Business-Friendly Is Not Enough (2011 Feb)

by Barry A. Liebling

Does President Obama’s intention to be more “business-friendly” represent good news or bad news? It is probably bad news because it indicates that he and his collaborators will take steps to turn up the volume of government intervention and chip away even more of what remains of free market capitalism.

In his first two years in office President Obama has succeeded in enormously increasing the size and scope of the federal government. Its visible hands are tampering with a wide array of businesses including financial institutions, energy, food, the automotive industry, education, and – most notoriously – healthcare.

Not coincidently the economy remains shaky, unemployment is unusually high, and firms are cautious about investing money because they worry that the business climate can get even worse. Many observers have criticized President Obama for his conspicuous antipathy towards business and believe his attitude is discouraging economic growth.

The President’s response has been to signal that he intends to be more “business-friendly.” He appointed William Daley as his new chief of staff – a man with experience in the Clinton administration and as a top executive with JP Morgan Chase. Furthermore, the President recruited Jeffrey Immelt, the chairman of GE to lead his new Council on Jobs and Competitiveness. It is significant that both of these executives are long-time advocates of public-private partnerships – using government power and money to support “projects that are vital to the country as a whole,” “key industries,” and “companies that can contribute to the common good.”

Let’s scrutinize the President’s “business-friendly” gesture.

There are two types of businesses – free market and crony. Free market businesses are owned and financed privately. People invest in them because they choose to do so. These firms succeed or fail in the marketplace on their own merits. Their revenues come from customers who voluntarily spend money for goods and services. A free market business has a minimal relationship with the government. It complies with laws, pays taxes, and expects the government to protect individual rights.

Crony businesses are ostensibly privately owned, but they seek and get special favors from the government. Crony businesses take advantage of special subsidies, grants, stimulus funds, and exemptions from the law. They get their privileges by the skillful use of lobbyists – convincing government officials that their companies and their industry is so important it deserves to be nurtured and coddled by the state. If crony businesses do well they make a lot of money for their stockholders who owe their success partially to political pull. If a crony company gets into trouble it can expect to be rescued by its government patrons.

Bear in mind that General Electric is among the largest of crony companies. For example it lobbies for climate legislation so it can sell its “Ecomagination” solar power and wind power products. In his January 2011 column Jeffrey Immelt explicitly said the “government should incentivize… investment in innovation” and called for “a partnership between business and government.” As an official player in the Obama administration what sorts of recommendations do you suppose Mr Immelt will provide? Which companies will he try to help?

Advocates of private-public partnerships do not want observers to notice the distinction between free market companies and crony companies. That is why they use the nebulous term “business-friendly.” Crony company enthusiasts are hoping that all businesses will be regarded as essentially the same. If free market companies are put in the same category as crony companies who benefits? The advantage goes to crony companies who feast at the government trough and then deny that they are doing anything – in principle – different from legitimate free market companies.

If you like a free market company you can invest in it if it is publicly traded. Conversely if you despise a free market company you can resolve to have nothing to do with it. By contrast, crony companies use tax dollars as their life blood. You are making payments to crony companies whether you like them or not. If you are unsympathetic to a crony company there is no easy way to extricate yourself. The government may change its policy and abandon a crony company, but that requires a shift in the political wind.

Free market companies are disadvantaged by the existence of crony companies. The state-favored companies are getting a boost, or “head start,” from the government. Investors are incentivized to buy shares in crony companies because they know that the government has a track record of bailing out its protected favorites when they get into trouble.

The attention of executives in free market companies is on the business. To a free market company the government is supposed to be the referee – impartial, neither propping-up nor persecuting any particular company. The attention of executives in crony companies is split between running the business and pleading for government favors. A substantial amount of time and energy is devoted to accumulating and maintaining prizes from the state – ultimately financed by tax payers. The business model of a crony company depends on its ability to outperform its rivals in the game of political pull.

Suppose the President really wants to help the economy and be “business-friendly” in an appropriate way. He should reject the private-public partnership model and end special privileges to any particular business. That unlikely event would benefit businesses that deserve to succeed.

*** See other entries at in “Monthly Columns.” ***

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