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The Moral Crisis of Crony Capitalism

An Interview with Peter Schweizer

Peter Schweizer is the William J. Casey Fellow at the Hoover Institution, Stanford University and a best-selling author. He is a partner in the Washington firm Oval Office Writers which provides speechwriting and communications services for corporate executives and political figures.

His most recent book is Throw Them All Out: How Politicians and Their Friends Get Rich off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison (Houghton Mifflin Harcourt, 2011). It was the subject of a feature on CBS' 60 Minutes and in Newsweek. He was recently interviewed by managing editor Ray Nothstine.

R&L: Why did you want to write this book? Tell us what crony capitalism means to you and give us a sense of its greatest threat.

Peter Schweizer: I wanted to write the book because for years I've been involved in policy and the philosophical debate in D.C. concerning the growth and size of government. I've come to the conclusion that while that debate is important and needs to continue to take place, the bottom line is that whether conservatives or liberals are in charge, the government continues to expand.

We've got to change the incentive structure that exists in Washington, and that incentive structure is driven by cronyism, where the state and private sector intersect. If I were to define crony-capitalism, I really use the term cronyism because I don't think that it speaks of capitalism per se, but cronyism is essentially where economic decisions in terms of who accumulates wealth and who doesn't, is not based on merit, it's not based on economic prowess or success or meeting needs in the marketplace. It's based on political connections and relationships whereby you are able to either manipulate the state to your advantage, and to the disadvantage of your competitors.

It's an enormous threat to our country because there are very few advocates for outright socialism anymore. But what you are seeing is that many people on the left are basically looking to use the market system for progressive ends and so they come up with very seductive ideas like public/private partnerships. They talk about the need we have that will be beneficial to our economy and to our country for there to be a growth in, say, green energy. And it's a very noble sounding ideal. The problem is that when it actually comes to implementation, given human nature and given the nature of politics, the loans and grants go to friends and allies rather than to people who are most deserving based on technological breakthroughs and consumer demand.

So I think it is undermining what creates prosperity in this country, which is free market capitalism.

How does cronyism affect the poor?

Our poverty programs get distorted by crony corporations. Just look at how the food stamp program has expanded over the years. Initially, it was a safety net to provide basic provisions, and most people agree basic safety nets are needed. The problem is that when the government started throwing around billions of dollars, the snack food and soft drink industry saw dollar signs. So they lobbied and got the regulations changed so that snack food and sodas are now covered by government assistance. It's now a $10 billion industry for soft drink companies. Then it got expanded to include convenience stores, and now you've got the fast food industry lobbying lawmakers to let people use EBT cards at fast food establishments.

I'm a big believer in free choice, but I believe that if you are getting government assistance, you give up some of your free choice as it relates to how you're spending welfare dollars. And I don't think anybody could come to the conclusion that changing the food stamp program in this way actually benefits the poor. It benefits the companies who are receiving tens of billions of dollars every year through the food stamp program, and I would argue, probably to the detriment of people that have grown dependent on the system.

How can we start to break the cycle of cronyism that affects our society?

I think you must look at the government side. When it comes to cronyism, you've got the conservative or libertarian view, which is the one that I take, and then you have some on the political left, let's say a Ralph Nader type, who also has serious issues with crony-capitalism. There is agreement about the detriment. But different people identify different things when it comes to the source of the problem. People on the left often paint crony-capitalism as an instance where public and government officials are being tossed around in this large ocean with all this corporate money and they really aren't in control. It's the corporations who drive the corruption we're told. I think that's simplistic and inaccurate because ultimately it's government authorities that has the power to implement law and demand that somebody do something.

Corporations, at the end of the day, are there to maximize shareholder profit and if they can do that by restricting the market to benefit their bottom line, they're going to do it. And that's why Milton Friedman was always quick to caution there is a difference between pro-business and free-market. There needs to be more restrictions on the government side.

I believe that Washington would benefit greatly from a law that already applies in 27 states, as it relates to campaign contributions. I do believe that people have a First Amendment right to make campaign contributions and I think efforts to restrict that are dangerous and unconstitutional. But I also believe that politicians and public officials don't have a constitutional right to necessarily receive them whenever they want. The reason that 27 states have outlawed and said that when their state legislatures are in session that politicians cannot solicit or receive campaign contributions, is precisely because it becomes a source of blackmail. In effect, there's an important bill, let's say, related to the oil industry up in Washington, and politicians will literally solicit campaign donations and money from the affected parties. And the oil companies, knowing that it will cost them a lot of money, are kind of put in a position where, in effect, I would argue they're being extorted to make those contributions.

Secondly, I am a big believer in term limits. I wasn't always a supporter of term limits, but I have come to the conclusion that what we have in Washington is a cultural problem and the only way you're going to affect that is through term limits. And then, of course, on a big scale, ultimately, the only solution is to shrink the size of government because as long as you have literally tens of billions, hundreds of billions of dollars that are being tossed around that can enrich people, you're inevitably going to have people highly motivated to engage in cronyism. There's just too much money to be made with the status quo.

Politics is just a reflection of our wider culture. So how important do you think is a moral revival in our country in terms of addressing this problem?

Well, I think it's hugely important. I'm a Christian. I believe that we're all fallen creatures and that if we believe that people can become angelic when they're in government, we're naïve and crazy. The bottom line is the same incentives that drive the free market system are incentives that drive people that are in politics. So yes, part of this is a reflection on our fallen nature. Whenever you have concentrated power or concentrated wealth, it leads to temptations and leads people to do things they wouldn't ordinarily do.

