Washington, DC -- (ReleaseWire) -- 11/11/2015 --DAWN BENNETT: Jay Cost is a columnist for The Weekly Standard where he writes The Morning Jay column. He's also the author of a new book titled The Price of Cronyism. As a reminder, the textbook definition of cronyism is the appointment of friends and associates to positions of authority without a proper regard to their qualifications. Jay, welcome to Financial Myth Busting.

COST: Thank you for having me. It's a pleasure to be here.

BENNETT: Jay, Mohandas Gandhi, on being asked what he thought of Western civilization, supposedly replied, "I think it's a good idea." I think the same response could apply to free-market capitalism these days. Is there capitalism after cronyism?

COST: You know, I think that the answer to that question is no, that once you get past a certain point of cronyism, it's very hard to find any semblance of a truly free market, because at its core, cronyism is a distortion of the free market. Cronyism is the effort of politicians to use public resources to facilitate private factions. Those factions gain a resource that they would not otherwise gain in a free market setting, where you're rewarded by dint of your hard work or your smart investing skills; this comes down to who you know. And when it happens on a large enough scale, what ends up happening, and I think we already see this, is a systematic, wide-scale diversion of resources away from their most useful applications, which is what capitalism is all about. Capitalism is about moving dollars to the places where they're most needed. But with cronyism, that process gets distorted, because dollars are allocated based on a political process. And then on top of that, businesses have a very strong incentive to spend money on lobbying and campaign contributions and feathering the nests of politicians, instead of trying to compete in the market place.

BENNETT: Judging by mainstream media, I'm seeing the two most pressing problems facing capitalism are income inequality and also the failure of laissez-faire markets to regulate their excesses. Is it possible to replace this current iteration of so-called capitalism with another arrangement?

COST: Well, that's a good question. I think that the bigger story here is the inability of government to regulate the market place effectively, which was a major premise of the expansion of the federal state over about the first third of the 20th century, we saw a large scale expansion of the government, and it was premised upon this belief the regulators could be independent stewards of the public interest. But cronyism is a process by which that premise is really undermined, because regulators can be captured in cronyistic practices as well, in some cases directly. For instance, I recently witnessed the former head of the Center for Medicare and Medicaid Services going over to the insurance company's lobby; that, to me, suggests a clear conflict of interests. But it can also happen indirectly, because regulators are not completely independent of the political process. They're overseen by congress, and congress is completely intertwined with cronyism. And so you can see, there's systematic evidence that members of congress put pressure on regulators, depending upon what their political benefactors, interest group benefactors want them to do. And also, there are striking individual examples of that as well.

BENNETT: Your new book, of course, deals with cronyism. When I read it, it actually felt a bit like fascism, in that everybody knows it's bad, but not many people can pin a precise definition on the term. I gave you mine at the opening of the show; what is cronyism to you, Jay?

COST: Well, I liked your definition a lot. It was one that I considered, but I want to expand the scope of it a little bit more, becauseyou know, cronyism, when we think about it, we usually think about it, as you said, in terms of jobs. But there are so many other resources now that politicians have to give away to their friends. So I sort of just think of it as political dollars or public dollars, broadly defined. Any time those are used to benefit some private group that has a connection to the politician who's dispensing the resources, that, to me, is inevitably a version of cronyism. So that can be a lot of things. That includes jobs, that includes transportation spending. That could be a favorable tax break. That could be extra pressure on a regulator, because he's harassing some business that happens to contribute heavily to a politician, and is in the politician's congressional district. So I would take a very broad definition. I don't think that's overly broad, but just to sort of think of it as the resources that the government has that are drawn from the public at large that are misused because they are used to benefit private groups or factions, rather than the public at large.

BENNETT: Cronyism has been around for a long time, probably as long as governments have existed in this world. Is democracy necessarily any better at keeping cronyism at bay than any other forms of government? Obviously America isn't as bad as some of the third world countries, which were built on corruption, but has America become increasingly bad at containing it?

