The following is a speech given by Bill Walton to the Center for Constructive Alternatives at Hillsdale College on Tuesday, Nov. 10, 2015.
I have spent most of my career on Wall Street and in business. I was CEO of a publicly traded NYSE private equity firm for about 14 years from 1997 to 2010. We were highly regulated by the Securities and Exchange Commission (SEC) as an Investment Company and headquartered just three blocks from the White House. I also served on the Board of the Financial Services Roundtable whose members were the 100 largest financial service companies in America. So I’ve been in the arena and have had a front row to seat to the business of government in Washington.
As I prepared this talk, I started out not wanting to tell a story of good and evil with the bad guys being; greedy capitalist, intrusive and coercive regulators, venal politician, K Street lobbyists versus “the rest of us.” You know, the talk radio version of cronyism.
I didn’t think it was that simple. But after digging into this issue, I’m beginning to think it is. We have a massive and growing problem in America: It’s a moral issue, it explains why economic growth is anemic, and it’s bipartisan.
We have a massive and growing problem in America: It's a moral issue, it explains why economic growth is anemic, and it's bipartisan.
The problem is not simply “crony capitalism,” the problem is that the size and scope of the federal government is such that it’s impossible to know where business starts and government ends.
The federal budget has ballooned to $4 trillion. Federal regulatory compliance costs add up to another $1.7 trillion and affect every industry. 87,000 new federal rules were issued since 1993.
So business has a lot at stake in Washington managing through a complex tax system and coercive regulations. But this is not a one-way dynamic. Business has figured out that when they lobby to maintain and increase subsidies they also have a lot to gain from Washington. Economists have a term for collusion between business and government: rent-seeking. Now it’s better known as cronyism.
But by seeking special favors at the expense of taxpayers and consumers, business threatens public support for business and free markets. Polls show that the vast majority of Americans believe that government and business work together against the rest of us.
This belief—and its reality—is a destructive force, undermining not just our economy and political system, but our culture.
Regulation and our incredibly complex tax code are big drags on business and economic growth. They’re also the main vehicles and the means to suppress competition and keep new entrants out. I vastly oversimplify, but there are essentially two ways for a business to make money:
In the market, competing for customers in a free market system of voluntary exchange.
The other way is petitioning government for a special privilege such as subsidies for sugar and other farm crops, or mandates for products like ethanol. Other special privileges include grants, loans, tax credits, favorable regulations, bailouts, loan guarantees, targeted tax breaks and no-bid contracts. Government can also grant monopoly status, barriers to entry and protection from foreign competition. Less obvious, but also forms of cronyism are occupational licenses, teacher certifications, and school accreditations.
The first way is the right way. It has the twin virtues of being both moral and creating the conditions for economic growth and innovation.
The right way is people engaging in what economists call “voluntary exchanges”—free exchange among free people—that improve lives and makes the economy grow.
It is the process that has allowed us to live in a time where there’s been more improvement in the human condition in the past two hundred years than in all the previous centuries combined.
Every measure of material human welfare-health, wealth, nutrition, education, transportation, communications, leisure time—have shown amazing gains. And virtually all of this innovation has been created and driven by entrepreneurs competing in a free market of voluntary exchange.
In contrast to coercion and cronyism, voluntary exchange is the process where people willingly trade one item for another, making both better off as a result.
The emphasis here is on “willingly.” Apple has an iPad for sale for $500. You give them $500 and they sell you the iPad. This is a voluntary exchange where both participants believe they’re better off after the trade. This also applies to the non-profit world. If you voluntarily write me a check to my educational foundation, we both feel better off—you, because you want to give to a cause that matters to you; and me, because I have more resources to fund that cause.
Voluntary exchange lies at the heart of free enterprise, market efficiency, and entrepreneurship. Individuals cooperate with one another, reach agreements, trade … and the network of relationships that emerges or evolves out of this trading process is called “the market.” Millions of voluntary exchanges every day make the world better off. They have the great virtue of being both moral and promoting economic growth.
By contrast: taxes, government statutes, and regulations mandate “involuntary” exchanges. They rely on coercion. A harsh word but try this out: Don’t pay your taxes. Then see who shows up to seize your assets or put you in jail.
The problem for us today is that it’s voluntary exchange that is most under threat from the government and its crony partners—and not just business. Crony partners also include labor unions, environmentalists, Planned Parenthood, and so on and so forth. Whether it’s the minimum wage, EPA regulations, abortion insurance mandates, or small business licensing, our entrepreneurial freedoms are being eroded. Increasingly we are being told, for example, what we can sell, to whom we can sell it and what wages and benefits we must provide. This is an increasingly poisonous toxic mix for entrepreneurship, innovation, economic freedom, and growth.
