CRONY CAPITALISTS COST YOU $

One of the special charms of our current, corrupt status quo is the fact that the mainstream media never raise the important questions that would demand attention if the pretenses of the system were valid.  You hear a torrent of commentary about how Quantitative Easing (QE) lifts asset prices under the pretense of stimulating recovery.  The trumpets sound as Obama proclaims:  "the shadow of crisis has passed" and promises new goodies, including free community college to the poor and middle-class students.  Then comes that great Brian Williams' moment, the rhetorical flourish that inspired me as I wrote this month's commentary:  "Will we accept an economy where only a few of us do spectacularly well?"  Mr. Obama asked.  "Or will we commit ourselves to an economy that generates rising incomes and chances for everyone who makes the effort?"  That actually is a good question, though dishonestly asked.  The more appropriate way to frame it would not be to wonder whether enough money can seep through the porous edifice of a corrupt state to tranquilize the losers from the great, crony capitalist feeding frenzy.  The better question is how politicians can be stopped from creating an ever-more burdensome anti-market sector, where as historian Fernand Braudel put it, "the great predators roam."  He saw from his study of history that it was typical for the well-connected to procure the assistance of state power in promulgating regulations that improve the profitability of their operations at the expense of others.  Who are those "others" designated to bear the expense of crony capitalist subsidies and anti-market favors?
 
Look in the mirror
 
You are the one who pays for the astonishing proliferation of anti-market laws and regulations that line the pockets of "the great predators" while you are lucky to see your spending power only flatten for 15 years, rather than decline outright.  In fact, since the sham recovery from the 2008 financial crisis, the wealthiest 0.1% (with at least $20 million in net worth) have seen the value of their holdings skyrocket, while the wealth of the rest of the population has declined.  This puts the lie to Obama's preposterous  pretense of concern for the middle class.  After all, his policies have helped concentrate wealth to levels unseen since the Roaring '20s.  And that hasn't been lost on the beneficiaries of his largess with your money.
 
Recall that Obama won 8 of the nation's 10 wealthiest counties in his reelection bid, some "by margins of two-to-one or better."  This also brings perspective to Joel Kotkin's observation that political contributions of "the one percent of the one percent went overwhelmingly to Democratic candidates.  For more gaudy details, see Kotkin's recent book The New Class Conflict.  Of course, Obama would prefer that you forget that he initially sought the White House as the candidate of big banks.  As reported by CNN, referencing Federal Election Commission figures, Goldman Sachs executives and PACs associated with Goldman Sachs were the largest corporate contributors to Obama's 2008 campaign for the White House.  In a related development, the Sunlight Foundation, a nonpartisan watchdog group that tracks lobbyist spending and influence in both parties, reported that Obama has received more money from Bank of America than any other candidate dating back to 1991.

 
They got their money's worth.  Obama continued the Bush policy of bailing out the big banks, both explicitly and implicitly.  By supporting QE, he sent trillions of dollars into bank coffers.  As of January 2015, 72% of money created through QE was sitting idle as excess reserves of private banks.  They got this essentially free money, with which they are minting profits as the Federal Reserves pays them 0.25% interest (or more than $64 million a year) on the excess reserves.  Frederick Soddy, a Nobel Prize Laureate in Chemistry, was a bitter opponent of the modern banking system that gives banks the privilege of creating money.  He wrote in The Role of Money, George Routledge and Sons, London 1934: 
 
The Banker as Ruler--from that invention dates the modern era of the banker as ruler.  The whole world after that was his for the taking.  By the work of pure scientist the laws of conservation of matter and energy were established, and the new ways of life created which depended upon the contemptuous denial of primitive and puerile aspirations as perpetual motion and the ability ever really to get something for nothing.  The whole marvelous civilization that has sprung from that physical basis has been handed over, lock, stock and barrel, to those who could not give and have not given the world as much as a bun without first robbing somebody else of it...The skilled creators of wealth [in industry and agriculture] have now become hewers of wood and drawers of water to the creators of debt, who have been doing in secret what they have condemned in public as unsound and immoral finance and have always refused to allow Governments and nations to do openly and above aboard.  This without exaggeration is the most gargantuan farce that history has ever staged.
 