But I think, second of all, there is an ethical erosion. There's a saying that a friend of mine used. He said when you first get to Washington, you think it's a cesspool; and after you stay a few years, it suddenly becomes a hot tub. And I do think there is the notion in Washington that some things that, at first, people don't think is acceptable soon becomes acceptable. And these are things that really would not be acceptable anywhere in the country.

It's a reflection of declining moral values on the broader culture, but also specifically among the leadership class, that they have convinced themselves that they are entitled to play by a different set of rules. They've convinced themselves because they are "serving the public good" that's its okay for them to serve themselves as well by engaging in these crony activities.

People assume automatically that big business or corporations equate to capitalism and a lot of times there's sort of a reflex on the right to defend those things. Why is that often wrong?

I think it's wrong almost all the time. And the examples I would give would be to look at Wall Street, which is one of the least free market bastions in America today. And there is this reflective instinct that conservatives have to defend Wall Street and I can't for the life of me figure out why. And the reason is that these are institutions that are already highly regulated, especially in the banking industry. They have investments and assets that are protected and guaranteed by the federal government when it comes to individual depositors in the banking system. I wrote a book a few years ago called Architects of Ruin. If you look back at the history of the last 20 years, you come to the realization that firms like Goldman Sachs, for example, has been bailed out five times over the last 20 years. They were bailed out first in 1993 when they bought a bunch of Mexican government bonds that went bust. The same thing happened with the East Asian Crisis and Latin American Crisis. The Treasury Department intervened and they didn't even lose any money on the deal.

The point being is that the big Wall Street firms get bailed out because they are politically connected, and that has nothing to do with the free market. And I think the same thing goes for other areas as well. Large firms, like the Wall Street firms for example, are generally in favor of Dodd Frank, which creates this highly complex, and expensive regulatory maze that most people can't even understand. If you're Goldman Sachs with your size and scope and assets and the number of attorneys that work for you, and you're competing against a firm that is one third your size, the firm that's one third your size is going to have a much more difficult time complying with those regulations. So large firms like complexity and government likes to deal with a smaller number of large firms rather than a large number of small firms. It's just easier for them. So you see collusion between big government and big business. I would say some of the biggest enemies of the free market today in America are big corporations.

Have you received any reaction from some of the members of Congress or politicians you mention in the book?

Yes, when the book was coming out, there were certain legal threats that were made by Senator John Kerry and others, to which the publisher and my response was go ahead and take action. It's all based on fact and public record and we're simply reporting what the information is that is already out there. Ultimately what's happened as a result of the book and then the 60 Minutes episode that came out based on the book, is that Washington passed this law called the Stock Act, which makes it a crime for congressional insider trading to take place. I think that sprung from fear because the reaction to the book and the 60 Minutes episode was strong.

They felt the need to respond in some way. But the reality is that not a lot has changed. Most people in Washington assume that citizens are going to stop paying attention and they can continue on with business as usual. And I think they're probably right, unless people are willing to be committed to serve as watchdogs. We need to watch the leaders in Washington and not assume they're going to do the right thing, because very often they're not going to do the right thing, regardless of party.

Crony capitalism, insider training, utilizing influence to enrich yourself in America is as old as the republic itself. I'm sure you've heard that argument. Is it really significantly different today?

I think it's significantly different for a couple of reasons. Yes, it has always been a historical problem. This is a human nature problem. It's not a Democrat or a Republican problem and it's not a modern problem, but I think it's grown for a couple of reasons. One is the amount of money that is available. Two hundred years ago, they might try to get a railroad going through their land and they might buy up the land beforehand. That sort of thing goes on, but in an area where literally the federal government is handing out tens of billions of dollars in loans and grants, the amount of money that can be made and the opportunities are just so much greater than they've ever been historically, and that relates to the size of the budget and the amount of money that's being passed around.

I think the second thing is it's also more widespread because it's harder to detect. Things in Washington now are so much more complex and difficult to follow that it's easier to camouflage what you're doing. If you've got, say, a healthcare bill that is 2,000 pages long, it's very easy to have some small clause in there that's going to have some huge benefit to a certain industry or a certain company. And if you're on the inside and know that and can trade stock based on that information, that presents a huge advantage that didn't exist before. Likewise, I use the example of former Speaker of the House Dennis Hastert. If you can insert an earmark into the highway bill, it's a lot easier to cover your tracks than it would have been 100 years ago when the size of bills and the role of government was much smaller. The amount of money and the complexity of government both make it much more opportunistic for people to engage in this kind of stuff.

Do you know of any church leaders or theologians who have addressed or talked about cronyism?

I've been a big fan of the work that Acton has done over the years and Father Sirico. But essentially none come to mind, but I certainly hope more do and I know Acton is sounding the alarm. I hope that there will be more attention paid to this because I really do believe that for all the rhetoric of the 99 percent versus the one percent, people think of that in terms of wealth differential. The bottom line is that the late Steve Jobs of Apple was part of that one percent. But he got to that one percent because he produced products and services that people wanted. That's how he became wealthy. I think the one percent that really matters is not based on wealth, it's based on connections, and these are people that had become very wealthy and very powerful through crony connections. Not based on any merit. Not based on providing a good or service that people value and voluntarily choose to use, but instead, by using the compulsive power of government. And I think that that has an enormously bad effect, not only on our culture, but also on the moral conditions in our society, because it begets more cronyism and more corruption, which is horribly damaging to our country.