Crony Capitalism vs. Market Morality

Finding an ethical lobbying line in a fallen age of corporatism


Scenario 1: It's 2005. While Republicans are fighting to permanently repeal the estate tax (or "death tax," in their phrasing), a nonprofit called the Coalition for America's Priorities spearheads the counterattack, deriding the proposed repeal as the Leave No Heiress Behind Act. One television spot, run by a coalition partner called United for a Fair Economy, features a lithe, flaxen-haired, Paris Hilton-esque narrator named "London" thanking the GOP for trying to maximize her inheritance.

The anti-repeal campaign is suffused with populist rhetoric. ("This is not a country of inherited wealth," coalition head Steve Ricchetti tells USA Today. "This is a country of earned wealth.") Yet the entire thing is funded by the life insurance industry.

Why? Because the death tax creates business for life insurers. A major selling point of life insurance is that its benefits, unlike inherited money, can be totally tax-free. Take the estate tax away, and that selling point disappears. Hence the campaign.

Scenario 2: It's 2010. William Hambrecht, a Bay Area financier, has donated more than $1 million to Democrats since 1993. More than $13,000 of that money has gone to Nancy Pelosi, a San Francisco congresswoman who once gave a House floor speech praising "a business pioneer, a philanthropist, and a longtime friend, Bill Hambrecht."

She could have added "business partner." When Hambrecht founded the United Football League in 2009 to try to compete with the NFL, Paul Pelosi Sr. -Nancy's husband-invested $12 million in one of the league's first four teams. In a fortuitous coincidence, Hambrecht's small investment bank has employed Paul Pelosi Jr., the congresswoman's son, for years.

In the waning days of Pelosi's term as speaker of the House, Hambrecht comes to Capitol Hill to testify before the Financial Services Committee. The committee is meeting to discuss a proposed tweak to regulations that govern initial public offerings (IPOs). Hambrecht's company would be the prime beneficiary of the proposal.

Committee Chairman Barney Frank (D-Mass.) pointedly notes at the beginning of the hearing that the regulatory change was not his idea. "I should note also that it was Speaker Pelosi who first called this to our attention earlier in the year.…It is something that the speaker has taken a great interest in because of her interest in job creation, so we have had to find a way to have this hearing."

Both of these scenarios sound sleazy: the kind of influence-peddling, insider-colluding tales that make Americans cynical about Washington. But in fact, only one of the two lobbying campaigns is genuinely objectionable. Explaining why means tackling one of the most important questions for libertarians observing our modern crony-capitalist economy, where the government's tendrils are so intimately entwined with the business world: What sorts of corporate lobbying are morally justified?

Baptists and Bootleggers

The life insurers' partnership with the left to save the estate tax is a classic case of Baptists and bootleggers, to borrow a famous phrase from the economist Bruce Yandle. In Yandle's account, the Baptist preacher provides the anti-alcohol campaigner with a moral cover story for his efforts, while the bootlegger, who will profit from Prohibition, bankrolls the effort.

George W. Bush's 2001 tax cut included a gradual repeal of the estate tax. But because the Bush bill was scheduled to sunset in 10 years, the tax was set to rise from the dead on January 1, 2011. After voters re-elected Bush and increased the Republicans' Senate majority in 2004, permanent repeal of the estate tax became a GOP priority.

Many liberals wanted to keep the tax, arguing that it helped slow the growth of economic inequality. But the real muscle opposing permanent repeal came not from liberals but from insurers. Steve Ricchetti and his brother Jeff founded Ricchetti Inc., a K Street firm, in 2001. (Jeff still runs the lobbying firm; Steve is now Joe Biden's chief of staff.) In 2004 the Association of Advanced Life Underwriting hired the Ricchettis to lobby on "issues affecting estate tax repeal," according to a filing with the Senate Office of Public Records. Ricchetti Inc. was also retained by a larger industry group, the American Council of Life Insurers (ACLI).

The inheritance tax gives wealthy people two artificial incentives to buy life insurance. The first is that insurance enables them to avoid paying the tax. If a woman died in 2001 and left her son $2.5 million, the son would have owed about $1 million to the government. But if the mother had a $2.5 million whole-life insurance policy and assigned ownership to her son, he wouldn't pay a penny in either estate or income tax on that money. Considering the tax savings, the policy would be a good deal even if she paid $3 million in premiums to get the $2.5 million benefit.

