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Archive for the ‘Cronyism’ Category

I have a Bureaucrat Hall of Fame to publicize civil servants who manage to get wildly over-paid while being notoriously under-worked. And I have a Moocher Hall of Fame to identify welfare recipients who have displayed special skills in living off the labor of other people.

But now I’m thinking I may need to create a Hall of Fame to “honor” politicians who go above and beyond the call of duty by displaying extraordinary levels of arrogance, elitism, malfeasance, and corruption. That’s because my initial plan to give a once-per-year award has been superseded by events.

  • Back in May, I gave a “Politician of the Year Award” to Rodrigo Duterte, the newly elected president of the Philippines, because he announced to voters that none of his mistresses is on the public payroll.
  • But earlier this month, I had to reopen the balloting since it was revealed that the follicly-challenged President of France, Francois Hollande, was squandering more than $100,000 per year on a hair stylist.

To make matters even more complicated, the Prime Minster of Malaysia has decided to join the contest.

And if these blurbs from a Wall Street Journal column are any indication, he definitely deserves some sort of recognition.

U.S. prosecutors on Wednesday linked Malaysian Prime Minister Najib Razak to hundreds of millions of dollars they believe were stolen from the Malaysian state-owned investment fund 1MDB. …The evidence of fraud connected to 1MDB from investigations in the U.S., Singapore, Switzerland and at least four other countries is damning. The U.S. Justice Department put the losses at $3.5 billion on Wednesday. The Swiss Attorney General’s office said earlier this year it suspects $4 billion was misappropriated.

That’s some serious diverting of other people’s money. Makes scams like Solyndra, Export-Import Bank, and Fannie Mae and Freddie Mac seem like amateur hour by comparison.

Not surprisingly, the Prime Minister and his cronies are using political coercion to silence and sidetrack whistle blowers.

…officials who tried to investigate 1MDB were sidelined. Attorney General Abdul Gani Patail was on the verge of bringing charges against Mr. Najib last summer when he was forced to resign for “health reasons.” …Abu Kassim Mohamed, chief commissioner of the Malaysian Anti-Corruption Commission, had advised prosecutors to charge Mr. Najib and was investigating 1MDB until last month, when the government announced he would move to a lower post.

Gee, seems like bad health and demotions are quite common in Malaysia.

The stonewalling reflects Mr. Najib’s strong political position at home. He has played the nationalism card to portray himself as a victim of foreign forces, used repressive laws to silence critics in the press and opposition, and expelled dissidents from his party. …Mr. Najib has also been helped at home by the appearance of close ties to U.S. President Obama, who invited him for a golf outing and ostentatious photo-op in Hawaii in December 2014.

I’m shocked, by the way, that Najib’s name hasn’t been linked to the money-laundering racket sometimes known as the Clinton Foundation. Seems like that would be a match made in heaven.

But perhaps I simply haven’t looked closely enough.

Also, this is a good opportunity to recognize the reporter, Clare Rewcastle Brown, who has done more than any other person to publicize this scam. She even got added to Fortune‘s list of “World’s Greatest Leaders.”

Through her website Sarawak Report, London-based journalist Brown has become an irritant in the corridors of power in Malaysia. Her exposés on state investment fund 1MDB—publicizing the alleged siphoning of $700 million into the pockets of Prime Minister Najib Razak—have made her a hero and a villain in the country, depending on whom you ask. The government has tried to arrest her for “activities detrimental to Parliamentary democracy” and has banned her website.

Speaking of her website, you can read her indictment of Najib by clicking here.

Let’s close with a caveat and a lesson.

The caveat is that Prime Minister Najib still hasn’t been convicted of anything. We have to hold out the possibility, however remote, that he’s actually innocent.

The lesson is that the Malaysian government shouldn’t be in the business of trying to allocate capital.

Even if a big government-run development bank miraculously and improbably steered clear of corruption, it’s always a bad idea to let politicians and bureaucrats invest with other people’s money.

And when you add the inevitable corruption to the mix, the net result is that you damage the economy while simultaneously lining the pockets of insiders.

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Last year, I shared the most depressing PowerPoint slide in Danish history.

Back in 2011, I wrote about a depressing picture of tax complexity in America.

Let’s continue with the “depressing” theme today.

James Bessen, from Boston University Law School, has an interesting article in the Harvard Business Review about the source of corporate profits in the 21st century (h/t: James Pethokoukis).

He starts with an observation and a query.

Profits are up. …is it good news for society?

The default answer presumably is yes. Higher profits, after all, generally are a sign of wise investments.

And when labor and capital are allocated wisely, that’s good news for consumers and workers.

But Bessen correctly observes that profits can increase for bad reasons, and that’s the focus of his research.

…the rise in profits might represent a decline in…economic dynamism. …Firms engage in political “rent seeking”—lobbying for regulations that provide them sheltered markets—rather than competing on innovation. If so, then high profits portend diminished productivity growth. …In a new research paper, I tease apart the factors associated with the growth in corporate valuations.

Unfortunately, he finds that cronyist policies account for a depressingly large share of corporate profits.

I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.

Here’s a very grim chart from his article. At the very least, I’ll call this the most depressing image of 2016.

