Crony Capitalism in America
In today’s business world we are no longer receiving the capitalism we were once promised in our classrooms. It has been a long time since companies were solely judged by how efficiently they deliver products and services to the marketplace. Instead, companies now succeed by how well politicians listen to campaign donations and are willing to help. That is because large multinational companies continue to rely on governmental interference in the economy to choose the winners and losers. This intimate relationship between Wall Street and Washington is seen through the federal government’s strong record of giving favorable regulations, subsidies, tariffs, and bailouts to their campaign contributors and former Harvard classmates.
Large multinational corporations have solid influence in legislation. This interferes with free market competition, as the government will harass the competitors of their “friends.” This practice replaces business’ need for innovation with being politically well connected. For example, during the “browser wars” in 1998, Netscape, a computer service firm, spent $1.7 million on lobbying while simultaneously being beaten by Microsoft. Netscape, to hurt the growing popularity of Microsoft, convinced the Department of Justice that Microsoft broke antitrust laws. On top of the money spent on having a presence in Washington, Netscape also led a lobbying effort with 15 other companies (with their own lobbyists) to Congress in order to make Congress interfere in the market and stop Microsoft’s growth. The consequence was that Microsoft was accused of breaking antitrust laws by introducing the Internet Explorer browser and allowing it to be exclusively part of the Windows operating system. Netscape claimed Microsoft had a monopoly over the internet and was intentionally hindering other browsers’ access to Internet Explorer. In 2000, the court sided with prosecutors and ruled against Microsoft. In 1998 one Microsoft official was quoted saying “consumers, not government regulators, should determine the future of technology.” The lawsuit’s most damaging effect was that The District of Columbia court ruled that the company must be broken up. This ruling was reversed by the Appeals court a few months after. In 1996, Microsoft was spending $623,000 on lobbying on Capitol Hill. After being harassed by the DOJ, they learned that they should be more active in lobbying Washington like their competitors. In 1998, Microsoft spent $5 million on lobbying activities and in 2019 that number is close to $18 million. This large increase in lobby spending can be explained by this statement Bill Gates made in 1998: “We should have stepped up our activities there a little bit sooner, particularly in light of the fact that our competitors were giving a lot of political donations and spending a lot of time back there.”
The more corporations spend on lobbying, the more they will be heard and, unlike Microsoft, left unbothered. Therefore, the power of regulations and government can work favorably for companies that have a presence in Washington. The most well-connected company can influence regulators to harm competition. For example, it was announced in early 2019 that Facebook CEO Mark Zuckerberg wanted more federal regulation in harmful content, election integrity, privacy, and data portability parts of the social media market. This sounds counterintuitive as calling for regulations would negatively affect Facebook earnings. However, the logic is reversed. Facebook welcomes more rules and requirements in these categories since it will decrease the threat of new entrants to the market. This is because when more regulations appear, new social media startups must hire more compliance officers, accountants, consultants, and lawyers to get through the paperwork and guide the business through the jargon. But smaller start-up companies cannot afford this large overhead cost. This hinders any company wishing to challenge Facebook’s growth or ability to continue operating. And if the competitor seems to have a growth potential, then it will be acquired and integrated within the superior economics of scale of Facebook. Thus, governmental regulation would help Facebook sustain its monopoly in the social media market.
This very small group of farmers get this preferred treatment because they are very politically engaged, accounting for 33 percent of crop industries’ total campaign donations, and 40 percent of crop industries’ total lobbying expenditures.
Big Tech is not the only sector with ties to Washington. The American sugar industry has benefitted from tariffs on sugar imports and billions of subsidies at the expense of taxpayers since the Great Depression. According to Bryan Riley, Former Jay Van Andel Senior Policy Analyst in Trade Policy, sugar beet and sugarcane farms account for about one-fifth of 1 percent of U.S. farms, and sugar producers account for 1.3 percent of the value of total farm and livestock production. He continues that of the total 2.2 million farms in the United States, there are just 3,913 sugar beet farms and 666 sugarcane farms.
