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“Cronyism Causes The Worst Kind Of Inequality”: Friends Of The Rulers Appropriating Wealth For Themselves

Economic inequality has skyrocketed in the U.S. during the past few decades. That has prompted many calls for government policies to reverse that trend. Defenders of the status quo argue that rising inequality is a necessary byproduct of economic growth — if we don’t allow people the chance to become extremely rich, the thinking goes, they will stop working, investing, saving and starting businesses. A receding tide will then cause all boats to sink.

Critics of the status quo have responded with the claim that inequality doesn’t help growth, but instead hurts it. This view was given ammunition by a number of recent studies, which have found a negative relationship between how much income inequality a country has and how fast it grows. One example is an International Monetary Fund study from 2015:

[W]e find an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth.

A similar 2014 study from the Organization for Economic Cooperation and Development concluded the same thing. Interestingly, the negative correlation between inequality and growth is found even when controlling for a country’s income level. This isn’t simply a case of wealthier countries growing more slowly and also being more unequal.

So the evidence is pretty clear: Higher inequality has been associated with lower growth. But as with all correlations, we should be very careful about interpreting this as causation. It might be that countries whose growth slows for any reason tend to experience an increase in inequality, as politically powerful groups stop focusing on expanding the pie and start trying to appropriate more of the pie for themselves.

The IMF and OECD list some channels by which inequality might actually be causing lower growth. The most important one has to do with investment. When poor people have more money, they can afford to invest more in human capital (education and skills) and nutrition. Because these investments have diminishing marginal returns — the first year of schooling matters a lot more than the 20th — every dollar invested by the poor raises national productivity by more than if it gets invested by the rich. In other words, the more resources shoring up a nation’s weak links, the better off that nation will be.

That’s a plausible hypothesis. But there might also be other factors contributing to the correlation between inequality and growth. It could be that there is something out there that causes both high inequality and low growth at the same time.

The obvious candidate for this dark force is crony capitalism. When a country succumbs to cronyism, friends of the rulers are able to appropriate large amounts of wealth for themselves — for example, by being awarded government-protected monopolies over certain markets, as in Russia after the fall of communism. That will obviously lead to inequality of income and wealth. It will also make the economy inefficient, since money is flowing to unproductive cronies. Cronyism may also reduce growth by allowing the wealthy to exert greater influence on political policy, creating inefficient subsidies for themselves and unfair penalties for their rivals.

Economists Sutirtha Bagchi of the University of Michigan and Jan Svejnar of Columbia recently set out to test the cronyism hypothesis. They focused not on income inequality, but on wealth inequality — a different, though probably related, measure. Concentrating on billionaires — the upper strata of the wealth distribution — they evaluated the political connections of each billionaire. They used the proportion of politically connected billionaires in a country as their measure of cronyism.

What they discovered was very interesting. The relationship between wealth inequality and growth was negative, as the IMF and others had found for income inequality. But only one kind of inequality was associated with low growth — the kind that came from cronyism. From the abstract of the paper:

[W]hen we control for the fact that some billionaires acquired wealth through political connections, the effect of politically connected wealth inequality is negative, while politically unconnected wealth inequality, income inequality, and initial poverty have no significant effect.

In other words, when billionaires make their money through means other than political connections, the resulting inequality isn’t bad for growth.

That’s a heartening message for defenders of the rich-country status quo. If cronyism is the real danger, it means that a lot of the inequality we’ve seen in recent decades is benign. Eliminate corrupt connections between politicians and businesspeople, and you’ll be safe.

But Bagchi and Svejnar’s finding cuts two ways. It also means that plain old inequality isn’t beneficial for growth, as its defenders have claimed. That removes one of the big objections government policy makers face in talking steps to reduce inequality — and that doing so is unlikely to hurt economic growth.

 

By: Noah Smith, Bloomberg View, Bloomberg Politics, December 24, 2015

December 28, 2015 Posted by | Crony Capitalism, Economic Growth, Economic Inequality | , , , , , , , , | 2 Comments

“Awwwwwkward”: Meet Ted Cruz’s Tax-Dodging Sugar Daddy

Hedge fund CEO Robert Mercer is all in for the conservative Texas Republican Ted Cruz, and the billionaire will have unusually substantial influence in how his contributions get spent.

But the billionaire also has some baggage—like, the avoiding billions in taxes kind of baggage.