Ugh, what a dismal observation on the state of our economy. Companies are almost making as much money from manipulating Washington as they earn from serving consumers. Heck, just consider the way politically connected financial institutions tilt the playing field for unearned goodies.

Bessen adds some analysis, including the very important insight that regulation and intervention tends to help big companies relative to small companies and new competitors.

Much of this result is driven by the role of regulation… Lobbying and political campaign spending can result in favorable regulatory changes, and several studies find the returns to these investments can be quite large. For example, one study finds that for each dollar spent lobbying for a tax break, firms received returns in excess of $220. …regulations that impose costs might raise profits indirectly, since costs to incumbents are also entry barriers for prospective entrants. For example, one study found that pollution regulations served to reduce entry of new firms into some manufacturing industries.

It’s also worth noting that he finds that this bad news really started back in 2000, which makes sense given that both Bush and Obama have pushed policies that have expanded the clumsy footprint of government.

This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. …while political rent seeking is nothing new, the outsize effect of political rent seeking on profits and firm values is a recent development, largely occurring since 2000. Over the last 15 years, political campaign spending by firm PACs has increased more than thirtyfold and the Regdata index of regulation has increased by nearly 50% for public firms.

What an awful cycle. Government gets bigger and more powerful, which lures companies into viewing Washington as a profit center, which then leads to more policies that expand the size and power of the federal government, which leads to further opportunities for rent-seeking behavior. Lather, rinse, repeat.

Oh, and don’t forget this is one of the reasons why there’s a revolving door of insiders who shift back and forth between the private sector and government, but their real job is always to be working the system to obtain undeserved wealth.

Which is why I periodically explain that there’s a big difference between being pro-market and being pro-business.

P.S. Earlier this year, I shared some data, based on sources of billionaire wealth, that suggested that cronyism wasn’t a major factor in the United States. But Bessen’s new research nonetheless shows we do have a major problem, perhaps because people who get rich honestly then decide to maintain their wealth dishonestly.

P.P.S. If there’s any sort of silver lining to this bad news, it’s this amusing parody commercial about Kronies, which are toys for the children of Washington’s gilded class.

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My main problem with Hillary Clinton is that she not only supports the bloated and enervating welfare state that already exists, but she wants to make it even bigger. Indeed, there’s only a very small gap between her and crazy Bernie Sanders when you examine their voting records.

There’s only a trivially small difference…between Hillary Clinton’s lifetime rating of 10.6 from the National Taxpayers Union and Bernie Sanders’ lifetime rating of 9.4. They both earned their failing grades by spending other people’s money with reckless abandon.

That being said, I’m disgusted and outraged by her dishonest and corrupt behavior.

The rule of law is one of the most important building blocks of a just and prosperous society, so it’s both morally nauseating and economically destructive when members of the elite enjoy special treatment.

Josh Barro definitely isn’t a member of the vast right wing conspiracy, so his list of Hillary’s ethical lapses should carry extra weight.

It’s possible that Clinton and Lynch were just catching up — “a social meeting,”… Similarly, it’s possible foreign governments donated to the Clinton Foundation because they viewed it as the most efficient available philanthropic opportunity, without regard for the favorable impression it might make on Bill and Hillary Clinton. It’s possible Goldman Sachs paid Hillary Clinton $675,000 for three speeches because they thought she would be really interesting, not because they thought the payment might help the bank make a favorable impression on a potential future president. It’s possible a major Clinton donor ended up on a State Department nuclear advisory board for perfectly innocent reasons, and that there were no untoward effects from top Clinton staffers being simultaneously on State Department and private payrolls. …The list goes on and on. …the Clintons have no apparent concern for appearances of impropriety, as long as they believe their actions cannot get them in trouble with the law.

And the Clintons get away with things that would land ordinary Americans in jail, so you have to give them credit for knowing how to exploit their political connections and power.

And that has a lot of people legitimately upset. The Washington Examiner opined about Hillary’s free pass from the FBI.

The Founding Fathers embraced principles that transcended their own human weaknesses and those of their posterity. They created a system in which process and law could check base personal ambition, favoritism and other low and common temptations. The idea was to put in place a system that would survive incompetent and corrupt leaders. …the public witnessed what happens when the system fails. Special people receive special treatment. Equal protection under the law turns out to be a fancy fiction. Some people are more equal than others. …An average government official who spent five years breaking the rules to frustrate the Freedom of Information Act, and who recklessly compromised classified information (more than 100 times), including top secret information (eight times), would serve time in federal prison. But Hillary Clinton is almost certain to suffer no consequences at all.

But what about Hillary supposedly having no bad intent, as the FBI Director offered up as a distraction?

This is bunk. Intention is something this law does not require. “Gross negligence” alone is sufficient grounds for prosecution because the officials to which it applies are entrusted with secrets that bring greater obligations than average citizens must bear. Precisely because of that greater risk of prosecution, high-ranking government officials who handle classified information, including Clinton, sign agreements that spell out their legal jeopardy.

Jacob Sullum of Reason also addresses this topic.

