Why Crony Capitalism Hurts Us All

Crony-Key-TakeawaysThe problem is hardly limited to Ex-Im. Concerns about giveaways to connected corporations have reached a boiling point, generating more and more controversy and outcry on both sides of the political divide. Conservatives point to examples like Ex-Im and Solyndra, the California-based solar company that went bankrupt after receiving $535 million in federal loan guarantees, while progressives point to special subsidies, tax loopholes and powerful lobbying by wealthy  companies, such as Boeing and General Electric as evidence that the relationship between government and business has crossed the line well beyond benign partnership.

“The whole notion of meritocracy has come under attack and has been displaced by notions of cronyism or kleptocracy or something similar.”

Meanwhile, the average citizen, soured by declining real personal income, has become increasingly cynical about what he views as neo-mercantilism or crony capitalism that appears to benefit the elites at the expense of ordinary people. According to a new global survey, the CNBC/Burson-Marsteller Corporate Perception Indicator, the U.S. public is divided on whether corporations are a source of “hope” (36 percent) or “fear” (37 percent), while in China, 84 percent say corporations are a source of “hope.” More than half of the U.S. public said “strong and influential” corporations are “bad,” even if they are promoting innovation and growth, while in China, 74 percent embrace strong corporations as “good.”

Some of those feelings may be due to cultural differences, but not all. And perceptions, even flawed ones, can have unfortunate consequences for business, even those whose commercial interests have little connection to government.

A Pervasive Problem
Cronyism, hardly a recent invention, has ebbed and flowed over the decades, but it appears to be on the rise today. “The whole notion of meritocracy has come under attack and has been displaced by notions of cronyism or kleptocracy or something similar,” says Jonathan Macey, Sam Harris Professor of corporate law, corporate finance and securities law at Yale Law School. Examples of corporate welfare abound—from energy tax breaks and fast food subsidies to endless patent protection for big pharma and bailouts of behemoths pulled back from the brink by Uncle Sam’s long and generous arm. The Cato Institute estimates that federal subsidies to corporations cost taxpayers almost $100 billion every year.