorial, who argues that stable tax policy would help recovery much more than any gimmickry. I would say that stable regulatory policy should be added to the mix, as well. He points out that the Congressional Budget Office has called for higher tax rates as one option to repair social security's balance sheets. The current loss of revenue from reduced rates only makes that option more attractive in the long run, so it is a self defeating policy, as employers know that they are likely to be saddled with higher taxes later and just have to lay people off. As a manager, I am always trying to balance hiring against future budget expectations, sometimes leaving positions vacant as a hedge. I can't imagine business owners think differently.

Taylor has a slightly different argument about why the temporary holiday is bad.

But the policies are worse than doing nothing at all. Rather than stimulate the economy, they hold the economy back by creating policy unpredictability and by distracting Washington from crucial long-term reforms that are key to restoring economic growth and creating jobs.

He also attacks the complexity of the tax code, and notes that there are 84 temporary provisions expiring this year. I think the Congress likes the temporary nature of the provisions, because they can collect rents from special interests every few years as inducement to extend them. This is in line with my recent theme of crony capitalism. How can the following temporary measure be of any value to the economy? "Three year depreciation for race horses two years old or younger." Really, when the race horse owners, those pillars of the American economy, need this policy extended, I am sure they are going to be very generous giving to their senator's re-election campaign.

Congress - Putting the Crony into Capitalism

Walter Russell Mead, getting to be one of my favorite writers, takes down Congress and Wall Street on their extremely cozy relationship. This whole article is worth a read, because it proves the old saw that the real crime is what's legal. A brief summary.

• Hedge fund investors and other key Wall Street insiders get tipped off by Congress and staffers on legislative direction. From the WSJ: When Senate Democrats finally brokered a compromise over the proposed health-care law, a group of hedge funds were let in on the deal, learning details hours before a public announcement on Dec. 8, 2009.
• As Mead notes. Fabulous profits are there to be made, perfectly legally; legislators do Wall Street a favor by giving the hedgies an early head’s up, the hedgies reciprocate by making large campaign contributions. Everybody wins except for the pathetic losers not part of the magic inner ring, and nobody breaks any laws.
• Congresscritters in turn, personally benefit from being brought in on deals that you or I can only dream about. Nancy Pelosi and her husband were parties to a dozen or so IPOs, many of which were effectively off limits to all but the biggest institutional investors and their favored clients. One of those was a 2008 investment of between $1 million and $5 million in Visa. . .
  
• OWS got it wrong, the problem isn't Wall Street, but the coziness between Wall Street and Washington, which the Tea Party better understands. The paternalistic and benevolent government envisioned by the architects of the blue social model has morphed into a corrupt insider state that can no longer regulate or protect. The answer can’t be to give more power to people like Chris Dodd; that is what the Tea Party understands and the OWS folks too often miss.

Considering all of the advantages that Congress has, we find studies that show that members of the House of Representatives stock market returns beat the market by 6.8%. To quote Dean:

These guys write the legislation, they make the rules... and they're completely immune from taking advantage of gaming the situation in any manner they feel... and they still can't make out any better than 6 and 12 percent above the market average?

U.S. Congress: where corruption meets complete incompetence.

No Wonder People Hate Big Pharma

Eli Lilly is shilling for Medicare Part D, the better to receive government dollars in the form of medicare reimbursements. Their scare campaign is shameless hucksterism and favor-currying with a corrupt Democrat White House and members of Congress. This is the evil of too much government; your tax dollars go to government programs that fuel profits that get recycled into expanding these same programs to take more of your tax dollars. Boycott Eli Lilly. They can have their freedom of speech, I can avoid their products.

Lie of the Day

Secretary of Energy Steve Chu on his actions in the Solyndra scandal.

"As the secretary of energy, the final decisions on Solyndra were mine, and I made them with the best interests of the taxpayer in mind," Chu told members of the House Energy and Commerce.

"And I want to be clear. Over the course of Solyndra's loan guarantee, I did not make any decision based on political considerations. My decision to guarantee a loan to Solyndra was based on the analysis of professional -- experienced professionals and on the strength of the information they had available to them at the time."

I look forward to the day when this perjury is proved, as anyone who has followed the story knows the Secretary of Energy is lying.

Quotes of the Week

Some great quotes about the state of the nation this week. First from Dean, on diagnosing the exact reason that the occupy movement appears to be careening out of control.

By rejecting the norms and institutions of civlized society they only find themselves recreating those institutions but without the underpinning of the rule of law. Without the rule of law, the Occupy "villages" become a study in the tyranny of the majority where pendulum swings in the "mood" of the General Assembly. . .