…one of the statutes guiding the FBI’s investigation, 18 USC 793, makes it a felony to “mishandle classified information either intentionally or in a grossly negligent way” (emphasis added), as Comey himself notes… Former New York City Mayor Rudy Giuliani, …who was the U.S. attorney for the Southern District of New York during the Reagan administration, says Comey’s description of Clinton’s behavior plainly qualifies as a violation of 18 USC 793(f). …Giuliani told NBC’s Brian Williams yesterday, “because he clearly found a direct violation of 18 United States Code, Section 793, which does not require intent. It requires only gross negligence in the handling of anything relating to the national defense. …The definition of gross negligence under the law is extreme carelessness. It’s the first definition that comes up in the law dictionary. …So that is a clear, absolutely unassailable violation of 18 United States Code, Section 793, which is not a minor statute. It carries 10 years in prison.”

For those who think Rudy Giuliani is perhaps exaggerating because of his support for Trump, then consider the views of former Attorney General Michael Mukasey, who is part of the #neverTrump camp.

It is a felony for anyone entrusted with lawful possession of information relating to national defense to permit it, through “gross negligence,” to be removed from its proper place of custody and disclosed. “Gross negligence” rather than purposeful conduct is enough. …As an example of the kind of information at stake, he described seven email chains classified at the Top Secret/Special Access Program level. These were the emails that the government had said earlier are so sensitive that they will never be disclosed publicly. …To be “extremely careless” in the handling of information that sensitive is synonymous with being grossly negligent.

Needless to say, ordinary Americans would never get this kind of preferential treatment.

David French, a former military officer, explains what would happen to someone in the armed forces who treated national security with the same degree of disdain.

I served ten years as an Army lawyer, and one of my responsibilities was advising the command on matters of military justice, including incidents where soldiers mishandled classified information. And if Hillary Clinton was a soldier, she would lose her security clearance, face administrative action, and face the specter of criminal prosecution. I’ve not only seen the pattern, I’ve also participated in the process. …If Hillary were Captain Clinton instead of the presumptive Democratic nominee and wife of a disbarred former president, the following things would occur, more or less simultaneously. First, the command would immediately suspend her security clearance. …Next, her commander would probably draft an administrative reprimand. …a career-killer if placed in an officer’s permanent file…Finally, the command would consider criminal charges. …the officer would in all likelihood not only violate the Espionage Act (the same statute at issue in Clinton’s case) but also the Uniform Code of Military Justice. …In other words, her actions would have ended her military career, and she would have been fortunate to resign in lieu of enduring a court-martial. In her post-military civilian life, she would have been unemployable in any serious government position… To say that Hillary Clinton is unfit to be commander-in-chief is to give her too much credit. It implies that she might be fit for other positions of responsibility. She’s not fit to be POTUS, and she’s not fit to be a private.

But there is a silver lining to the dark cloud of Hillary favoritism.

We can enjoy some dark humor while the rule of law is further eroded.

The clever folks at Reason TV put together this video showing how Hillary Clinton has blatantly lied about her actions.

By the way, Hillary’s negligence and disdain for national security is just the tip of the iceberg.

She already has engaged in countless other shady acts, such as allowing her top aide, Huma Abedin, to be on the government payroll while simultaneously getting payoffs as an influence peddler.

Or consider the Clinton Foundation. Investor’s Business Daily makes a compelling case that it’s nothing but a racket.

…the Clinton Foundation gathered some $100 million from a variety of Gulf sheikhs and billionaires, not to mention taking in millions of “donations” from private businesses that later benefited from their supposed “charitable” largesse. Some of those who gave big bucks to the Clintons had interests that were, to put it mildly, not in keeping with U.S. interests. …now comes a more serious, far-reaching question: Is the entire Clinton Foundation so full of conflicts of interest and questionable dealings that it amounts to little more than a massive fraud intended solely to enrich its presidential namesake and his family? Charles Ortel, a Wall Street financial analyst, who pored over the Clinton Foundation’s books, filings and records, thinks so. He concluded that “a substantial portion of Clinton Foundation activities is certainly not ‘charitable’ or ‘tax-exempt’ in the accepted legal senses…” the nonprofit watchdog Charity Navigator removed the Bill, Hillary and Chelsea Clinton Foundation from its list of charities because of its “atypical business model.” …Getting rich isn’t a crime. But it might be if you did it in the guise of being a tax-free humanitarian charity, interested only in the betterment of humankind.

The Washington Examiner also has looked at the Clinton Foundation’s dodgy finances and activities.

The Clinton Global Initiative has a curious record of leaving its projects unfinished, despite receiving multiple large donations from foreign interests that could benefit if Hillary Clinton is elected president (and may have already benefited from her service at the State Department). …the initiative has completed fewer than half of the commitments made since 2005. Thirty-six percent of them are listed as being “in progress.” Many others are listed as “stalled,” “unfulfilled,” or haven’t had any progress reported in at least two years. This may just be a sign of bad timing or ineffective philanthropy, but when combined with the rest of the information available about the Clintons’ philanthropic activities, it hints at something more sinister. …accepted a great deal of money in donations from businesses and foreign governments that had a lot to gain from her help.

Here one of the examples that certainly seems tawdry, if not sinister.

In one well-known case, a group of Canadian mining magnates made millions in undisclosed donations to the Clinton Foundation, and a Russian bank closely linked to the Kremlin paid Bill Clinton $500,000 to give a single speech in Moscow. All of these parties involved in funneling money to the Clintons and their enterprises were part of a large mining deal that required approval from a government panel on which Clinton sat.

