Its Not Capitalism, its Crony Capitalism

The latest risk supposedly precipitating a collapse of America is not the rise of Socialism; It is not Senators Elizabeth Warren or Kamala Harris or even AOC. Medicaid for all will be expensive, and a guaranteed income will be costly – but they are not existential threats. It ain’t even the Russians hacking the 2016 election or the rise of China as an economic powerhouse.

The threat to America is this: we have abandoned our core philosophy. Our first principle of this nation as a meritocracy, a free-market economy, where competition drives economic decision-making. In its place, we have allowed a malignancy to fester, a virulent pus-filled bastardized form of economics so corrosive in nature, so dangerously pestilent, that it presents an extinction-level threat to America – both the actual nation and the “idea” of America.

This all-encompassing mutant corruption saps men’s souls, crushes opportunities, and destroys economic mobility. Its a Smash & Grab system of ill-gotten rewards for the well-connected few. The rest of the population? Fuck ’em. This is not what Capitalism is, at least not as conceived by Adam Smith.

The peril gravely putting our nation at risk of failure is Crony Capitalism.

We can define this as the return on capital generated not by innovation and risk taking, but rather through the unholy alliance between the business and political classes. Instead of genuine competition, they use the states’ power to legislate, regulate, grant hand outs, permits, government licenses, special tax breaks, and other dispensations as favors to enrich each other.

I make this observation as an unabashed capitalist. Over the course of my career I have started several businesses, some of which have succeeded. In my day job, I invest capital for other capitalists. Around the world, it is undeniable that capitalism has produced more wealth and human well-being than any other system this world has known. The global gains in income that has raised millions out of poverty the past several decades is directly attributed to major economies such as China embracing (at least in part) some form of market-based capitalism.

How bad is cronyism? Look no further than the giant sum of corporate money spent on lobbying to get a sense of how enormous the problem has become.

Here are some of the worst manifestations of this pox on capitalism:

• Private jets tax breaks: If you want to understand why so many Americans think the system is rigged, look no further than this blasphemy. As Bloomberg News reported, the 2017 tax reform created a new set of tax breaks for the wealthy to make these purchases. It is an outrage.

Corporate facilities: Wisconsin stands out for cooking up one of the worst deals ever, promising something like $4.5 billion in tax giveaways in exchange for a promise by Chinese electronics maker Foxconn to build a giant TV factory and employee 13,000 people. The whole thing has turned out to be a giant bust. This probably goes a long way toward explaining why the state’s idiot-in-chief (now former governor) Scott Walker, was thrown out of office by voters who were disgusted with the entire giveaway.

Amazon’s HQ2: Talk about horrific optics: The wealthiest man in the world running the 3rd most valuable company in America came around begging for a handout. The failure of the Amazon HQ2 deal in New York City may be behind us, but it was more of the same bullshit. Local governments need to stop playing this costly “race to the bottom” using taxpayer money to lure businesses to places they probably would have moved anyway. Perhaps the national Mayors Association or the Governor’s group might want to come up with a set of best practices on this.

• Sports stadiums: Are we still talking about this? There may be no more malignant class of Faux Capitalists than these welfare queens. Politicians continue to offer taxpayer dollars to subsidize private for-profit companies that consistently fail to produce a net positive return to the community. The costs for these facilities should be shifted to the people who either own the stadiums and the teams that play there, or those who attend events there via their tickets.

• Taxi Medallions: Technology at its best can thwart the worst of crony capitalism, which doesn’t come more blatant than the New York City Taxi and Limousine Commission. Uber, Lyft and ride-hailing services fractured the rancid relationship between taxi medallion owners and their captive regulator, which artificially limited the number of cars for hire even as the city’s population grew.

• Carried interest: This may be the “single most outrageous tax loophole in America.” This egregious tax break lets a few politically well-connected rich people, many earning many millions or even billions of dollars, to pay a much lower income tax rate than those earning middle incomes. Despite a promise of candidate Donald Trump, it somehow survived the 2017 tax reform mostly intact.1

Financial-crisis bailouts: The various rescues privatized the rewards of risk-taking and stuck taxpayers with the losses. Corporate executives were rewarded for managing their firms so poorly that bailouts were the only reason they survived. Wall Street received bonuses, while many on Main Street have yet to recover 10 years later. The lesson here was that it was better to be connected to Treasury Department and the Federal Reserve than it was to be a good steward of capital. This is the purest definition I have come across of crony capitalism: “Socialism for the rich, capitalism for everyone else.”

General Motors Another serial offender, and has long strong-armed local towns and cities with promises of factories and jobs, both before and after bankruptcy (for which it received a huge government bailout.) It’s a sign of weakness, not strength, that the company was more adept at extracting government largess than actually building cars that people want to buy.

I plan to do more thinking and research on this topic. There will be a more measured Bloomberg column about what I find.

But JFC, there are lots of worrisome signs out there that require immediate attention. 

Want to guess why more young people support socialism than capitalism? They cannot afford decent health care or their own place and have crushing student loans —  all the while billionaires get tax breaks for their private jets. WTF do you think the outcome of that scenario is going to be?

Here is some advice to real capitalists: You best recognize that Socialism is the symptom, but the underlying problem is cronyism. Wise up before, as Nick Haneuer presciently warned 5 years ago, The Pitchforks Are Coming… For the Plutocrats.



UPDATE: March 10, 2019

Hudson Yards versus Amazon HQ2, March 10, 2019.



HQ2: Understanding What Happened & Why (February 19, 2019)



1. It extended the holding period to qualify for carried interest rates of 20 percent from one year to three.

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