The second incentive is not about avoiding the tax; it's about affording it. If you want to hand down a family business, an art collection, or some other illiquid item, you might buy a life insurance policy adequate to pay the tax on the inheritance. Wealthy people "quite often use life insurance as a means to generate the cash to pay the tax on the transfer to the next generation," Jim Swink of the Planning Corporation of America told On Wall Street, an investing publication, in 2007.

You can see why the insurance industry lobbies like crazy. In years when the estate tax is on the legislative table, ACLI reliably makes the top tier of K Street interest groups; in 2004 only five single-industry lobbies spent more.

If "the social responsibility of a business is to increase its profits," as Milton Friedman once wrote, can a libertarian blame life insurance companies for these efforts? They were acting, after all, on behalf of their own shareholders and creditors. And the efforts worked: The death tax still exists, continuing to generate business and profits for the life insurance industry.

But yes, we can blame them. The problem is not that the insurers sell products that derive their value from big government; it's that they're actively pushing for the interventions that give their products value. They are not just filling a need created by big government. They are demanding that big government create that need.

Lobbying for Liberty

Contrast that with Hambrecht's attempts to revise the rules for IPOs. Hambrecht's business would have been the prime beneficiary of the policy he was proposing, but he was not lobbying to constrain anyone's freedom or increase anyone's taxes.

Under existing law, companies wanting to go public needed to jump through complex and expensive regulatory hoops that left them dependant on the giant Wall Street firms to underwrite their IPOs. Small firms, worth less than $5 million, were exempted from these rules. Hambrecht was lobbying to increase the exemption level to $30 million. (In 2012 a provision much like Hambrecht's passed into law as part of a broader reform of financial regulations called the JOBS Act.)

Long ago, WR Hambrecht & Company developed a simpler, cheaper process for businesses to take their companies public. OpenIPO is Hambrecht's registered trademark, and it is one of the primary ways smaller companies get listed on public exchanges. The more small companies go public, the more clients there are for OpenIPO, and the more profit Hambrecht makes.

So Hambrecht was lobbying for his own profits, but he was also lobbying for a change that would give more opportunity to smaller companies and smaller investors. And there was nothing in the reform he backed that would stop competitors to OpenIPO from trying to take his business.

Hambrecht evidently believed that if businessmen were more free to choose how to go public, they would choose his product. The only victims of his lobbying were the big investment banks who had long enjoyed an oligopoly on the unnecessarily costly process of taking small companies public. In other words, Wall Street giants were losing a government-granted privilege.

Hambrecht's influence game had all the trappings of special-interest pleading. But it's hard to find fault with what he did.

Hambrecht is different from the insurers because he's not profiting off of big government. But even profiting off of big government can be blameless, if you do it like Anthony DeNicola does. DeNicola, the president and co-founder of White Buffalo, is a professional sharpshooter. Local governments hire his company to thin deer herds that have become nuisances. He brings his team of sharpshooters to town, scopes out good shooting spots, and then spends a few days in tree stands or high back decks, taking out hundreds of deer.

In 2000, for instance, the area around Princeton, New Jersey, had more than 300 deer-auto collisions. "The herd's population had climbed to nearly 100 deer per square mile, prompting some residents to refer to the animals as 'rats of the night,' " Outdoor Life reported. "One root cause of the deer overpopulation: Princeton Township had outlawed hunting in 1980." So the town hired DeNicola's hunters to cull the herd. It was hardly the company's only client: DeNicola is flooded with work from suburbs up and down the East Coast. Hunters don't have much political power in the suburbs, so there are a lot of places between Boston and D.C. where hunting has been banned.

DeNicola's business-his dream job-depends on counterproductive government intrusions on the liberty of hunters. In this regard, he is like the life insurers. But unlike the insurers, he does not lobby for the maintenance and expansion of the laws from which he benefits. To the extent that he has any say over hunting regulations, he calls for their liberalization. In the meantime, his business helps solve a problem those bad laws created. You can't fault him for that.

Drawing the Line

There's nothing inherently wrong with profiting off big government. If the government creates a surplus of deer, someone has to thin that surplus. If government forces factories to clean up their emissions, someone has to make the smokestack scrubbers. If government requires drivers to use ethanol, someone has to make the stuff.

Nor is it inherently wrong to lobby for policies that increase your profits. "Petitioning the government for the redress of grievances" is protected by the First Amendment, and the regulatory environment often chips away at the profits companies would otherwise make. What is wrong is to lobby for policies that enrich your business by taking away other people's property or liberty.