COST: I would say there were two questions there. The first is whether or not democracy's inherently better or worse. I would say it's neither, that I think that, in particular if you look at James Madison's writings in the late 1780s, he was struggling with the fact that, in the states at least, we had these exquisitely democratic governments that were, in many instances, shockingly corrupt. Because majorities of the people, do not necessarily speak for the public interest. Often times it's a majority faction that just is intent to use public resources to benefit itself, rather than the whole community. So democracy isn't inherently a solution. Now, as for the question of whether or not cronyism in the country has gotten better or worse, I think that it has gotten more professional. It's not nearly as unseemly as cronyism in other countries, and I think that there are certain rules of the road that are followed here, the protection of individual rights and a basic guarantee of due process of law, all of which in end stages of corruption tend to be thrown out the window, and people are just summarily dealt with. We don't have anything like that, so in that respect, we're better. But I will say that I think that if you judge cronyism not necessarily by what's going on in some tin pot dictatorship somewhere, but against our own history, then I think that cronyism has gotten worse for two reasons. The first is that the federal government simply has more dollars to allocate now. The federal budget is now measured in the trillions, whereas when the country was founded, it was in the millions. So there's just more dollars to misuse. But beyond that, I also think that our institutions of government were never designed to handle properly these functions that we have now; things like Medicare and social security. And again, if you go back to James Madison, he was a big believer in the fact that institutions had to be properly designed to handle the task that you want to assign them. And nobody in Philadelphia in 1787 thought that this house and this senate and this president could handle these sorts of tasks. They would never even have imagined that these were tasks that needed to be handled. Something like Medicare, for instance, requires the invention of modern medicine, which by and large hadn't happened yet. So we've retrofitted a big, huge government onto a structure of government that was meant to do much less. And I think that facilitates cronyism as well, because the institutions themselves are simply not capable of handling these tasks responsibly, and that results in cronyism.

BENNETT: Alexander Hamilton, who was one of the founding fathers of the United States and a major author of the Federalist Papers, praised corruption as being necessary to help grease the wheels of a government. I didn't realize that until I read your book. Is it okay, you think, that we all agree that a founding father erred in his judgment?

COST: Well, for starters, Hamilton's view was not unique to Hamilton. David Hume expressed that view as well, and he was a classic enlightenment scholar, and is widely read now and very insightful. I think that Hamilton had a point, that when you just think about politics as it happens, that we can talk about republicanism from an ideal perspective, but the truth is that sometimes the wheels simply need to be greased, and I think that there are instances throughout history where that has had to happen, and it was just a good thing that it did happen. Abraham Lincoln, for instance, had patronage to dispense to get the 13th amendment passed, which abolished slavery. So it was a good thing that he had that patronage to dispense. If he couldn't win politicians over with the merits, it was important that he win them over, nonetheless. I do think, though, that as a governing methodology, it's a very dangerous one, and I think that we've seen that danger. Because of course it's premised on the idea that the person dispensing the patronage will have a higher view of the public interest. And Hamilton sort of approached politics in that way; he was very suspicious of mass-based democracy and was very much of the opinion that there was an elite caste in society that should manage public affairs. And I think on that front, he was wrong there is no such thing as a natural aristocracy, for lack of a better phrase. And so I think that in most instances, politicians, over the course of history, you can point to a handful of Abraham Lincolns, but for every one of those, I could point to three dozen politicians nobody remembers anymore, because they were so corrupt we've all forgotten them. And that is the problem with cronyism. The problem with it is not its existence, per se; the problem comes in when its bad effects become so overwhelming and it really begins to undermine the nature of our governing regime itself.

BENNETT: My opinion is that the best way to combat cronyism is to pass a constitutional amendment, making it clear that the rest of the constitution means what it says, and congress can't spend money on areas over which it has no power, but I know that's not going to happen. Do you have any ideas for a more realistic solution to this?

COST: Yeah, well, you know, it's unfortunate, because they tried that with the 9th and 10th amendments, and they just kind of ignored them. And by the way, I think that one of the problems with the constitution itself—and this gets back to Philadelphia in 1787—is that there's an inherent conflict of interests in that document, which is to say that the institutions that determined the size and scope and behavior of the federal government are all, themselves, within the federal government. You know, they set up a very exquisite system of checks and balances for within the government, but there's nothing checking the government externally. The one thing that was really capable of doing that was the appointment of the senate by state legislatures, which was, of course, abolished with the Seventeenth Amendment in 1913. That, by the way, really paved the way. That was the prelude to the expansion of the federal state, was the direct election of senators. But I think that, to answer your question more directly, the proper place to look at this is campaign finance, because if we think about cronyism as a transaction, which is the way I like to think about it, as a transaction between interest groups and politicians, that we have to find a way to make those transactions more difficult to happen. So this sort of amounts to a shift in strategy, at least among conservatives. I know conservatives, for instance, have been working great guns against the export-import bank, as an example of cronyism, and there seems to be a strategy to go after the policies themselves. But I think the policies are generated as a consequence of these bad relationships that politicians have with interest groups. And so an issue like campaign finance reform, if it's dealt with in an intelligent way, which, admittedly, through most of our history, it has not been, but if it is dealt with in an intelligent way, campaign finance reform could disrupt those relationships, which I think are at the root of our problem with cronyism.

BENNETT: Do you think capitalism has a future?

COST: Oh, I absolutely think it does. I mean, it is still the most progressive force in the history of the world. Unfortunately, capitalism is distorted in the United States, through the process of cronyism. But I think cronyism is a problem that, while we can't eliminate it altogether, I think we can mitigate its worst effects, and really I think in the real world, that's what it really comes down to, is just giving capitalism a little bit more breathing room to do the great things that we know that it's capable of doing.

All data sourced through Bloomberg.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com

She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.

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