Cronyism—From Wall Street to Main Street

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Individuals from across the political spectrum denounce cronyism. Politicians as diverse as Sarah Palin and Barack Obama have decried businessmen who use government favors for economic gain. Groups with diametrically opposing views, such as the Tea Parties and Occupy Wall Street, have attacked the cozy relationship between many businesses and government. Despite the seemingly universal condemnation of cronyism, it remains alive and well. And most likely, it is occurring right in your home town—cronyism exists at every level of government.

Of course, nobody explicitly argues for cronyism. Instead, these businessmen argue that they need special favors in order to serve the “general welfare” or the “common good.” But no matter the alleged ends they profess, their goal is to use the coercive power of government for their own benefit. They seek to stifle competition through licensing and permitting processes. They use eminent domain to seize property from those who will not voluntarily sell. They use zoning to prevent individuals from using their property as they choose. And sometimes they openly call for when competitors can open for business.

As one example of cronyism, in 2011 Julie Crowe sought to start a taxi service catering to female college students in Bloomington, Illinois. At a hearing before the deputy city manager, competitors testified against her proposal, claiming that the city did not need any more taxi cabs. The deputy city manager denied Crowe’s application for a taxi license, stating that it was not “in the best interest of the city to put another vehicle on the street.”

When Crowe appealed to the city council, one alderman argued that the cash flow would be inadequate to sustain the new business, citing the fact that other cab companies were struggling financially. Perhaps city officials were correct, and the market cannot support another taxi company. But perhaps Crowe is correct, and she has identified a profitable niche.

When innovators are prevented from testing their ideas, city officials do not know if the struggles experienced by the existing companies are because of the market or because of complacency bred by government intervention. Rather than allow the market to determine if Crowe would succeed, politicians and bureaucrats sided with her competitors and denied Crowe the opportunity to even find out. And this is but one example of local cronyism.

The use of eminent domain for the purpose of economic development made news in Kelo v. New London. While many states have since enacted laws to protect property owners, the practice has continued in many locales as the politically connected use local governments to coerce property owners into selling their land.

For example, from 2003 to 2011 the township council in Mount Holly Township, New Jersey, used eminent domain to condemn and demolish the homes of more than two hundred low income families. The township wanted to sell the land to a private developer who planned to build high-end apartments and town homes. After going into debt for more than $17 million, a federal court ordered the township to halt its condemnations.

Earlier this year, when Minnesota legislators considered a law to allow sales of liquor on Sunday, small liquor store owners successfully fought against the proposal. They did not want to open on Sundays, and feared that competitors who did open would take market share.

In July, Bill Meagher, owner of Lakeside Creamery in Oakland, Maryland, received a variance to the local zoning ordinance that would allow him to rent boats at the lake where he operates. Three competing businesses promptly filed a petition to overrule the variance and prevent Meagher from renting boats because they would be “specially and adversely affected.” At a public hearing on the issue, one opponent to the variance said, “I think that it was totally unfair to the existing boat people. You are cutting their throats by just allowing someone to come in and rent boats.” In other words, the “existing boat people” should be protected from further competition by government decree. The case is still pending.

In each of these examples, private businesses have used government to accomplish what they could not do in a free market. Political influence superseded the free and voluntary choices of producers and consumers. These businesses have used a government club to accomplish what they could not achieve by means of their business activities.

While the use of political favors for business gain is often called “crony capitalism,” it is anything but capitalism. Capitalism is the system in which individual rights, including property rights, are respected. Under capitalism, individuals are free to act on their own judgment, so long as they respect the mutual rights of others. In a capitalist system, businessmen and entrepreneurs compete to fulfill the needs and desires of consumers, rather than compete to influence politicians and bureaucrats.

Julie Crowe believed that she had identified a need that existing taxi companies were not meeting. She was willing to invest her time and money to demonstrate the truth of her judgment. If she was correct, her business would thrive. If she was wrong, she would go out of business. But government officials declared her judgment irrelevant, and they used government force to prohibit her from demonstrating whether she was right or wrong.

