10 Nov 2014Working Paper Summaries

Crony Capitalism, American Style: What Are We Talking About Here?

by Malcolm S. Salter

In essence, crony capitalism conveys a shared point of view-sometimes stretching to collusion-among industries, their regulators, and Congress. The result is business-friendly policies and investments that serve private interests at the expense of the public interest. In this research paper, the author's goal is to add precision and nuance to our understanding of this form of corruption. He does so first by exploring definitions of crony capitalism. He then outlines the toolkit of crony capitalism including 1) campaign contributions to elected officials, 2) heavy lobbying of Congress and rule-writing agencies, and 3) a revolving door between government service and the private sector. The paper next describes the costs of cronyism and concludes with innovative ideas for curbing the excesses of crony capitalism. As the author notes, thorny problems remain: for example, the fact that "the public interest" in matters involving subsidies, tax preferences, and legislative loopholes is often difficult to discern and agree on. Key concepts include:

The line between corrupt cronyism and legitimate bargaining among self-interested parties in the halls of government may be blurry.
Although the costs to taxpayers of direct and even indirect subsidies can be measured, quantifying the cost of violations of the principle of equal treatment by government, the distortion of market mechanisms, and the undermining of public trust in government and business is vastly more difficult.
The US has a long history of attempted campaign finance reform, which is critical to curbing crony capitalism. In the absence of meaningful reform, one corrupting feature of federal campaigns has not changed. Today 85 percent of funding for congressional campaigns comes from large contributors-mainly wealthy individuals and corporations.
Among other necessary reforms, we need to take seriously the need to minimize trust-destroying conflicts of interest in Congress and privileged access by influential business interests to Congress and regulatory agencies.
In the absence of such reform, the many benefits of the espoused system of democratic capitalism cannot endure.

Author Abstract

This paper seeks to reduce the ambiguity surrounding our understanding of what crony capitalism is, what it is not, what costs crony capitalism leaves in its wake, and how we might contain it.