The Magazine

The Crony Capital

Capitalism, Washington, D.C., style.

Jun 23, 2014, Vol. 19, No. 39 • By JIM DEMINT and MIKE NEEDHAM
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This year’s turbulent primary season, which hit a crescendo this month with David Brat’s upset victory over House majority leader Eric Cantor in the Republican primary for Virginia’s 7th Congressional District, is an opportunity for conservatives to reflect. Why have our political leaders struggled so much to capture the enthusiasm of the conservative grassroots? Why did Republicans fail to win power in the last national election, despite wide distaste for the president’s signature legislation? Is the Tea Party’s agenda the solution to that failure or the problem? To many observers, the answers are both obvious and discouraging: The messages most appealing to the conservative base do not resonate with the general public, and the messages most likely to sway swing voters do little to energize conservatives. The movement is trapped in a double-bind.

Oink!

This view is wrong. Not all of the concerns of today’s grassroots are fundamentally about left versus right, and not all political appeals to the center are bound to alienate conservatives.

For too long, conservatives have lazily substituted rhetoric about free markets and lower taxes for the hard work of identifying and eliminating structural obstacles to economic dynamism. That work is uncomfortable, as it forces conservatives to come to terms with claims made more often by the left than the right about our political and economic systems. But it is necessary, and not just as a corrective to the left’s misguided arguments; it will also lead to sounder public policy.

Left-wing populists like Elizabeth Warren argue that the American vision of democratic capitalism is incapable of living up to its ideal, a society of upward mobility, widespread prosperity, and opportunity for all. “The game right now in America is rigged,” Warren says. “It is rigged so that those at the top keep doing better and better, and everyone else is under increasing pressure, is under increasing economic strain. The rules don’t get better for America’s middle class. The rules are getting better for those who are a thin slice at the top.”

Republican political professionals might prefer to dismiss such assertions, but most Americans—conservatives included—are indeed frustrated with a political economy that increasingly seems to benefit the well-connected. Tea Partiers have as much trouble as Occupy protesters identifying with bailed-out mortgage lenders and Washington lobbyists. Elizabeth Warren’s policy prescriptions may be unwise, but the critique of American capitalism underlying them has more resonance than we conservatives like to admit. Until we begin to address the tension between the interests
of K Street’s clients and the interests of most Americans, many voters who might be inclined to agree with us will stay home.

Conservatives should recognize, moreover, that there is nothing conservative about the status quo that has engendered such cynicism in so many Americans. Where the left errs is not in its frustration with our current system but in its diagnosis that the problem is the free market itself. The truth of the matter is perfectly compatible with conservatism: Many of big business’s greatest advantages over small competitors stem not from scale achieved through success in the free market but from success in capturing the levers of political power.

Sometimes, the means employed by politicians to protect big business are clear: subsidies and bailouts delivered to political allies, for example. Others are less obvious: licensing requirements easily overcome by large-scale enterprises but especially onerous for small-staff operations; tax loopholes available only to those who can afford savvy tax lawyers; complex regulations comprehensible only to experts in administrative procedure.

These decrees kill competition, and in so doing, they don’t merely hurt small business; everyone in the market suffers. There’s a reason most Americans are struggling to keep up with essential expenses such as housing and health care. Government policy directly insulates entrenched players in these industries from competition while providing them taxpayer-funded financial support. This nexus of big business and big government is a recipe for greater costs for most Americans, through higher prices and higher taxes.

Five and a half years into the Obama era, a healthy conservative movement would be well positioned to highlight the link between big government and corporate cronyism. President Obama’s stimulus package, supposedly passed to address unemployment, functioned primarily to line the pockets of well-connected unions and firms like Solyndra rather than to build a foundation for a broad-based recovery. Obamacare, professedly designed to reduce costs, has served instead to increase premiums, limit choice, and guarantee insurers a steady stream of revenue. The Dodd-Frank reform, billed as a measure that would protect consumers from future financial collapses, has only exacerbated the problem of too-big-to-fail, and Wall Street profits have soared in subsequent years. Corporate friends of the Obama administration and the Democratic party have done quite well in the Obama era, even as the economy has stagnated. Being well-connected does wonders.

There’s nothing wrong with soaring profits, as long as they don’t come at the expense of the public weal. Irving Kristol once observed that big business “straddles, uncomfortably and uncertainly, both the private and public sectors of our ‘mixed economy.’ ” The discomfort is disappearing. In the Obama era, big business seems to prefer sure profits guaranteed by government to the risks of competition.

