Opportunity, Cronyism, and Conservative Reform
April 30, 2014
It is always a privilege to be back at the Heritage Foundation, the heart of America’s conservative movement. And it is to that broad, diverse movement that I have come to speak today about an issue with the potential to unify and revive our coalition.
As I see it, there are two great domestic challenges facing our country today.
Problem number one is America’s large and growing Opportunity Deficit. Up and down our society - which used to be defined by unmatched economic growth and social flourishing - a new and unnatural sclerosis is taking hold. For millions of working families of or aspiring to our middle class, the American Dream is slipping out of reach.
Problem number two is that, for the moment, the United States still lacks a political party ready to solve problem number one. I am here today because I believe conservatives are in a unique position to begin to solve both.
America’s Opportunity Deficit presents itself in three principal ways:
- First, in the growing crisis of immobility among the poor, where families and communities are trapped in poverty, sometimes for generations, and are increasingly disconnected from the networks of opportunity that more affluent Americans take for granted.
- Second, in the crisis of insecurity within our middle class, where the hallmarks of the American Dream – from family stability and work-life balance to affordable education and health care – have grown too elusive for too many.
On these first two fronts there is some good news to report.
A new generation of conservative leaders is emerging to meet these growing challenges with principled, positive reforms, including repairs to our welfare, prison, job-training, tax, energy, and education systems.
Running through each is a recognition that for many Americans today, especially for the poor and middle class, the greatest obstacles to the pursuit of happiness are actually misguided government policies. These conservative reformers understand that to restore equal opportunity to all Americans, it’s not enough to just cut big government. We also have to fix broken government – to restore and expand access to America’s exceptional free-enterprise economy and voluntary civil society.
These reforms aim, in the words of Abraham Lincoln:
“to lift artificial weights from all shoulders, to clear the paths of laudable pursuit for all, to afford all an unfettered start and a fair chance in the race of life.”
The emergence of this new Conservative Reform Agenda – while it is still a work in progress - is an exciting development for our cause. It harkens back to an earlier era when Ronald Reagan’s generation of conservatives turned a moribund G.O.P. into America’s party of ideas, and built a national majority that changed history.
But as crucial as this work is, it remains incomplete. As I mentioned earlier, there is a third part of America’s Opportunity Deficit that compounds the other two. For the same kind of dysfunctional big government that unfairly excludes the poor and middle class from earning their success on a level playing field… sometimes unfairly exempts the wealthy and well-connected from having to earn their success.
This is America’s crisis of crony capitalism, corporate welfare, and political privilege: in which government twists public policy to unfairly benefit favored special interests at the expense of everyone else.
Cronyism simultaneously corrupts our economy and our government, turning both against the American people. It forces American families who “work hard and play by the rules” to prop up, bail out, and subsidize elite special interests that don’t. It therefore represents a uniquely malignant threat to American exceptionalism.
And so, the third part of a new, Conservative Reform Agenda must restore equal opportunity to the top of our society, too: to root out cronyist privilege from the law, and from our party, to re-empower the American people, and restore fairness, dynamism, and growth to our economy.
Share your thoughts on how we can fight cronyist privilege here
Free enterprise works – morally and materially – because it aligns the interests of the individual and society. It’s a system governed by an “invisible hand” that rewards the creation of value, and by an “invisible foot” that punishes complacency, especially at the top.
In the marketplace, personal success depends on interpersonal service. So even the most fortunate and successful have to earn their bread working for everyone else.
Steve Jobs didn’t succeed by rigging the computer industry – he figured out how to make technology accessible and helpful to ordinary people. Oprah Winfrey didn’t try to bury other talk-show hosts in red tape – she spent decades perfecting her own show, informing and inspiring millions of viewers. Michael Jordan never mandated us to watch him play basketball – he just played so well that we wanted to.
On the other hand, the American people didn’t want to buy Edsels, New Coke, or Zunes - so those much-ballyhooed products failed. In America, even giant corporations like Ford, Coca-Cola, and Microsoft were powerless over an un-impressed public.
In a properly functioning free-enterprise economy – in which success can be earned, and has to be – successful CEOs stay up nights either obsessing about innovating to better serve their customers, or panicking about competitors who are.
Thus free enterprise simultaneously yields economic growth and cultivates social solidarity. The system is not perfect, but it is fair - because its power resides in the people. And so rewards flow to those who add real value to the lives of their neighbors and their nation.
Cronyism turns all of this upside-down.
It empowers and enriches the few by disenfranchising the many. Like a black hole, cronyism bends the economy toward the state, inexorably shifting wealth and opportunity from the public to policymakers.
The more power government amasses, the more privileges are bestowed on the government’s friends, the more businesses invest in influence instead of innovation, the more advantages accrue to the biggest special interests with the most to spend on politics and the most to lose from fair competition.
Once profits depend on serving congressmen instead of customers, the interests of the elite diverge from those of the nation. Innovation slows, and true inequality – inequality of opportunity - emerges. The American people are forced to work for big businesses instead of the other way around. The middle class falls and the middle-men rise.
