by William L. Walton
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 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:
- 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 form of cronyism are occupational licenses, teacher certifications and school accreditations.
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 DC.
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.