It also aids and abets entrenched incumbents.
In the time we have tonight, I can only give an overview of the problem and a few examples. If you want a deep dive into the problem of cronyism read three books that I highly recommend.
The first book is by Mancur Olson “The Rise and Decline of Nations,” which explains that paradoxically the longer the society enjoys political stability, the more likely it is to develop powerful special-interest lobbies that in turn make it less efficient economically. It’s the problem of factions that America’s founders knew, where groups with concentrated interests form factions at the expense of the rest of society.
Olson called it “advanced institutional sclerosis.”
The second book is “By the People“ by Charles Murray of the American Enterprise Institute, where I was a trustee. It provides an excellent history and analysis of the end of what he calls “the American project,” the founding principle of America that “people can be left free as individuals, families, and communities to live their lives as they see fit as long as they accord the same freedom to everyone else, with government safeguarding a peaceful setting for those endeavors but otherwise standing aside.”
He concludes that the normal political process will not restore us to a nation devoted to limited government and economic and religious freedom. He calls cronyism corruption.
The third book “Knowledge and Power“ is by George Gilder, founder of the Discovery Institute, where I am a senior fellow. George shows that economic growth is driven by sudden, unexpected, revolutionary innovations driven by entrepreneurs. Left to its own devices, an entrepreneurial economy will rescue itself, while massive government intervention only disrupts the information loop between the market and entrepreneurs. “Everything useful or interesting depends on agents of change called entrepreneurs.” Capitalism is not chiefly an incentive system but an information system, and wealth expands through learning and discovery. Regulation and tax systems that seek to command and control the economy, distort the market signals that innovation requires.
Any system that protects old ways of doing things—cronyism—stifles innovation and growth.
His optimistic message is that an economic system can revive itself as quickly as minds and policies can change.
This talk is titled “The Problem of Crony Capitalism Today.” I don’t believe that American politicians, bureaucrats, and businesses today are more venal or dishonest than politicians or businessmen of the past. There has forever and always been cronyism and people seeking special favors from the government. What’s changed is that the scope and reach of the federal government has dramatically expanded.
Before the 1930s, Court interpretations and the general consensus in America was that the Constitution severely restricted the power and scope of the federal government. Then a constitutional revolution occurred from 1937 through 1943 that dramatically expanded its powers. There is not enough time to get into the details but three Supreme Court rulings changed everything.
The first allowed Congress to delegate its powers to federal agencies.
The second gutted the Commerce Clause giving the federal government power over regulating virtually all manufacturing and agriculture in United States. Federal Judge Alex Kozinski calls this the “Hey-you-can-do-anything-you-feel-like” clause.
The third ruling, declaring Social Security constitutional, reinterpreted the “general welfare” clause to allow Congress to spend money on virtually anything.
Fast-forward to today. There is little chance that these rulings can be reversed. Charles Murray believes that there is no chance and observes, “To reverse any of these rulings would mean that about 90 percent of everything the federal government does is unconstitutional. That’s not going to happen.”
Before the New Deal in the 1930s very few industries were affected by what went on in Washington. Only if you ran a railroad or utility, or were looking for tariff protection from foreign competition, did you need to think about dealing with the federal government. The New Deal ushered in the Civil Aeronautics Board, the FCC, and about a dozen other industry specific agencies. But if you weren’t in these industries, not much changed, and even by 1960 only a handful of corporations had even a small office in Washington.
A sign indicating K Street in Washington, D.C. on Oct. 2, 2008. Karen Bleier/AFP/Getty Images
Then came Lyndon Johnson—the Great Society—and a great pouring out of regulations from Washington. Almost 30,000 pages were added to the Code of Federal Regulations by the end of the 1960s. The Civil Rights Act of 1964 brought about unprecedented federal oversight of employee hiring firing, and promotion. But it was Richard Nixon who truly brought us The Regulatory State. From 1970 to 1974, 16 new major regulatory agencies were established including the EPA and OSHA, and the powers of the EEOC were expanded.
What made these regulatory agencies different was that they were given economy wide authority to regulate every business in the country.
By 2012, the number of pages in the Federal Code of Regulations had risen to nearly 175,000 pages.
And on a parallel path, the federal tax code became increasingly complex and massively intrusive with thousands of deductions, incentives, penalties, and special favors for virtually every industry in America.
We now have a tax code that is 4 million words long.
And how did business respond? They went to Washington. By the end of the 70s most major corporations and trade groups had set up office in D.C.