We also have the Clintonian equivalent of Trump University, as outlined by Professor Jonathan Turley.

Donald Trump has been rightfully criticized and sued over his defunct Trump University. There is ample support for claiming that the Trump University was fraudulent in its advertisements and operations. However, the national media has been…sidestepping a scandal involving the Clintons that involves the same type of fraud allegations. The scandal involves a dubious Laureate Education for-profit online college (Walden) and entails many of the common elements with other Clinton scandals: huge sums given to the Clintons and questions of conflicts with Hillary Clinton during her time as Secretary of State.

Here are some of the sordid details.

Laureate Education was sued over its Walden University Online offering, which some alleged worked like a scam designed to bilk students of tens of thousands of dollars for degrees. Students alleged that they were repeatedly delayed and given added costs as they tried to secure degrees, leaving them deeply in debt. …The respected Inside Higher Education reported that Laureate Education paid Bill Clinton an obscene $16.5 million between 2010 and 2014 to serve as an honorary chancellor for Laureate International Universities. …Various sites have reported that the State Department funneled $55 million in grants during Hillary Clinton’s tenure to groups associated with Laureate’s founder.  That would seem a pretty major story… The Wall Street Journal reported that Laureate was able to “skirt” regulations on reporting “gainful employment” due to its large number of schools and students outside of the country… Laureate has come up in the Clinton email scandal.  In her first year as Secretary of State, Clinton is quoted as directly asking that Laureate be included in a high-profile policy dinner — just months before the lucrative contract was given to Bill Clinton. …the size of the contract to Clinton, the grants from State and the complaints over alleged fraud should warrant a modicum of attention to the controversy.

Let’s close with one final example of Clintonesque sleaze. She apparently thinks insider trading is a good idea so long as the insiders are members of her family.

In 2012, Mezvinski, the husband of Chelsea Clinton, created a $325 million basket of offshore funds under the Eaglevale Partners banner through a special arrangement with investment bank Goldman Sachs. The funds have lost tens of millions of dollars predicting that bailouts of the Greek banking system would pump up the value of the country’s distressed bonds. …newly released emails from 2012 show that she and Clinton Foundation consultant, Sidney Blumenthal, shared classified information about how German leadership viewed the prospects for a Greek bailout. Clinton also shared “protected” State Department information about Greek bonds with her husband at the same time that her son-in-law aimed his hedge fund at Greece. …sharing such sensitive information with friends and family would have been highly improper. Federal regulations prohibit the use of nonpublic information to further private interests or the interests of others. The mere perception of a conflict of interest is unacceptable. …monitoring Greece was part of Clinton’s job description, but, ethically, that does not mean that a family member should make bets that depend upon the actions of another family member.

The point of all this is not that Hillary Clinton is sleazy and corrupt, though that’s one obvious conclusion.

Instead, as I’ve demonstrated over and over again, the real lesson is that Washington is filled with people like her.

And the reason that sleazy people gravitate to Washington is that we have Leviathan-sized government that enables politically well-connected people to obtain vast amounts of unearned and undeserved wealth.

Including lots of Republicans, so this isn’t a partisan argument.

Moreover, the problem almost certainly won’t get solved by electing different people. The only real solution is shrinking the size of government so there’s less opportunity for graft.

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The American economy is in the doldrums. And has been for most this century thanks to bad policy under both Obama and Bush.

So what’s needed to boost growth and create jobs? A new video from Learn Liberty, narrated by Professor Don Boudreaux (who also was the narrator for Learn Liberty’s superb video on free trade vs. protectionism), examines how to get more people employed.

A very good video. There are three things that grabbed my attention.

First, there’s a very fair compilation of various unemployment/labor force statistics. Viewers can see the good news (a relatively low official unemployment rate) and the bad news (a lowest-in-decades level of labor force participation)

Second, so-called stimulus packages don’t make sense. Yes, some people wind up with more money and jobs when politicians increase spending, but only at the expense of other people who have less money and fewer jobs. Moreover, Don correctly notes that this process of redistribution facilitates cronyism (the focus of another Learn Liberty video) and corruption in Washington (an issue I’ve addressed in one of my videos).

Third, free markets and entrepreneurship are the best routes for more job creation. And that requires less government. Don also correctly condemns occupational licensing rules that make it very difficult for people to get jobs or create jobs in certain fields.

The entire video was very concise, lasting less than four minutes, so it only scratched the surface. For those seeking more information on the topic, I would add the following points.

  1. Businesses will never create jobs unless they expect that new employees will generate enough revenue to cover not only their wages, but also the cost of taxes, regulations, and mandates. This is why policies that sometimes sound nice (higher minimum wages, health insurance mandates, etc) actually are very harmful.
  2. Redistribution programs make leisure more attractive than labor. This is not only bad for the overall economy because of lower labor force participation. This is why policies that sometime sound nice (unemployment benefits, food stamps, health subsidies, etc) actually are very harmful.

Let’s augment Don’s video by looking at some excerpts from a recent column in the Wall Street Journal by Marie-Joseé Kravis of the Hudson Institute.