If undue intrusions on liberty are immoral, then helping enact those intrusions is also immoral. Sure, the politicians who create corporatist policies bear the ultimate blame, but if you, as a lobbyist, convince someone to do something wrong, how are your hands not also dirty?

One might object that a corporate executive's primary duty is to maximize shareholder value, period, usually by maximizing profits. But almost nobody really believes that the profit-maximizing directive should be absolute. What if a foreign king promised a secret supply of slave labor to a corporation in exchange for a pittance in patronage? Would the CEO be duty-bound to accept this great deal?

No. The CEO's charge should not be "increase shareholder value by any means necessary." It should be "increase shareholder value by all appropriate means." That precludes participating in slavery, and it precludes lobbying for unjust laws.

So where do you draw the line? In 2001, a Costco shareholder wrote to the company to complain about its willingness to benefit from eminent domain. Costco counsel Joel Benoliel replied that in places where "Redevelopment Districts with bonding authority and powers of condemnation have been the norm for many decades," his company's participation in the process does not make eminent domain any more common; it just affects who benefits from it. "The fact is," Benoliel wrote, "if we refrained from participating in these deals, our competitors for these sites…would take advantage of our reticence, and our shareholders would be the losers."

The plausibility of this defense depends on the specifics. If a county takes land through eminent domain and then looks for retailers to set up shop, it's hard to blame a business for trying to get in on the deal. But if a county, seeking a particular company, offers to acquire some property for that enterprise through eminent domain, it is harder to justify saying yes. If a developer or retailer explicitly asks a government for an eminent domain taking, it is asking for outright theft. The fact that everyone else is doing it does not change the moral calculus.

Lobbyists and CEOs will always have a free-market-sounding defense to make. Sometimes the defense will be legitimate. Frequently it will not. Libertarians need to probe those defenses, asking businessmen and their hired guns these tough questions. Keep it up, and perhaps one day the businessmen will start asking those questions of themselves.

NEXT: Brickbat: Viral Photos

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  1. It’s lonely here.

      1. what Patrick said I’m shocked that a mom able to get paid $5552 in four weeks on the internet. did you read this site link ..,.,..,.,.,., jobs80
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  2. They are not just filling a need created by big government. They are demanding that big government create that need.

    This is just the sort of market failure that requires that government step in and do something. Tony will be around this afternoon to explain why I’m right on this.

    1. I submit that the appropriate action for the government to take is to step up and NOT do things. If government didn’t dole out favors, corporations and industries wouldn’t lobby for them.

      1. hey, those campaigns don’t contribute to themselves. Favors come at a cost.

      2. Yeah but you can’t make money and get power unless you dole out favors. Didn’t you watch Scarface explain the rule to Manny in that movie?

        1. First choo get da munny, den you get da power, DEN you get da womin Manny.

  3. We give Big Government enormous power to muck up people’s lives. It’s eminently logical that people will go to great lengths to ensure that Big Government is mucking up somebody else’s life. And yet people think the solution to this it to give Big Government more power to muck up people’s lives.

    1. That is exactly right. Government is nothing more then force backed up by violence. The less of that, the better.

    2. “And yet people think the solution to this it to give Big Government more power to mfuck up people’s lives.”


      1. It’s because they’re weak people that lake their own personal empowerment and so seek to vicariously get a sense of power by pushing big gov into asserting their will on others for them…much like a little guy might solicit a big brother to beat up a bully, real or imagined.

  4. “The CEO’s charge should not be “increase shareholder value by any means necessary.” It should be “increase shareholder value by all appropriate means.”

    This happens in Canada with companies like Bombardier and Pratt & Whitney who operate in loser industries. It’s sickening how much political leverage they possess that comes in the form of subsidies. All in the name of maintaining ‘competitive advantage’ and ‘saving jobs.’ Or in the case of Bombardier, the insidious nationalist notion of ‘protecting a national treasure.’ It’s all bull shit.

    Why, just the other day Bombardier laid off 1100 jobs. They always lay off no matter how much goodies they get from the government.

    I learned the hard way about investing in companies that take or survive on subsidies. They’re not worth shit.

    1. Why do you hate Canadian companies? Do you want to be more like America?

      1. I hate companies who rely on tax payers all kinds regardless of creed, race or age.

        1. which is why I hate green energy companies the most.

      2. Firefly condemns ‘companies that take or survive on subsidies’ & cites 2 Canadian examples. Your response is to ask why he hates Canadian companies – thereby implying that ALL Canadian companies, rather than the two ‘bootleggers’, “increase shareholder value by any means necessary”. #CounterfeitLogic

        Or, was that your point?

