Corporations and Political Corruption: The Curse of Cronyism and How to End It

In “The Assault on Corporations” (TOS, Fall 2020), I showed that the economic power of a corporation is fundamentally different from the political power of government. Whereas economic power is the ability to produce and trade, political power is the legal authority to use physical force against people. Government acts legitimately when it uses force to protect people from criminals and hostile nations. But it often acts illegitimately, using force to violate people’s rights. A corporation can have vast economic power, but unlike government, it has no legal authority to force anyone to do anything. Despite this, people often conflate economic power with political power, incorrectly ascribing political power to corporations.

Although corporations lack direct political power, some critics retort, this misses the point. They use their economic power to unduly influence government. Corporations thus wield political power, the argument goes, because they gain control over those who have it. “These massive concentrations of economic power,” says former secretary of labor Robert Reich, “generate political clout that’s easily abused.”¹ Liz Kennedy from the Center for American Progress says, “America faces a crisis of corporate capture of democratic government, where the economic power of corporations has been translated into political power with disastrous effects for people’s lives.”² Or as Massachusetts Institute of Technology Professor Noam Chomsky puts it, “The corporations set the conditions within which the government operates, and control it to a large extent.”³ This control encompasses both parties. “The corporate political machines,” journalist Chris Hedges writes, “control the Republicans and Democrats.”⁴

How do they suppose this happens? Pointing to the Constitution, Senator Sheldon Whitehouse asserts that the founding fathers made a tragic mistake. “They overlooked one threat. They overlooked the corporation,” he says; “The Founding Fathers saw no specific threat to our government from corporate entities, so they built no specific defenses to protect against them.”⁵ Because of this oversight, as author Robert Monks puts it, “Corporations have effectively captured the United States: its judiciary, its political system, and its national wealth.”⁶

Reportedly, corporations have pulled this off through lobbying and campaign spending. As George Monbiot (The Guardian) says, “The forces that threaten to destroy our wellbeing are also the same everywhere: primarily the lobbying power of big business and big money.”⁷ According to Professors Benjamin Page (Northwestern) and Martin Gilens (University of California at Los Angeles), “Too much damage is being done to democracy by the flood of private money in our politics.”⁸ Senator Whitehouse agrees: “Giant corporations and their minions exert power over our democracy—flooding our elections with cash intended to buy results.”⁹

The results that corporations buy include tariffs, subsidies, deregulation, and tax cuts. Some call this bribery; some call it corruption; some call it cronyism.

This undue corporate influence, many argue, stifles the government’s ability to get important things done, thwarting the will of the public. Billionaire and Democrat presidential primary candidate Tom Steyer says, “The corporations own the government, and the government serves them and not the people of the United States.”¹⁰ Or as authors Wendell Potter and Nick Penniman write, “It is difficult to imagine how we can make meaningful progress as long as so many of our lawmakers and regulators are in the deep pockets of a few big companies.”¹¹

If the government answers to corporations, not voters, then our system is a sham. Rather than a government of the people, by the people, and for the people, we have, as New York University Professors Ralph Gomory and Richard Sylla put it, “a government of the corporations, by the corporations, and for the corporations.”¹² On this belief, many citizens have lost trust in the system. A 2010 survey of young adults revealed that the top reason they planned not to vote was “because no matter who wins, corporate interests will still have too much power and prevent real change.”¹³ According to Senator Elizabeth Warren, “People feel like the system is rigged against them, and . . . they’re right. The system is rigged.”¹⁴

The solution to this rigged system, many say, is obvious: The government, author David Korten writes, must “limit the power and freedom of powerful corporations in order to restore democracy.”¹⁵ Political activist Ralph Nader says we must “subordinate raw corporate power to the will of the people.”¹⁶ And echoing a widespread sentiment, Senator Bernie Sanders says we must “get corporate money out of politics.”¹⁷

By shackling corporations and unrigging the system, we are told, our democracy will work properly again, enacting good policies in the public interest. As Page and Gilens write, “We believe that majority rule . . . tends to produce public policies that benefit the largest number of people and promote the common good.”¹⁸

The above narrative contains snippets of truth. However, lacking relevant context, it grossly misconstrues how the politico-economic system works. As most people on both the left and the right agree, our system is dysfunctional. But are corporations to blame for this dysfunction? And is more democracy the answer?

Lobbying and Campaign Spending

Many corporations do lobby; that is, they petition the government in order to influence public policy. Besides contracting outside firms to lobby for them, some corporations have a government affairs department, employing in-house lobbyists. Corporations also lobby through trade and industry associations, such as the U.S. Chamber of Commerce, the National Association of Realtors, and the Pharmaceutical Research and Manufacturers of America (PhRMA).

Politicians and their staffers rely heavily on lobbyists to provide information, present policy research, and help draft legislation.¹⁹ Lobbyists also help politicians raise money for their campaigns. Besides contributing themselves, lobbyists hold political fund-raisers, soliciting money from their corporate clients.

Corporate lobbyists target politicians on regulatory committees that oversee their industries. These committees write and approve bills before Congress votes on them, and lobbyists influence what gets included or excluded from them. Not coincidentally, those on high-profile committees—such as the Financial Services Committee, the Energy and Commerce Committee, and the Agriculture Committee—get the most campaign contributions from the industries they oversee. They also get far more contributions than others in Congress. But those on the Ways and Means Committee—responsible for writing tax laws—get the most.²⁰

Although the Tillman Act of 1907 banned corporations from providing funding directly to political candidates, many big corporations have political action committees (PACs) in which they raise money to contribute. They also spend money independently on political ads.²¹ Corporations, however, are not alone in lobbying and political spending. From labor unions to the National Rifle Association, to the National Education Association, to the American Association of Retired Persons, myriad special interest groups also try to influence elections and public policy. Combined, corporations, PACs, and special interests devote billions of dollars annually to politics. In 2019, they spent $3.47 billion on lobbying and $5.72 billion on political campaigns.²²

