Editor’s note: A shortened and edited version of this column first appeared in the new edition of Forbes magazine.
In 1979, Robert Bartley’s editorial writing at the Wall Street Journal not only garnered a Pulitzer Prize, but also exposed a pernicious threat to free enterprise. In a piece titled, “Down With Big Business,” which focused on how General Motors was using its muscle and government connections to squeeze out competitors, Bartley concludes we ought not rely on big business to defend free markets.
Bartley laments, “The business giants have rather equivocal interests in free enterprise.” It’s up to the American people – innovators and entrepreneurs, small business owners, Bartley’s “XYZ Bumperlight Lens Company” – to take a stand. Thirty years later, this crony capitalism is back with a vengeance. The big government and big business nexus has returned, wreaking havoc on economic recovery and fueling continued resentment among the American people.
Today, countless Americans find themselves on the outside looking in. The forces of power on Wall Street and Washington remain distant, inaccessible, and entrenched. Jobs remain elusive, and an ominous force seems to be suffocating the entrepreneurial fire required for recovery.
But what exactly is “it”? Millions of Americans feel it – but can we articulate the specific manifestations of this plague and the specific steps to fight it?
Today’s crony capitalism has been accelerated by an aggressive program by President Obama and the Democratic congressional leadership. It manifests in the federal government’s active role in picking economic winners and losers. Big businesses use their connections, muscle, and influence to carve out exemptions and favors for themselves. Many established firms actually lobby for harmful tax and regulatory policies, knowing they are in a better position to survive than their less powerful competitors. In this environment, a business’s commitment to customer service shifts from consumers to politicians.
For a business to succeed, it will need to outmuscle its competition in the corridors of Congress, rather than in the open market.
The actions taken at the height of the financial panic last fall, with credit markets frozen, succeeded in preventing a systemic – and catastrophic – collapse. Since bringing us back from the precipice however, the Troubled Asset Relief Program [TARP] has morphed into crony capitalism at its worst. Abandoning its original purpose providing targeted assistance to unlock credit markets, TARP has evolved into an ad hoc, opaque slush fund for large institutions that are able to influence the Treasury Department’s investment decisions behind-the-scenes. No longer concerned with preserving overall financial market stability, Treasury’s walking around money continues to be deployed to reward the market’s Goliaths while letting its Davids suffer. We were told that the financial giants, most prominently Goldman Sachs and JP Morgan, were “too big to fail.” We were given the same slippery justifications in diverting TARP funds beyond their original intent – moving into auto companies and heavy-handed neo-industrial policy. Yet in communities across America, bank regulators are busily shutting down banks that were "too small to succeed." The disconnect turns to frustration as bailed out firms Goldman Sachs and JP Morgan announce record profits, while the community bank closes its doors.
With risk aversion preventing small businesses from accessing capital, job losses continue to mount and the engines of economic growth continue to stall. Small firms have to file for real bankruptcy – not the bailout bankruptcy afforded to AIG, Bank of America, GM, Chrysler, and others.
Beyond the perversion of TARP, Washington is working hard to nationalize other sectors of our economy. The House Finance Committee is pushing a massive financial “reform” bill, making permanent the bailout mentality. This overhaul effectively creates banking utility companies.
The Treasury Department has effectively nationalized the housing finance sector, with Fannie Mae & Freddie Mac demonstrating how fast big businesses, through a federally blessed and backed oligopoly, can fall.
The same “solutions” are now offered to tackle the challenges in health care and energy. The 2,000+ page health care overhaul establishes a sweeping array of new entitlements, mandates, penalties and directives, with all health coverage requiring Washington’s approval. The byzantine cap-and-trade scheme, which already passed the House, similarly centralizes an entire sector of our economy in Washington. On both ends of Pennsylvania Avenue, health care and energy lobbyists continue to fall over themselves to cut their deals – knowing that if they aren’t at the table, they’ll be on the menu.
Neither political party is immune from fostering this pervasive culture of crony capitalism. My own party – the party of Lincoln and Reagan – neglected the principles it passionately championed in decades past. Republicans became more interested in securing political power as an end, rather than a means of limiting the federal government’s power over our lives. The Republican Party has recently confused being pro-business with being pro-market. The poisonous earmark culture was emblematic of businesses, large and small, working their connections to carve out political favors for financial gain.
While Republicans were confused as to the meaning and practice of our principles, the Obama Administration and the Democratic leadership are perfectly comfortable with the philosophy underpinning crony capitalism. After all, big business and big government find many ways to enjoy a common cause. So while we Republicans need to rededicate ourselves to our principles, the Democrats running Washington would have to repudiate theirs.
The problem today has escalated far beyond partisan politics. Big businesses’ frenzied political dealings are not driven by party or ideology, but rather by zero-sum thinking in which their gain must come from a competitor’s loss. Erecting barriers to competition is a key to maintaining advantage and market share. With Washington leading the way, it makes sense for the big boys to redirect their resources to their lobbying shop and government affairs office. They’re far less interested in expanding the economic pie than with making certain that they get their slice.
