LESSONS LEARNED #59: “When the Right partners with business the Left calls it crony capitalism. When they partner with business the Left calls that smart government.” -Old Pithy

Posted by PITHOCRATES - March 31st, 2011

Microsoft Learns the hard way to Lobby Congress

Microsoft was a rogue corporation.  A big, profitable, rogue corporation.  And it was in the government’s crosshairs.  With all of their going about their business.  Alone.  Without any federal assistance.  Who did these people think they were?  They didn’t spend a dime lobbying the federal government for anything.  As if they could just go on about their business competing in the free market.  Scoffing at the government’s business resources.  All those things they could bring to the table.  To make an unorganized market organized.  Make Microsoft better.  Make Microsoft’s products better.  All for a nominal fee.  Some campaign contributions.  A vacation junket or two.  A little monkey business with someone you’re not married to.  A Roman indulgence of intoxicating substances and flesh.  You know, lobbying stuff.  But no!  Not Microsoft.  Those holier than thou sons of bitches.  Who did they think they were?

Well, Microsoft went too far.  Pissed off the wrong people.  People with friends in Washington.  People with power.  And a justice department.  Empowered with antitrust legislation.  Big, nasty, legal teeth.  Their crime?  They gave away Internet Explorer free.  And that was unfair to their competitors.  But it was a sweet deal to the consumer.  None of them complained.  They were happy to get IE free.  It saved them money.  It was their competitors that were pissed.  Because they couldn’t sell something that Microsoft was giving away free.  So the Department of Justice (DOJ) sued Microsoft claiming they violated the Sherman Antitrust Act.  Which Congress passed in 1890 to protect consumers.  And here the DOJ was fighting a case.  And if the DOJ won, the consumer lost.  They would have to pay for IE or a web browser from one of Microsoft’s competitors.  Which just goes to prove that it is never a consumer that complains about ‘predatory’ pricing.  It’s always a competitor that can’t compete at the same price that runs to the DOJ crying for antitrust protection.

Microsoft learned a very important lesson.  When you sit on big piles of money you don’t dis the federal government.  You show them the proper respect and give them some of that money. For your own protection.  For if you don’t they will go after you.  Like they did with Microsoft.  Who is smarter now.  Today, Microsoft spends millions on lobbyists.  To pay tribute for the pleasure of being left alone to operate in the free market.

Money Corrupts, Big Piles of Money Corrupt Absolutely

Microsoft is not alone.  There are a lot of honest companies out there.  But, sadly, there are a lot that aren’t.  Especially if they have a friend in Washington.  Because Washington sits on great big piles of money courtesy of the tax payers.  And a select few spend that money.   Put these two together and it’s a recipe for corruption.  Because one person can skim a little off the top of a huge transaction that is all but impossible to see.  Unless you start living like a Rockefeller on a government salary, that is.

The Teapot Dome scandal was the biggest government scandal of its time.  It involved leases to oil reserves transferred from the Navy to the Department of the Interior.  These were strategic reserves for our navy in case we went to war.  Important to have.  Because you don’t want to run out of oil during a war.  Albert Fall was the Secretary of the Interior.  And it was his job to lease those oil reserves.  Which he did.  But they didn’t go to the low bidder.  They went to the one that made it most worth his while.  Ultimately it was all that ‘making it worth his while’ that did him in.  He became a very rich man.  Which was impossible on his salary.  So they caught him.

Congressmen profit as Shareholders in Crédit Mobilier

The Teapot Dome was a big scandal perpetrated by a few players.  The Crédit Mobilier scandal, on the other hand, had far greater tentacles.  And is a good example of how government partnering with business goes wrong.  It involved the Union Pacific Railroad.  A sham company they created called Crédit Mobilier.  And some 30 Congressmen. 

The railroad to the pacific was a risky proposition.  It would take a very long time to build.  It would go through some very difficult terrain and hostile Indian country.  And there were few shippers on the proposed road.  In other words, it would take a long time to earn any revenue on this line.  And it was possible that they would never complete it.  Or ship enough freight to operate it profitably.  So the government stepped in and partnered with the Union Pacific.  And the fraud began.

