Crony Capitalism: Right Here, Right Now

By Macey, Jonathan R. | Harvard Journal of Law & Public Policy, Winter 2014 | Go to article overview

Crony Capitalism: Right Here, Right Now


Macey, Jonathan R., Harvard Journal of Law & Public Policy


Crony capitalism describes an economic and political environment in which pursuing and obtaining government favors is both part of everyday life and a necessary protocol for succeeding in business. Where crony capitalism exists, notions of meritocracy have been displaced by notions of cronyism or kleptocracy or something similar. Crony capitalism has ebbed and flowed in our history, and it seems as though today it is on the rise.

Just looking at late 2012 and early 2013, one could talk for hours about the examples of crony capitalism--for example, the $78 million tax write-off in the new tax bill for NASCAR drivers. (1) That write-off may be very popular--I don't know-but it is crony capitalism.

The tax benefits for the New York Liberty Zone provide another example. (2) Yet another was the tax victory given to companies operating in American Samoa by Chris Dodd--a former Connecticut Senator--who now represents Hollywood's movie studios. He got those companies a two-year extension on a provision allowing film and television producers to expense the first $15 million of production costs incurred in the United States--a kind of wholesale crony capitalism. (3)

There are also examples involving recent political appointees. The Senate confirmed Jack Lew as Secretary of the Treasury in February 2013, (4) and one of the striking things about that appointment is that his contract at Citibank, where he did administrative work with a hedge fund, stipulated that he would receive a bonus if, and only if, he were appointed to a senior position in government. (5) It now appears that not all bribery is illegal because it appears that prospective bribery is okay. As long as you buy the futures contract that calls for paying a bureaucrat in the future, it is not the same thing as buying it on the spot market, where bribes are paid at around the same time the favors are granted. I think that permitting prospective payments to government regulators is not such a good idea.

Mary Jo White provides another example. White is a very distinguished lawyer--a former partner in the law firm of Debevoise & Plimpton--who has now been confirmed as the Chairman of the SEC. (6) While White was at Debevoise, one of her clients was the investment banking firm Morgan Stanley. In 2005, Morgan Stanley's board of directors decided to make a man named John Mack the CEO, but they encountered a problem. Reports suggested that Mack might have violated those pesky provisions in the federal securities regulation that outlawed insider trading. (7)

White's client, Morgan Stanley, called her. (8) They said it would be embarrassing if they elected John Mack as CEO and he was sued for securities fraud the next day. So they asked White to find out whether he would be sued. White then called the head of the Enforcement Division of the Securities and Exchange Commission, Linda Chatman Thomsen, to ask how things looked for Mr. Mack. (9) Though there are at any given time hundreds of people begging for information about whether and when the SEC will finish investigations or reach a conclusion in a particular case, White got her answer. (10) Mr. Mack ascended to the position of CEO of Morgan Stanley. Thomsen, incidentally, is no longer the head of the Enforcement Division of the SEC. She is now a partner at Davis Polk & Wardwell in New York. (11)

In short, the United States has many examples of crony capitalism. It is clear that the supply and demand of crony capitalism is such that this sordid brand of capitalism is going to emerge and even dominate wherever the conditions are ripe for it. Crony capitalism involves a demand side--which is the demand of regulated institutions like Morgan Stanley or Goldman Sachs or whomever for legislative favors--and a supply that is provided by bureaucrats and elected officials. The main point is simply that as economic regulation increases and competition decreases, crony capitalism grows. …

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