Welcome to our system of political capitalism, where merit matters, but political connections matter even more. In an unmixed capitalist system, money flows to those who provide valuable goods and services to consumers. In a system of political capitalism, money flows to special interest groups with friends in high places.
In his 2018 book Political capitalism, Randall Holcombe, an economist at Florida State University, defines it as a regime marked by cooperation between political and economic elites for their mutual benefit at the expense of the masses. Among the advantages sought by the elites, there is of course the maintenance of their positions of power.
The Occupy Wall Street (OWS) movement was born out of opposition to political capitalism. Indeed, OWS members rightly felt that the financial bailouts and bailouts of the banking system by the Federal Reserve during the Great Recession were the products of a system that favored politically connected bankers and their friends in Congress. OWSers denounced the recipients of government favors as the “one percent” and compared them to the “99 percent” who often had to bear the high costs of these policies.
What the OWS movement failed to see, however, is that it is not just Wall Streeters who are favored by the capitalist polity. This broad organizing force underpins most government spending and regulatory decisions.
Consider the export subsidies that have existed for decades. These subsidies mostly benefit the same giant manufacturers, like Boeing and GE, that were the main recipients decades ago. It doesn’t matter which party is in power: the big exporters will collect their largesse and express their gratitude to their friends in Congress with campaign contributions and votes. That is why The Wall Street JournalAndy Kessler calls this system of cronyism “Kickback Capitalism”.
Once you understand how political capitalism works, it becomes clear that it drives most decisions in Congress. For decades, sugar subsidies have benefited the same small group of wealthy sugar beet growers and processors through an unholy alliance with politicians that goes far beyond who happens to be in power in Washington, Florida or in Louisiana.
The CHIPS and Science Act, passed last year, is another episode of politicians bestowing favors on their friends in the semiconductor industry. The previous episode took place in the 1980s and was set in the 1990s.
The $54 billion in COVID-19-era airline bailouts were reportedly granted to avoid laying off some 30,000 airline workers. Yet during the same period, Regal Cinemas announced the temporary closure of all of its 536 locations in the United States and laid off 40,000 employees. There was no one in Congress calling for a special bailout of Regal (thankfully). The simple reason is that the airline bailouts weren’t so much about airline employees as they were a way to do a favor for airline shareholders who have many friends in Congress.
Perhaps the most striking example of political capitalism took place during the administration of former President Donald Trump, live on television. In March 2018, Trump hosted a “listening session” with steel and aluminum executives he had invited to the White House. The whole thing was televised, allowing us to see Trump joking around with his CEO friends as they pleaded for government support for their industry. The head of Nucor, for example, told the president how his 25,000 employees would really benefit from steel tariffs imposed on American steel buyers. And just like that, those of us watching saw in real time the president acceding to Nucor’s request.
These are the same steel companies that will benefit from the semiconductor subsidy requirement that government aid recipients use domestic steel to build production facilities.
Political capitalism is not limited to corporations. Other elite groups also benefit. Canceling student loans can be seen as a gift from President Joe Biden’s administration to tomorrow’s economic elites and today’s young voters. Last year’s infrastructure bill, with all its demands, is rightly seen as a handout for trade unions. Unions are great political allies, always among the top political contributors in elections. The close relationship between teachers’ unions and congressional politicians helps explain the billions of dollars that have flowed to public schools during the pandemic, even as most students have been kept at home to receive poor education and high doses of anxiety.
From consumers of sugar and steel to students who have already paid off their loans or used their savings to pay for their studies, political capitalism punishes those who are not part of the elite or cannot organize themselves for favors politicians. Unfortunately, this gives both politics and capitalism a bad name.
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