To be clear, the federal government should not stack the deck against big businesses either. The government does not have a stake in the fight between David and Goliath – our only concern is to make certain that it is a fair fight. The government today is far from an unbiased arbitrator, and it is smothering dreams and stifling growth.
We’ve been down this road before. There was a time in this country when the airlines, railroads, the energy sector, trucking and bus industry were all firmly under government control. The problem was not only excessive government meddling, but large established firms cooperating to protect their market share and erect barriers to new entrants.
Some initial progress on breaking up these monopolies began during the Carter Administration.
Then came the Reagan Revolution, whose key underpinnings were empowering small businesses, lowering the hurdles that keep new entrants out, and unleashing the power of competition, innovation, and the American entrepreneurial spirit. President Reagan, aided by leaders such as my mentor, Congressman Jack Kemp, successfully implemented a comprehensive strategy to reduce marginal tax rates, ease government’s burdens on entrepreneurial activity, restrain nondefense spending, ease trade barriers, and tame the scourge of inflation.
And, the progress continued after the Reagan Administration. The most infamous manifestation of crony capitalism during these days was Ma Bell. One company, the former iteration of AT&T, locked arms with the federal government to create a legalized telephone monopoly. Ma Bell was regulated like a utility, and for decades the industry (consisting of one company) languished in mediocrity. Americans were held hostage to lackluster service and even required to rent their phones from the telephone company. These clunky devices only performed analog voice calls and everyone avoided long distance dialing because of its outrageous expense.
Legal action was taken, ultimately leading to the breakup of AT&T/Ma Bell in 1984. While far from perfect, the passage of the Telecommunications Act of 1996 allowed for competition and innovation to be unleashed. The robust technological and digital revolution that followed brought Americans faster voice, video, and Internet services at lower costs. These innovations were the result of the interaction of producers and consumers; the work of innovators and entrepreneurs no longer stifled by monopolistic giants and government control.
Ma Bell of yesterday is the Fannie and Freddie of today. Now more than ever, there is a desperate need for Robert Bartleys of the 21st Century to expose the return of crony capitalism and a new generation of Ronald Reagans and Jack Kemps to fight it.
In a recent article in National Affairs, University of Chicago’s Luigi Zingales provides a path forward: “By appealing to the best of the populist tradition, we can introduce limits to the power of the financial industry – or any business, for that matter – and restore those fundamental principles that give an ethical dimension to capitalism: freedom, meritocracy, a direct link between reward and effort, and a sense of responsibility that ensures that those who reap the gains also bear the losses. This would mean abandoning the notion that any firm is too big to fail, and putting rules in place that keep large financial firms from manipulating government connections to the detriment of markets. It would mean adopting a pro-market, rather than pro-business, approach to the economy.”
(“Capitalism After the Crisis,” Luigi Zingales, National Affairs,
http://www.nationalaffairs.com/publications/detail/capitalism-after-the-crisis)
For every encroachment into the market by the federal government – under the guise of “reform” – there exist pro-market alternatives that Republicans must articulate and passionately defend.
We must champion an aggressive reform agenda to tackle our outdated financial regulatory structure, the convoluted and anti-competitive tax code, and the looming entitlement crisis, and to fix what’s broken in health care, energy, and more. We should focus on removing the hurdles the government has erected, rather than further centralizing power in Washington. The legislative reform must focus on empowering individuals instead of bureaucrats.
This does not mean eliminating government’s role. Government has a clear role, for example, to ensure financial markets are transparent and that corruption is avoided and punished when committed. It has a critical role to provide a safety net for society’s most vulnerable – those that cannot take care of themselves. Government’s primary role should be preserving individual freedoms and not smothering them through paperwork, regulations, penalties, mandates, and taxes generated by growing bureaucracies in Washington, D.C.
The economic costs of rejecting democratic capitalism in favor of a European social welfare state include stagnant growth, permanent high unemployment, and an inferior standard of living for generations to come. As power further centralizes in Washington, the incentives for corruption rise exponentially. The gravest of consequences falls upon the cultural and moral fiber of our society. The triumph of crony capitalism would mark a swift departure from the responsible, self-reliant citizenry that built our nation’s prosperity. We cannot lose our commitment to individual liberty – a commitment we’ve shed blood to defend in generations past. The American idea cannot be defeated.
This is not a contest for one political party, one sector of our economy, or one segment of the population. We all stand to lose as crony capitalism drains the life from our economy; but we all stand to gain from the fruits that genuine, vigorous, free market competition provides.
U.S. Rep. Paul Ryan (R-Janesville) represents Wisconsin’s First Congressional District. He serves as ranking member of the House Budget Committee and senior member of House Ways and Means Committee.