  5. How about we not elect nickle whores to congress.

    1. That’s a problem because the only candidates for congress typically are nickle whores, regardless of team affiliation.

  6. If government doesn’t get to pick the winners and losers there will be income inequality! Can’t have any of that, so MOAR crony-capitalism pleaze.

    /nanny-stater off

  7. ” What sorts of corporate lobbying are morally justified?”


    1. I think lobbying to keep the congress kritters mitts off of your industry is a fine use of lobbying. Lobbying for any special benefit for your company and/or industry is not a good use.

      1. I should add that in theory that shouldn’t be necessary, but I do believe in the right of self defense and I think that lobbying can qualify as justified self-defense.

        1. That’s basically my job description right there.

  8. The only way for The People to choose winners and losers is through government, because government is The People!

    Otherwise it’s the corporations and the rich who decide!

    1. Nonsense. The representatives we elect are almost without exception bought and paid for by those they will then select as “winners.” The losers are “The People.”

      We, the people, can selec winners and losers perfectly well – with our choices. Lousy products will fail, good ones will succeed.

  9. Libertarians and their politicians should start with the easiest target in the war for economic freedom: corporate welfare. The vast majority of American’s are agin’ it and many leftist will cheer you (quietly) as well. Abolishing corporate welfare should be associated with libertarianism like white is associated with rice.

    1. My brown rice says you’re racist!

      1. I knew this one was coming right after I hit the submit button!

    2. Unfortunately, the progs have brainwashed many people into thinking that corporate welfare is libertarianism, among other nonsense. We have a lot of un-teaching to do.

    3. Most “corporate welfare” is in the form of tax breaks, not subsidies. The way to get rid of it is to simplify the tax code and lower rates….pretty much like Republicans pitch year in and year out.

      How’s that working out for them?

  10. Learn Your Craft, Mr. Carney

    As a professional writer, Mr. Carney should use words carefully. As an economics-oriented writer, he especially should use economics-related words carefully. He does not.

    The recently-coined and widely-misapplied term, “crony capitalism”, represents an oxymoron. What does that make those professional writers who use it?

    Although never having used it in his famous book, Adam Smith, the father of capitalism wrote his work as an attack against mercantilism and its governmentally-contrived markets, the opposite of capitalism and its free markets. Instead of using the proper term, mercantilism, Mr. Carney and many of his colleagues prefer to use the catchy oxymoron, “crony capitalism”, apparently harboring the contemptuous view that their readers are too ignorant to be familiar with the correct term; that is, assuming that they themselves are familiar with it. Either way, they should learn their craft and be true to it. Words have meaning, Mr. Carney; as can lobbyists, words can kill (

    1. Agreed. How about just “Cronyism”. Leave capitalism out of it completely since it is exact the opposite.

    2. While your point – that a common term is a misleading one – sounds well worth considering, how did I know that your wholesale attack on the author’s command of English would reveal something like this at the other end of the link you provided?

      From your blurb on Amazon:

      Using a no-holes-barred, in-your-face style

      1. “…a no-holes-barred, in-your-face style”

        Sounds a lot like porn to me.

    3. Mr. Carney and many of his colleagues prefer to use the catchy oxymoron, “crony capitalism”, apparently harboring the contemptuous view that their readers are too ignorant to be familiar with the correct term

      And in many cases they’re right. I think part of the problem is that many people, especially on the left, attack our current system as “capitalism” even though it’s not true capitalism in the free market sense. So the term “crony capitalism” was invented as a short hand way to differentiate our bastardized cronyist system from true capitalism.

      I’m not sure why they didn’t use the term mercantilism other than the fact that the word isn’t used very much anymore, so few people know what it is.

    4. Hey, Biobehavior, these terms all have enough arbitrariness that the ones you prefer can be undermined just as easily. “Mercantilism” by derivation should mean a tendency toward buying & selling; I know it’s come to mean something more specific, but so has “crony capitalism”. And as Clarence Carson and others have pointed out, “capitalism”, a term coined by Marx, was to imply, by its construction to parallel like terms, “rule by capital”, which is why he & I and many others prefer “free enterprise”.

  11. A better way to handle both death and life insurance is to tax the beneficiary based on the resulting income, whether from an inheritance or from an insurance payout. It’s much simpler, treats every beneficiary equally and eliminates lots of lobbying and other squabbling.

    There are many other games associated with managing taxes surrounding death, all of which generate dead-weight losses to the economy, jobs, young people, etc., while benefiting politicians, lawyers, accountants and other fixers. What a waste.