Similarly, if the owner of a liquor store in Minnesota decides that opening on Sunday is a good idea, he should be free to do so. If other liquor store owners judge it better to close on Sunday, they too should be free to act as they deem best. Consumers will quickly let each know the wisdom of his decision. But Minnesota legislators have declared it illegal for liquor store owners to find out.

These restrictions, and many more like them, are the result of political pressure being applied by those who stood to gain. Rather than compete in a free market, some businessmen find it easier to make campaign donations or assemble a loud gang at City Hall. Why compete when you can simply make a lot of noise about the “public interest”? Why try to provide a better service than Julie Crowe when you can simply get a law passed that makes it illegal for her to compete with you?

It is easy to denounce the bailout of banks or the “green energy” cronies of the current administration. But integrity demands consistency. And consistency demands that those who oppose cronyism on the national level also oppose special government favors on the state and local level. We cannot and will not end cronyism on Wall Street while demanding it on Main Street.

A New Way to Compete

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There was a time when business owners competed on the basis of their products or services. They would try to be more innovative than competitors. They would develop new products, offer better service, or charge lower prices in order to win market share. Today, it appears that business owners compete to find the most creative legal arguments.

For example, in Garrett County, Maryland, three business owners have filed suit to stop Lakeside Creamery from renting boats on Deep Creek Lake. The plaintiffs claim that the boat rental business would be detrimental to “public welfare.” If this is true, “the public” will discover that fact rather quickly and the business will go broke. But rather than allow consumers to make that choice, these businesses want to impose their judgment on the entire community.

Said one opponent to Lakeside Creamery’s plan, “You are allowing an ice cream place to become a boat rental place. I think that was totally unfair to the existing boat people. You are cutting their throats by just allowing someone to come in and rent boats.”

According to this individual, competing in a free market is akin to a street brawl. Apparently, offering a better service, or lower prices, or nicer boats is akin to cutting throats. He believes that the existing “boat people” should be protected from further competition. They were there first, and that fact “justifies” using government force to prohibit competition.

The plaintiffs in this case are no better than a common street gang. They are fighting to protect their turf. That the battle is being fought in a well-lit court room, rather than a dark alley, doesn’t change the principle.

A Naked Power Grab in California

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California’s San Bernardino County and the cities of Ontario and Fontana are considering the use of eminent domain to seize underwater mortgages. A private company, Mortgage Resolution Partners, is pushing the idea.

An article on the website for the ABA Journal quotes the Wall Street Journal:

For a home with an existing $300,000 mortgage that now has a market value of $150,000, Mortgage Resolution Partners might argue the loan is worth only $120,000. If a judge agreed, the program’s private financiers would fund the city’s seizure of the loan, paying the current loan investors that reduced amount. Then, they could offer to help the homeowner refinance into a new $145,000 30-year mortgage backed by the Federal Housing Administration, which has a program allowing borrowers to have as little as 2.25 percent in equity. That would leave $25,000 in profit, minus the origination costs.

This is cronyism at its worst. Mortgage Resolution Partners proposes to use government force to obtain business that it would not otherwise get. Unable to compete in the market, the company wants government to arbitrarily devalue existing loans so that it—the company—can profit.

Of course, this legalized theft is “justified” on the grounds that it will keep people in their homes. But theft is theft.

In principle, this proposal advocates using eminent domain for any purpose whatsoever. Auto prices too high? Use eminent domain to seize the auto dealership and sell the cars for a lower price. Grocery prices too high? Seize the grocery stores.

This really shouldn’t be surprising, since the Supreme Court has given a green light to mob rule. The Court, Roberts told us last week, will not protect the people from the consequences of their political decisions. If the people vote tyrants into office, the court will not intervene. This is a naked power grab, and if it succeeds in California, it will likely sweep the nation as more and more governments get in on the act.

If this proposal succeeds, property rights in America are absolutely dead. Governments will be empowered to seize anything in the name of the “public interest.”

HT: Keith Weiner