It wasn’t always like this. Before the 1970s, lobbying and campaign spending were meager compared to today. Few corporations had lobbyists, and fewer had Washington offices. Some trade associations lobbied, but their efforts were sporadic; their methods, unsophisticated; their influence, small.²³ In 1971, Lewis Powell, before becoming a Supreme Court justice, wrote what was later called the Powell Memo. “As every business executive knows,” the memo reads, “few elements of American society today have as little influence in government as the American businessman [and] the corporation. If one doubts this, let him undertake the role of ‘lobbyist’ for the business point of view before Congressional committees.”²⁴

This changed rapidly. Corporations started to mobilize politically, opening Washington offices while creating more industry associations. Several top CEOs formed the Business Roundtable in 1972 for the purpose of lobbying. Meanwhile, from 1974 to 1980, membership in the Chamber of Commerce doubled.²⁵ From 1971 to 1982, firms with registered lobbyists exploded from 175 to 2,445. Corporate PACs also grew, from 89 in 1974 to more than 1,200 in 1980.²⁶ And the total number of PACs (including noncorporate ones) rose from fewer than 1,000 in 1974 to nearly 4,600 in 1985.²⁷ With them came more campaign spending. From 1974 to 1982, spending by all congressional candidates increased from $77 million to $343 million.²⁸

A 1979 poll revealed that 90 percent of corporate executives said their firm’s “concern with and involvement in federal government relations” had risen in the past three years, and for a majority, this concern was “extremely strong.”²⁹ The question is: Since the 1970s, why have lobbying and campaign spending grown so dramatically?

Observe that in the 1960s and 1970s, the entitlement state and the regulatory state also grew dramatically. President Lyndon B. Johnson’s “Great Society” created many wealth redistribution programs, from Medicare to Medicaid, to food stamps, to subsidies for higher education. It also enlarged other programs, including Social Security. Moreover, by signing the Tax Reform Act of 1969, President Richard Nixon raised taxes on business. He also expanded the power of the Federal Trade Commission while creating several new regulatory agencies, including the Occupational Safety and Health Administration, the Environmental Protection Agency, and the Consumer Product Safety Commission. Adjusted for inflation, federal entitlement spending from 1960 to 1980 grew nearly sixfold, from $112 billion to $657 billion.³⁰ And the Code of Federal Regulations grew nearly fivefold, from 22,877 to 102,195 pages.³¹

The vast growth of the regulatory-entitlement state led to the vast growth of lobbying and campaign spending.³² Why? The more government intervenes in the economy—restricting the freedom of corporations, mandating what they must and must not do, imposing onerous compliance costs—the more incentive corporations have to influence how it intervenes. A government that heavily redistributes wealth, moreover, favoring some at the expense of others, foments an interest-group society: Privileged groups will lobby to protect their loot, some victims will lobby to become a privileged group, and other victims will lobby to protect their rights. As the great French political economist Frédéric Bastiat wrote in 1850, when law is “diverted from its true purpose—that it may violate property instead of protecting it—then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder.”³³

The burst of corporate lobbying in the 1970s was in self-defense, as corporations tried to protect themselves against Johnson’s and Nixon’s interventionist onslaught. The CEOs who created the Business Roundtable believed business should play a “role in the formation of public policy” in order to reduce “unwarranted intrusion by government into business affairs.”³⁴

Although corporate lobbying efforts slowed such intrusion in the 1980s, a potentially enormous threat arose in 1993 with President Bill and First Lady Hillary Clintons’ universal health-care plan. Among other things, it would have imposed price controls, forced employers to provide health insurance, and mandated what benefits insurance plans could offer. In response, the health-care industry upped its lobbying, which helped defeat the plan. From 1992 to 1994, the number of health-care firms engaged in lobbying nearly doubled.³⁵ Campaign contributions followed suit. “As Congress prepares to debate drastic changes in the nation’s health care system,” the New York Times reported, “its members are receiving vast campaign contributions from the medical industry, an amount apparently unprecedented for a non-election year. . . . It is apparent that the early winners are members of Congress.”³⁶

Another, more recent intrusion is President Donald Trump’s “trade war,” which is harming not only businesses that import consumer goods, but also those that import components and raw materials. This has led many such businesses to hire lobbyists to help them get tariff exemptions. As Politico reports, “Trump’s trade wars have turned lobbying on tariff exemptions into a big business. . . . More than two dozen mostly small- and mid-sized companies have hired a Washington lobbyist for the first time.”³⁷

The top reason corporations lobby, according to a survey of lobbyists, is the “need to protect against changes in government policy (or other government actions) that could be harmful.”³⁸ The evidence shows that most corporations start lobbying for defensive reasons. Yet for some corporations, resisting government encroachment is not the only reason they continue lobbying.

Historically, most businessmen wanted government to stay out of their way. But in recent decades, the attitudes of some have changed. As one lobbyist describes it, “It’s gone from ‘leave us alone’ to ‘let’s work on this together.’”³⁹ Lobbyists have helped engender this shift because they have vested interests in persuading their corporate clients to sign up for more lobbying.⁴⁰ Like most services, lobbying comes in degrees, ranging from a narrow focus on one issue to a comprehensive, multipronged strategy encompassing many issues.

The most politically active corporations don’t always know everything their outside lobbyists are doing, as most executives focus on their businesses while leaving political affairs to specialists.⁴¹ As Senator Whitehouse points out, “CEOs may be wildly ignorant of their own lobbying operation . . . [leading to] one set of policies in the executive suites, but a completely different push from their lobbying muscle in Congress.”⁴²

As corporations become more politically engaged, the strategies of some—often at the behest of their lobbyists—shift from defense to offense.

