Lantos was a champion of Ex-Im, fighting off efforts by conservative Republicans to end it and aggressively pushing for its reauthorization. He was a tireless advocate of a government program that was directly benefiting his largest single stock asset.
Honest graft is so insidious because it piggybacks on legitimate service, and cloaks both in the name of public good.
Give someone the chance to feel that they are serving the public and getting rich at the same time and you have created a nightmare. Always a practical observer of human nature, Benjamin Franklin in 1787 expressed concern to the Constitutional Convention that when you give politicians the opportunity to 'do good and do well' you are asking for trouble: 'There are two passions which have a powerful influence in the affairs of men. These are
Ben Franklin knew human nature. He would not have been surprised by the deep sense of entitlement claimed by the Government Rich. Because of their 'public service' and 'sacrifice' to us, they feel entitled to the manipulation of the business market for their own benefit. Their attitude is that the rules that apply to the rest of us—insider trading laws, conflict-of-interest statutes—don't apply to them
The Permanent Political Class does not produce any goods or services. Their ability to make money rises from their ability to extract wealth by leveraging it from others. Politicians can write legislation that can destroy corporations or help them prosper. They can perform constituent services to benefit friends or punish enemies. They can intervene with bureaucrats in a way that can reap billions for a company. They have access to information that can dramatically affect the economy and financial markets, information that few other people have.
All of this crony capitalism comes at a high price for the rest of us. Under free market capitalism, the idea is that a rising tide lifts all boats. Henry Ford wanted Americans to become more prosperous because then he could sell them more cars. Crony capitalism is a zero-sum game. Crony capitalists don't care whether a rising tide lifts all boats. They just want to buy their way onto the big party boat.
All too often people assume that corporations and special interests have the real power and that politicians are mere corks tossed around in the rough surf of capitalism. The fact is that the Permanent Political Class has immense formal and informal powers that are both blunt and subtle. For example, your chance of getting audited by the Internal Revenue Service often depends on who your congressman is. One study found that the IRS actually shifts enforcement away from congressional districts represented by legislators who sit on committees with oversight of the IRS.28
A study by Stanford University's Rock Center for Corporate Governance found evidence that firms that make political contributions and hire lobbyists are less likely to face enforcement actions by the Securities and Exchange Commission. And if they are subject to an SEC enforcement action, they are likely 'to face lower penalties on average.'29
Two professors found that companies that hire lobbyists are, on average, much less likely to be detected for fraud, or they can evade detection for 117 days longer than average. These firms are also 38% less likely to be detected by regulators. The scholars note that 'the delay in detection leads to a greater distortion in resource allocation during fraudulent periods. It also allows managers to sell more of their shares.' Having friends in Washington can be extremely valuable.30
Washington's financial leveraging power can be found even in something as seemingly innocuous as the Endangered Species Act (ESA). The act can have an enormous economic effect on property owners and developers. Scholars at Auburn University found that the implementation of the ESA has been highly political. Politics determine which species gets listed as threatened or endangered and how quickly (or slowly) a certain species gets recognized and protected. The researchers found that states with House members on the budget oversight subcommittee responsible for funding the U.S. Fish and Wildlife Service and the Environmental Protection Agency had significantly fewer listings than other states. As the researchers put it, 'Congressional representatives who sit on the Interior subcommittee of the House Appropriations Committee use their position to shield their constituents, at least partially, from the adverse consequences of ESA.'31
By looking at Department of Housing and Urban Development grants designed to combat economic blight and help 'distressed' cities, researchers found that there was no evidence that these factors had any real effect on how the HUD grants were awarded. The decisions were instead based on political influence, by bureaucrats rewarding friends.32
Has anything really changed since George Washington Plunkitt's day? The methods, techniques, and tools are similar. But while Tammany Hall corruption controlled a city, today's crony capitalism is about a system that operates at the highest levels of an entire nation.
There is a lot of money sloshing around in the nation's capital. As of 2010, seven of the ten richest counties in the United States were in the Washington, D.C., area. During the Great Recession of 2008–2009, Washington boasted the best-performing real estate market in the country. What is it that drives the D.C. economy? Not private enterprise, certainly. And we can only expect these trends to continue, unless we make changes.33
The upper tiers of the U.S. economy are increasingly a network of individuals who make special deals with politicians—and the politicians themselves. The distinction between the public and private sectors has become blurred. More than half of the Fortune 1000 companies have an ex-politician or ex-bureaucrat sitting on their corporate boards.
Before plunging into the specifics and key offenders of modern crony capitalism, we need to ask: How is this possible, and why does our system of laws allow all this to happen? As you will see, the answer isn't simply a matter of overlooked corruption. The system of crony capitalism has powerful defenders.
The bank robber Willie Sutton was once asked why he robbed banks. His well-known response: 'Because that's where the money is.' Why has crony capitalism become so widespread? The response is the same. Let's take a look at how the crony insiders get their loot.
Part One
CONGRESSIONAL CRONIES
1. THE DRUG TRADE
OVER THE PAST half century there has been a massive web woven between the federal government and the health care industry. Whether due to special taxes, fines, regulations, subsidies, or mandates, there have been enormous sums of money at stake in governmental decision-making for health care companies—and the companies' investors. By 2007, federal government programs like Medicare, Medicaid, and others accounted for 46% of all health care spending in the United States.1 Knowing what changes might be in store for those programs, and having advance notice of details of other health care legislation, could translate into a lot of profits. For a sitting United States senator, trading stocks at the same time you are pushing and writing legislation could net you millions in capital gains.
Throughout 2009, Washington was consumed by the Patient Protection and Affordable Care Act, or what became commonly known (at least to its critics) as Obamacare. It began as a campaign promise, became a debate, and ended with horse-trading, political threats, and partisan muscle. The bill that was eventually passed by Congress and signed by President Obama was 2,500 pages long. Very few members actually knew everything that was in the bill or what it all meant. Some members had not even had a chance to read it. The health care industry and pharmaceutical companies employed thousands of lobbyists to shape the legislation. When the dust finally settled, clear winners and losers emerged. The details that determined who came out ahead and who didn't were almost always hammered out behind closed doors. A single event could cause the price of a stock to swing wildly.