Next, from Peggy Noonan, quoting Paul Ryan on what should be the real object of our ire, both tea partyer and occupier:

The "true sources of inequity in this country," he continued, are "corporate welfare that enriches the powerful, and empty promises that betray the powerless." The real class warfare that threatens us is "a class of bureaucrats and connected crony capitalists trying to rise above the rest of us, call the shots, rig the rules, and preserve their place atop society."

Amen, brother.

Palin on Crony Capitalism - Daniels on the Red Menace

Two prominent Republicans who are not declared candidates for President are making their mark on the national debate. Sarah Palin has been highlighting the issue of crony capitalism of late and Mitch Daniels new book is a serious look at the mountain of debt he sees as a threat to the Republic.

Even before the recent Solyndra blow up, here was Sarah Palin diagnosing our current ills on September 4th in Iowa.

Yeah, the permanent political class – they’re doing just fine. Ever notice how so many of them arrive in Washington, D.C. of modest means and then miraculously throughout the years they end up becoming very, very wealthy? Well, it’s because they derive power and their wealth from their access to our money – to taxpayer dollars. They use it to bail out their friends on Wall Street and their corporate cronies, and to reward campaign contributors, and to buy votes via earmarks. There is so much waste. And there is a name for this: It’s called corporate crony capitalism. This is not the capitalism of free men and free markets, of innovation and hard work and ethics, of sacrifice and of risk. No, this is the capitalism of connections and government bailouts and handouts, of waste and influence peddling and corporate welfare. This is the crony capitalism that destroyed Europe’s economies. It’s the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys. It’s a slap in the face to our small business owners – the true entrepreneurs, the job creators accounting for 70% of the jobs in America, it’s you who own these small businesses, you’re the economic engine, but you don’t grease the wheels of government power.

Palin attacks the key issue that unites ordinary individuals left, right and center, the use of government to further enrich the already rich and powerful. It is the challenge of our time to convince those on the left that it is constant government meddling in the economy and the immense regulatory regime, not free markets, which lead to this outcome. Probably better to start with those in the center, who might be more open to this line of argument. The GOP needs to go on the offensive against crony capitalism, unfortunately they have been guilty just as have the Democrats in purchasing favors for special interests. However, the time is ripe for this message. We could start by stripping out all of the special favors in the tax code. Starting over with a lower corporate tax rate, but no special exemptions would go a long way to restoring public belief in the party who proposed that plan.

While Palin attacks the most politically compelling issue, Daniels attacks on the debt, on which he is unusually well qualified. His book, Keeping the Republic, Saving America by Trusting Americans is brilliantly titled. The tagline, Change that believes in you cleverly turns Obama's promise on its head. I am really thrilled that he has adopted my ideas on means testing social security and medicare. (OK, probably not, but I feel vindicated since few other prominent Republicans have supported my position.) He also makes the point that the whole of the federal budget should be under consideration, including defense. This issue of defense spending is going to split Republicans, but it needs to be considered, since it comes in at $700 billion plus per year.

More important than any policy prescription offered by Daniels, is his understanding of the need to limit the scope of the federal government and return to a philosophy of self governance.

The coming debate is not really about something so mundane as tax policy or health care or energy choices. It is about things more fundamental: who is in charge, the people or those who supposedly serve at their sufferance?

Answering that it is the former, requires the people to be capable of managing their own affairs. They are in fact so capable. But we should remember that it is ingrained in the language of the left that all mankind's ills: sickness, poverty, old age, sloth, and gluttony are not solved by individuals or capitalist institutions, only by government. But a government powerful enough to solve such issues would be a fearful master indeed, and we would be subjects, not citizens. It is good of Daniels to remind us.

More Picking Winners and Losers

If there was any doubt as to why corporations and unions contribute large sums to political campaigns, today's news should dispel any doubt.

1. Ben Nelson (D-NEfarious) quietly introduced a change to the current financial reform legislation that would hugely benefit Berkshsire Hathaway, Warren Buffet's conglomerate investment vehicle, headquartered in Omaha. Berkshire Hathaway has large exposure to derivative contracts that the bill, as previously written, would have required reserves against potential losses against to be set aside. Now the bill will only apply to new derivatives. This probably makes sense, but why does it take lobbying by a firm led by one of the nation's wealthiest to make a change. Because it's about who wins and loses. No amount of campaign finance reform could stop Buffet from influencing this legislation. All he would have to do was to drop a few lines in his newsletter about what an idiot Ben Nelson was, and Nelson's opponent would be showered with cash. Unless were going to totally end free speech in America,.... (never mind, I don't want to give the left any ideas.)


