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,"Š" 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.