    1. But does recycling the money make it “income” to everyone whose hands it passes into? “Income” could be construed literally to mean “receipts”, but usually it refers to gains from production.

      1. I suppose we could go wrestle in the weeds about that, but I’d say income is money/stuff you didn’t have last year that you have this year.

        As a detail, I’d recommend that we put money from such payouts into a sovereign wealth fund, which I’d then divvy up among everyone born that year to get them started as capitalists. The money would not be entailable until the recipient reaches 26 (and leaves their parents’ insurance!)

  12. WTF?

    Pelosi’s husband invested millions in yet another football league that was supposed to compete with the NFL, in 2009?

    I mean, this is a perennial failed enterprise to begin with, but in 2009? I’m truly shocked by this.

    How in hell did these people become rich, doing shit like that?

    Oh… Wait… I think I might know.

  13. Are there any other lobbyists who are regulars here?

    Cause it basically turned me into a libertarian.

  14. This is an extremely clear disposition on the subject of crony capitalism and morality. Those who are critical of Stanley’s conclusion, should reread the article. It also explains why Buffet pals around with liberals and other big government politicians. Buffet needs the cash flow from life insurance to fund his stock picking. And, he is a brilliant stock picker.

  15. The worst enemy of free enterprise is big business.

  16. The development example posed in the next-to-last para. of the article leads to belly-of-the-beast cases wherein in order to exercise one’s liberty, one has to impinge on someone else’s, because existing regimes leave no other choice. It is frequent for local gov’t to so cartelize development that one must accept their terms, which may include many privileges for a developer such as eminent domain, on a take-or-leave-the-whole-package basis. By the same token, the politics of the opposition also tends to be whole-package basis wherein to stop something like eminent domain, you must ally yourself with forces that if successful will politically prevent the development on any terms. Such was the case with a proposed Ikea in New Rochelle. Deciding whose side to take can be tough for a libertarian; either way, someone will gain some freedom and someone will lose some, and it may be the same someone or a different one.

  17. There is a real danger in this sort of logic… it’s okay to lobby the government for freedom – i.e. what Reason believes in.

    Now try to convince a liberal that it’s not okay to lobby the government for “social justice” measures – even if you profit from them.

    Sauce, goose, gander.

    Yeah, relativism, but it really is dangerous.

  18. Brooke. if you, thought Dorothy`s blurb is terrific… on monday I got a brand new GMC since I been making $4067 this last four weeks and-also, $10 thousand this past munth. with-out any question its the easiest work I have ever done. I began this 4 months ago and pretty much straight away startad earning minimum $82.. p/h. why not try this out W? o? r? k? s? 7? 7? .? ?? ?? ??

  19. Thank you for this very insightful article. For me, you hit the nail on the head with this comment: “Whatiswrong is to lobby for policies that enrich your business by taking away other people’s property or liberty.” I was moved to write a post on myownblog. Here it is:

  20. Thank you for this very insightful article. For me, you hit the nail on the head with this comment: “Whatiswrong is to lobby for policies that enrich your business by taking away other people’s property or liberty.” I was moved to write a post on myownblog. Here it is:

  21. Just for the record, there’s no such thing as “crony capitalism.” It’s an oxymoron, like “promiscuous virginity” or “drunken sobriety.” You can have capitalism OR you can have cronyism, but the two can never coexist.

  22. before I saw the check ov $4298, I didnt believe that…my… sister was realy earning money part-time at there computar.. there moms best frend has been doing this for only 23 months and just now took care of the loans on their appartment and got a top of the range Acura. you could try here W? o? r? k? s? 7? 7? .? ?? ?? ??

  23. just as Russell replied I’m shocked that someone can earn $4298 in a few weeks on the computer. look at this now W? o? r? k? s? 7? 7? .? ?? ?? ??

  24. How could someone write this article without mentioning Warren Buffet (that man of the people) and his lobbying on behalf of the life insurance industry? Or mentioning how cronyism allows former politicians and their staffers to monetize their “public service” to become far wealthier than they could doing honest work?

  25. like Marvin explained I am taken by surprise that a mother able to get paid $5359 in four weeks on the internet. have you read this site link ?????? http://www.works77.???m

  26. my best friend’s sister-in-law makes $70 /hour on the computer . She has been without work for 7 months but last month her check was $12532 just working on the computer for a few hours. you can look here


  27. This is a country of earned wealth.”) Yet the entire thing is funded by the life insurance industry.

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