In economics, as far back as Joseph Schumpeter, or even Karl Marx, we have known that the flow of business deaths and births affects the dynamism and growth of a country’s economy. Business deaths unlock resources that can be allocated to more productive use and business formation can boost innovation and economic and social mobility. For much of the nation’s history, this process of what Schumpeter called “creative destruction” has spread prosperity throughout the U.S. and the world. Over the past 30 years, however, with the exception of the mid-1980s and the 2002-05 period, this dynamism has been waning. There has been a steady decline in business formation while the rate of business deaths has been more or less constant. Business deaths outnumber births for the first time since measurement of these indicators began.

Why has entrepreneurial dynamism slowed? What’s happened to the creative destruction described in a different Learn Liberty video?

Unsurprisingly, government bears a lot of the blame.

Many studies have also attributed the slow rate of business formation to the regulatory fervor of the past decade. …in a 2010 report for the Office of Advocacy of the U.S. Small Business Administration, researchers at Lafayette University found that the per employee cost of federal regulatory compliance was $10,585 for businesses with 19 or fewer employees.

Wow, that’s a powerful real-world example of how all the feel-good legislation and red tape from Washington creates a giant barrier to job creation.

And it’s worth noting that low-skilled people are the first ones to lose out.

P.S. My favorite Learn Liberty video explains how government subsidies for higher education have resulted in higher costs for students, a lesson that Hillary Clinton obviously hasn’t learned.

P.P.S. Perhaps the most underappreciated Learn Liberty video explains why the rule of law is critical for a productive society. Though the one on the importance of the price system also needs more attention.

P.P.P.S. And I’m a big fan of the Learn Liberty videos on the Great Depression, central banking, government spending, and the Drug War. And the videos on myths of capitalism, the miracle of modern prosperity, and the legality of Obamacare also should be shared widely.

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At the risk of understatement, Obamacare is a mess.

It’s been bad for taxpayers, bad for consumers, and bad for healthcare.

It’s even been bad for some of the special interest groups that backed the legislation. The big insurance companies supported the law, for instance, because they thought it would be good to have the government force people to buy their products.

And these corrupt firms even got a provision in the law promising bailouts from taxpayers if the Obamacare system didn’t work.

Given the miserable track record of the public sector, that was probably a crafty move.

But the companies mistakenly assumed their sleazy pact with Obama, Pelosi, and Reid was permanent. Fortunately, their Faustian bargain appears to be backfiring.

Senator Marco Rubio has led the fight to stop bailouts for the big insurance companies.

Here are some excerpts from his recent column in the Wall Street Journal.

Six years after being signed into law, ObamaCare is a costly and unsustainable disaster. …ObamaCare is also bringing out corporate America’s worst crony-capitalist impulses. The health-insurance lobby has teamed up with trial lawyers to sue the federal government—through individual lawsuits and a $5 billion class action—for not following through on a sweetheart bailout deal buried in the law. This provision of ObamaCare would have required taxpayers to bail out insurers.

But in a rare victory for taxpayers, the Florida Senator got the law changed to restrict bailouts.

My conservative colleagues and I sounded the alarm about the likelihood of a taxpayer-funded bailout of health insurers (and were mocked as Chicken Littles for it). …When it came time to pass a spending bill at the end of 2014, we succeeded in making it the law of the land that the ObamaCare bailout program could not cost taxpayers a single cent—which ended up saving taxpayers $2.5 billion. In December of last year, we came back and repeated the feat. Now I am urging leaders in both the House and Senate to make this a priority and stop the bailout a third time.

As you might imagine, there’s a counterattack by the corrupt insurance companies that conspired with the White House to impose Obamacare on the nation.

…the health-insurance companies are suing to try to get their bailout…professional attorneys from the Congressional Research Service…said that the administration’s practice of making other payments to insurers under the ObamaCare reinsurance program “would appear to be in conflict with the plain text” of the law. …Health insurers can hire all the high-paid trial lawyers they want, but they will run into a constitutional buzz saw: America’s founding document grants Congress the power of the purse… Health-insurance companies need to wake up to the reality that this…money they are fighting for, and that the Obama administration is trying to weasel a way to somehow give them, belongs to taxpayers. Taxpayers get to decide—through me and others in Congress—whether to bail them out. And the people have spoken: No, we will not bail out health insurance companies for ObamaCare’s failures.

Amen to Senator Rubio.

Let’s hope Congress continues to oppose bailouts, and let’s also hope the White House isn’t successful in somehow giving our money to the big insurance companies.

Speaking of which, here’s what Investor’s Business Daily wrote about the bailout controversy.

Right when you think Washington can’t get any worse, it does. That much was evident at a recent U.S. House of Representatives committee hearing into the Obama administration’s bailout of private health insurance companies. It’s a textbook case of government officials ignoring federal law to put special interests before the interests of American taxpayers and families.

Here’s how the mess was created…and how the Obama White House chose to respond.

Thanks to the Affordable Care Act’s labyrinthine mandates, health insurance companies have collectively lost billions of dollars on the exchanges, leading to an increasing number of them limiting their participation in or exiting the exchanges altogether. As a result, many insurers have demanded larger subsidy payments. …responding to insurance industry demands — in November the Obama administration promised to “explore other sources of funding” for payments to insurers. Yet rather than work with Congress, the administration flouted the law entirely — and in this case, that means using tax dollars to bail out insurers left on the exchanges. CMS simply decided to ignore the law.