As the regulatory state has grown, the role of politicians and their staff has changed, adding the role of liaison with regulatory agencies, in addition to legislation. With enormous power over the activities of the private sector, literally billions of dollars can be at stake for an industry. This is the principal cause for the flow of lobbying money to K Street.
As Charles Murray puts it, “Corruption in the political process varies directly with the number and value of things that politicians have to sell.” That value has increased exponentially.
Politics has now become a way to get rich.
As Andrew Ferguson points out, “a seldom remarked fact of American politics is that people in positions of government authority—senators, cabinet officers, governors, ranking members of the House of Representatives—Democrats and Republicans alike— live a life utterly removed from that of the people they rule. The trappings of office include cars and drivers, private jets, four star restaurants, and skyboxes … all for free.”
They aren’t carrying their own luggage.
And most come to Washington filled with ideals and plans for change. Then, the system corrupts them. As a friend of mine, Al Regnery, who was publisher of the American Spectator, puts it, “They come to clean up the cesspool in Washington, then they discover it’s a hot tub.”
A few years ago, I believe it was 2006; I had my first direct experience with the lobbying culture of Washington. I learned that even politicians who I believe are among the good guys, get captured by how Congress works and how special interests work their agenda into legislation.
As a CEO of a highly regulated financial company, I concluded, like many other CEOs, that I needed to understand how the political process worked, if nothing else to protect our company’s interests from harmful regulation and legislation. So we set up a political action committee.
And I was invited to a weekend-long PAC event sponsored by a senator who I had great respect for. Still do.
It was held at a NASCAR race in Homestead Florida.
At the time, a Transportation Bill was in the works, a huge bill, most of which wasn’t about transportation. There were about 30-40 attendees, mostly lobbyists, as it turned out. As a weekend progressed, my senator friend looked at me quizzically from time to time as if I was going to bring something up. Finally, on Sunday as we were leaving, he asked, “what are you down here for?” “Good judges, less regulation, tax reform,” I said.
He looked at me and smiled, “You’re new to Washington aren’t you? Everybody here has got something in the Transportation Bill.”
It seems like every time Congress passes a big new bill its intended or unintended consequences end up benefiting incumbents, big business, and entrenched interests and hurts small business and consumers. Three bills spring to mind: Sarbanes-Oxley, Dodd Frank, and The Affordable Care Act, also known as Obamacare.
Dodd-Frank was supposedly aimed at Wall Street, but it hit Main Street harder.
Community financial institutions, which make the bulk of small business loans, are overwhelmed by the law’s complexity. Government figures indicate that the country is losing on average one community bank or credit union a day. About 100 new banks entered the economy every year between 1990 and the financial crisis in 2008. From 2009 through 2013, only about seven new banks have been formed—total.
There are several reasons the decline in the number of banks:
Increasing regulatory compliance costs. For example, the small United Southern Bank in Kentucky is about the same size as it was in 2009 but has had to add 15 back-office workers to ensure compliance with new federal regulations;
The Federal Reserve Board is manipulating the money supply to keep interest rates near zero, which helps the big banks but crushes small bank interest rate margins;
It will take over 24 million man-hours per year to comply with the rules imposed by Dodd-Frank. It only took 20 million to build the Panama Canal.
Goldman Sachs CEO Lloyd Blankfein frankly tells us that Goldman is a big beneficiary of Dodd-Frank’s more intense regulatory requirements, which have “raised the barriers to entry into the banking business higher than at any other time in modern history.”
JP Morgan CEO Jamie Dimon said the same thing, explaining that Dodd-Frank helped create—in a term that Warren Buffett uses—a “bigger economic moat” around the megabanks.
Tim Carney of the Washington Times writes: “Regulations like Dodd Frank protect the giants because politics and lobbying are home games for the big guys. Goldman is famously close with Washington, and the revolving door between Goldman and its regulators is well-trafficked.”
More regulation increases the value of lobbyists and lawyers, particularly those lobbyists and lawyers who used to be lawmakers and regulators. Wauwatosa Community Bank can’t afford to hire many former members of the House Financial Services Committee.
Community banks represent the vast majority of U.S. bank and are critical to the economy because they are more likely to make small-business loans.
Community banks hold 46 percent of loans to farms and small businesses while holding only 14 percent of total banking industry assets. For rural communities, small banks are often the only lender, since the big banks are closing branches.
For decades, U.S. stock exchanges were seen by companies around the world as the most prestigious location to list shares. But the number of public listings in the U.S. peaked at 8,884 companies in 1997. It’s now down to roughly 5,000.
