How Crony Capitalism Works

Higher political contributions equals more government contracts on even better terms

Svetlana Larina/Dreamstime

Higher campaign contributions by companies helps them to secure more federal government contracts at better terms that yield higher profits, says a new working paper from researchers associated with the Networks Financial Institute at Indiana State University. In "It's a Sweetheart of a Deal: Political Connections and Federal Contracting," economists Stephen Ferris and Reza Houston confirm earlier econometric findings that firms that make more contributions to politicians do better than companies that supply lower or no contributions. They measured political connections of firms by taking into account the size of political contributions made by each company's political action committee (PAC) to directly to Congressional candidates and political parties and to their associated PACs.

Looking at all of the firms listed on the S&P 1500 Composite Index, they find that companies that make above median political contributions received 6.1 to 8.6 times more federal contracts than those making below median contributions. In addition, larger contributors receive larger contracts that are together nearly 17-fold more valuable than the aggregate of those contracts made with companies whose contributions fell below the median.

Additionally, Ferris and Houston wanted to find out whether larger contributors got better contractual terms, that is, sweetheart deals. To probe this, they constructed a four-point Sweetheart Index based on contractual terms that are clearly advantageous to the contractor but not necessarily so for the government. Specifically, they scanned government contracts for no-bid, cost-plus, multi-year, and exemption from cost and pricing data provisions. Obviously, all four provisions enhance the profitability of the contracts. So what did Ferris and Houston find?

We observe that contract terms are consistently more favorable for firms with stronger political connections The overall sweetheart index across all measures of political connectivity is 1.12 for firms making below median political contributions. The corresponding value for those firms making above median contributions is 1.41. The difference in these index values is statistically significant.

So politically connected companies, that is, those make larger contributions to politicians and parties, are not only more likely to be awarded government contracts, they are also more likely to get sweetheart deals. President-elect Donald Trump says that he is going to "drain the swamp" that is Washington, D.C. His own career as crony capitalist and his Carrier intervention do not provide much hope that he will do more than change the denizens who inhabit that particular swamp.

Comments

[BakedPenguin]

You can't get money out of politics unless you get politics out of money.

[R C Dean]

Quoth the Iron Law:

Money and power always find each other.

[esteve7]

After talking with a number of Progs, they don't dislike Crony Capitalism, they dislike Capitalism. They literally think that companies are big bad evil and only focus on 'profits' and 'shareholders' and not their customers (seriously) --- ie People don't shop at Wallmart because they freely choose to. They are FORCED to shop at Wallmart. So we need the government to step in and do what's right.

They are perfectly fine with all the crony capitalism and government giveways and takeways, because government is good and for the people, not like those greedy companies.

I know this is a fucking child's mindset. These people are going to be economically illiterate the rest of their lives.

[Lee Genes]

They prefer crony capitalism because it is closer to how socialism actually works.

[sarcasmic]

Exactly. Crony capitalism is good because winners and losers are chosen by out political betters. Unlike markets where idiot consumers choose winners and losers by buying stuff. That's why Wallmart is everywhere. Idiot consumers choose Wallmart because of lower prices, not understanding that their political betters would choose better stores. That's why everything needs to be controlled by politics. Because people are just too fucking stupid. Except when they vote in elections. I mean, except when they choose the correct person in elections. But yeah, markets are bad because people are stupid.

[CZmacure]

This is an accurate description of the views of my proggie peers.

[sarcasmic]

They are FORCED to shop at Wallmart.

That is exactly correct. People need to buy stuff in order to live. So when Wallmart forces out the good stores with evil practices like lower prices, they essentially force everyone to shop there. Where else are they going to go? Not only that, but people need jobs in order to live as well. So when Wallmart forces out good employers, they force people to work for them. It's no accident that Wallmart is the biggest single employer in this country. It is because they force good employers to go out of business and then force the workers to work for them. It's all force.

[chemjeff]

In my discussions I've come to the conclusion that the progressives believe in a sort of Superhero version of government. And not the dark troubled heroes like Batman. More like the Saturday morning cartoon heroes, like Superman. He is fighting for "truth, justice and the American way", his motives are never suspect, and the only blameworthy people around are those who don't believe enough in the pure motives of Superman.

[Rasilio]

Err I'm not one to shoot down evidence of crony capitalism but I think I see a major flaw in their methodology.

Not all companies are in industries which have large numbers of values of government contracts available to them so it is inherently possible that the arrow of causation points the other way. That is companies who compete in industries where more government contracts are awarded spend more on lobbying.

[John]

That is exactly how the causation arrow works. Even as big as the government is, most companies do not and could not depend on government contracts to stay in business. Moreover, between the small business and the minority set asides in government contracting any company that things they are going to make it in government contracting is kidding themselves. Government contracts create their own ecosystem of connections and corruption. They always have.

It amazes me how allegedly smart people can so often get causality backwards.

[sarcasmic]

My employer exists solely on government contracts. It is basically a holding company. They find small companies with small contracts, buy the company, then get the contract for cheaper because of less overhead. Wash, rinse, repeat. Meanwhile the corporate executive board is basically a revolving door for newly retired generals and other top brass to get a golden parachute while using their connections so secure more contracts. It's pretty disgusting. But the pay ain't bad and there is something to be said for job security.