Unfortunately, ordinary people don’t have that option.

They simply pay more to get less.

Meanwhile, Americans rightly wonder who’s looking out for them. Premiums have actually risen faster in the five years after passage of the Affordable Care Act than in the five years before, while deductibles average nearly $3,000 for the most popular exchange plans.

Isn’t that typical.

Big government makes life worse for the average person while the special interests get special deals.

Speaking of special deals, let’s look at another Obamacare rescue for a privileged group.

Bob Moffit of the Heritage Foundation explains the contortions needed to keep health insurance subsidies flowing to Capitol Hill.

…one scandal is truly bipartisan: How key administration and congressional officials connived to create, under cover of the Affordable Care Act, also known as Obamacare, special health insurance subsidies for members of Congress.

Here’s the background.

Rushing to enact the giant Obamacare bill in March 2010, Congress voted itself out of its own employer-sponsored health insurance coverage—the Federal Employees Health Benefits Program. …But in pulling out of the Federal Employees Health Benefits Program, they also cut themselves off from their employer-based insurance contributions.

Subjecting themselves and their staff to Obamacare may have been smart politics, if only to avoid the charge of hypocrisy, but that created a different problem.

Obamacare’s insurance subsidies for ordinary Americans are generous, but capped by income. No one with an annual income over $47,080 gets a subsidy. That’s well below typical Capitol Hill salaries. Members of Congress make $174,000 annually, and many on their staff have impressive, upper-middle-class paychecks. …Realizing what they had done, congressional leaders sought desperately to get fatter taxpayer subsidies in the Obamacare exchange system. …The standard excuse was that, without a special “sweetener,” a Capitol Hill “brain drain” would ensue; the best and brightest would flee to the private sector to get more affordable employment-based coverage.

Gee, it would have been a shame if the people who have screwed up public policy had to get jobs in the private sector (or, more likely, the parasitic lobbying sector).

But the law oftentimes is not an obstacle when the Obama White House wants something to happen.

…at a July 31 closed-door meeting with Senate Democrats, President Barack Obama had promised he would “fix” the mess they made of their health coverage. So, on Aug. 7, 2013, just as Congress was getting out of town for the August recess, the Office of Personnel Management ruled that members of Congress and staff enrolled in the exchange program would get Federal Employees Health Benefits Program subsidies, even though they were no longer in the program.

But how exactly did the White House evade the law?

…the Office of Personnel Management declared that Congress and staff were eligible to enroll in the Washington, D.C., “SHOP” Exchange, a health insurance exchange reserved for small businesses with fewer than 50 employees. The exchange offers special insurance subsidies to participating small businesses. The problem was, of course, that Congress is not a “small business,” at least under any clinically sane definition of the term, and no section of the Affordable Care Act provided for any congressional exemption from the ban on large employer participation in the SHOP exchanges.

By the way, as a former staffer on Capitol Hill, I do have some sympathy for the lower-level folks who didn’t create the Obamacare mess and would suddenly be in a position of having to pay all their health costs out of pocket if the law was obeyed.

But that’s not a reason to engage in legal chicanery.

As part of tax and entitlement reform, by all means let’s shift to a system where we address the third-party payer crisis by having most health care expenses directly financed by consumers (reserving insurance for large, unpredictable expenses). That new system should include all people, including politicians and their staff.

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According to Economic Freedom of the World, there are five major factors that determine a nation’s economic performance.

Here’s the recipe for growth and prosperity.

  • Rule of law and property rights.
  • Small government.
  • Stable monetary policy.
  • Reasonable regulatory policy.
  • Free trade.

This great publication is the first thing I check when I want to see whether a country leans in the direction of markets or whether it is burdened by a lot of statism. And it allows for meaningful comparisons between nations since it relies on global data sources.

But not all economic variables have good data sources that allow apples-to-apples comparisons. It’s very difficult to measure the degree to which various governments interfere with the price system by imposing controls (either minimum or maximum price limits).

Identifying the degree of cronyism in an economy also is a challenge since there are not reliable numbers for the degree to which politicians in various nations provide favors for particular firms or sectors.

So I was very interested when I saw that the Economist has put together a ranking that shows the degree to which a nation’s billionaires either earn their wealth via markets or cheat their way to wealth via cronyism.

It obviously doesn’t cover nearly as many nations as Economic Freedom of the World, but perhaps the folks at the Economist have come up with a methodology that eventually will allow a specific measure of cronyism in the future.

The article explains how the rankings were derived.

…for the past 20 years, from Malaysia to Mexico, crony capitalists—individuals who earn their riches thanks to their chumminess with government—have had a golden era. Worldwide, the worth of billionaires in crony industries soared by 385% between 2004 and 2014, to $2 trillion. The Economist’s crony-capitalism index tries to measure the extent of this graft for a number of important countries. Industries that have a lot of interaction with the state are vulnerable to crony capitalism (a full list of industries is provided in the table below). These activities are often legal but always unfair (Donald Trump, a casino and property tycoon, earns the 104th spot in our individual crony ranking). …Germany is cleanest, where just a sliver of the country’s billionaires derives their wealth from crony sectors. Russia fares worst in our index: wealth from the country’s crony sectors amounts to 18% of its GDP.