Regulations such as the Sarbanes-Oxley Act, Section 404, Reg FD, etc. have had a chilling effect on companies wishing to go public in the United States but once again have had little effect on big companies.
For example, public company regulatory costs are estimated at $4 million annually for an emerging growth company when it goes public, often most of its profits. At the same time, emerging markets such as China have lured more companies to their exchanges.
Between 2000 and 2012, the United States averaged just 177 listings annually. Meanwhile, the number of listings on exchanges in China nearly tripled to more than 4,000.
Emerging public growth companies create the most jobs. There was a study a couple years ago that showed that these so-called “gazelles” created as much as 75 percent of the high paying jobs in America.
Now CEOs and venture capital backers of emerging growth companies don’t want the hassles and costs of running a public company. So they instead choose to be acquired.
The problem is that big companies don’t create jobs. Many big companies acquisition strategies are to buy an emerging growth company for its technology then fire the people.
Back to the problem of cronyism.
Lobbying has evolved from companies protecting themselves from such things as tax increases and regulations to using the political process to help them become more profitable.
The classic case is the Medicare Modernization Act of 2003, which ushered in Medicare Part D drug benefits. The Economist magazine reports that pharmaceutical companies spent about $130 million to help get the law passed—a lot of money –but the payoff has been estimated to be over $240 billion in new drug sales over a 10-year period—all paid for by tax payers.
The ethanol mandate, which benefits corn growers in dozens of states, is among the least defensible corporate-welfare boondoggles that Washington has created. As Tim Carney reports, “It forces drivers to put corn alcohol in their cars by forcing refiners to blend it with real gasoline.”
“Ethanol is far less efficient than gasoline. It increases food prices by taking up cropland that could go to other crops. It makes animal feed more expensive, hurting ranchers, and boosting meat prices. It places extraordinary stress on water supplies.”
Look at the case of General Electric, which in last year’s annual report described itself as “A New Kind of Industrial Company.” That’s for sure.
In the last decade, Capital Research Center reports that GE has spent over $300 million lobbying and its CEO Jeff Immelt visited the Obama White House 33 times.
Why would a business spend this kind of time and money lobbying? Because it produces results.
A Wall Street road sign near the New York Stock Exchange (NYSE) in New York City on Oct. 16, 2014. Jewel Samad/AFP/Getty Images
The progressive group Americans for Tax Fairness claims that General Electric paid no federal income taxes from 2008 to 2012 and that it got $3.1 billion in refunds on $27.5 billion in profits during this period. While I think this is probably exaggerated, GE paid nowhere near the statutory rate of 35 percent. Its payments were probably closer to 2-3 percent, because it has the resources and lobbying skills to work the corporate tax code to its benefit.
(This is one of the reasons that we should get rid of the corporate tax altogether—another being the code’s drag on economic growth. It’s manifestly unfair that GE should be able to game the tax system, while smaller rivals cannot.)
GE also received over $2 billion in federal loan guarantees for wind and solar projects. It was a big recipient of bank bailout TARP money, notwithstanding the fact that GE Capital is not a bank. It was paid subsidies of $132 million for a lithium battery company that ended up in bankruptcy.
Of course, one of the most effective ways to lobby is to wrap your special interest in a cloak of some public good. In the name of protecting the environment, General Electric was one of the principal advocates of energy legislation that effectively outlawed incandescent light bulbs to be replaced with LED bulbs.
What this bought GE was that it was able to get out of unprofitable, low margin commodity incandescent light bulbs and into the much more profitable high margin LED business. Before the legislation, consumers balked at the higher LED prices, but with the law we are now forced to pay up.
In another loudly proclaimed show of “giving back” GE donated $30 million to NYC Schools. $11 million went to Charlie Rangel’s District. At the time, Charlie was Chairman of the House Ways & Means Committee, overseeing corporate tax rules. What a coincidence.
On the Charlie Rose show, Immelt praised the communist government of China: “State-run Communists may not be your cup of tea—but their government works.”
He also told shareholders, “In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner. The interaction between government and business will change forever.”
So are their solutions to the pervasive and growing problem of cronyism? If so, they need to be big ones. Radical ones. Tinkering with things like term limits, revolving door government, campaign finance reform are not likely to change much in Washington so long as trillions of dollars are at stake.
Mancur Olson believed there is only one way to cure “advanced institutional sclerosis.” Be utterly defeated in a world war like Japan and Germany. They had to start over from scratch.
Charles Murray advocates “massive civil disobedience” underwritten by privately funded multibillion-dollar defense funds to sue government and cronyists.
