Category Archives: Crony Capsules

Crony Capsule 6: The Disease of Cronyism

CWPoisonIn the last Crony Capsule we saw the different way cronyism manifests itself at the local level; relationships with state politicians and regional tax exemptions are a few examples of how local states “benefit” local industries. Now we are focusing on the global economic and social consequences of corporate welfare and cronyism.

Cronyism has been growing like a disease inside our competitive capitalist system. Instead of having an economy based on performance, quality and innovation, cronyism has lead to special connections and lobbying.

The following articles provide us with an overview concerning how cronyism undermines our society and our capitalist system:

1. In this comprehensive article, James V. DeLong the author of the book Ending ‘Big SIS’ (The Special Interest State) and renewing the American Republic; summarizes the major subjects concerning his book and stresses the problem we face today in keeping special interest groups away from receiving corporate welfare from the government.

“Some commentators are under the illusion that the current national crisis will sober up the special interests. But that is not how it works, because a crisis makes special interests less, not more, responsible. The situation becomes, in the language of game theorists, a “last-period problem.” As a game approaches an end, the players have no need to cooperate for the sake of protecting long-term relationships. Their incentive is to grab as much as possible before the game ends, or, to translate to the real world, before the society collapses. Do not look for crisis to bring out a sense of responsibility in the advocates for the interests.”

2. The following article focuses strictly on the current identity crisis that American Capitalism is suffering. Our capitalist system that was once primarily based on hard-work, competitive and innovative companies, and entrepreneurship has degraded into clientelism, favoritism and special political connections.

3. In this column, we see the way in which society currently perceive our new form of “crony-capitalism”. It is easy to understand people’s anger against our current system, where political connections often mean more than value creation.

“As we witness the riotous dissolution of corrupted capitalism, we need not wait for the history books to identify the mile markers of self-destruction. If we are to rebuild capitalism, even as it is tearing itself down, then we will need to become street-smart detectives in analyzing the current economic murder-suicide in progress.”

4. The last article deals with the immorality of corporate welfare. This general overview seeks to demonstrate the negative potential that cronyism possess to undermine our system of meritocracy.

“When you think about the thousands and thousands of lobbyists in our nation’s capital who become “cronies” with members of Congress, the insider deals they make, and what it is costing the American taxpayer, you can see the evil of it. To have good government, we must have transparency, often promised but seldom received. As voters, we must hold all those elected to office to a higher standard. “We The People” must take our nation back and vote people out of office when they are guilty of “cronyism,” as this will send a powerful message. It has always been true: “Righteousness exalts a nation but sin is a reproach to any people.”

Crony Capsule 5: The Other Faces of Cronyism

In the last Crony Capsule we saw egregious examples of how big successful companies receive special treatments and deals from federal and local governments. Even though this form of corporate welfare is the most common and corrupt form of relationship between business and government; there are several other forms of cronyism that we need to be aware of.

The following articles give us examples of these lesser-known types of special treatments in action today:

1. In this article, we see how big-government, implies big branches of government and one of the branches that benefits the most, out of our bloated government is the Department of Defense. There is nothing inherently wrong with having a consistent military defense; the problem arises when defense spending increases not for defense purposes, but for the purpose of helping friends by buying their equipment.

Schweizer [from the Daily Beast], points to a Government Accountability Office (GAO) audit last year that found that mismanagement at the Department of Defense had resulted in $70 billion of waste in just two years. And a 2010 GAO report revealed that the Defense Logistics Agency was purchasing 50% more military equipment than was needed, resulting in $7 billion of supplies gathering dust in a warehouse.

2. The following article is a clear example of how local governments satisfy the crony necessities of special interest groups that are not necessarily well-known big businesses; in this case college football bowls are abusing no-bid contracts, in order to receive money from the government.

In all likelihood, we will have two semifinal games that work within the existing bowl structure and a final game that is at a neutral site in one of the new gargantuan NFL football stadiums. College football will thus earn revenue from bidding out its final game but nothing for the two lucrative semifinal games that it will just hand to the bowls. No attempts to maximize profits of what will be the most anticipated college football games likely ever. Instead, they’ll let the bowls alone profit off these games. Why? Seriously, WHY?