His alleged failure to pay those taxes led to substantial congressional scrutiny in 2014—and it’s not clear the investigation is over.

This, and some of Mercer’s side projects, could present interesting challenges for Cruz’s campaign. Especially since Cruz has been a vocal opponent of those who “give favors to Wall Street” and engage in “crony capitalism.”

On the one hand, Mercer’s support is fantastic for Cruz for all the obvious reasons (having a billionaire in your corner is nice). On the other hand, Mercer’s hedge fund—Renaissance Technologies—recently faced an unflattering congressional investigation, the results of which indicated that it used complex and unorthodox financial structures to dramatically lower its tax burden.This drew scorching bipartisan criticism from investigators on the Senate Permanent Subcommittee on Investigations.

“Renaissance profited from this tax treatment by insisting on the fiction that it didn’t really own the stocks it traded—that the banks that Renaissance dealt with, did,” said Sen. John McCain during a hearing on the issue, per Mother Jones. “But, the fact is that Renaissance did all the trading, maintained full control over the account…and reaped all of the profits.”

In his opening statement for that hearing, then-subcommittee chair Sen. Carl Levin, a Michigan Democrat, said that Mercer’s business avoided paying more than $6 billion in taxes between 2000 and 2013.

Since then, Levin has retired from the Senate and Republican Sen. Rob Portman has taken his place as subcommittee chair. When I called the subcommittee’s Capitol Hill office to see if any investigation into Renaissance was still underway, the person who answered the phone said he couldn’t comment on active investigations. I then asked if that meant the investigation was in fact active.

“I can’t say whether it’s active, I can’t say whether it’s inactive, I can’t even say whether we’ve investigated them,” he said.

Later, Portman’s spokeswoman, Caitlin Conant, emailed to say that the committee doesn’t comment on its work beyond what’s in the public record. Renaissance Technologies didn’t respond to a request for comment on whether they’re currently being investigated.

Given this probe into his company’s books, it’s no surprise Mercer has invested heavily in keeping financial industry watchdogs from gaining political power. However, you’d think this might conflict with his candidate’s populist zeal.

“[M]y criticism with Washington is they engage in crony capitalism,” Cruz told Bloomberg Politics. “They give favors to Wall Street and big business and that’s why I’ve been an outspoken opponent of crony capitalism, taking on leaders in both parties.”

But the Cruz campaign doesn’t seem to see any problems with the arrangement. When I asked Rick Tyler, the campaign’s senior communications adviser, if he was worried about potential conflicts, he said, “No way.”

Mercer has long backed conservative candidates, and he’s spending heavily on Cruz through a new breed of super PACs started by the super rich.

An anonymous Cruz source told Bloomberg on Wednesday that a franchise of pro-Cruz super PACs—formed just this week—will have raised $31 million by end of the day on Friday. There are four super PACs, called Keep the Promise, Keep the Promise I, Keep the Promise II, and Keep the Promise III.

This is not normal; presidential candidates usually give their imprimatur to one such group, which then rakes in contributions and makes independent expenditures to help the candidate. After all, there are legal limits on how much donors can give to presidential candidates, but no limits on how much they can give to these PACs.

One longtime campaign lawyer said the widespread Republican donor buyer’s remorse exists from the 2012 general elections—when a few powerful super PACs spent massive sums of money to get Mitt Romney elected, and were left empty-handed on Election Night. As a result, billionaires are starting their own PACs to fund political campaigns to have more control on how their money gets spent.

It’s worth noting that this explanation doesn’t make sense to everyone. Dan Backer, an attorney who’s worked extensively with Republican and Tea Party groups on campaign finance issues, said he thought having multiple super PACs could make life unnecessarily difficult for everyone involved.

“All you’re doing is multiplying your reporting and compliance burden for no good reason,” he said. “At first blush, it just strikes me as a little weird.”

Regardless, the operating assumption seems to be that having a cadre of super PACs will give mega-donors like Mercer more power over the dynamics of the presidential election. Saul Anuzis, a Michigan Republican operative who started a Mercer-funded super PAC in the 2014 midterms, indicated as much in an interview with Mother Jones. He told the magazine that he expected to see “more and more super-PACs starting that are donor-centric or district-centric.” In Cruz and Mercer’s case, that prediction seems remarkably prescient.

