Today there is a relation of mutual dependence between America’s largest firms and the political class, one in which deals are made and favors are traded, and it kicked into high gear with the Troubled Asset Relief Program (TARP) bailouts during the Great Recession of 2007–9. Senior financial executives found themselves traveling to Washington for the first time, and the former assistant treasury secretary Richard Clarida saw how the relationship between Wall Street and the federal government had fundamentally changed: “It’s often said that Wall Street is no longer the financial capital, that it’s Washington, D.C., and that’s certainly true. I don’t think this is destined to change. I think this is going to be a fact of life.”1
From TARP, to the Export-Import Bank, to the tariff protections offered to favored industries, there is a growing concern that the federal government has become a necessary business partner, and that the (imagined but not entirely imaginary) free-market capitalism of the past has been transformed into a wasteful crony capitalism that favors well-connected special interests. The fact that 81 percent of the government’s green-energy grants went to Obama’s 2008 campaign donors should be troubling regardless of one’s stance on climate change.2 Or take the support given to America’s sugar producers, who benefit from tariffs that raise sugar prices 64 to 92 percent above the world average.3 A strategic sugar stockpile isn’t exactly in America’s national interest, but for the industry the tariffs represent money well spent on lobbyists and campaign contributions. And the problem is bipartisan. Rajhuram Rajan and Luigi Zingales calculate that the trade barriers introduced during the Reagan-Bush 1980s amounted to a $30 billion subsidy to industry, and that those subsidies cost consumers $6.8 billion.4
Are trade barriers necessarily harmful, though? Do they always favor powerful interest groups at the expense of average Americans? Many people believe it’s the opposite: that we’re hurting ourselves as a nation with our current trade deals, and that our free-trade policies transfer wealth from the poor to the rich within America. Donald Trump has brought the issue of trade policy to the front burner, arguing that free trade ships jobs overseas and impoverishes many working Americans, who then have even more difficulty buying the consumer goods that free trade is supposed to make affordable. On the other hand, tariffs may impose costs disproportionately on low-income Americans, and the support given to sugar producers is a good example. Poorer Americans spend a greater share of their earnings on food, so a sweet tooth will hurt them in the pocketbook more than rich Americans. If we erect higher trade barriers, then, might we possibly be making things worse for the poorest? Consider, too, that trade barriers would be set in Washington, where the thumbs of donors and lobbyists weigh heavily on the scales, and they won’t be representing America’s underclass. It’s easy to imagine shiny new policy gizmos, but before they’re enacted the same old tools of influence will be applied.
Spending resources to shape legal rules—through campaign contributions, government-relations departments and lobbyists—is called rent-seeking, a phenomenon first described by Gordon Tullock in the 1960s.5 A business seeks rents when it expends resources in the pursuit of politically driven business gains, through government bailouts,6 tariff protections7 or favorable tax treatment.8 The efforts to secure these advantages may bring some public benefit by informing voters and busy officials about the consequences of burdensome laws.9 But there are costs that must be deducted from any such gains. In fact, rent-seeking will often represent a net deadweight loss, either because the firm or industry proposes inefficient rules, or because any social benefits are exceeded by the costs of rent-seeking. It dissipates resources by shifting investments away from core business functions, drawing talent, technology and capital away from their most productive uses.10
The rent-seeking firm or industry will seek to create a semipermanent relationship with a politician.11 We’re most likely to find this happening in regulated industries, and the relationship between regulator and regulated can become very cozy. It’s what George Stigler, an economist at the University of Chicago, called “regulatory capture,” where the regulated industry captures the regulator, who then sides with the industry more than with the public he’s supposed to protect.12 That would seem to be the only explanation for the Agriculture Department’s love affair with the domestic sugar industry, and the same might be said for federal peanut programs, which guarantee farmers high prices and result in overproduction. The Agriculture Department buys the surplus peanuts and then dumps them on poor countries such as Haiti, which further impoverishes the desperately poor peanut farmers there.13
Regulatory capture also helps explain the government’s stimulus programs during the Great Recession. The Federal Reserve’s nearzero interest rates were meant to restart the economy, but it’s been calculated that they cost U.S. savers—many of them retirees on a fixed income—$500 billion in interest income.14 When the zero-interest policy didn’t produce a healthy recovery, the government pumped trillions of dollars into the economy through the TARP bailouts and a quantitative easing program of buying long-term government bonds. Politically connected banks received larger bailouts than financial institutions that spent less on lobbying or political contributions.15 Senator Elizabeth Warren (D-MA) has pointed to a chummy relationship between major banks such as Goldman Sachs and the Federal Reserve, which is supposed to monitor them.16
As the number of government regulations has increased, so too have the rewards from having a hand in shaping them. Our regulatory regime, ostensibly designed to help middle-class buyers, begins to resemble a form of consumer protection for billionaires that cartelizes our economy and squeezes out competition from below.17 Even the burdens of regulation can turn out to be an anticompetitive blessing for the major firms that enjoy economies of scale in coping with them. For a large firm, with its battery of lawyers and compliance experts, it’s simply a cost of doing business. For smaller firms, however, the startup costs of conforming with the regulations can be prohibitive. To mention but one example, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, itself 1,000 pages in length, has already spun off 22,000 pages of regulations. Imagine a new entrant into the market trying to work its way through all of that before it can open its doors for business.
Lee Drutman of the New America foundation describes how a seemingly simple rule can become a regulatory nightmare. Dodd-Frank’s “Volcker Rule” began as a three-page proposal to prevent banks from engaging in proprietary trading (where a firm invests its own money rather than that of its depositors). When enacted, this had turned into ten pages, but it soon became 298 pages of rules. That left too many questions unanswered, however, and when finally released the rules were nearly 1,000 pages long. Even then the Federal Reserve criticized the rule’s lack of specificity.18
Complexity in government advantages the large firm that can invest in the legal resources to work its way around the plethora of rules, and that’s especially true if the firm invests in lobbying. One of the largest companies in the world, General Electric, paid no taxes in 2010. At the same time, it spent tens of millions of dollars to lobby for changes to the tax code.19 GE wasn’t alone in this arena, either. The Sunlight Foundation reported that the ten Fortune 100 companies that lobbied on fifty or more bills over 2008–11 paid an average effective tax rate of 17.1 percent, while the publicly traded companies that lobbied on fewer than twenty-five bills paid a rate of 26.0 percent.20 What complexity offers to large firms is not only economies of scale in regulatory compliance, but also the ability to bend the rules in a way that’s hidden from public view.21
Rent-seeking and crony capitalism may bring benefits to particular companies or industries, but they are drags on the overall economy. They’re also highly unjust, for they amount to a transfer of wealth from those who lack access, to those who have it—from the outsider to the corporate welfare bum. The new man without connections is less likely to start a firm or expand an existing one when the scales are weighted against