Keep in mind that these are public institutions, not private businesses, who are opting out of generating greater profits. It may be legal, but it’s certainly unethical, especially considering that the conference commissioners and athletic directors have received gifts from the bowl organizations.

3. In this  example, we see how cronyism manifests itself in different forms. In this case highlighted by the think-tank AEI, they demonstrate how college aid is in reality just another form of corporate welfare. College aid, apparently help students by making their tuition more affordable; but what in reality occurs is that universities can indiscriminately increase tuition once again in response to that government aid, transferring ever-increasing amount of money out of the taxpayers.

The most obvious way that colleges might capture federal student aid is by raising tuition. Research to date has been inconclusive, but Stephanie Riegg Cellini of George Washington University and Claudia Goldin of Harvard have provided compelling new analysis. […]. Riegg and Goldin find that that aid-eligible institutions “charge much higher tuition … across all states, samples, and specifications,” even when controlling for the content and quality of courses. The 75 percent difference in tuition between aid-eligible and ineligible for-profit colleges — an amount comparable to average per-student federal assistance — suggests that “institutions may indeed raise tuition to capture the maximum grant aid available.

4. The relationship between local businesses and local governments is sometimes problematic. They often help small business that are not efficient and add little value to society. Rural airports are receiving an ever increasing amount of subsidies; lawmakers from rural areas fought hard to maintain the taxpayer’s subsidies that end up benefiting airline flights. These “special” treatments, according to this article are reaching this year a record $214 million.

The program awards contracts, usually worth between $1 million and $2 million a year, to subsidize airlines that serve airports such as Escanaba, Mich., Pueblo, Colo., and Scottsbluff, Neb. Such subsidies work out to as little as $6 per passenger for airports like Cody, Wyo., and Sault Ste. Marie, Mich. But subsidies can often reach hundreds of dollars each way on a round trip flight to and from isolated places like Kalaupapa on the island of Molokai in Hawaii or Great Bend, Kan., whose three or so passengers a day benefited from a subsidy exceeding $600 in 2010, the most recent year for which data is available.

Crony Capsule 4: When Big Government and Big Business Get Married

One of the most familiar forms of cronyism is the close relationship between big business and the government. This form of corporate welfare is particularly outrageous since most of these large companies are perfectly able to compete and earn money on their own. It is unacceptable to see big companies like Apple, Caterpillar, Boeing and several other Fortune 500 listed companies getting special treatment from their friends in the government.

There is no need for federal, state, or local governments to give them any form of tax incentives, loans or subsidies. These corporations should only get rewarded in the market system when they create value for their consumers.

The following articles give us examples of this type of corporate cronyism in action today:

1.  This article shows how Texas is giving $21 million to Apple to “incentivize” them to move away from California. Local governments give billions of dollars to “convince” corporations to do business in their states at local taxpayer’s cost.

‘Supporters of tax incentives will argue that this incentive package will add will add 3,600 jobs to the economy, but this is still a bad deal. First, it’s not clear if these jobs will actually be created; research consistently shows that state incentive programs fail to produce the jobs and economic activity that they promise. Second, it ignores that jobs are lost in the private sector when the government creates jobs.’

2. The following article is a clear example of how local governments are creating incentives for private companies to bring businesses to their states, but at the cost of the workers in their state. These incentives allow businesses to keep their employees income taxes, without even informing them. These types of incentives only foster cronyism among companies, pushing them to seek further government favors rather than be more competitive and cost-efficient.

“States are allowing private companies to withhold personal income taxes from their employees, and keep the money for themselves. According to a recent report from Good Jobs First, more than 2,700 companies in 16 states do this, totaling nearly $700 million each year.”

3. In this example, we see how this terrible form of corporate welfare uses different governmental entities in order to receive special incentives. The Essential Air Service program is a federal program that subsidizes flights and small airports to function. These subsidies go from the small airports straight into big airline companies that benefits from the program. Taxpayer’s money is wasted on empty airplane seats, which doesn’t seem to bother the airline one bit.

“This is absolutely outrageous, said Florida Rep. John Mica, the Republican chairman of the House Transportation Committee, which oversees the Air Service. “You know we’re running $17 trillion in deficit.”