Cronyism

The pharmaceutical industry presents an example of lobbying that shifted from defense to offense. Whereas the industry’s trade group, PhRMA, lobbied against the Clinton health-care plan, it lobbied for—and helped draft—the Medicare Modernization Act (MMA, 2003).⁴³ The MMA added a prescription drug subsidy (Part D), the biggest expansion of Medicare in history. As the government became a main buyer of prescription drugs, pharmaceutical sales soared. Medicare Part D now costs almost $100 billion annually.⁴⁴

Congressman Billy Tauzin, receiving substantial campaign contributions from the health-care industry, shepherded the MMA through the House.⁴⁵ After leaving Congress in 2005, he became president of PhRMA, which then lobbied heavily for the Affordable Care Act (ACA, 2010). President Barack Obama wanted measures to contain costs on Medicare Part D, but PhRMA opposed them. Obama agreed to limit these measures, and in exchange, PhRMA ran a $150 million ad campaign supporting the bill.⁴⁶ But PhRMA wasn’t the only group to lobby. More than fourteen hundred organizations also lobbied on the ACA.⁴⁷

PhRMA’s offensive lobbying strategy—pursuing special favors, corporate welfare, and rights-violating regulations—is an instance of cronyism, the practice of lobbying for policies in which government wields force to help a company or harm its competitors. Defensive lobbying, by contrast—legitimately lobbying to avoid unjust penalties—is not cronyism. But as we will see, the line between defensive lobbying and offensive lobbying is often unclear.

Because wealth redistribution and government intervention are rife, so is cronyism. The government favors some corporations with tariffs (e.g., steel), subsidies (agriculture), bailouts (banks), loan guarantees (alternative energy), and monopoly franchises (public utilities)—to name a few. A government that dispenses such favors will inevitably attract favor-seeking corporations.

Of course, corporations and politicians never admit that cronyism is their motive for supporting such policies. Instead, they often rationalize these policies by offering specious economic arguments. Consider the Troubled Asset Relief Program (TARP) “bailout” of big banks. When the financial crisis unfolded in the fall of 2008, politicians argued that banks were “too big to fail,” so government must bail them out to prevent “contagion.” Yet there is no evidence to support this view—and ample evidence to show that the government’s capricious, haphazard response worsened the crisis.⁴⁸ By bailing out Bear Stearns, then Fannie Mae and Freddie Mac, the government created the expectation that it wouldn’t let any large financial institutions fail. Inexplicably, it then let Lehman Brothers fail. Markets panicked from the government’s inconsistency, plummeting further after it enacted TARP. Despite this, no firms defaulted specifically because Lehman did; its bankruptcy caused no adverse ripple effects or cascading failures. And the company was unwound in a smooth, orderly manner, as its businesses were sold off quickly to other firms.⁴⁹

Whereas some politicians supported TARP because they feared the crisis would be worse without it, others supported it because of their ties to the financial industry. Is it a coincidence that the architect of TARP, Treasury Secretary Hank Paulson, was the former CEO of Goldman Sachs?⁵⁰ Maybe. But shortly before the bailout, Senator Charles Schumer summoned several financial executives for a Democrat fundraiser. He told them that TARP would be a hard sell in Congress, yet they could count on his party. Over the next week, those executives sent $135,000 in campaign contributions.⁵¹ According to one study, the more contributions politicians got from the financial industry, the more likely they were to vote for TARP.⁵² Another analysis showed that “politically engaged firms were not only more likely to receive TARP support, but they also received a greater amount of TARP support and received the support earlier than firms that were not politically involved.”⁵³

The TARP bailout reeked of cronyism. Perhaps the most notorious crony corporation, however, is not in banking but in agriculture: Archer-Daniels-Midland (ADM). For decades, former CEO Dwayne Andreas had close ties to politicians and contributed millions of dollars to their campaigns.⁵⁴ Close to half of ADM’s business involves producing ethanol and high-fructose corn syrup (both derived from corn). These two products wouldn’t be economically feasible without heavy government intervention—which ADM lobbied for. Although ethanol is a substitute for gasoline, in a free market, no one would use ethanol as it costs much more and is a lower-quality fuel than gasoline. But thanks to a combination of tariffs, subsidies, mandates, and tax incentives, the government has artificially created a market for one of ADM’s main products.⁵⁵

High-fructose corn syrup, a substitute for sugar, has a similar story. The price of sugar in the United States is two to three times higher than the average price in other nations because of tariffs, price supports, subsidized loans, and import restrictions, all lobbied for by the sugar industry.⁵⁶ But one company producing no sugar also supports these policies: ADM. Why? The artificially high price of sugar has artificially increased demand for high-fructose corn syrup. Many food and beverage companies that would prefer sugar instead use high-fructose corn syrup because it costs less. While lining the pockets of ADM, the government’s sugar and ethanol policies cost consumers and taxpayers billions of dollars annually.⁵⁷

Besides lobbying for tariffs or subsidies, some corporations lobby for more regulation. Yet pundits often tell us that corporations reflexively oppose regulations, fighting ruthlessly against them. “When corporations lobby government,” law Professor Joel Bakan says, “their usual goal is to avoid regulation.”⁵⁸ This is true for many corporations but not all. H&R Block lobbied for new IRS requirements on professional tax preparers.⁵⁹ Mattel and Hasbro lobbied for strict regulations on toy safety.⁶⁰ Sylvania and General Electric lobbied for higher efficiency standards on lightbulbs.⁶¹ Kellogg and the Grocery Manufacturers of America lobbied for more stringent food safety regulations.⁶² “I believe we need a more active role for governments and regulators,” Facebook CEO Mark Zuckerberg says; “From what I’ve learned, I believe we need new regulation.”⁶³

Regulations raise the cost of doing business. So why would a corporation support them? Some think regulation will give them a government stamp of approval, creating greater trust among consumers and investors. Other corporations, if they know regulation is coming anyway, would rather deal with one set of federal regulations than fifty sets of state regulations. Crony corporations, however, support regulation for a different reason: It creates barriers to entry, insulating industry incumbents from new competition. During the Reagan administration, Robert Monks and Nell Minow worked on a Presidential Task Force on Regulatory Relief. To their surprise, they “found that business representatives continually sought more rather than less regulation, particularly when it would . . . protect them from competition.”⁶⁴

Some regulations purposely stifle competition, and even those that don’t nonetheless have the same effect. The Code of Federal Regulations is now more than 185,000 pages long. Though small businesses are exempt from some regulations, other regulations impose onerous burdens on them. Fred Deluca, founder of Subway, says, “If I started Subway today, Subway would not exist.” The environment for entrepreneurs, he continues, has “gotten worse because there are more and more regulations. It’s tough for people to get into business, especially a small business.”⁶⁵ Peter Schiff, founder of Euro Pacific Capital, agrees: “My small brokerage firm now has a rather sizable compliance department. Had all the rules and regulations that exist today been in place in the mid 1990s when I started my firm, I simply would not have had the financial resources to start it up.”⁶⁶