According to Ross Marchand of the Taxpayers Protection Alliance, for this special group the governmental favoritism consists of subsidies when sugar prices fall below a certain level, protection from foreign competition, and a guarantee that prices stay high through production quotas. In total U.S sugar consumers paid about $4 billion more for sugar than the international price in 2019. This number only increased from the 2014 cost of $1.4 billion when raw sugar's world price was 17 cents a pound, compared with 24.3 cents in the U.S. This very small group of farmers get this preferred treatment because they are very politically engaged, accounting for 33 percent of crop industries’ total campaign donations, and 40 percent of crop industries’ total lobbying expenditures.
However, the worst practices are present in America's most regulated sector: banking. In the financial services sector, there seems to be an unspoken rule that Washington will bail out banks whenever there is trouble. For example, President Reagan’s administration bailed out Continental Illinois Bank, the eighth largest commercial bank at the time, in 1984. The same went for President Bill Clinton’s administration, which in 1998 bailed out Long-term Capital Management, a hedge fund that threatened to bring down other banks if it itself declared bankruptcy.
However, no other relief package can compare to TARP, Troubled Asset Relief Program, which in 2008 took effect during the Bush administration, and gave financial, automotive, and manufacturing giants a combined $700 billion in bailouts. This large relief package was given to financiers that contributed to the severity of the crisis by creating and trading subprime mortgages. Every company that got a piece of that bailout, had a lobbying arm in Washington. This pattern causes dependence on government by large financial firms. The firms lack any fiscal discipline for their actions because they know that their friends in the government will bail them out whenever crisis arises. The moral hazard plays itself out as banks are not responsible for their actions, as the government made clear it will pay for their mistakes. This leads firms to get into more risky speculation, which they would not be doing if they did not have a government guarantee.
With the increase of governmental regulations and influence over the economy to choose the “winners and losers,” every company feels the pressure to keep government close.
This is not to say that government regulations are never welcomed in our economy. Regulations that protect third parties by handling externalities from pollution and environmental waste caused by corporate incompetence are welcomed by consumers. In addition, regulations that protect consumer information around emerging technologies are needed. However, most governmental interferences in the economy do not help the American consumer. A large part of government regulations in the economy are put into place with good intentions to “do something” but the solutions exacerbate the problem. While the rest are in place to benefit their business friends. For example, corn subsidies and steel tariffs are here to protect the profits of well-connected American businesses from cheaper foreign competition while hurting American consumers.
From lobbying Congress, to promising government bureaucrats managerial positions after they leave their jobs, the influence that Big Business has over Washington is growing. However, we should not blame the corporations who participate in legal bribery, but our government officials. I will never see companies having a moral compass when the goal is to make money for their shareholders. With the increase of governmental regulations and influence over the economy to choose the “winners and losers,” every company feels the pressure to keep government close.
I blame government officials for letting this unholy alliance continue. Like corporations, governments are made up of groups of individuals. Except, the government is formed to serve the interests of the people. Sadly, government is made up of individuals and individuals have their own interests. Regardless of how society wants government to act, human vice is prevalent in everyone and does not go away once you become a senator.
The increase in government power allows them the opportunity to exploit their current taxpayer funded position for personal gain. The most recent example is the crony capitalism involved in the Walmart and Oracle approved acquisition of TikTok. President Trump ordered ByteDance to divest TikTok because of the national security risks possessed by the video app, Musical.ly, giving away the collected data (browsing and search history, IP addresses) of American customers to the Chinese government. The Trump administration then allowed for a bid and negotiations to match TikTok with an approved acquirer. It is no coincidence that both Oracle and Walmart got the winning bid while donating heavily to Republican causes. According to Wall Street Journal article Trump, TikTok, and Crony Capitalism, Larry Ellison is the co-founder of Oracle and a prominent Republican donor, while current Oracle CEO, Safra Catz, worked on the executive committee for the Trump transition team in 2016. Both companies having stakes in TikTok allows them to compete with public Trump critique, Jeff Bezos.
There is no accountability for politicians like Waters.