I do not embrace every facet of Soddy's embittered indictment of modern banking.  Still he has a point.  Quantitative Easing was evidently designed to enrich the few at the expense of many.  In the first instance, it was a financial death sentence for grandmother, slashing the annual interest paid on her savings to 0.25%.  To see this more clearly, assume that Grandmother had $400,000 in savings.  Today her annual interest income is just $1,000.  Compare this to the 4% (or $16,000) a year she could have earned in bank CDs a year before the 2008 crisis.  And it is not any better for grandfather.  In 2011, The Wall Street Journal profiled Forrest Yeager, a 91-year-old resident of Port Charlotte, Florida, with remaining savings of only $45,000, Yeager must dig deeper into his principal to supplement his $1,500 monthly income from Social Security and a small pension.  According to the Journal, Yeager reported that he found himself "betting on dying before his money runs out."  For Yeager and others like him, QE really was a death sentence.  Did Obama care about those people?
 
While money was pulled out of the pockets of millions of savers, elite bankers were handed trillions that they proceeded to use to drive up stock prices; scoop up foreclosed homes that they turned around and rented to dispossessed homeowners, not to mention the risk-free money they made by idling their excess reserves at the Fed.  Obviously, it is the big borrowers and speculators who are the big beneficiaries of the Fed's monetary policies.

 
Crony Capitalists
 
How much poorer?  Try $125,000 for yourself and each member of your family.  I did not just make up that number out of thin air (the same way bankers create money).  A couple of clever economists, John W. Dawson and John J. Seater, specialize in the economics of regulation and have tried to quantify the costs of mushrooming anti-market regulation in terms of lost efficiency and economic growth.  They wrote: “We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it – total factor productivity (TFP), physical capital, and labor.  Regulation has caused substantial reductions in the growth rates of both output and TFP…”  They refer to dozens of studies, almost all of which “conclude that regulation has deleterious effects on growth.” 
 
Using the Code of Federal Regulations (CFR),  -- the annual consolidation of all existing federal regulation – as a proxy for the success of crony capitalists in rigging the system, Dawson and Seater show that regulation density has increased annually since 1949, when the first edition of the CFR was published.  Dawson and Seater claim that had federal regulation remained at its 1949 level, U.S. GDP in 2011 would have been $54 trillion instead of $15 trillion.  In other words, their calculations show that the average American (man, woman and child) would now have about $125,000 of additional income to spend each year.  That may seem incredible.  After all, who expects to be robbed of more than he has?  But think again.  Overall, it reflects a $2,000 per capita annual decline from the economic potential that can be realized in a free market, or about a two percentage point annual decline in growth rates – a conclusion that “is in line with results” of other studies.  The predatory laws and regulations of the anti-market, crony-capitalist state have already cost you a fortune, more than a casual counterfactual accounting can detail.  Among other things, the huge overburden of corrupt regulation creates daunting  hurdles for small competitors and start-ups to overcome.

 
A major Brookings study shows that American businesses “are getting old and fat.”  Robert Litan and Ian Hathaway document one obvious consequence of the accumulated costs of metastasizing laws and declining entrepreneurship in their paper, “The Other Aging of America: The Increasing Dominance of Older Firms.”  They point to a decline in the rate of new firm formations plus an increase in business failures for younger firms.  Taken together,” the authors write: “the data present here clearly show a private sector where economic activity is sharply concentrating in older firms – a trend that is occurring in a nearly universal fashion across sectors, firm sizes, and geographies.  This begs the question of whether a shift towards older firms matters.  This implication is based on what we know from previous research, that an economy that is saturated with old firms is one that is likely to be less flexible, and potentially less productive and less innovative than an economy with a higher percentage of new and young firms. 
 
In short, if you look closely, there is ample evidence that the crony capitalists have cost you a fortune.  The estimate of $125,000 per year was current through 2011.  Now four years later, that sum should be updated to at least $133,000.  The political system has put the “great predators” and even the “middling predators” in a position to dictate regulations, subsidies and restrictions that put billions, (or even trillions), in their pockets at your expense.  Obama hates Capitalism but he loves Crony Capitalism.

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