Notably, some of the most ardent supporters of regulations recognize that they stifle competition. Our “regulatory system,” Nader observes, “undermines competition and entrenches monopoly at the public’s expense.”⁶⁷ Small businesses and community banks “are drowning in complicated regulations,” Senator Warren points out; “long, complex rules create loopholes that the big companies can take advantage of, but they leave little guys out in the cold.”⁶⁸ And as political commentator Thom Hartmann explains, “large businesses have an infrastructure to deal with regulations, [whereas] the burden of regulations on small businesses sometimes wipes them out.”⁶⁹

Although regulations generally disadvantage smaller competitors, some small businesses still profit from government favoritism.⁷⁰ The Small Business Administration and other government agencies, for example, subsidize and guarantee loans for small businesses. And in some industries, regulations protect incumbent small businesses by blocking newcomers. Liquor stores, limousine drivers, taxi companies, moving companies—these are just a few industries in which state certificate of need (CON) laws restrict the entry of new firms.⁷¹

Regulation, in short, harms some small businesses, yet favors others. This highlights an important truth about cronyism. Most critics stress that cronyism victimizes consumers and taxpayers. But they often overlook another group of victims: other corporations.

Manufacturers paying higher prices for steel are among the victims of steel tariffs. Food companies paying higher prices for sugar, and candy companies that have moved their operations offshore because of higher prices are among the victims of sugar subsidies. Sound financial institutions that would have bought the assets of failing banks at fire-sale prices are among the victims of the TARP bailout. Corporations that would enter other industries, yet are blocked from doing so, are among the victims of CON laws and monopoly franchises. Car manufacturers banned from selling directly to consumers are among the victims of state laws favoring car dealerships. Companies such as Airbnb and Uber, banned in some cities, are among the victims of these cities’ efforts to insulate hotels and taxis from competition. The most innovative, successful corporations are among the victims of antitrust; less successful corporations file about 95 percent of antitrust lawsuits, seeking to hog-tie their rivals.⁷²

When government intervenes in the economy—restricting, mandating, prohibiting, expropriating—it initiates force against people and businesses, violating their rights. This is why the regulatory-entitlement state invariably harms us all—even those it seemingly benefits.

Suppose a corporation’s lobbyists cannot repeal a harmful intervention. (This is common, as lobbying is far more effective at blocking proposed policies than at repealing existing ones.)⁷³ If, to offset this harmful intervention, the corporation lobbies to gain or keep another seemingly beneficial intervention, is that defensive or offensive? If offensive, is it justified? Or suppose the government subsidizes a corporation’s competitors. If that corporation, too, lobbies for a subsidy to negate its competitors’ unfair advantage, is that defensive or offensive? Answering these questions is complicated because many corporations are harmed by countless interventions while profiting from others. Whether, on net balance, they are unjustly gaining or unjustly losing is thus extremely difficult to decipher.

As cronyism becomes more pervasive, and as more corporations become beneficiaries and victims of it, the line between defensive lobbying and offensive lobbying becomes increasingly unclear.

Systemic Corruption

If corporate lobbyists raise money and contribute to political campaigns in return for government favors, isn’t that bribery? According to the law, no. Lobbyists and politicians know how to play the game legally. If their exchange is indirect, if a quid pro quo is not explicit, it is technically not bribery. But technicalities aside, from an outsider’s perspective, even if it’s legal, it certainly smells like bribery, and that is how pundits often describe it. However, for an exchange to be considered bribery, the person handing over the money must be the initiator. Corporate lobbyists, though, don’t often volunteer to give money; politicians “request” it.

“We imagine lobbyists stalking the halls of Congress,” NPR reports, “trying to influence lawmakers with cash. But often, it’s the other way around: Members of Congress stalk lobbyists, looking for contributions.”⁷⁴ As one former lobbyist puts it, “when a Congressman calls and you need his vote, you agree to host a fundraiser. That means finding other people to come and give money.”⁷⁵ In a voice mail left for a lobbyist, Representative Eleanor Holmes Norton said she was “surprised” that the lobbyist had not contributed to her. “I’m simply candidly calling,” she said, “to ask for a contribution.” She also reminded the lobbyist that she is a senior member of the committee and chair of the subcommittee in his “sector.”⁷⁶ NPR pointed out that what Norton did is common: “Hundreds of such calls from lawmakers likely occur every month. And that’s no doubt an understatement.”⁷⁷

Nearly everyone across the political spectrum laments that corporations unduly influence government. But the dirty secret of Washington is that politicians want corporations to lobby. Why? Because raising money from corporations that lobby is far easier than raising money from those that don’t. Moreover, politicians know that in order to get corporations to lobby, government must intervene in their affairs. Heavily regulated industries also lobby heavily—and contribute to political campaigns. As Tim LaPira of the Center for Responsive Politics puts it, “industries like banking or oil and gas spend an enormous amount of money because they have a history and legacy of being regulated.” By contrast, he points out, “The small proportion of money [hedge funds] are spending is related to the fact that they are not heavily regulated.”⁷⁸

That was in early 2007, but as the New York Times reported, “Washington has turned its attention to the fast-growing hedge fund industry.”⁷⁹ After Senator Schumer held a dinner with hedge fund managers, lobbying expenditures for the industry grew sevenfold in a year while its campaign contributions more than tripled from the 2006 to the 2008 election cycles.⁸⁰ One can only presume Schumer’s message to the hedge fund industry was similar to Senator Orrin Hatch’s earlier message to the tech industry. “If you want to get involved in business,” Hatch said, “you should get involved in politics.”⁸¹

Entangling corporations in politics means more lobbying, which means more contributions for politicians. In 1994, Vice President Al Gore proposed lighter regulation for Internet service providers. The response from Congress, according to one of Gore’s aides was, “Hell no! If we deregulate these guys, how are we going to raise any money from them?”⁸²

Besides regulation, the tax code is an inexhaustible tool for politicians to solicit campaign contributions. But according to many commentators, the tax code also exemplifies cronyism and corporate welfare. How? Targeted tax breaks.⁸³ A corporation that lobbies for tax cuts, however, is not lobbying for a handout; it’s lobbying for the “privilege” of keeping more of its own money. Yet critics argue that taxing some corporations less than others is unfair. True, though corporations that pay less taxes should not be blamed for this. Corporate taxes are unequal, and the tax code is mind-numbingly complex because politicians purposely designed it this way.