One example of the many congressional corruption scandals involves longtime Democrat Maxine Waters, who in 2010 was accused by the House Ethics Committee of helping to provide bailout funds to OneUnited Bank. The problem was that the bank and her family have a close relationship as many executives were close friends and her husband was a former Chairman who owned $350,000 worth of stock at the time. Despite her conflict of interest, she helped assist her Chief of Staff (her grandson) to further guide OneUnited Bank to get the bailout funds. She even used her political influence to have Treasurer Henry Paulson take meetings with executives of OneUnited Bank. The ethics committee admitted that she technically did not break any laws but she did use her political connections to influence the Treasurer to grant $12 million to OneUnited Bank. This scandal is among many others in which she used her seat in Congress to benefit her family and business associates. There is no accountability for politicians like Waters. She is currently in her 15th term in Congress and serves as Chairwomen of the House Finance Committee.
Insider deals and corruption are also prevalent in America’s so-called 4th branch of government, the bureaucracy. The problem with these unelected people having a growing influence is that voters cannot vote them out, unions are making it harder to fire them, and politicians do not have the incentive to defund them. The prevalent problem is the lack of accountability—regulators can join the companies they are supposed to regulate. Defenders of the “revolving door” between government and the private sector say that companies need individuals that understand how to comply with rules and regulations. However, there is a conflict of interest when a regulator must oversee the same company which they plan on moving to in the future.
Our politicians feel very comfortable in their seats.
Besides the federal financial service agencies, the highest turnovers in government to industry is in the Food and Drug Administration (FDA). According to a NPR article titled A Look At How The Revolving Door Spins From FDA to Industry, more than a quarter of the Food and Drug Administration employees who approved cancer and hematology drugs from 2001 through 2010 left the agency and now work or consult for pharmaceutical companies. Dr. Vinay Prasad, assistant professor of medicine at Oregon Health and Science University, says this pattern can be troubling because for current regulators “if you know a major post-employment opportunity is on the other side of the table, you give them the benefit of the doubt”.
In addition to politicians and ambitious bureaucrats having the opportunity to cozy up to corporations, they also are not accountable to the people. This is reflected in the reelection percentage in the 2018 midterm election. The reelection rate for incumbent seats for senators and congressmen were 84% and 91%, respectively. Our politicians feel very comfortable in their seats. This coziness gives politicians the ability to stay in office for years while allying themselves with their own special interests at everyone’s expense.
To stop this unholy alliance, the most effective way would be to grant term limits to our politicians and freeze the “revolving door” between government officials getting jobs in the private sector. To enact term limits on our federal politicians, a constitutional amendment must be passed. Constitutional amendments were created to serve as a check to the federal government by updating our constitution. The process has two paths, the first is to get two-thirds of both houses of Congress to pass a proposed constitutional amendment, then send the proposed amendment to the states for ratification, finally three-fourths of the states (38 states) will ratify the proposed amendment. The second path begins with two-thirds of state legislatures (34 states) asking for Congress to call “a convention for proposing amendments.”, then states send delegates to this convention, where they can propose amendments to the Constitution. It similarly ends with three-fourths of the states (38 states) ratifying an amendment approved by “convention for proposing amendments,”.
In having term limits, the pressure to win re-election would diminish, since those running for the seat would face the reality that their job could be temporary and can never be a lifelong career. Instead of pocketing money from businesses, they would start focusing on their duties to the country. When combining the consequences from term limits and the implementation of “cool off” policies for all government employees switching to the private sector, corporations will see less of an incentive to lobby and participate in the political process. This can limit Big Business interfering in our elections without the need to create an additional amendment to our constitution.
For many years Washington has been selling their politicians, and bureaucrats to the highest bidder. In return for donations, politicians choose the winners and losers in the economy by introducing regulations, subsidies, and bailouts to their friends. If our government does not start to change this open corruption, then the middle class should start hiring lobbyists too.
By Daniel Zurek
Illustrations done in collaboration with the New Media Artspace at Baruch College. The New Media Artspace is a teaching exhibition space in the Department of Fine and Performing Arts at Baruch College, CUNY. Housed in the Newman Library, the New Media Artspace showcases curated experimental media and interdisciplinary artworks by international artists, students, alumni, and faculty. Special thanks to docent Jose Daniel Benitez for creating artwork for this piece.
Check the New Media Artspace out at http://www.newmediartspace.info/