The Magazine

Politicized Capitalism

Boss Obama takes charge of the economy.

Jul 27, 2009, Vol. 14, No. 42 • By FRED BARNES
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President Obama is ushering in an era of politicized capitalism. Since he took office, corporate heads and business executives more and more look to Washington as the wellspring of financial success. And politicians and government officials have much to offer them: grants, loans, loan guarantees, subsidies, contracts, tax credits, regulatory and legal advantages of one kind or another over competitors, even guaranteed profits. Tempting stuff, for sure, and businesses are increasingly unable to resist. This is not a healthy trend.

The distinction here is with America's traditional system of market capitalism, which requires companies and entrepreneurs to compete in the marketplace. Except with President Franklin Roosevelt's New Deal in the 1930s and during wartime--when government officials intervened aggressively in the economy--this has been the dominant form of capitalism in America. It's allowed Americans to become the most prosperous people in the world.

The two types of capitalism exist in stark contrast in the American auto industry. General Motors and Chrysler have survived thanks to billions from the Obama administration and forgiveness of billions more in loans and other obligations. GM and Chrysler are now wards of the federal government, which picks their CEOs, names their boards, and can tell them which cars to manufacture.

Then there's Ford, also a money loser in recent years. It turned down a government bailout and now must pay back its loans in full. Ford decided to compete in the marketplace for the preference of consumers, not in Washington for donations from government. It has one advantage: It's a private corporation free of government control.

Politicized capitalism comes in many forms. The Troubled Asset Relief Program (TARP) has spent hundreds of billions to stabilize banks, including some that didn't need to be bailed out. TARP funds have also gone to insurance, finance, loan, and auto companies, among others. The Federal Reserve and the Federal Deposit Insurance Corporation, while nominally independent, have followed Obama's lead and backed hundreds of billions in home loans and debt issuance. All this money--and the deference to Washington that comes with it--has reached deeply into the economy.

And Obama is eager to bring still more of the private sector under the government safety net. Big banks have paid back billions in TARP loans they received last year, but the administration has decided against using that money to reduce the deficit. Obama would rather spend it.

This was the headline of a Washington Post story on July 11: "White House Eyes Bailout Funds to Aid Small Firms." No doubt many firms would like cheap, subsidized loans from Washington, and they've begun pressing members of Congress for help in getting them. But a program of aid to small business would be a significant departure from TARP's original mandate of rescuing shaky banks.

Politicized capitalism inevitably leads to crony capitalism, the rewarding of friends and supporters with economic favors. The bailout of GM and Chrysler was a boon to the United Auto Workers, which contributed lavishly to Obama's presidential campaign. His cap and trade energy program, which has passed the House, would reward favorites of the administration and congressional Democrats with valuable allowances to emit greenhouse gases.

Another beneficiary is Goldman Sachs, the Wall Street financial giant with allies, former (and probably future) employees, and protégés in key positions in Washington. Goldman was instantly converted into a bank holding company last fall--pre-Obama--and thus eligible for TARP funds. It gained from the bailout of AIG. The insurance company quickly paid back $13 billion it owed Goldman, and last week Goldman posted record profits.

What's wrong with all this? A lot. Market competition produces innovation and inventions. In the 1980s and 1990s, the greatest breakthroughs occurred in technology, the sector least regulated and favored by Washington--that is, the sector most resembling pure market capitalism. "Political capitalism," in contrast, simply "inhibits the ability of companies to operate as market entrepreneurs," says Burton W. Folsom, an economic historian at Hillsdale College in Michigan.

And since politicized capitalism includes efforts to redistribute income--this is especially true with Obama--it necessarily impedes a rise in the standard of living by stifling investment. It also leads, because politicians are involved, to class warfare. We see this today in the ugly disputes over bonuses at TARP-funded companies.