Consider “tax extenders.” These are targeted tax breaks, such as the biodiesel fuel tax credit, that expire every few years. Yet Congress renews most, so why not make them permanent?⁸⁴ That would defeat their purpose—from the politicians’ perspective. When a tax extender is about to expire, the corporations benefiting from it will lobby for renewal. This is what the politicians want, as they will raise money from those corporations in exchange for renewing the tax break— temporarily, of course.⁸⁵

The game politicians play with tax extenders is similar to a more insidious tactic they use to extract campaign contributions. Politicians will often introduce a bill that would harm an industry. Corporations will then pony up money to have the bill quashed. But the politicians, wanting this from the start, had no intention of enacting the bill. Its purpose was only to raise money from the industry. Politicians even have nicknames for these bills, including “milker bills,” “juicer bills,” and “fetcher bills.”⁸⁶ In this context, campaign contributions are protection money. “Pay us,” the politicians wink and nod, “and we won’t harm you.”

This is akin not to bribery but extortion.

When John Hofmeister, former president of Shell Oil Company, appeared before Congress, politicians grilled him about high oil prices. Representative Maxine Waters even threatened “taking over and the government running all of your companies.”⁸⁷ As Hofmeister recounts, “After the hearings, a lot of those who had been attacking Shell asked me to donate to their campaigns or help to organize a fund-raiser for them.”⁸⁸

Besides threatening harm, politicians also raise money by promising benefits. In 1999, Jim Nicholson, chairman of the Republican National Committee, sent a letter to Charles A. Heimbold Jr., CEO of Bristol-Myers Squibb. (The letter was disclosed in a campaign finance lawsuit.) “We must keep the lines of communication open,” Nicholson wrote, “if we want to continue passing legislation that will benefit your industry.”⁸⁹ He also asked for a $250,000 donation.⁹⁰

Whether dangling a carrot or brandishing a stick, when politicians who hold life-and-death power over an industry come “asking” for money, corporations have no choice but to play the political game. They must lobby, and they must contribute to political campaigns—or suffer the consequences.

Look at what happened to Microsoft. In the 1990s, it spent little on lobbying, and CEO Bill Gates bragged that Microsoft did not have a Washington office. This upset some politicians. Senator Hatch said Microsoft is “knuckle-headed and hard-nosed. . . . I have given (Microsoft) advice, and they don’t pay any attention to it.”⁹¹ According to one lobbyist, “You can’t say, ‘We’re better than that.’ At some point, you get too big, and you can’t just ignore Washington.”⁹² In March 1998, a congressional staffer presciently commented, “The [tech] industry had an attitude that government should do what it needs to do but leave us alone. . . . Their hands-off approach to Washington will come back to haunt them.”⁹³

So it did. Two months later, the Justice Department slapped Microsoft with an antitrust lawsuit. What was its crime? It offered a Web browser, Internet Explorer, for free, bundling it with the Windows operating system. After years of litigation, a settlement was reached, but the damage was already done. Though Microsoft was best positioned to create an operating system for cell phones, it lost to Google’s Android. “We were doing what was called Windows Mobile,” Gates said. “We missed being the dominant mobile operating system by a very tiny amount. We were distracted during our antitrust trial.”⁹⁴

Gates regretted that he was not politically engaged, and Microsoft quickly learned its lesson, spending boatloads of money on lobbying. Other tech companies followed suit. Yet one tech company held out longer than its peers: Apple. Until 2012, it spent relatively little on lobbying. At the time, Jeff Miller, a former senior aide on a Senate Antitrust Subcommittee, said, “I never once had a meeting with anybody representing Apple. There have been other tech companies who chose not to engage in Washington, and for the most part that strategy did not benefit them.”⁹⁵ Apple’s lobbying expenditures have since more than tripled in response to increased scrutiny from the government.⁹⁶

Unlike Apple and Microsoft, who play the political game because they must, some corporations play it because they can. Rather than seeking independence, they seek tariffs, subsidies, anticompetitive regulations, and the like. That such corporations should be condemned seems obvious. But condemning them, though justifiable, is often problematic because identifying which corporations should be condemned is fraught with difficulty, given the unclear line between defensive and offensive lobbying. Also, such condemnation is often misplaced because crony corporations are a symptom of the problem, not its cause.

Primarily, what must be condemned and changed is the system that goads corporations to lobby in self-defense while enticing them to lobby for political favors. This politico-economic system is a mixed economy, a mix of freedom and government intervention, of capitalism and the regulatory-entitlement state. One argument for a mixed economy is that, although capitalism is a great engine of wealth creation, its “excesses” must be tamed. Government intervention is vital for the “public interest” and the “common good.”

We need to rethink this view. The dysfunction and injustice of this system follows from the government’s power to intervene in the economy, dispensing political favors to some at the expense of others. Who should receive such favors? At whose expense? And why? In a mixed economy, the groups wielding the most political influence determine who wins and who loses. The result is a free-for-all of corporations, special interests, and their lobbyists vying to sway public policy. The implicit principle underpinning this system is: There are no principles.

The individual’s rights? Antiquated.

His freedom and liberty? Dispensable.

His wealth and property? Up for grabs.

No policy, however immoral or irrational, is off-limits if lobbyists can jockey enough politicians, or enough politicians can jockey each other, to support it. Every major bill is hundreds, if not thousands, of pages because politically connected groups pull strings, inserting provisions that benefit themselves—or harm others. As a result, government policy is a jumbled, unintelligible mix of privileges and penalties. In a mixed economy, competition for political favors increasingly replaces competition in the marketplace. Meanwhile, as the volume and complexity of government intervention grow, so does the burden on the economy. What is the solution to this rotten system?