[John]

That is the ecosystem I am talking about. But that is the result of how the government does its contracting. It says a lot about government contracting and nothing about "crony capitalism" whatever the fuck that is.

[sarcasmic]

Looks like you're turning into a brick wall again, but I'll waste one comment on you.

Crony capitalism basically means government choosing winners and loser. Be it with contracts, subsidies, monopolies, or some other protection for a favored company or industry.

To put it into logical terms, all government contracts are crony capitalism but not all crony capitalism is government contracts. All oranges are fruit but not all fruit are oranges. You know logic, right?

Anyway, that's my attempt to reason with you. Good day.

[John]

If the government is giving out contracts, it necessarily is choosing winners and losers. Someone has to get the contracts right?

[sarcasmic]

One could ask if these contracts are legitimate functions of government, and then wonder why the contracts exist in the first place.

[Rasilio]

Not exactly, this focused on the Fortune 100 which includes more than a few companies who derive well north of half their revenue from government contracts. But a company like Wal Mart is not going to be scoring much if anything in the way of government contracts and certainly not at the federal level and as such they do not need to spend as much on lobbying wheras defense contractors needs to spend the money on lobbying because if the new weapon system does not get approved they don't get any of the contracts and if it does they already know in advance they are getting some of them.

[John]

There are a lot of companies who do do well with government contracts. But that just says we have a big government that spends a lot of money. It says nothing about how the rest of the market works or really anything about cronyism, which is a word that I wish people would stop raping and leave alone for a while.

[sarcasmic]

You don't know the word cronyism. Boo fucking hoo.

[Adam330]

My BS meter was already running yellow since members of congress are very far away from the actual process of awarding contract. Then I got to this: "they scanned government contracts for no-bid, cost-plus, multi-year, and exemption from cost and pricing data provisions." Perhaps the authors are unaware of this but, if a contract is no-bid (actually "sole source"), then it requires cost and pricing data. And if it's not sole source, then it is, by definition, competitively awarded, and does not require cost and pricing data. So their universe of contracts with "sweetheat" terms essentially includes all contracts.

[Billy Bones]

"Then I got to this: "they scanned government contracts for no-bid, cost-plus, multi-year, and exemption from cost and pricing data provisions.""

I personally read that as they scanned for contracts that fit any one of the four criteria, not contracts that fit all four criteria, which would make the rest of your post moot.

[John]

There are very few government contracts that fit that description. And the ones that do are in DOD and DOE and for very specific things. This is a completely worthless study.

[Ron Bailey]

BB: You read it right.

[Adam330]

No, it means that all contract automatically get at least one point in their study. And the idea that cost-plus and multi-year contracts confer no benefit on the government is hilariously wrong. Multi-year contracts save the government tons of money, unlike the normal government contract structure of using annual options that drive costs up. And cost-plus contracts are needed on many government contracts because the government is unwilling or unable to tightly define its requirements. Cost-plus contracts are huge pains for the contractors since they resul in years or after-the-fact audits where your costs are questioned with the benefit of hindsight by no-nothing accountants. Using fixed price contracts in those situations leads to fiascos like the A-12 debacle.

[sarcasmic]

In other breaking news, water is wet and grass is green!

[Billy Bones]

In the non-political, real-business world, we call that a "kickback". In the political arena, it is just business as usual.

But seriously, this is a problem I had with the Citizens United ruling. It further entrenches this crony capitalism. I have no problem with donations from individuals, non-profits, and PACs, but I have never been able to wrap my mind around the fact corporations are people who are permitted to contribute. I remember a little line from some famous speech, "Government of the people, by the people, for the people". I am still having trouble finding corporation in that quote.

[Ted S.]

Corporations are groups of people banding together to exercise their 1A rights in a way that's easier than doing it individually.

[John]

but I have never been able to wrap my mind around the fact corporations are people who are permitted to contribute.

Do you have a problem wrapping your mind around the fact that corporations are people entitled to due process or to not have their property taken without compensation? If not, then why can't you see it for the first amendment?

A corporation is nothing but a human association. It is no different than a PAC por a union or a "non-profit" in that it is a collective association of individuals. Individuals don't give up their rights because they choose to associate with one another. Therefore, the organizations they form have the same rights the individuals who formed them or owned them have.

Moreover, what the fuck is so special about a "non profit"? You don't think something like the Sierra Club can't corrupt the government? If you think there is some meaningful difference in the legal rights available to an association based on whether it is there to make a "profit", whatever, that is, then you can't wrap your mind around the free market in general.

[Billy Bones]

Very good points, John, and many a great debate could had on those points. My main point, though, is that the corporations existed long before the US, and no matter how many times I read my pocket Constitution, I still don't see where the fore-fathers stated, "We The People and Corporations of The United States, in order to form a perfect union..."