The trick was how to make this loser a winner.  Railroad profits weren’t the answer.  So how can a railroad company make a profit without running any trains?  Why, from construction, of course.  That’s where Crédit Mobilier came in.  They built the railroad.  Billed Union Pacific.  Who then billed the government.  And, surprise, surprise, construction costs went way over budget.  Because they were overbilling Union Pacific.  Who then overbilled the government.  But the government just kept on paying.  Why?  Because they had shares in the very profitable Crédit Mobilier.  You see, when you share in the obscene profits of a government contractor you have little incentive to see or stop the fraud.

Government Steps into the Mortgage Business and Gives us the Subprime Mortgage Crisis

For years the federal government implemented policies to increase home ownership.  In their models, this was the driver of all economic activity.  A lot of material and labor builds a house.  And a lot of material and labor builds the things that furnish a house.  Ergo, the more people who bought houses the greater the economic activity.  And that meant everyone.  Even the people who couldn’t qualify for a mortgage.  A lot of which were minorities.  So if a bank denied anyone a mortgage, it just reeked of racism.  So lenders had to find a way to make the unqualified qualified before the DOJ charged them with discrimination in lending.  So, in the mid 1990s, they figured out how to make the unqualified qualified.  Along with a little help from the government.

The subprime mortgage was the vehicle.  Adjustable Rate Mortgages (ARMS).  And No Income No Asset (NINA, aka, Ninja) loans.  Of course, these by themselves didn’t solve any problem.  Because no respectable lender would ever approve such risky mortgages.  This is where government came in.  Or, rather, the Government Sponsored Enterprise (GSE).  Better known to you and me as Fannie Mae and Freddie Mac.  Here’s how it worked.  The GSEs bought those risky loans from the lenders.  Then sold them to Wall Street.  Where investment bankers packaged them into Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDO).  High risk loans became low-risk, high-yield securities.  The risk was transferred from the bank to the taxpayer and then to the investor.  And back to the taxpayers when they had to pay for the bailout of the subprime mortgage crisis.

The enabler for this great financial crisis was the government.  First ‘encouraging’ banks to loan to the unqualified.  And then by their partnership with the GSEs.  Encouraging more and more risky behavior because they were getting a piece of the action.  So they turned a blind eye.  Even when some warned the committees responsible for their oversight.  They laughed.  Said they were just mean racists trying to deny fair and affordable housing to minorities.  And they insisted that these GSEs were financially strong and healthy.  Up until the world learned they weren’t.

Crony Capitalism can be Smart Government if it Saves the Environment

There’s one reason why government partners with business.  Corruption.  Crony capitalism.  Either an unscrupulous business trying to buy favors for personal gain.  Or an unscrupulous politician trying to sell favors for personal gain.  And good luck if you run an honest business.  Because the buying and selling of favors simply becomes paying tribute to be left alone.

Both sides are guilty of this.  Though the Left says it’s the Right that is in the pocket of the corporations.  Which is funny.  Because the Left is just as guilty.  But when they do it, it serves a higher purpose. So it’s smart government.  Such as when one of the world’s largest corporations, GE, doesn’t pay any income taxes.  By using some creative accounting practices.  But they’re very cozy with the current administration.  So they get a pass.  And they’re eager to cash in on all that green legislation.  To help them sell their green products.  You see, that’s good for the environment.  So it’s okay that they don’t pay income taxes.  And, more importantly, they have lobbyists.  They know how to play the game.  And they play it well.

But when the Right wants to cut the corporate income tax to stimulate the economy to create jobs, that’s just corporate welfare.  They’ll fight that every day of the week.  But if a corporation’s lobbyists treat them well, they’ll make the incandescent light bulb illegal.  So that corporation can sell more of their compact fluorescent lamps.  But that’s not crony capitalism.  That’s just smart government.  Because it saves the environment.