Why ‘More Democracy’ Is Not the Answer

Our system has so many problems, some argue, because our democracy has been hijacked. “Regular people,” Senator Whitehouse laments, “are no longer in the driver’s seat of American democracy.”⁹⁷ Who, then, is in the driver’s seat? The “forces of corporate power,” Whitehouse continues, “have infiltrated our democracy.”⁹⁸ Korten says, “When corporations rule over our political, cultural, and economic spaces, democracy is at best an illusion.”⁹⁹ Or as Reich declares, “democracy cannot be achieved unless power is reallocated.”¹⁰⁰

In this view, unless we take power from corporations and return it to the people, no progress is possible. “We need to fix democracy,” Potter and Penniman argue, “before we can fix the other problems we all face.”¹⁰¹ This will “give public-interest legislation a much better shot of winning over the private interests.”¹⁰² Professors Page and Gilens agree: “Our problems can be more effectively addressed if we reform our political system to achieve more democracy: more equal opportunity for all citizens to shape what their government does and policies that better address the needs of all Americans.”¹⁰³

In order to fix our democracy, these intellectuals argue, we must get private money out of political campaigns. Why? Because, as Page and Gilens assert, “Money profoundly corrupts U.S. politics.”¹⁰⁴ Or as Potter and Penniman put it, “Money in politics isn’t just something bad that’s getting worse—it’s paralyzing the country.”¹⁰⁵ The problem with money, they tell us, is that politicians become more responsive to their donors than their constituents. This is why we need campaign finance reform. According to former Representative Mickey H. Edwards, “Limiting campaign support, either directly to a candidate or as an independent expenditure, would help return the focus to public, rather than private, interests.”¹⁰⁶

But campaign finance regulation hasn’t fixed anything, and further reform won’t either. Failing to keep private money out of politics, the history of campaign finance law is a history of circumvented rules. Limit contributions directly to candidates, and people will contribute to political parties. Limit that, and they will contribute to PACs. Limit that, and they will raise money for candidates and “bundle” the contributions together. Limit that, and they will buy ads urging citizens to vote for a candidate (“express advocacy”). Limit that, and they will buy ads highlighting a candidate’s record without declaring for whom to vote (“issue advocacy”). Limit that, and they will distribute campaign literature anonymously. Closing such “loopholes” is futile. If people want to funnel money into politics, they will find a way to do it.¹⁰⁷

Even if regulation could effectively limit private money in politics, this would have an ominous effect: protecting incumbent politicians. Incumbents benefit from name recognition, and they get more press coverage, enjoying a big advantage over challengers. The only hope for most challengers, therefore, is to raise enough money in order to tell voters who they are and what their message is. But limiting contributions makes this arduous task more difficult, further disadvantaging them.¹⁰⁸

This wouldn’t be a problem, some argue, if we had publicly funded elections. Although that’s debatable, such elections are troublesome for other reasons. Redistributing wealth from individuals to politicians is bad enough. But forcing people to subsidize political speech they disagree with is indefensible. Moreover, the government certainly cannot fund every potential challenger. Who, then, should be funded? And how much should they get? These questions cannot be decided fairly or rationally when the source of money is illegitimate.

This leads us to the biggest problem of campaign finance regulation: It violates the First Amendment. The Supreme Court, in cases such as Citizens United v. FEC (2010), has recognized this, though inconsistently.¹⁰⁹ Yet supporters of regulation strongly disagree. Money, they argue, is not speech. That’s true but irrelevant. The right to free speech entails the right to give, accept, or spend money for the purpose of speaking. Communicating with a mass audience costs money. Restricting money used for speech restricts speech.

As for corporate political spending, it should be treated the same as that of individuals or other organizations. The First Amendment says, “Congress shall make no law . . . abridging the freedom of speech, or of the press.” It does not say, “except for corporations.” We recognize that news and media corporations have a right to support or oppose candidates, but we ought to recognize that all corporations have this right. A newspaper editorial endorsing a candidate is, in principle, no different from a corporation sponsoring a commercial for the same purpose.

Unlike some who deny that campaign finance regulation restricts free speech, others openly admit it does. Senator Whitehouse argues that to combat corruption, “the right to speech must yield.”¹¹⁰ Never mind the corruption that leads to. Yale Professor Owen Fiss, though, argues that we must restrict some speakers when they are too effective. “The state,” he says, “may even have to silence the voices of some in order to hear the voices of others. Sometimes there is simply no other way.”¹¹¹

Even if campaign finance regulation, despite its insurmountable problems, could somehow “fix democracy,” as some claim, it would not fix the dysfunction and injustice of a mixed economy. Why? Because money is not what corrupts politics. With or without money, politics becomes corrupted when it is not guided by objective principles.

Observe that the loudest supporters of more democracy are also the loudest supporters of a bigger regulatory-entitlement state—albeit a more democratic one free from corporate influence. “We the people,” Korten says, “must strip corporations of their power.”¹¹² This would lead, we are told, to less cronyism and less corporate welfare. Meanwhile, “more democracy,” Page and Gilens explain, leads to “public policies that reflect the will of all Americans.”¹¹³ What policies? Universal health care, free college tuition, a higher minimum wage, and greater redistribution of wealth to combat “inequality.” “Any true democracy,” Chomsky says, “has to be what we today call a welfare state—actually, an extreme form of one, far beyond anything envisioned in this century.”¹¹⁴

A more democratic regulatory-entitlement state, one that allegedly would stop government from violating rights for the benefit of corporations, would still violate rights. A regulatory-entitlement state run according to the wishes of the majority is as unjust as one run according to the wishes of a politically connected minority. (The American mixed economy has elements of both.) In each case, the system is essentially the same; the only difference is the quantity and identity of the victims.