I’m glad to have these new numbers, but I’m not completely sold on the methodology used by the Economist.

Is all banking and finance really cronyism? That seems a bit of a stretch. While there are some indications that Warren Buffett is now a cronyist, I’m not aware of any evidence suggesting he used government connections to become rich in the first place.

And what about energy and chemicals? That description may apply to some rich people in the U.S. and elsewhere, but there are plenty of examples (the Koch brothers) of billionaires in this sector that have earned their wealth.

And speaking of wealth, why did the article compare wealth (which is a stock) and GDP (which is a flow)? I realize the Economist needed some sort of benchmark, but they chose an approach that has dubious methodological value.

All that being said, I suspect that the countries near the top of that list have a genuine problem with cronyism and the ones near the bottom do a better job of letting market forces operate.

So congratulations to Germany and South Korea and boos for Russia and Malaysia.

And a bit of applause for the United States. We have some egregious forms of cronyism that benefit the undeserving rich, but most American billionaires apparently earn their money.

Now let’s zoom out and look at the historical case against cronyism with this superb video from Prager University.

The bottom line is that scams like Solyndra are the modern version of what many railroads did in the 1800s.

I didn’t realize, though, that Uncle Sam also squandered money trying to invent the airplane.

P.S. You can enjoy other great videos from Prager University by clicking here, here, here, here, here, and here.

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I’m a big fan of Estonia.

According to both the Fraser Institute and the Heritage Foundation, it has considerable economic freedom.

It has a low-rate flat tax, meaning that investors, entrepreneurs, and small-business owners aren’t punished for contributing more to the nation’s economic output.

It responded to the 2008 crisis by cutting spending rather than engaging in a Keynesian spending binge (which also led to an exploding cigar for Paul Krugman).

Now I have another reason to like Estonia.

It’s a role model for how to reduce corruption by shrinking the size and scope of government.

First, some background.

Neil Abrams and Professor Steven Fish have a column in the Washington Post about the seemingly intractable problem of boosting the rule of law in developing and transition economies.

Western aid agencies and scholars agree that the rule of law is required before developing countries can reduce poverty and corruption. For decades, they have supported aid programs designed to help developing countries establish law-based states. …In a rule-of-law state, the rules apply even to the rulers, not just the ordinary folks. The rule of law is not the same as democracy. Scores of developing countries have demonstrated that establishing democracy is the easy part. The rule of law is harder to attain. From India and the Philippines to Argentina, democracy coexists with endemic corruption, and elites remain largely exempt from the rules.

They then explain that its well-nigh impossible to create the rule of law in a society that has a big government.

…our research suggests that they have the sequence backward. Before urging governments to adopt the rule of law, they must first advise reformers to take one key step: eliminating the government subsidies that sustain criminal elites and replacing the compromised bureaucrats who patronize them.

Now for the big takeaway from their column: Estonia is the role model for how this can happen.

Our research shows that a few good policies can pave the way for the rule of law. For instance, Estonia’s clean and capable state administration represents a model of post-communist success. But this was not always the case. In 1991, when communism collapsed, Estonia, like other post-Soviet countries, had almost no working institutions and a burgeoning class of economic predators, nor was Estonia economically privileged. In the early post-Soviet years, its income per capita was only 10 to 20 percent higher than that of Russia and Romania and 20 to 30 percent lower than that of Croatia, Slovakia and Hungary. But Estonian leaders acted boldly. …early Estonian governments ended practically all subsidies to state and private enterprises. …in developing countries, state subsidies almost always benefit corrupt elites more than ordinary people. This policy cut off the budding economic criminals who profit from state largesse rather than entrepreneurial aptitude — and made it possible for real entrepreneurs to thrive. Deprived of subsidies, old-guard enterprise directors and crony capitalists could not muster enough political influence to hold governments hostage.

Sadly, other nations are not copying Estonia, in part because the international bureaucracies and national agencies that dispense foreign aid don’t support policies to shrink government in recipient nations.

Unfortunately, Estonia is the exception and not the rule. That’s  not for lack of trying on the part of the West. The United States, the European Union, the World Bank, the European Bank for Reconstruction and Development and the United Nations have spent billions of dollars for the express purpose of helping countries build a rule of law. …But they’re stumbling. The Western effort assumes that the rule of law will flourish only if developing countries receive enough education, guidance, training and money. In fact, a growing body of research throws such optimism into doubt.

In other words, foreign aid – at best – is useless. And it may be harmful by financing a bigger role for recipient governments.

The authors close by emphasizing the need (assuming genuine rule of law is the goal) to prune the bureaucracy and public sector.

Scholars often treat the rule of law as a prerequisite for market-oriented economic policies such as liberalizing prices and trade and eradicating wasteful subsidies. They’re getting it backward. Instead, first eliminate the subsidies and purge the compromised bureaucrats who stand in the rule of law’s way. This is hard to do. It will provoke tremendous resistance from those who profit from the status quo. But it’s far more realistic and effective than simply encouraging countries to adopt the rule of law.

So what are the implications of this analysis for the United States?

