Monday, January 23, 2012

Crony Capitalism vs. Free Markets

You decide...

Crony capitalism is an economy in which success in business depends on close relationships between business executives and government officials (those who are supposed to be democratically elected politicians looking out for the people's interests). Crony capitalism may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, subsidies, the non-prosecution of any wrong-doing, and so forth.

We've heard all the Republican presidential candidates accuse President Obama and the Democrats of crony capitalism, and they would be correct. GM is just but one of many examples. In this particular case, Obama says he saved jobs and the auto industry. The Republicans have cried, "Crony capitalism!", and that Obama had put the UAW union workers ahead of GM shareholders.

The Republicans and the Democrats are both right, and they're both wrong. Both parties are guilty of crony capitalism. The Republicans had also voted to bail out the financial institutions and auto industries after the housing market collapse and the stock market crash in 2008.

And the $700 billion for TARP was just the tip of the iceberg (the near interest-free cash from the Federal Reserve to commercial banks with no stipulations and no prosecutions for fraud.)

Both of our political parties have been equally guilty of crony capitalism for decades. Both parties have hoodwinked the American taxpayers into believing that we've had a free market economic system for years, and we went to war to protect these free markets --- but they're not really "free" at all for the American taxpayers. We've always been forced to bail them out.

For decades the government has decided which businesses will fail and which ones would survive. Lobbyists for the major banks and corporations have been paid very well to influence our elected officials. (Read my post: Lobbyists on K St. paid like CEOs on Wall St.)

Even when bankruptcies are filed, taxpayers are still forced to pick up the tab. Here are just but a few past examples (before the most recent bailouts).

1970 Penn Central Railroad $3.2 billion
1971 Lockheed $1.4 billion
1974 Franklin National Bank $7.8 billion
1975 New York City $9.4 billion
1980 Chrysler's FIRST Bail Out $4 billion
1984 Continental Illinois National Bank & Trust $9.5 billion
1989 Savings & Loan $293.3 billion
2001 Airline Industry $18.6 billion

See the complete list of bailout recipients (not including subsidies).

We've bailed out lots of industries, even when it wasn't necessary, just to manipulate a company's financial obligations and labor contracts for the benefit of big corporations (small businesses are always allowed to fail).

A free market society is supposed to be a competitive market where prices are determined by supply and demand. Economic intervention and regulation by the state is supposed to be limited to tax collection and the enforcement of private ownership and contracts. In its purest form, the government is supposed to be neutral in its role in administration and legislation of economic activity, neither limiting businesses by regulation, by protecting them from internal or external market pressures, nor by actively promoting it by owning financial interests in them, or by offering subsidies to businesses, or giving away taxpayer-funded R&D (research and development).

But this is not the way our economy really works. If this were true, why didn't a corporation like GM ever go out of business?

Before the outbreak of World War II General Motors produced vast quantities of armaments, vehicles, and aircraft for both the Allied and Axis customers. By the spring of 1939, the German government had assumed day-to-day control of American owned factories in Germany, but decided against nationalizing them.

After Hitler invaded Poland the U.S. auto companies were still concerned that Nazi Germany would nationalize American-owned factories, so GM later declared it had abandoned its Nazi subsidiary, and took a complete tax write-off, of which they received a tax reduction from U.S. taxes of approximately $22.7 million.

After the war had ended GM collected another $33 million in "war reparations" because the Allies had bombed its German facilities for which they had earlier declared a complete tax write-off, and had received a tax reduction.

While General Motors has claimed its German (Opel) operations were outside its control during World War II, this assertion appears to be contradicted by available evidence. General Motors was not just a car company that happened to have factories in Germany; GM management from the top down had extensive connections with the Nazi Party all during the 1930's and into the 1940's.

GM's total bail out back then is worth about $285 billion in today's money.

Fast forward to February 2011 - The U.S. Treasury just gave GM another tax break to reduce its U.S. tax bill by an estimated $14 billion in the coming years, and its global taxes by close to $19 billion, according to a recent company filing. We're still bailing out GM!

Crony capitalism or Free Markets?

The Republican presidential candidates and Tea Party members are still crying for free markets, but every time they're elected into office, they just can't say "no" to corporate influence any more than the Democrats can. And it's the taxpayers that always pay for this.

The Republicans have been complaining about food stamps, but yet they all voted to continue government subsidies for big oil companies, corporations who are making record profits and aren't paying their share of taxes. Does that make any sense at all? Is that a free market economic principle? But the big oil executives say that by NOT giving them our money is "un-American". (Is corporate welfare supposed to be patriotic in a free market?)

We hear a lot of rhetoric about "energy independence" and "Drill, baby, drill!" - but the Wall Street Journal reports, "Thanks to new drilling techniques, such as hydraulic fracturing and horizontal drilling, the U.S. price of natural gas has plummeted, and is now among the cheapest in the world. The new drilling methods has unleashed a flood of cheap natural gas in the U.S. market. Now they're looking to find new international markets for the surplus production (to export for corporate profits), which would raise natural-gas prices for U.S. customers."

And according to the CIA's World Factbook, the United States is already exporting 2 million barrels of oil a day. So why are we having a discussion about TransCanada's Keystone XL pipeline if we have an oil shortage and/or need "energy independence" when we're exporting oil and natural gas?

Simple answer: For corporate profits, at the expense of U.S. taxpayers.

I proposed an idea about the Keystone Pipeline, funding a massive non-profit public works program to build an oil company that's operated and owned by our government (the people) for our own use, buying oil at "cost". But would anybody listen to common sense?

But instead, BIG OIL will sell the oil back to the American taxpayers for the highest bid through Goldman Sachs on the commodities market, or export it to places like China....where our jobs went. Crony capitalism or Free Markets?

Obama talked about "transforming America" and Speaker of the House John Boehner says he wants to "fix government", but both political parties are beholden to corporate interests, and the American people are always getting screwed in the matter who's in charge.

To be truly rid of corruption and crony capitalism -- and to be able to restore America's true free markets -- we would first have to have congress pass an amendment to the U.S. Constitution overturning Citizens United, and get money out of politics. We would once again need publicly funded elections. But how long before or if this could ever be accomplished? I'm not holding my breath.

And then we would also need to change the federal bankruptcy laws, so that CEOs like Donald Trump can't escape their financial obligations by passing on their failures to the American taxpayers, while at the same time, still remain pompous and rich.


  1. WSJ - "Increased exports of U.S. natural gas could drive up domestic gas prices as much as 54% in 2018...U.S. manufacturers could face stiffer prices for natural gas and lose a competitive edge over companies abroad."

  2. Why do we not call crony capitalism what it is. Facsim, end of story, and both parties have plenty of facsist. We call it cronyism, progressive whatever...sounds really great when they call it a nation jobs act or some such nonsense. It isnt a free market. Its the same market China uses, Russia use, Germany uses...its a federal typ bank with the corportist in charge

    1. Free Markets are Fraudulent Markets