George Gilder believes that one solution is to “zero base budget” every agency on a three-year budget cycle. Zero out their budget and make them show that they are doing something worthwhile. He would also sunset all regulations after 10 years.
I'd start with getting rid of the income tax code and replacing it with a flat tax or fair tax. This would eliminate tax code cronyism and ignite the economy.
Whatever we do—and I’m not advocating being massively defeated in a world war—we need to think big and act now.
I’m hoping that some Hillsdale graduates will lead the charge.
The Problem of Crony Capitalism Today
The following is a speech given by Bill Walton to the Center for Constructive Alternatives at Hillsdale College on Tuesday, Nov. 10, 2015.
I have spent most of my career on Wall Street and in business. I was CEO of a publicly traded NYSE private equity firm for about 14 years from 1997 to 2010. We were highly regulated by the Securities and Exchange Commission (SEC) as an Investment Company and headquartered just three blocks from the White House. I also served on the Board of the Financial Services Roundtable whose members were the 100 largest financial service companies in America. So I’ve been in the arena and have had a front row to seat to the business of government in Washington.
As I prepared this talk, I started out not wanting to tell a story of good and evil with the bad guys being; greedy capitalist, intrusive and coercive regulators, venal politician, K Street lobbyists versus “the rest of us.” You know, the talk radio version of cronyism.
I didn’t think it was that simple. But after digging into this issue, I’m beginning to think it is. We have a massive and growing problem in America: It’s a moral issue, it explains why economic growth is anemic, and it’s bipartisan.
The problem is not simply “crony capitalism,” the problem is that the size and scope of the federal government is such that it’s impossible to know where business starts and government ends.
The federal budget has ballooned to $4 trillion. Federal regulatory compliance costs add up to another $1.7 trillion and affect every industry. 87,000 new federal rules were issued since 1993.
So business has a lot at stake in Washington managing through a complex tax system and coercive regulations. But this is not a one-way dynamic. Business has figured out that when they lobby to maintain and increase subsidies they also have a lot to gain from Washington. Economists have a term for collusion between business and government: rent-seeking. Now it’s better known as cronyism.
But by seeking special favors at the expense of taxpayers and consumers, business threatens public support for business and free markets. Polls show that the vast majority of Americans believe that government and business work together against the rest of us.
This belief—and its reality—is a destructive force, undermining not just our economy and political system, but our culture.
Regulation and our incredibly complex tax code are big drags on business and economic growth. They’re also the main vehicles and the means to suppress competition and keep new entrants out. I vastly oversimplify, but there are essentially two ways for a business to make money:
The first way is the right way. It has the twin virtues of being both moral and creating the conditions for economic growth and innovation.
The right way is people engaging in what economists call “voluntary exchanges”—free exchange among free people—that improve lives and makes the economy grow.
It is the process that has allowed us to live in a time where there’s been more improvement in the human condition in the past two hundred years than in all the previous centuries combined.
Every measure of material human welfare-health, wealth, nutrition, education, transportation, communications, leisure time—have shown amazing gains. And virtually all of this innovation has been created and driven by entrepreneurs competing in a free market of voluntary exchange.
In contrast to coercion and cronyism, voluntary exchange is the process where people willingly trade one item for another, making both better off as a result.
The emphasis here is on “willingly.” Apple has an iPad for sale for $500. You give them $500 and they sell you the iPad. This is a voluntary exchange where both participants believe they’re better off after the trade. This also applies to the non-profit world. If you voluntarily write me a check to my educational foundation, we both feel better off—you, because you want to give to a cause that matters to you; and me, because I have more resources to fund that cause.
Voluntary exchange lies at the heart of free enterprise, market efficiency, and entrepreneurship. Individuals cooperate with one another, reach agreements, trade … and the network of relationships that emerges or evolves out of this trading process is called “the market.” Millions of voluntary exchanges every day make the world better off. They have the great virtue of being both moral and promoting economic growth.
By contrast: taxes, government statutes, and regulations mandate “involuntary” exchanges. They rely on coercion. A harsh word but try this out: Don’t pay your taxes. Then see who shows up to seize your assets or put you in jail.
The problem for us today is that it’s voluntary exchange that is most under threat from the government and its crony partners—and not just business. Crony partners also include labor unions, environmentalists, Planned Parenthood, and so on and so forth. Whether it’s the minimum wage, EPA regulations, abortion insurance mandates, or small business licensing, our entrepreneurial freedoms are being eroded. Increasingly we are being told, for example, what we can sell, to whom we can sell it and what wages and benefits we must provide. This is an increasingly poisonous toxic mix for entrepreneurship, innovation, economic freedom, and growth.