I would also vehemently disagree that a person's job is also is an association in any way other than a way to make a living. Chik-Fil-A employees hundreds of thousands of people. Do you believe every single one of those employees hold the exact political views as the Cathy's? Is it fine for Chik-Fil-A to donate millions of dollars to politicians to outlaw same-sex marriage? Is that the choice of every employee on Chik-Fil-A's payroll. Yeah, sure go get a different job, but for the millions currently out of work, that is not always a viable option.

[John]

People necessarily implies corporations, just like it implies churches and unions and all other forms of voluntary associations.

[Adam330]

"Chik-Fil-A employees hundreds of thousands of people. Do you believe every single one of those employees hold the exact political views as the Cathy's?"

No, I certainly don't. And neither do I think that the 1.2 billion Roman Catholics hold the exact same political (or even religious) views as the pope. What's your point?

[Adam330]

By the way, Chick-Fil-A didn't contribute millions of dollars to politicians to outlaw same-sex marriage. It contributed millions of dollars to a foundation, and that foundation gave grants to other groups that some consider to be anti-gay. As far I can tell, there's never been an allegation that any of this money ended up as a campaign contribution.

[Rasilio]

Actually they have not. While there were some forms of legally recognized corporate bodies present in the mercantilist sustems of 16th and 17th centuries they bore no resemblance to what we call corporations today. The very earliest embryonic corporations were only being created in England contemporaneously with the events of the American Revolution. The corporation did not come into it's modern form until 1855 in England with the Limited Liability act and in the United States not until 1896

[R C Dean]

I have no problem with donations from individuals, non-profits, and PACs,but I have never been able to wrap my mind around the fact corporations are people who are permitted to contribute

Non-profits are corporations you know.

As are some PACs , although most, I believe, are just a checking account. Run by a corporation.

So, you "have no problem with donations from individuals, [corporations], and[corporate checking accounts], but I have never been able to wrap my mind around the fact corporations are people who are permitted to contribute."

[Sevo]

Billy Bones|1.3.17 @ 3:41PM|#
"But seriously, this is a problem I had with the Citizens United ruling"

Real shame about that.
"Congress shall make no law..."
Do you see that word "no"?
Now, put on your thinking cap and give it a try.

[Rasilio]

Here is the thing.

Lets say you banned corporate political donations, what do you expect you would achieve?

First off, very very few political donations come from the companies themselves if for no other reason than legally speaking the corporation is just another person subject to the same limitations on political donations everyone else is. When you read about how many millions company X donated to a particular election it is generally the sum of donations from everyone who works for that company.

Second and more importantly, if a company does want to donate mass dollars to an election campaign it is a trivial task to arrange some under the table payments to their senior officers and have each of them donate that money to the campaign and no matter how tight you made the law it would be easy for them to go one more level removed from the companies center and find proxies to make the donations on their behalf.

At the end of the day attempting to ban corporations from spending money on elections is pointless at best

[Ron Bailey]

R: Just to be clear - in this study the researchers looked only at the contributions from corporations' PACs.

[I am the 0.000000013%]

As long as corporations are taxed, they should have a voice in government.

[Adam330]

Put your mind at ease them because contributions directly from federal contractors are already banned and that wasn't undone by Citizens United. In fact, the ban has been challenged since CU and upheld by the DC Circuit. The contributions in question here are from PACs, which are funded by company employees, not from the corporate treasury.

[CZmacure]

"Crony Capitalism" should probably be called "Crony Socialism" because "Capitalism" isn't really about the state arbitrarily picking winners and losers, is it?

[sarcasmic]

crapitalism

[Sevo]

How Crony Capitalism Works"

"The largest free electric car charging network in the US." voltacharging.
"Tesla's mission is to accelerate the world's transition to sustainable energy." tesla
"Affordable solar products to power your world" solarcity
"SpaceX designs, manufactures and launches advanced rockets and spacecraft" spacex
"Revolutionizing transit with America's most popular electric bus" proterra
(reason doesn't like links and I don't have the smoke-signal codes)

[Ron Bailey]

S: The largest free electric car charging network in the US. It must be a deep mystery to some folks how more than 100,000 service stations got built without government help.

[Sevo]

Could be apocryphal, but I remember reading that during Khrushchev's visit, a Soviet official asked who was in charge of getting the right amount of food to NYC every day...

[ScottPsychInSac]

Sevo--Not apocryphal, just off on the particulars. Many sources detail an account of a conversation between Gorbachev and Thatcher where Gorby asked Thatcher how she made sure the British people got enough food, to which she replied, "I don't, prices do." Something I wanted to contribute to this dialogue is that while there are some nice, compact definitions of "crony capitalism" above, most fail to capture the basic market elements of cronyism; that is, cronyism is simply one form of government interference in the market whereby a government entity brings influence to bear in private markets by selectively subsidizing demand and/or restricting supply. The subsidize-restrict structure is the actual mechanism for "picking winners and losers." And, contracts is only one rather small facet of the cronyism issue. Perverse government incentives abound in just about any industry that has to answer to a government regulatory body.

[Sevo]

Hadn't heard the Gorby anecdote, but the one I'm referring to was much earlier. I read about it while I was in grammar school, which was during the Neolithic period.