“The Scripps National Investigative Team’s investigation exposed one flight between Baltimore and Hagerstown, Md. — about 75 miles apart — was so sparse, the captain allowed the only other passenger who wasn’t the team’s producer to sit in the co-pilot’s seat. Some seats remained folded down for the round trip.”

4.  When governments try to help business at any cost, they often end up stimulating unprofitable and inefficient projects. In this article, we see how Pinellas County (Florida) charged the taxpayers millions of dollars for a construction project that never even started.

Crony Capsule 3: Energy Welfare Strikes Back

On our last Crony Capsule, we discussed how energy subsidies are nothing new, but today they are more wide-spread than ever before. The government is willing to put on the line billions of taxpayer dollars in their quest for the next efficient form of energy.

What the government hasn’t realized is that these attempts are doing more harm than good to our economy. Supporting unprofitable enterprises misunderstands what the concepts of innovation and entrepreneurship in the marketplace are about.

There is a problem with our current system of picking winners and losers in the energy markets. People in power often have the tendency to prefer their friends as winners – cronyism. At the very least, they pick businesses that have the goal of establishing political influence to get more government favors, instead of producing better and cheaper goods for American consumers.

The following articles give us examples of this type of energy cronyism in action today:

1. In this article, we see how the current administration has been trying to support their selected winners by promoting solar tariffs: rolling out new taxes on Chinese solar manufacturers. This calls into question the government’s stated goal of promoting green energy. These taxes only make solar panels more expensive, undermining consumer’s ability to freely support different energies.

“The Obama administration has lost a subsidy war and has started a trade war, all for the benefit of one politically favored industry. As China officials quickly pointed out, this tariff “will hurt both countries because China imports a large amount of raw materials and equipment from the U.S. to produce solar panels, and it exports such goods to the U.S.” But these industries aren’t as politically connected as the many wannabe Solyndras.”

2. The following article is an example of how energy welfare does not work as intended.

“Overall First Solar had cut 100 jobs earlier in December, and then slashed global payroll by 2,000 workers in April. As the “green jobs” hemorrhaged, executive pay rose. Former CEO Rob Gillette received $32 million over a two-year period before he was dismissed in October. The Arizona Republic reported in April that First Solar also paid its eight top executives nearly $16 million last year.”

3. In this Utah example, we see how this dangerous form of corporate welfare is a bi-partisan syndrome. Both Republicans and Democrats neglect how the system of competition and enterprise should work in America.

“Utah Sen. Orrin Hatch did so many favors for Raser Technologies, a green technology company in his state, that the company named its geothermal power plant “The Hatch Plant.” His role turned out eerily reminiscent of President Obama’s support for the failed solar-panel maker Solyndra. The Hatch Plant is now shuttered, and Raser Technologies has gone bankrupt.

4. The belief that supporting any form of green energy businesses will create jobs and stimulate the economy does not address the fact that in order to do so the businesses needs to be sound, competitive and profitable. Politicians, such as the ones in Ohio, fail to realize that what makes a business thrive are their incentives to excel and outperform their competitors. In this article, we see that subsidies and stimulu achieve quite the opposite effect.


Crony Capsule 2: Energy Welfare

Energy subsidies such as Fossil Energy Research and Coal Research are old forms of cronyism, nearly as old as the first Ford car.  The federal government has spent billions of dollars on research and subsidies to keep unprofitable energy businesses afloat, with the dream that one day these “investments” might payoff or bring the next energy revolution.

The federal government has long believed itself to have better business instincts than entrepreneurs like Henry Ford and Steve Jobs, a belief that has proven wrong many times.

These investments are not only applied to conventional forms of energy. Recently, the government has been increasingly shifting our money towards new forms of “green energy” that have a questionable track record.

The following articles give us examples of this type of energy cronyism in action today:

1. In this article by Human Events, they show how during the last couple of administrations the “green energy” subsidies and welfare has been dramatically increasing becoming the new king of corporate welfare, unfortunately without substantial improvement to the environment:

CBO released a report stating the obvious.  They found that in 2011, federal subsidies for green energy totaled $24 billion.  Also, between 2009 and 2012, the DOE provided $25 billion in loans “primarily to producers of advanced vehicles, generators of solar power, and manufacturers of solar equipment.”  Fossil fuels, on the other hand, received $3.4 billion in “tax preferences.