It also aids and abets entrenched incumbents.
In the time we have tonight, I can only give an overview of the problem and a few examples. If you want a deep dive into the problem of cronyism read three books that I highly recommend.
The first book is by Mancur Olson “The Rise and Decline of Nations,” which explains that paradoxically the longer the society enjoys political stability, the more likely it is to develop powerful special-interest lobbies that in turn make it less efficient economically. It’s the problem of factions that America’s founders knew, where groups with concentrated interests form factions at the expense of the rest of society.
Olson called it “advanced institutional sclerosis.”
The second book is “By the People“ by Charles Murray of the American Enterprise Institute, where I was a trustee. It provides an excellent history and analysis of the end of what he calls “the American project,” the founding principle of America that “people can be left free as individuals, families, and communities to live their lives as they see fit as long as they accord the same freedom to everyone else, with government safeguarding a peaceful setting for those endeavors but otherwise standing aside.”
He concludes that the normal political process will not restore us to a nation devoted to limited government and economic and religious freedom. He calls cronyism corruption.
The third book “Knowledge and Power“ is by George Gilder, founder of the Discovery Institute, where I am a senior fellow. George shows that economic growth is driven by sudden, unexpected, revolutionary innovations driven by entrepreneurs. Left to its own devices, an entrepreneurial economy will rescue itself, while massive government intervention only disrupts the information loop between the market and entrepreneurs. “Everything useful or interesting depends on agents of change called entrepreneurs.” Capitalism is not chiefly an incentive system but an information system, and wealth expands through learning and discovery. Regulation and tax systems that seek to command and control the economy, distort the market signals that innovation requires.
Any system that protects old ways of doing things—cronyism—stifles innovation and growth.
His optimistic message is that an economic system can revive itself as quickly as minds and policies can change.
This talk is titled “The Problem of Crony Capitalism Today.” I don’t believe that American politicians, bureaucrats, and businesses today are more venal or dishonest than politicians or businessmen of the past. There has forever and always been cronyism and people seeking special favors from the government. What’s changed is that the scope and reach of the federal government has dramatically expanded.
Before the 1930s, Court interpretations and the general consensus in America was that the Constitution severely restricted the power and scope of the federal government. Then a constitutional revolution occurred from 1937 through 1943 that dramatically expanded its powers. There is not enough time to get into the details but three Supreme Court rulings changed everything.
The first allowed Congress to delegate its powers to federal agencies.
The second gutted the Commerce Clause giving the federal government power over regulating virtually all manufacturing and agriculture in United States. Federal Judge Alex Kozinski calls this the “Hey-you-can-do-anything-you-feel-like” clause.
The third ruling, declaring Social Security constitutional, reinterpreted the “general welfare” clause to allow Congress to spend money on virtually anything.
Fast-forward to today. There is little chance that these rulings can be reversed. Charles Murray believes that there is no chance and observes, “To reverse any of these rulings would mean that about 90 percent of everything the federal government does is unconstitutional. That’s not going to happen.”
Before the New Deal in the 1930s very few industries were affected by what went on in Washington. Only if you ran a railroad or utility, or were looking for tariff protection from foreign competition, did you need to think about dealing with the federal government. The New Deal ushered in the Civil Aeronautics Board, the FCC, and about a dozen other industry specific agencies. But if you weren’t in these industries, not much changed, and even by 1960 only a handful of corporations had even a small office in Washington.
Then came Lyndon Johnson—the Great Society—and a great pouring out of regulations from Washington. Almost 30,000 pages were added to the Code of Federal Regulations by the end of the 1960s. The Civil Rights Act of 1964 brought about unprecedented federal oversight of employee hiring firing, and promotion. But it was Richard Nixon who truly brought us The Regulatory State. From 1970 to 1974, 16 new major regulatory agencies were established including the EPA and OSHA, and the powers of the EEOC were expanded.
What made these regulatory agencies different was that they were given economy wide authority to regulate every business in the country.
By 2012, the number of pages in the Federal Code of Regulations had risen to nearly 175,000 pages.
And on a parallel path, the federal tax code became increasingly complex and massively intrusive with thousands of deductions, incentives, penalties, and special favors for virtually every industry in America.
We now have a tax code that is 4 million words long.
And how did business respond? They went to Washington. By the end of the 70s most major corporations and trade groups had set up office in D.C.
