Today March 1, 2013, the Federalist Society’s 2013 Annual Student Symposium began at the University of Texas at Austin. The theme of the convention is "The Federal Leviathan: Is There Any Area of Modern Life to Which Federal Government Power Does Not Extend?" Judge Jerry Smith of the U.S. Court of Appeals for the Fifth Circuit introduced the opening panel, which was on the subject of crony capitalism.
The first speaker was John A. Allison IV, CEO and President of the Cato Institute and author of the recent book The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope. He began by speaking about the financial crisis. It is a myth, he claimed, that deregulation and greed are what caused the crisis. On the contrary, the financial services industry is the most regulated sector in the world. The problem, he said, is that it is mis-regulated, and he offered a litany of examples. As for the claim of greed, he noted that there is no evidence that there was any more greed than usual in the history of Wall Street.
Allison then turned to address the term “crony capitalism” itself. In his view it is an oxymoron. The proper term is “crony statism.” This is another instance, he explained, when the left has appropriated a term for its own purposes—just as classical “liberalism” was replaced by Left “liberalism.” As for crony statism, he said, “I have no empathy for businesses that look for favors from government. But it’s the government that ultimately doles out the favors. The main fault lies on the latter.” The ultimate cronies, he continued, are the Federal Reserve: It was created with the support of the large New York banks, which thought to themselves, “Wouldn’t it be great if government would lend me money whenever we have a tough time?” Allison noted that Citigroup has already failed and been bailed out by the Federal Reserve three times in its history.
Allison said that the government’s response to the 2008 financial crisis created massive uncertainty through its arbitrary decisions. For instance, Wachovia bank has forced to sell itself to Citigroup, even though the latter was in worse shape. The explanation for this, he claimed, is that the latter had a lot more contacts in Washington, D.C. Similarly, Bear Stearns was arbitrarily saved for reasons that remain obscure to this day. That decision by the federal government suggested it would save all of the investment banks, but then it left Lehman Brothers fail, even though it was a more important bank. Secretary of the Treasury Hank Paulson made that decision. Allison claimed it was well known that due to their prior history, Paulson hated Lehman and that he made the decision for personal reasons. Allison added that he found it disturbing that non-elected officials have such incredible power to dole out favors.
He suggested two cures for the problem of crony statism. The first is simply to return to the enumerated powers in the Constitution, to limit the government’s ability to regulate commerce. The Framers never intended the Commerce Clause to grant Congress such sweeping powers, explained. The second solution is to ratify an amendment protecting the separation of commerce and state, analogous to the First Amendment’s separation of church and state.
Speaking next was Jide Okechuku Nzelibe, professor at Northwestern University School of Law. He said that if you look at the wide variety of ways people use the term “crony capitalism,” they basically mean it to men “things I don’t like: embezzlement, bribery, theft, and so on.” The Left uses the term as another way of complaining that corporations are becoming too powerful—i.e., that through the Chamber of Commerce, etc. businesses have more influence on government than the influence groups the Left favors, such as the ACLU. This is, of course, a mistaken usage; what the Left is really complaining about is interest group politics they do not like. They are seeking regulation to favor their groups over the interests of business.
Defining “crony capitalism,” he continued, entails the difficulty job of drawing boundaries. He noted that in the 19th century, the word “crony” simply meant “friend” and did not have a negative implication. The word first became negative during the Truman administration, when the press accused the president of appointing his friends—his cronies—to important positions despite their having no relevant qualifications. To address the definitional boundary problem, Nzelibe offered a few hypotheticals. In the first, the dean of a law school hires someone as a law professor despite the fact that he has no publications or teaching record. He hires him simply because he is a trusted friend. That appears to be pure cronyism, the sort everyone opposes. But to change the hypothetical, what if the dean hires the same person on the grounds that the professor’s numerous contacts would help the law school in fundraising? Nzelibe claimed that fundraising is not typically part of a professor’s job description; hiring on such grounds seems wrong, even though it might benefit the school. To alter the hypothetical still further: Suppose the law school hires a dean precisely because he has connections that would help the school in its fundraising. In that case, the dean’s “qualifications” are in fact appropriate to the job, which entails fundraising as a major aspect.
Nzelibe then turned to examples in the political sphere. If a business owner tells a legislator that some proposed policy would hurt his business, a business than employs many people in the district, that is simply representative democracy at work, not cronyism. But what if the legislator responds, “I’ll vote against the policy if you appoint my two golf buddies to the board of your company.” Placing one’s friends in business positions is simply not one of the proper roles of a legislator. The politician is leveraging his power in an unseemly way. Moreover, it is not good for the business if it is forced to take on unqualified board members. It appears to be a deadweight loss. This, the Nzelibe explained, is a classic example of the crony capitalism we should oppose.
The final speaker was Jonathan R. Macey, Sam Harris Professor of Corporate Law, Corporate Finance, and Securities Law at Yale Law School. He offered a descriptive, not normative, account of crony capitalism. Such cronyism has ebbed and flowed throughout American history, he said, but it appears to be on the rise now. He pointed to a number of examples, including a $220 million tax rebate for rum distillers and a giant tax write-off for NASCAR drivers. He also noted the example of Obama’s appointment of Jack Lew as Secretary of the Treasury—despite the fact that Lew has no relevant experience in finance. Macey explained that when Lew worked at Citibank, he had a contract that said he would receive a bonus if and only if he attained a position in the government. Macey commented, “Bribery is illegal, but it would seem that prospective bribery is not,” which got a big laugh from the audience.
When the conditions are right in politics and the economy, Macey continued, crony capitalism will arise and even dominate. It is a simple matter of supply and demand. The bureaucrats and elected officials are the suppliers. He said, “Like the rain, everyone complains about it, but what can you do to change it?” Macey pointed to grounds for hope: when the amount of competition in the economy increases, cronyism decreases.
As evidence, he pointed to what he claimed what the single largest reduction of crony capitalism in American history. At the turn of the 19th century, if someone wanted to start a corporation, he needed to get a state charter—but this was the era of “special charters.” That meant that you needed to get the state legislature to pass a special statute to authorize the charter. The system was fertilizer for cronyism since the charters often granted monopoly power to the corporation. Yet this cronyism ultimately stopped. “Why?” Macey asked rhetorically. “Forgive my cynicism, but I don’t think New Jersey legislators simply thought, ‘I’m tired of taking all these bribes.’” What had happened was that courts had been ruling that if one state would not charter a corporation, those who needed a charter could go to another state for incorporation, which would solve the problem. These court decisions had the effect of permitting jurisdictional competition for corporate charters, and that competition is what ended the cronyism.