In 2010, 2012, and 2014 the billionaire spent significant money trying (unsuccessfully) to take out Oregon Democratic Representative Peter DeFazio, who has made his support of higher Wall Street taxes a signature issue. And DeFazio has used the fact that he’s a Mercer target to burnish his fiscal-progressive bona fides.

Mercer helped Lee Zeldin defeat former Securities and Exchange Commission prosecutor George Demos in a 2014 Republican House race primary. Mercer also helped Zeldin win the general election, where he defeated a Democratic incumbent who was a vociferous defender of Dodd-Frank.

But his areas of interest are broader than just elections. He singlehandedly paid for a $1 million TV ad campaign opposing the so-called Ground Zero Mosque. And his affinity for conservative causes seems to go back to his early days doing research for the Kirtland Air Force Base’s weapons lab in New Mexico.

Mercer hinted at his political evolution in a 2014 speech he gave to accept the Association for Computational Linguistics lifetime achievement award. He described rewriting a computer program so that it worked more efficiently, and then said that his bosses at the lab decided to just make the program do more complicated computations.

“I took this as an indication that one of the most important goals of government-financed research is not so much to get answers as it is to consume the computer budget, which has left me ever since with a jaundiced view of government-financed research,” he said.

Excepting Zeldin, Mercer’s chosen candidates haven’t fared particularly well. The billionaire spent $1 million to help pay for the 2012 Republican National Convention, and also gave Karl Rove’s Crossroads GPS significant funds to try to boost Republicans’ fortunes. And he spent $200,000 on Wendy Long’s Senate race. Who’s Wendy Long, you ask? Right.

There’s a kind of funny flip in the media narrative here, too. After Cruz announced that he would run, a Politico sub-hed blared that he was “months behind his competitors in recruiting mega-donors and bundlers.” If the storied $31 million materializes, then those concerns were probably meritless.

But, to paraphrase the poet, with new money comes new problems. And it remains to be seen how a cozy alliance with a guy whose hedge fund allegedly dodged $6 billion in taxes could play out for the senator.

 

By: Betsy Woodruff, The Daily Beast, April 10, 2015

April 11, 2015 Posted by | Campaign Financing, Crony Capitalism, Ted Cruz | , , , , , , , | 1 Comment

“VIP Donors And Partners”: Deep Pockets Back Organizer Of CPAC

The three-day Conservative Political Action Conference that began Thursday at National Harbor in Maryland showcases a wealth of conservative spending power from more than 200 right-leaning donors, foundations, universities, think tanks and activists who have collectively doled out more than $1 million to help underwrite the event.

The American Conservative Union, which is hosting the conference for the 40th consecutive year, offers underwriters a sliding scale of benefits at rates ranging from $3,000 for exhibitors to $50,000 for event “partners.” The ACU also lists some 100 “VIP donors” on its website, without indicating how much each gave.

Nine “partners” collectively paid $450,000 to enjoy benefits such as hospitality room access, color ads in CPAC publications, exhibit space and invitations to private meetings, dinners and receptions, according to the website.

The partners include Judicial Watch, the National Rifle Association and the Tea Party Patriots.

The event’s 21 “sponsors” — who shelled out $19,000 apiece for a total of $399,000 — include the Washington Examiner and the Lynde and Harry Bradley Foundation, which according to tax records spent and gave out $40 million in 2011.

CPAC“co-sponsors” paying $8,000 apiece include the Susan B. Anthony List, which opposes abortion; the conservative grass-roots group Let Freedom Ring; and the Liberty University School of Law.

The ACU has long derived less influence from its budget than from its widely referenced scorecards and the CPAC gathering, which this year has drawn thousands of conservative activists and dozens of prominent elected officials and organizers.

But that is starting to change: The organization’s budget has quadrupled, from about $1.2 million in 2009 to $4.2 million last year, according to its tax filings.

Because the ACU is a 501(c)(4) social- welfare group, it is not required to report the names of its donors. But the group’s board includes the top executives of deep-pocketed players such as the NRA, which, according to tax records, had a $231 million budget in 2011; The Heritage Foundation, which had $80 million in expenses that same year; and Microsoft Corp.

The ACU’s political action committee raised and spent only about $120,000 in the 2012 election cycle, Federal Election Commission records show. But the ACU launched a super PAC in 2011 that raised and spent another $10,000 or so.