As the regulatory state has grown, the role of politicians and their staff has changed, adding the role of liaison with regulatory agencies, in addition to legislation. With enormous power over the activities of the private sector, literally billions of dollars can be at stake for an industry. This is the principal cause for the flow of lobbying money to K Street.
As Charles Murray puts it, “Corruption in the political process varies directly with the number and value of things that politicians have to sell.” That value has increased exponentially.
Politics has now become a way to get rich.
As Andrew Ferguson points out, “a seldom remarked fact of American politics is that people in positions of government authority—senators, cabinet officers, governors, ranking members of the House of Representatives—Democrats and Republicans alike— live a life utterly removed from that of the people they rule. The trappings of office include cars and drivers, private jets, four star restaurants, and skyboxes … all for free.”
They aren’t carrying their own luggage.
And most come to Washington filled with ideals and plans for change. Then, the system corrupts them. As a friend of mine, Al Regnery, who was publisher of the American Spectator, puts it, “They come to clean up the cesspool in Washington, then they discover it’s a hot tub.”
A few years ago, I believe it was 2006; I had my first direct experience with the lobbying culture of Washington. I learned that even politicians who I believe are among the good guys, get captured by how Congress works and how special interests work their agenda into legislation.
As a CEO of a highly regulated financial company, I concluded, like many other CEOs, that I needed to understand how the political process worked, if nothing else to protect our company’s interests from harmful regulation and legislation. So we set up a political action committee.
And I was invited to a weekend-long PAC event sponsored by a senator who I had great respect for. Still do.
It was held at a NASCAR race in Homestead Florida.
At the time, a Transportation Bill was in the works, a huge bill, most of which wasn’t about transportation. There were about 30-40 attendees, mostly lobbyists, as it turned out. As a weekend progressed, my senator friend looked at me quizzically from time to time as if I was going to bring something up. Finally, on Sunday as we were leaving, he asked, “what are you down here for?” “Good judges, less regulation, tax reform,” I said.
He looked at me and smiled, “You’re new to Washington aren’t you? Everybody here has got something in the Transportation Bill.”
It seems like every time Congress passes a big new bill its intended or unintended consequences end up benefiting incumbents, big business, and entrenched interests and hurts small business and consumers. Three bills spring to mind: Sarbanes-Oxley, Dodd Frank, and The Affordable Care Act, also known as Obamacare.
Dodd-Frank was supposedly aimed at Wall Street, but it hit Main Street harder.
Community financial institutions, which make the bulk of small business loans, are overwhelmed by the law’s complexity. Government figures indicate that the country is losing on average one community bank or credit union a day. About 100 new banks entered the economy every year between 1990 and the financial crisis in 2008. From 2009 through 2013, only about seven new banks have been formed—total.
There are several reasons the decline in the number of banks:
Goldman Sachs CEO Lloyd Blankfein frankly tells us that Goldman is a big beneficiary of Dodd-Frank’s more intense regulatory requirements, which have “raised the barriers to entry into the banking business higher than at any other time in modern history.”
JP Morgan CEO Jamie Dimon said the same thing, explaining that Dodd-Frank helped create—in a term that Warren Buffett uses—a “bigger economic moat” around the megabanks.
Tim Carney of the Washington Times writes: “Regulations like Dodd Frank protect the giants because politics and lobbying are home games for the big guys. Goldman is famously close with Washington, and the revolving door between Goldman and its regulators is well-trafficked.”
More regulation increases the value of lobbyists and lawyers, particularly those lobbyists and lawyers who used to be lawmakers and regulators. Wauwatosa Community Bank can’t afford to hire many former members of the House Financial Services Committee.
This is a big problem.
Community banks represent the vast majority of U.S. bank and are critical to the economy because they are more likely to make small-business loans.
Community banks hold 46 percent of loans to farms and small businesses while holding only 14 percent of total banking industry assets. For rural communities, small banks are often the only lender, since the big banks are closing branches.
For decades, U.S. stock exchanges were seen by companies around the world as the most prestigious location to list shares. But the number of public listings in the U.S. peaked at 8,884 companies in 1997. It’s now down to roughly 5,000.
Regulations such as the Sarbanes-Oxley Act, Section 404, Reg FD, etc. have had a chilling effect on companies wishing to go public in the United States but once again have had little effect on big companies.
For example, public company regulatory costs are estimated at $4 million annually for an emerging growth company when it goes public, often most of its profits. At the same time, emerging markets such as China have lured more companies to their exchanges.
Between 2000 and 2012, the United States averaged just 177 listings annually. Meanwhile, the number of listings on exchanges in China nearly tripled to more than 4,000.
Why does this matter?