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FUNDAMENTAL TRUTH #59: “When the Right partners with business the Left calls it crony capitalism. When they partner with business the Left calls that smart government.” -Old Pithy

Posted by PITHOCRATES - March 29th, 2011

The Right likes Capitalism, the Left likes Marxism

Crony capitalism isn’t capitalism.  At best it’s mercantilism.  At worse it’s autocracy.  But the critics of capitalism haven’t the foggiest clue of what capitalism is.  They think it just exploits the working class.  Like Karl Marx said.  Of course, Karl Marx was wrong.  His philosophy has never worked.  Whereas capitalism, true capitalism, has.  Try to point to a successful Marxist country today.  You can’t do it.  Because when you take from those according to ability and give to those according to need you have everyone trying to show as little ability and as great need as possible.  Put yourself in that position.  Do you want to show some genius and work 12-hour days and see all of your earnings go to people sitting at home collecting state benefits?  Or would you rather not work those 12-hour days, relax at home and collect those state benefits?  If these are your choices, you don’t have to answer.  Because everyone is going to choose to stay at home and collect benefits.  Because no one volunteers to be a slave.

In such a world try to imagine how many cellular towers people would install when no one wants to work.  Not many.  Which means no cell phones, no text messaging, no internet on your mobile device and no sitting in your favorite coffee shop Internet hotspot.  For no one will spend the excruciating time, money and effort to create something while he or she is paid less than those with greater need who do nothing.  In other words, there is no incentive to work hard.  So no one will work hard.  Just like you won’t work hard by working overtime hours for free.  And why won’t you?  Because when you work you sell your time to an employer.  It’s your time.  If no one is paying you for it, you’d rather do something fun.  We all would.  Because it’s our unalienable right to pursue happiness.  Like Thomas Jefferson wrote in the Declaration of Independence.  And pursue it we do.  Because when it comes to our happiness, we’re all Jeffersonians.  Even Alexander Hamilton.  Even though they often saw things differently.

And one of those things was capitalism.  Jefferson didn’t like bankers.  Especially when they were in tight with the government.  Hamilton, on the other hand, liked the bankers.  Because he knew the difference between money and capital.  Assume everyone has a few bucks in their pockets.  What is that going to buy these individuals?  Not much.  Certainly no cellular towers.  But when you pool that money together you get capital.  And capital can buy cellular towers and the other conveniences of modern society.  And this is capitalism.  There’s a little more to it but the point is capitalism provides incentive.  And incentive stimulates innovation.  People take risks, work hard and create great things.  Marxism, on the other hand, provides no incentive for anyone to innovate.  There are no risk takers and people work the bare minimum they can get away with.  And there is nothing great in a Marxist society except misery, hunger and fear.  North Korea and Cuba are about the last of the Marxist societies remaining.  The Soviet Union, Eastern Europe and Mao’s People’s Republic of China are relics of the Cold War.  Now on the ash heap of history.  And all of these countries have/had sealed borders.  People could not leave.  If they tried they often died.  Many still risked it.  Because life was horrible under Marxism.

Jefferson the anti-Capitalist turns to Capitalism

Now whenever you gather money in great big piles you invite corruption.  Especially in government.  Which is what Jefferson feared.  You need money to do things.  And if government had access to great pools of it, they could do a lot of things.  Build armies.  Build navies.  Fight wars.  Grow the size of government.  Increase the size of the federal payroll.  Buy favors.  Sell patronage.  So more and more people became part of a growing, bloated federal government.  Who then had a vested interest in seeing it continue to grow to protect and increase the power and money they had.  All the great cities in the old world (London, Paris, Madrid, etc.) were corrupt.  The bankers were in bed with the politicians.  And the people suffered.  In his beloved France, Jefferson saw firsthand this insidious combination of money and power impoverish and starve the masses.  He saw revolutionary fervor grow in the Jacobin clubs.  And witnessed the outbreak of the French Revolution.  To check the power of the absolute monarchy and instill republican ideals.  And he liked what he saw.