Isn’t majority rule, however, a valid basis for deciding public policy? If the majority wants a regulatory-entitlement state, doesn’t that legitimize it? After all, as Hartmann notes, the question for a democracy is “what is the will of the people?”¹¹⁵ And many believe that America’s founders intended to create a democracy. Expressing a widespread sentiment, former Representative Jim Leach says, “Our founders . . . went to great lengths to attempt to erect a system that would be democratic.”¹¹⁶

This view is wrong. “It has been observed . . . that a pure democracy, if it were practicable, would be the most perfect government. Experience has proved that no position in politics is more false than this.”¹¹⁷ The man who said this was not an autocrat but coauthor of The Federalist Papers, Alexander Hamilton. “There never was a democracy yet,” John Adams observed, “that did not commit suicide.”¹¹⁸ The founders went to great lengths to create not a democracy but a system with safeguards against it. This system is a constitutional republic. “We are now forming a republican government,” Hamilton said; “Real liberty is neither found in despotism or the extremes of democracy.”¹¹⁹

Although “democracy” and “republic” are sometimes used interchangeably, the founders did not equate them. The primary definition of democracy—of pure democracy—is unlimited majority rule.

Some political theorists argue that we have a basic choice between two alternatives: “rule by the people” or “rule by elites.” Or as Reich puts it, “It’s democracy or oligarchy.”¹²⁰ This is not the fundamental issue, and it is a false alternative. (The federal government has features of each: The House of Representatives is popularly elected, but the Supreme Court is not, nor was the Senate before the ratification of the Seventeenth Amendment in 1913.)

Who governs and how they are selected are important yet secondary questions. The primary question is the purpose for which they govern. Without a rational purpose, rule by the people can be as oppressive as rule by elites. The powers of those who govern, therefore, must be limited and specifically defined. And the institutional structure of government must be designed to combat abuses of those powers. One way is elections, a method for selecting who will govern, for checking their power, and for peacefully removing them when needed.

But elections are not the only method, nor are they enough for checking political power. Though the Constitution contains democratic elements, they are not the essential, the defining, or the most important part of the political system the founders created.¹²¹ Elections are one of many institutions—from federalism to a bicameral legislature, from the Bill of Rights to an independent judiciary, from the electoral college to checks and balances, from enumerated powers to separation of powers. The purpose of these institutions—and the defining characteristic of the constitutional republic the founders created—is not to enshrine majority rule but to protect individual rights. The Declaration of Independence states this purpose explicitly: “to secure these Rights [to life, liberty, and the pursuit of happiness] Governments are instituted among Men, deriving their just Powers from the Consent of the Governed.”

Yet, since the Progressive Era at the turn of the 20th century, a “progressive” intellectual-political movement has tried to override the Constitution.¹²² The New Deal Supreme Court, for example, nullified the principle of limited, enumerated powers (the Tenth Amendment and Article I, section 8) in cases such as Helvering v. Davis (1937), United States v. Carolene Products (1938), and Wickard v. Filburn (1942).¹²³ This opened the door to the enormous growth of the regulatory-entitlement state.

But quashing enumerated powers is not enough for the “progressive” supporters of democracy. They also decry the Senate and the Supreme Court, the electoral college and the separation of powers.¹²⁴ These “undemocratic features of our political system,” Page and Gilens lament, prevent “the adoption of new policies that large majorities of Americans want.”¹²⁵

That is precisely the point. The fatal flaw of pure democracy is the lack of institutional safeguards to prevent the majority from voting away others’ rights. James Madison understood this. “Democracies,” he pointed out, have “been found incompatible with personal security and the rights of property.”¹²⁶

If more democracy means fewer limits on political power, it won’t end the cronyism and corruption of a mixed economy. Why? Because this “solution” not only fails to fix the problem, it exacerbates the problem. The problem is not that corporations have too much power; it’s that government has too much power.

Separating Economy and State

As we have seen, when government has the power to redistribute wealth and intervene in economic affairs, this impels corporations and special interests to influence how it uses that power. And those with the deepest pockets and the most political connections will be best positioned to exploit political power for their own ends.

Some say this shows why cronyism is wrong: It favors “big guys” more than “little guys.” Authors Brink Lindsey and Steven M. Teles of the Niskanen Center ask, “How can we have a welfare and regulatory state strong enough to undergird a modern economy and render its outcomes tolerably fair while not using that power to simply transfer resources to the most powerful and best organized?”¹²⁷ This is a loaded question. Whether the regulatory-entitlement state favors the rich or poor, the powerful or nonpowerful, is not the issue. Cronyism is wrong not because it benefits the “wrong people,” but because it violates individual rights. The question is not: Who should government privilege at the expense of others? The question is: Should the government have such power?

No, it shouldn’t.

Cronyism, political extortion, and special interest lobbying inevitably follow from a government with the power to meddle in the economy. The solution, therefore, to the dysfunction and injustice of a mixed economy is an unmixed economy, an economy separated from the state. And this entails abolishing the regulatory-entitlement state. In such a system, the power of government would be constitutionally limited to protecting individual rights. In an economic context, this consists of outlawing theft and fraud, enforcing contracts, settling liability disputes—and nothing else.

This system—the system in which economy and state are fully separated—is laissez-faire capitalism. Some intellectuals, however, argue that capitalism deserves the blame for cronyism. “Crony-capitalism,” Conor Lynch (Salon) says, “is not a perversion of ‘pure capitalism,’ it is simply a natural evolution of it.”¹²⁸ Professor Luigi Zingales says, “Pure laissez-faire can breed crony capitalism.”¹²⁹ According to economists Michael Munger and Mario Villarreal-Diaz, “The road to cronyism leads directly through capitalism.”¹³⁰

The problem with this view, besides lacking evidential support, is that cronyism long predated capitalism. Further, observe that statist regimes with the most heavily controlled, least capitalist economies have the most cronyism and corruption.¹³¹ Yes, semi-capitalist systems (mixed economies) exhibit cronyism, but as this article has shown, cronyism follows from government intervention, not from capitalism.

Throughout all of history, some people have sought political favors at others’ expense. Such behavior can be curtailed only in a system in which political power is properly limited. Stripped of its authority to redistribute wealth and intervene in the economy, the government would have no power to privilege some or penalize others.

Corporations and special interests would have no incentive to lobby for favors if government has no favors to give.¹³² Corporations, too, would have no need to lobby in self-defense if government didn’t have life-and-death power over them. And lacking such power, politicians could not threaten corporations with harmful legislation in order to extort campaign contributions from them.