Emerging public growth companies create the most jobs. There was a study a couple years ago that showed that these so-called “gazelles” created as much as 75 percent of the high paying jobs in America.
Now CEOs and venture capital backers of emerging growth companies don’t want the hassles and costs of running a public company. So they instead choose to be acquired.
The problem is that big companies don’t create jobs. Many big companies acquisition strategies are to buy an emerging growth company for its technology then fire the people.
Back to the problem of cronyism.
Lobbying has evolved from companies protecting themselves from such things as tax increases and regulations to using the political process to help them become more profitable.
The classic case is the Medicare Modernization Act of 2003, which ushered in Medicare Part D drug benefits. The Economist magazine reports that pharmaceutical companies spent about $130 million to help get the law passed—a lot of money –but the payoff has been estimated to be over $240 billion in new drug sales over a 10-year period—all paid for by tax payers.
The ethanol mandate, which benefits corn growers in dozens of states, is among the least defensible corporate-welfare boondoggles that Washington has created. As Tim Carney reports, “It forces drivers to put corn alcohol in their cars by forcing refiners to blend it with real gasoline.”
“Ethanol is far less efficient than gasoline. It increases food prices by taking up cropland that could go to other crops. It makes animal feed more expensive, hurting ranchers, and boosting meat prices. It places extraordinary stress on water supplies.”
Look at the case of General Electric, which in last year’s annual report described itself as “A New Kind of Industrial Company.” That’s for sure.
In the last decade, Capital Research Center reports that GE has spent over $300 million lobbying and its CEO Jeff Immelt visited the Obama White House 33 times.
Why would a business spend this kind of time and money lobbying? Because it produces results.
The progressive group Americans for Tax Fairness claims that General Electric paid no federal income taxes from 2008 to 2012 and that it got $3.1 billion in refunds on $27.5 billion in profits during this period. While I think this is probably exaggerated, GE paid nowhere near the statutory rate of 35 percent. Its payments were probably closer to 2-3 percent, because it has the resources and lobbying skills to work the corporate tax code to its benefit.
(This is one of the reasons that we should get rid of the corporate tax altogether—another being the code’s drag on economic growth. It’s manifestly unfair that GE should be able to game the tax system, while smaller rivals cannot.)
GE also received over $2 billion in federal loan guarantees for wind and solar projects. It was a big recipient of bank bailout TARP money, notwithstanding the fact that GE Capital is not a bank. It was paid subsidies of $132 million for a lithium battery company that ended up in bankruptcy.
Of course, one of the most effective ways to lobby is to wrap your special interest in a cloak of some public good. In the name of protecting the environment, General Electric was one of the principal advocates of energy legislation that effectively outlawed incandescent light bulbs to be replaced with LED bulbs.
What this bought GE was that it was able to get out of unprofitable, low margin commodity incandescent light bulbs and into the much more profitable high margin LED business. Before the legislation, consumers balked at the higher LED prices, but with the law we are now forced to pay up.
In another loudly proclaimed show of “giving back” GE donated $30 million to NYC Schools. $11 million went to Charlie Rangel’s District. At the time, Charlie was Chairman of the House Ways & Means Committee, overseeing corporate tax rules. What a coincidence.
On the Charlie Rose show, Immelt praised the communist government of China: “State-run Communists may not be your cup of tea—but their government works.”
He also told shareholders, “In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner. The interaction between government and business will change forever.”
Yes, GE is a new kind of industrial company.
So are their solutions to the pervasive and growing problem of cronyism? If so, they need to be big ones. Radical ones. Tinkering with things like term limits, revolving door government, campaign finance reform are not likely to change much in Washington so long as trillions of dollars are at stake.
Mancur Olson believed there is only one way to cure “advanced institutional sclerosis.” Be utterly defeated in a world war like Japan and Germany. They had to start over from scratch.
Charles Murray advocates “massive civil disobedience” underwritten by privately funded multibillion-dollar defense funds to sue government and cronyists.
George Gilder believes that one solution is to “zero base budget” every agency on a three-year budget cycle. Zero out their budget and make them show that they are doing something worthwhile. He would also sunset all regulations after 10 years.
I'd start with getting rid of the income tax code and replacing it with a flat tax or fair tax. This would eliminate tax code cronyism and ignite the economy.
Whatever we do—and I’m not advocating being massively defeated in a world war—we need to think big and act now.
I’m hoping that some Hillsdale graduates will lead the charge.
Thank you.
Bill Walton is the founder of Rappahannock Ventures LLC. Copyright The Daily Signal. This article was previously published on DailySignal.com.