With the backdrop of history, two men (and their followers) pulled America in two directions.  The Hamiltonians wanted to model America after the British Empire.  Rich and powerful.  Jefferson envisioned a nation of citizen farmers.  Simple farmers toiling the land.  Free from the corruption of the banks and the merchants.  With limited government.  Working with a modest federal budget.  Without any debt.  Of course, this all went out the window with the Louisiana Purchase.  When he needed a big whopping pile of money.  And a little extraconstitutional authority as well.  Sort of like a European monarch.  Which he took.  And thanks to a little thing called capitalism, the British and Dutch put together some creative financing for the French and the Americans.  They paid cash to France in exchange for the American bonds they just underwrote.  Some would say it was a bit hypocritical considering his attacks against Hamilton, but the U.S. profited very well from that purchase.  The point being is that even an ardent anti-capitalist like Jefferson had to turn to capitalism to close this deal.  Because there was no other way a young and poor nation could ever come up with that kind of money without borrowing it.

But all politicians aren’t like Thomas Jefferson.  In fact, shortly after the Founding Father generation, government began to grow.  There were political favors.  Pandering.  And corruption.  As the quality of the politician declined more unscrupulous people were attracted to government.  A growing nation needed to grow.  It needed to build things.   Armies.  Navies.  Forts.  Government buildings.  Post offices.  Canals.  Railroads.  As the nation grew it collected more taxes.  It soon had a lot of money to buy these things.  And issuing contracts for these things could be a very lucrative endeavor.  For the unscrupulous politician.  Who would only contract with those who made it worth his while.  The unscrupulous businessman.

Buying and Selling Favors for Personal Gain

This is crony capitalism.  The joining of business and government in backroom deals.  This isn’t laissez-faire capitalism.  This is the buying and selling of favors for personal gain.  And this is what many people think capitalism is.  Especially those critics on the Left.  Who think in zero-sum terms.  The only way some people can have more money is if other people have less.  Some people are lucky.  Some just aren’t.  Ability and ambition have nothing to do with it.  It’s all based on who you know.  And when money and power is concentrated in too few hands, it shuts out others from the market place.  And that’s just not nice.  Good people will be unable to make other and more important things.  So unless someone smart steps in and coordinates this economic activity, that activity will be inefficient.  It will build the wrong things.  And the wealth will accumulate in the wrong hands.

These politicians want to partner with business to make the right things.  By the right people.  The things they want to see built.  And not the things they don’t like.  A good example of this today is the electric car.  And the internal combustion engine.  They love one.  And despise the other.  They put in policies to increase the cost of gasoline-powered cars.  And the cost of gasoline.  And provide subsidies to electric car companies to help them build cars no one wants to buy.  And subsidies to consumers to reduce the price on electric cars.  So they’ll buy something they don’t want.

Currently, there is no market for the electric car.  People are buying it now for one of two reasons.  Because of the subsidies.  Or the smugness.  Yet companies are building these cars.  Why?  Well, they’re not doing it to lose money.  They’re making money.  Somehow.  But it isn’t in the market place.  And if it isn’t the market place, it can mean only one thing.  They are getting some sweet federal subsidies to build these cars no one wants.  And this just isn’t capitalism.  It’s another example of crony capitalism.

The Left hates Shareholders, not Corporations

The Left attacks the Right for being the party of the big corporations.  They’re nothing but a bunch of crooks.  The corporations.  And the Republicans.  Republicans pander to the corporations.  They want to deregulate their industries.  While consumer safety suffers.  As does the environment.  And they want to cut their taxes.  Paid for by tax hikes on the poor and working class.  To those on the Left the business corporation is evil incarnate.  Unless they want to partner with them.  And build things together.  Then they’re okay.

The Left hates corporations.  Yet it’s always the left that favors corporatism.  The partnering of business and government.  Like in Mussolini’s fascist Italy.  Or outright nationalization of the corporation.  A complete takeover by the government. Like in Hugo Chavez‘s Venezuela.  It apparently isn’t the corporations per se they hate.  It’s the shareholders.  They have no problem with these corporations making obscene profits.  As long as the politicians can share in these profits.

So there you have it.  The difference between crony capitalism and smart government.  It all depends on the amount of money flowing into the government’s coffers.  If the shareholders keep the full return on their investment then the business and Republicans are practicing crony capitalism.  If the shareholders share their return on their investment with the Democrats, then that’s smart government partnering with business.

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