Given that America now ranks below Estonia for rule of law, and given that rule of law is gradually eroding in the United States, the obvious lesson is that the public sector in America needs to shrink.

The real challenge, though, is convincing politicians to give up power.

Professor Glenn Reynolds of the University of Tennessee Law School explains in USA Today that a larger government is good for politicians because it creates opportunities for graft.

The explanation for why politicians don’t do all sorts of reasonable-sounding things usually boils down to “insufficient opportunities for graft.” And, conversely, the reason why politicians choose to do many of the things that they do is … you guessed it, sufficient opportunities for graft. That graft may come in the form of bags of cash, or shady real-estate deals, or “consulting” gigs for a brother-in-law or child, but it may also come in broader terms of political support.

Glenn notes that there’s an entire school of thought in economics that analyzes this unfortunate tendency of politicians to conspire with interest groups at the expense of taxpayers and consumers.

…there’s a whole field of economics based on this view, called “Public Choice Economics.” Nobel prize winning economist James Buchanan referred to public choice economics as “politics without romance.” Instead of being selfless civil servants motivated solely by the public good, public choice economics assumes that politicians are, like other human beings, heavily influenced by self-interest. …You pick a car because it’s the best car for you that you can afford. Politicians pick policies because they’re the best policies — for them — that they can achieve. …the entire system is designed — by politicians, naturally — to make it harder for voters to keep track of what politicians are doing. The people who have a bigger stake in things — the real estate developers or construction unions — have an incentive to keep track of things, and to influence them.

Having received my Ph.D. from George Mason University, home of the Center for the Study of Public Choice, I echo Glenn’s comments about the value of this theory.

So what’s the moral of the story?

As summarized by Professor Reynolds, bigger government means more corruption and smaller government means less corruption.

The more the government does and the more decisions that are relegated to bureaucrats, “guidance” and other forms of decisionmaking that are far from the public eye, the more freedom politicians have to pursue their own interest at the expense of the public — all while, of course, claiming to do just the opposite.

Now let’s look at some real-world examples from Washington.

By the way, I’m not writing to specifically condemn Obama and his team, even though I’m quite confident that the Chicago machine produces people who excel at unethical behavior.

Republicans also get their hands dirty by steering undeserved wealth to special interests, as explained here, here, and here.

That being said, most Washington corruption today seems associated with the Democrat Party for the simple reason that Democrats control the bureaucracy.

For instance, here are some of the key points from a New York Times report.

The State Department, under Secretary Hillary Rodham Clinton, created an arrangement for her longtime aide and confidante Huma Abedin to work for private clients as a consultant while serving as a top adviser in the department. Ms. Abedin did not disclose the arrangement — or how much income she earned — on her financial report. It requires officials to make public any significant sources of income.

To be blunt, this stinks to high heaven.

…the picture that emerges from interviews and records suggests a situation where the lines were blurred between Ms. Abedin’s work in the high echelons of one of the government’s most sensitive executive departments and her role as a Clinton family insider. While continuing her work at the State Department, in the latter half of 2012, she also worked for Teneo, a strategic consulting firm, which was founded by Doug Band, a former adviser to President Bill Clinton. Teneo has advised corporate clients like Coca-Cola and MF Global, the collapsed brokerage firm run by Jon S. Corzine, a former governor of New Jersey.

The Daily Caller also has been doing some first-rate work on the cronyism and corruption inside Washington.

One of their stories, for instance, exposed the left-wing connections of the supposedly “apolitical” bureaucrat at the heart of the IRS scandal.

IRS Exempt Organizations Division director Lois G. Lerner, who has been described as “apolitical” in mainstream press coverage of the IRS scandal, is married to tax attorney Michael R. Miles, a partner at the law firm Sutherland Asbill & Brennan.

And why does that matter?

The 400-attorney firm hosted an organizing meeting at its Atlanta office for people interested in helping with voter registration for the Obama re-election campaign. …Lerner personally signed the tax-exemption approval for a shady charity run by Obama’s half-brother, after an inexplicably brief one-month application process.

Time to wrap this up.

I enjoy Mark Steyn for his biting humor, but he makes a very serious and relevant point is his latest column.

A civil “civil service” requires small government. Once government is ensnared in every aspect of life a bureaucracy grows increasingly capricious. The U.S. tax code ought to be an abomination to any free society, but the American people have become reconciled to it because of a complex web of so-called exemptions that massively empower the vast shadow state of the permanent bureaucracy. Under a simple tax system, your income is a legitimate tax issue. Under the IRS, everything is a legitimate tax issue: The books you read, the friends you recommend them to. There are no correct answers, only approved answers.

I made a similar point, arguing that you can’t have a competent government unless it’s a small government.

But as the public sector expands, effective management becomes much harder.

And, as discussed in an interview with John Stossel, you also get corruption, mixed with incompetence and thuggery.

Let’s close by re-issuing my video explaining how big government enables pervasive corruption. It’s never been more timely and appropriate.

P.S. There are some countries with big governments that are not plagued by corruption. The Nordic nations, for instance, rank at or near the top in many economic indications, including high-quality rule of law. Though it’s worth noting that these jurisdictions scored highly in these areas before the burden of government was expanded.

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