2. Meanwhile the WSJ editorial pages discuss UPS latest attempt to compete with FedEx, by saddling FedEx with the same Teamster problems that plague UPS. What does Congress have to do with this? The rules for organizing unions at airlines and railroads are different for trucking companies. Under the Railway Labor Act, unions must organize nationally, which has been an impediment to unionization of FedEx. Meanwhile the teamsters strikes have often caused havoc at UPS including the infamous 1997 strike. The Chair of the House Transportation Committee, James Oberstar (D-mORalizing) has tried to change these rules to favor the Teamsters and UPS. So why wouldn't FedEx, UPS and the Teamsters all be pouring cash into key elections? For FedEx, their very survival as a company might be threatened.

3. As previously discussed on these pages, the current financial reform bill makes permanent the idea that the federal government will become the permanent Bailout King. Obama says otherwise, but why would his bill include a $50 billion dollar "resolution" fund, if it wasn't intended to be used to bail out companies that are in trouble. Obama says this won't cost tax payers a dime, because it will be paid for by taxes on financial firms. But how are those firms and their shareholders not taxpayers? And how is it that those expenses won't be passed along to consumers, since they will be a cost of doing business for every financial firm?

Obama wants to make this guy look small time.

4. Closer to my home of San Diego, a $228 million dollar redevelopment project downtown has been stalled, again, by the Coastal Commission. If you were a developer, spending money putting plans together, and having bid a project, wouldn't you be tempted to spend a little coin to influence the membership of the commission? I would think so.

None of this is to say that regulation is always bad, or government has no role. But we can see that the side effects of regulation and picking winners is to cause financial capital to be converted into political capital in our economy. That should cause us to regulate cautiously and minimally. It should mean that we try to limit the size and scope of government. It means, we should adopt the Tea Party agenda.

Programming Note

Out of town for a few days, so blogging will be light. We have two big issues in the Congress right now, Cap and Trade and Financial Reform. My sense is that Cap and Trade won't pass unless significant sweeteners for coal state Democrats are thrown in the mix, in which case, it won't actually do much to reduce Carbon Dioxide emissions. We should oppose this bill for those reasons and because it will be one more way for the Congress to rewards special interests and continue to rake in campaign cash from same. I intend to eventually post about how the simplicity and fairness of the tax system contribute to economic growth; it is not sufficient to merely go for reductions in taxation and spending, although they are important as well. Cap and trade, like the health care Obamanation is another step in the wrong direction.

On financial reform, I blogged on Sunday on this issue. We should remain vehemently opposed to the Dodd's bill because it keeps Too Big To Fail alive and well, permanently entrenching crony capitalism in our system.

Banking and Capitalism, as in Crony and Capitalism

Obama is again attacking bankers as a politically expedient scape goat as anger over bank bonuses spreads by proposing a bank tax. Interestingly, in 2009, Obama was worried about bank losses, now he complains about bank profits. However, I have noticed a trend among some libertarian leaning bloggers to be a bit non-chalant about this issue because they just see it as the free market at work. I beg to differ and emphatically. Although Obama's bank tax is a horrid idea, because it plays investors for suckers, (or Chicagoans), Republicans better come up with a plan to deal with the moral hazard, see Dean' video post.

Why is there outrage over bank bonuses in the first place? Because the taxpayers are being played for suckers. The banks made risky loans and fobbed off the risk to taxpayers, were bailed out with taxpayer dollars and now those same executives are rewarded with big bucks. Left, right or libertarian, who can't be outraged. But Obama tipped his hand in the waning days of the Massachusett Senate election that he is going to use Republican opposition as evidence of Republicans continuing to favor Wall Street over Main Street, and to be fair, he has a point. John Stossel has an excellent review of crony capitalism in general, but I want to focus on what to do about the banks.

It is too simple to just say that government shouldn't bail out the banks. It is widely understood that a series of bank failures has serious implications for the economy as a whole and no one is really going to risk finding out what would happen if a half dozen of the country's largest banks went bust. The bankers themselves are aware of this. Further, the bigger a bank gets, the more likely it will be seen as "too big to fail." This drives down its cost of obtaining funds, as investors realize there is little downside to investing in the biggest banks. This allows the big banks to get bigger, exacerbating the problem.

What to do? All banks are required to keep capital reserves to preserve system stability. These reserves, are of necessity, much less than the total amount of loans outstanding; if the reserve requirement were 100%, how could they make loans? Reserve requirements are more typically below 20%, (this is not my area of specialty, so see the wiki article for more.) In my view, a simple way to reduce the moral hazard and simultaneously remove the funding advantage of the big banks is to increase the reserve requirements as a banks size increases. While this sounds simple it would certainly be tricky in practice. How would one measure size for example, on an absolute or relative scale? However, I believe that such a system is achievable and would have the salutary effect of making the larger banks more safe, not less, as they increased in size. It would also increase the cost of capital as banks exceeded threshold size, thereby limiting the positive feedback effect that allows the largest banks to have the lowest cost of funds and continue to grow unchecked. Republicans need to get in front of this issue, because I think that Obama will be able to get traction against them if they don't.