2. The following article shows us that as economic stimulus, energy welfare does not work as intended. The wind industry has actually lost about 10,000 jobs since 2009, even though it doubled its domestic production, the American Wind Energy Association reports.

President Obama spent $90 billion of his stimulus package on green energy projects, including weatherization of buildings and development of electric vehicles. Yet, by the end of last year, just 16,100 people landed new jobs in the so-called green industry, Labor Department statistics show, far short of the 200,000 jobs the White House projected it would help create each year.

3. In this article we see the full list of bankrupt green companies and we realize how the government more than often, have failed to spot “good business” models, wasting taxpayer money in unsustainable companies that go bankrupt.

But what may come as a surprise is the overall amount of money being thrown away on these green companies that the administration has championed. Of the $10.7 billion in green-energy commitments, detailed below, approximately $3.2 billion is to companies that are in bankruptcy, and another $7.1 billion is committed to teetering firms.

4. The unintended consequences of these new forms of green energies are unpredictable, not only for our economy (distorting the market with unprofitable businesses) but also for our environmentThe National Center for Public Policy Research “estimates that wind turbines kill approximately 100,000 birds every year. The American Bird Conservancy claims the number could be triple that estimate — affecting the songbird community most of all.” So not only the government is “investing” tax-payers money in unprofitable business, but it also supports a serious threat to local bird populations.

Crony Capsule 1: Agribusiness

Editor’s note: We are beginning a new series of posts, called Crony Capsules, that highlight a specific issue area relating to cronyism and give several recent examples.

Agribusiness welfare such as farm subsidies and sugar programs are one of the oldest and biggest forms of cronyism in America. These programs redistribute tax-payer’s money to big and wealthy farm owners, in order to keep their noncompetitive crops afloat.

There is a huge misconception with helping the farmers, people believe that we must protect and help the classical “American farm-life style” from cheap foreign crops. The facts tells us otherwise; near all of these subsidies goes to only one third of the wealthiest farm conglomerates. The richest 10% of the farmers get near 70% of the subsidies. It is time to stop this egregious form of corporate welfare.

The following articles give us examples of this type of cronyism in action today.

1. In this article by the Environmental Working Group (EWG), they show that 23 members of Congress, or their family members, benefitted from $6,140,634 in taxpayer-funded farm subsidy payments between 1995 and 2011:

 Members of Congress who receive farm subsidies are part of a system that cries out for reform and poses stark choices between propping up the largest and most successful businesses or helping working farmers, struggling families and the environment,” said Craig Cox, senior vice president of agriculture and natural resources at EWG.

These farm payments are not improper or illegal, but they do create a conflict of interest for these members of Congress,” said Cox. “Some of them are major players in the 2012 farm bill debate and all of these lawmakers will be forced to cast a vote on the final bill.

2. The following article, shows us that many big farm owners are using more resources in lobbying to get more corporate welfare, instead of using them to improve their business and produce more and better food for America:

By unanimous consent, the South Portland Planning Board cleared the way for the city’s second farmers market, but lobbying on the issue by one city councilor prompted Chairman Rob Schreiber to walk out of the meeting in protest for this egregious shameful act of lobbying.

3. Sugar subsidies are a big part of this Agribusiness corporate welfare. The unintended consequences of these subsidies are enormous; sugar quotas keep sugar prices up, making food and candy more expensive and less affordable for the average person, including those who food-stamps to afford artificially high-priced food. In this article, Daniel Horowitz proposes a novel idea for our country to solve this issue:

Let’s stop subsidizing Big Sugar.  Maybe if the government wouldn’t intervene in the agriculture sector, inducing sharp increases in the price of commodities, many of the 46 million people on food stamps would be able to afford food.

4. Some senators such as Richard Lugar have been fighting for decades to abolish sugar subsidies and allow us to import cheaper sugar from abroad in order to make cheaper and better food products. In this article, Tyler Kingkade tells us the history of this fight against sugar cronyism and how we need more people like Sen. Lugar to reestablish low sugar prices:

“Every time Hoosiers see sugar listed as an ingredient on their food labels,” Lugar said at the factory, “they should know that are paying more than they should because of the federal government’s sugar policy.”