Individualism, Collectivism, and the Constitution

If separating economy and state requires a government constitutionally limited to protecting individual rights, and if this will solve the problems of a mixed economy, then why has the United States devolved into the regulatory-entitlement state that it has become? The U.S. Constitution was designed to protect against such a path. So what went wrong? The New Deal Supreme Court, as we have seen, nullified the principle of limited, enumerated powers—and this followed from a “progressive” intellectual-political movement, a movement committed to eroding the spirit, essence, and purpose of the Constitution.¹³³

The Constitution alone is not enough. It cannot withstand a long-term concerted effort to subvert it. A constitution devised to protect individual rights requires an individualist philosophy in the culture to preserve it.

Such a philosophy recognizes that the individual’s life belongs not to others but to himself. His life is his responsibility, and he must support it by his own thought and effort. To live a flourishing life, he must be free to pursue his happiness and to voluntarily associate with others. He must be free to pursue all this—by right. The individual’s rights are not grants from society that it can rescind. Neither arbitrary nor subjective, the principle of individual rights derives from the objective requirements of human life. Because life requires reasoned action, the individual must be free to act on his own thinking and judgment as long as he respects the freedom of others to do the same (the right to liberty). And because life requires producing material values, the individual legitimately owns the wealth he creates (the right to property). This, in brief outline, is the philosophy needed to preserve a rights-protecting constitution.¹³⁴

A contrary doctrine, however, inspired the movement to erode the Constitution. This doctrine elevates society above the individual. It considers the individual not an end in himself but a means to the ends of others. It calls for sacrificing his interests to the “public interest.” It calls for subordinating his rights to the “will of the people.” It calls for restricting his freedom for the “general welfare.” It calls for invading his privacy for the “greater good.” It calls for taking his wealth for the “common good.” We should “agree on a set of responsibilities shared by all members,” Reich says, “exacting certain sacrifices for the common good.”¹³⁵ This doctrine is collectivism.

From the Progressive Era to the New Deal, to the Great Society, to the 2010s, “progressive” presidents have couched their political agendas in collectivist terms. President Theodore Roosevelt said we need a “partial substitution of collectivism for individualism.”¹³⁶ President Franklin D. Roosevelt said that his policies “call for a willingness to sacrifice individual gains, to work together for the public welfare.”¹³⁷ “We must all learn,” President Lyndon B. Johnson said, “to submerge our individual differences to the common good.”¹³⁸ “My days,” he went on, “are spent in trying . . . to use the public’s dollars for the public good.”¹³⁹ President Barack Obama said, “the call to sacrifice for the country’s greater good remains an imperative of citizenship.”¹⁴⁰

The main purpose of government, collectivists tell us, is not to protect the individual’s rights. Instead, as Bakan says, the government’s “sole purpose” is “to protect and promote the public interest and reflect the people’s will.”¹⁴¹ Ensuring “the common welfare,” Hartmann argues, is “why we have government in the first place.”¹⁴² According to Lindsey and Teles, “In the ideal democracy, the mechanisms of government are . . . converted into policies that serve the common good.”¹⁴³

The “public interest,” the “common welfare,” the “common good,” and the like—what do these vague platitudes mean? “There is a confusing lack of consistency,” Edwards observes, “in determining where the common good lies.”¹⁴⁴ If so, then what is the standard for defining it? “The final arbiter of the public good,” political analyst Jay Cost says, “must be the public itself.”¹⁴⁵ The meaning of these catchphrases depends on the ever-changing will of the public. What constitutes the “common good” or the “public good” is elusive and nonobjective.

Although collectivist catchphrases have no clear meaning, politicians, intellectuals, and special interests do have a clear purpose in using them: rationalizing interventionist government. John Hawkins (National Review) says that breaking up big tech corporations “would reduce the power of these companies and serve the public interest.”¹⁴⁶ Harvard Professor Howard E. Gardner says, “I endorse the promulgation of regulations . . . that ‘nudge’ [read: force] people and institutions toward the common good.”¹⁴⁷ According to Korten, policies “in the public interest” include “the breakup of corporate monopolies” (any big corporation), “the equitable distribution of property ownership” (taking property from some to give to others), “a living wage for working people” (forcing employers to pay higher wages), and “a progressive tax system” (taxing some at much higher rates than others).¹⁴⁸

If doubts still exist about the purpose of collectivist catchphrases, Korten lays it bare. “Government,” he says, must “use coercive power in the public interest, including the power to confiscate property.”¹⁴⁹ That is the undisguised essence of the regulatory-entitlement state—straight from one of its most outspoken advocates.

Government policies that steal the individual’s wealth, restrict his liberty, and force him to act against his judgment are immoral. This is why the regulatory-entitlement state should be abolished. But to achieve this, we must reject collectivism, exposing it for what it is: a wholesale rationalization for violating individual rights.

The late historian Howard Zinn, an icon of the left, said “‘big government’ . . . is here to stay. The only question is: whom will it serve?” He was clear on whom he thought it should serve. After decrying a government that serves business and “the wealthy classes,” he said, “We want [a] government” that, among other things, “gives free medical care to everyone and pays for it out of a reformed tax system which is truly progressive.”¹⁵⁰ So government either serves the “1 percent” at the expense of the “99 percent” or it serves the “99 percent” at the expense of the “1 percent.” But this is a false alternative.

Leftist-collectivist-progressive supporters of democracy such as Zinn oppose cronyism because it benefits the “wrong people”—the “1 percent.” Yet their opposition to cronyism will not help to end it. In subverting constitutional limits on political power and calling for even fewer limits on such power, they’ve worsened the problem.¹⁵¹

Zinn rejects the possibility of a system without victims, a system based on a constitutionally limited, rights-protecting government—one barred from picking “winners and losers,” one that deems everyone equal under the law, one that is just. This is the only kind of government resistant to cronyism, and contrary to Zinn, it is exactly what we should be striving for. More important, we must also strive for a culture that embraces the indispensable foundation of such a government: an individualist philosophy.

About Michael Dahlen

Michael Dahlen is the author of Ending Big Government: The Essential Case for Capitalism and Freedom. He holds a Master of Science in finance and economics from Walsh College and a Bachelor of Science from Penn State University. His articles have appeared in Skeptic, Liberty, and American Thinker. He is a managed accounts administrator for SEI Investments.

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