Unfortunately, because many voters still perceive Republicans as pro-business rather than pro-market, the party is poorly positioned to articulate this critique. Congressional leadership’s obsession of late with amnesty for illegal immigrants—a priority for big business that remains anathema to Main Street—has done the conservative movement no favors in this regard. Perceptions can change, but only if political leaders claiming the mantle of Reagan make some difficult decisions. Congressional leaders have numerous opportunities to break with the politics of crony capitalism this year, but only if they are willing to upset powerful corporate interests in the process.

Consider the Export-Import Bank, up for congressional reauthorization this year. A New Deal program created to make loans to the Soviet Union, it has been used for the last 70 years to make loan guarantees that help some American exporters compete in foreign markets. The operative word here is “some.” Only 2 percent of American exports receive taxpayer-backed guarantees. In 2012, one corporation, Boeing, took 80 percent of the guarantees—$12.2 billion. Conservatives seeking to draw a contrast with the left would allow the bank to expire and leave the defense of cronyism and corporate welfare to the opposition. They must be ready, however, for backlash from its beneficiaries.

The same is true of the broken “tax extender” process. Each year, Congress extends a block of short-term tax provisions in ostensibly temporary legislation. Included are minor, obscure tax breaks—tax credits for railroad track maintenance and mine rescue team training, for example—as well as major provisions, such as the research and development tax credit. Because the extenders tend to be considered as a group rather than separately, many schemes that would never survive individual scrutiny are propelled on the popularity of bigger provisions with larger constituencies. Like the now-dead earmarks, extenders are a way of doing business that encourages favor-trading and rent-seeking. Unsurprisingly, the annual extender package attracts more than its fair share of attention from lobbyists and other influence peddlers. Conservatives should recognize such processes as detrimental to the long-term interests of our movement and make an ultimatum: Congress allows each extender to rise or fall on its own merits through individual votes or lets the entire package die.

Housing finance represents another area in which fealty to special interests has prevented right-leaning politicians from taking the high ground. In the wake of the financial crisis of 2008, few Americans are sympathetic to the government-sponsored entities whose conduct triggered the collapse. Yet Fannie Mae and Freddie Mac remain, and the hedge funds that bet big on their taxpayer-backed recovery are emboldened. They are running advertisements opposing reform in the New York Times and the Wall Street Journal and threatening behind the scenes to withhold campaign contributions from noncompliant members of Congress. National realtor lobbies have been no less active on the issue, and lawmakers who should know better have shielded Fannie and Freddie from the extinction they deserve. A conservative House leadership would advance to a floor vote House Financial Services Committee chairman Jeb Hensarling’s PATH (Protecting American Taxpayers and Homeowners) Act, which would wind down Fannie and Freddie in five years. It would send a powerful message that the Republican party will not be intimidated from reforming the system that brought about the greatest economic downturn since the Great Depression.

Obamacare, of course, remains the centerpiece issue of 2014, and conservatives cannot afford to ignore it. Even here, joined with the effort to repeal the law and enact reforms that empower patients and doctors, conservatives have an opportunity to draw a contrast with the left’s favoritism for big business: They can work to eliminate the “risk corridor” insurance company bailout program designed to insulate insurers from the market dysfunction introduced by the law’s other provisions.

Candidates of any stripe looking toward November would be remiss in ignoring such a rare overlap in partisan interests. Most rank-and-file liberals despise the perceived soullessness and impunity of “big business,” and most conservatives despise government handouts in any form—to say nothing of the constitutional issues involved. The only people remaining to oppose reform are the leadership of both parties, who rarely enjoy rocking a boat full of campaign contributions. But even they can be shamed into action if inaction is made too politically expensive an option.

Whether it’s ending Ex-Im, killing subsidies, or preventing further bailouts, conservatives have a sterling opportunity at this moment of uncertainty to reintroduce themselves to their countrymen as their legitimate advocates in Washington. They can hold the feet of faux-populist progressives to the fire, exposing them as the real shills for corporate interests.

We know that the conservative movement is for real capitalism and against the Crony Capital. Now is the time to prove it.

Jim DeMint, a former Republican senator from South Carolina, is president of the Heritage Foundation. Mike Needham is president of Heritage Action for America, a grassroots advocacy organization.

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