And the ACU itself made a $30,549 independent campaign expenditure on behalf of Republican Rep. Chuck Fleischmann of Tennessee, according to the Sunlight Foundation, suggesting that the conservative group may be gearing up to raise its campaign trail profile.

 

By: Eliza Newlin Carney, Roll Call, March 14, 2013

March 17, 2013 Posted by | CPAC, Crony Capitalism | , , , , , , , | Leave a comment

“Lobbyists, Guns And Money”: ALEC, NRA And The “Exploitation Of Public Fear”

Florida’s now-infamous Stand Your Ground law, which lets you shoot someone you consider threatening without facing arrest, let alone prosecution, sounds crazy — and it is. And it’s tempting to dismiss this law as the work of ignorant yahoos. But similar laws have been pushed across the nation, not by ignorant yahoos but by big corporations.

Specifically, language virtually identical to Florida’s law is featured in a template supplied to legislators in other states by the American Legislative Exchange Council, a corporate-backed organization that has managed to keep a low profile even as it exerts vast influence (only recently, thanks to yeoman work by the Center for Media and Democracy, has a clear picture of ALEC’s activities emerged). And if there is any silver lining to Trayvon Martin’s killing, it is that it might finally place a spotlight on what ALEC is doing to our society — and our democracy.

What is ALEC? Despite claims that it’s nonpartisan, it’s very much a movement-conservative organization, funded by the usual suspects: the Kochs, Exxon Mobil, and so on. Unlike other such groups, however, it doesn’t just influence laws, it literally writes them, supplying fully drafted bills to state legislators. In Virginia, for example, more than 50 ALEC-written bills have been introduced, many almost word for word. And these bills often become law.

Many ALEC-drafted bills pursue standard conservative goals: union-busting, undermining environmental protection, tax breaks for corporations and the wealthy. ALEC seems, however, to have a special interest in privatization — that is, on turning the provision of public services, from schools to prisons, over to for-profit corporations. And some of the most prominent beneficiaries of privatization, such as the online education company K12 Inc. and the prison operator Corrections Corporation of America, are, not surprisingly, very much involved with the organization.

What this tells us, in turn, is that ALEC’s claim to stand for limited government and free markets is deeply misleading. To a large extent the organization seeks not limited government but privatized government, in which corporations get their profits from taxpayer dollars, dollars steered their way by friendly politicians. In short, ALEC isn’t so much about promoting free markets as it is about expanding crony capitalism.

And in case you were wondering, no, the kind of privatization ALEC promotes isn’t in the public interest; instead of success stories, what we’re getting is a series of scandals. Private charter schools, for example, appear to deliver a lot of profits but little in the way of educational achievement.

But where does the encouragement of vigilante (in)justice fit into this picture? In part it’s the same old story — the long-standing exploitation of public fears, especially those associated with racial tension, to promote a pro-corporate, pro-wealthy agenda. It’s neither an accident nor a surprise that the National Rifle Association and ALEC have been close allies all along.

And ALEC, even more than other movement-conservative organizations, is clearly playing a long game. Its legislative templates aren’t just about generating immediate benefits to the organization’s corporate sponsors; they’re about creating a political climate that will favor even more corporation-friendly legislation in the future.

Did I mention that ALEC has played a key role in promoting bills that make it hard for the poor and ethnic minorities to vote?

Yet that’s not all; you have to think about the interests of the penal-industrial complex — prison operators, bail-bond companies and more. (The American Bail Coalition has publicly described ALEC as its “life preserver.”) This complex has a financial stake in anything that sends more people into the courts and the prisons, whether it’s exaggerated fear of racial minorities or Arizona’s draconian immigration law, a law that followed an ALEC template almost verbatim.

Think about that: we seem to be turning into a country where crony capitalism doesn’t just waste taxpayer money but warps criminal justice, in which growing incarceration reflects not the need to protect law-abiding citizens but the profits corporations can reap from a larger prison population.

Now, ALEC isn’t single-handedly responsible for the corporatization of our political life; its influence is as much a symptom as a cause. But shining a light on ALEC and its supporters — a roster that includes many companies, from AT&T and Coca-Cola to UPS, that have so far managed to avoid being publicly associated with the hard-right agenda — is one good way to highlight what’s going on. And that kind of knowledge is what we need to start taking our country back.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, March 24, 2012

March 26, 2012 Posted by | Corporations, Crony Capitalism | , , , , , , , | 1 Comment

   

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