Far from the rivals of popular mythology, the elite leaders of Big Government, Big Business, and Big Special Interests are more often than not partners, in collusion to help each other climb to the highest rungs of success, and then pull up the ladder behind them.
To be clear, the problem I’m describing is not that there is too much money in politics. It’s that there’s too much politics in the economy: three-and-a-half trillion dollars in direct federal spending, and almost $2 trillion more redirected through regulations.
Exposing even a significant fraction of that amount to political influence would distort enough enterprise to pull the economy off its moorings. And that’s precisely what has happened.
What we’re left with today is a warped economy increasingly built on connections instead of competitiveness. Record corporate profits and jaw-dropping gains among elites, but slow growth, stagnant wages and limited opportunities for everyone else. Except, of course, in the Washington, D.C. area, home to six of the ten wealthiest counties in the United States.
There is a reason opinion surveys show that America’s largest political and economic institutions have lost the public’s trust. Those institutions have ceased to be trustworthy. Americans across the ideological spectrum - from the Occupy Left to the Tea Party Right - are figuring out that America’s Opportunity Deficit is not a mystery. It’s a government program.
Or rather, it’s thousands of government programs. Special-interest privilege has become so prevalent, it’s a wonder anyone can make an honest buck anymore.
Cronyist policies come in many shapes and sizes, but the upshot is always the same: making it easier for favored special interests to succeed, and harder for their competitors to get a fair shot.
There are direct subsidies, like those that are supposedly necessary to protect family farmers.
Except every year, 75 percent of the $24 billion we spend on agriculture handouts goes to the top 10 percent of recipients. The bulk of these subsidies aren’t going to the Little House on the Prairie; they’re going to The Wolf of Wall Street.
(Which I have not seen, by the way. I heard there’s dancing.)
Cronyism also entails indirect subsidies, like the loan guarantees issued by the Export-Import Bank. Here again, more than three-quarters of ExIm’s billions of dollars in loan guarantees go to just three corporations that are perfectly capable of securing private financing anywhere in the world.
We all know about the booming proliferation of tax carve-outs and loopholes. Today, the internal revenue code is about four million words long. Depending on your brand of right-of-center politics, that works out to about five copies of the King James Bible… or six copies of Atlas Shrugged.
But the tax code is just one of many cases in which the sheer size and complexity of the law operates as a cronyist subsidy all by itself.
Complicated regulations – however imposed – always increase the costs of doing business. Those higher costs in turn advantage the largest firms because they can always afford to hire more lawyers and lobbyists, while smaller, younger competitors can’t.
For this reason, very often the most onerous regulations governing an industry are endorsed by the largest players in that sector. The largest light-bulb manufacturers supported the 2007 ban on incandescent bulbs. The largest toy manufacturers supported onerous new testing standards in 2008. The largest tobacco company supported 2009 legislation to give the FDA regulatory oversight over its product. And lest we forget, the largest pharmaceutical companies supported Obamacare. In every case, the resulting regulations helped cement the incumbents’ dominant market positions – as intended.
This process – what economists call “regulatory capture” - is also the stock-in-trade of state and local cronyism. You may have heard about local restaurants lobbying for regulations to drive off food trucks, or taxi companies trying to bar Uber and ride-sharing start-ups from city streets. But the problem is much deeper.
Today, one in three Americans works in a profession that requires special government permission to earn a living. I’m not talking about district attorneys and anesthesiologists, but hair-braiders, eye-brow threaders, massage therapists, and fortune tellers. The true purpose of occupational licensing – especially in lower-skilled trades that have always been avenues of opportunity for lower-income Americans – is to exclude as many newcomers as possible while keeping customer prices artificially high.
But a recent study by the Kaufmann Foundation found that fully 100 percent of net American job creation between 1977 and 2005 came from start-up firms. Thus regulations that favor established incumbents over younger competitors specifically hamstring the very businesses we need to create jobs.
Sometimes cronyist schemes go so badly, so quickly, that the corruption actually causes a scandal, as was the case with politically connected solar-panel manufacturer Solyndra, which went bankrupt and lost every dime of a $535 million federal loan guarantee. But more often, special-interest privilege burrows so deep into the policymaking process that the parasite starts to overwhelm its host.
Consider federal financial regulation.
Prior to 2008, the inflation of the housing bubble was a bipartisan initiative. Under presidents and Congresses of both parties, Fannie Mae, Freddie Mac, and the Federal Housing Authority collaborated with Wall Street to conceal the risks associated with subprime mortgages.
Then, when the inevitable collapse came, the $700 billion TARP program bailed out the big banks, when the market was ready to discipline them and reward their smaller, more prudent competitors. And now, the Dodd-Frank financial reform law that was supposed to end “too big to fail” has instead codified Wall Street’s implicit taxpayer guarantee – which according to one study may account for those firms’ entire profit margins.
Under this so-called reform, the biggest banks have grown bigger than ever, while community banks are disappearing, regional banks are being unfairly squeezed, and lower-income Americans are being locked out of the banking system altogether.
Or look at the federal sugar program, where an array of taxes, mandates, and subsidies conspire to jack up the prices Americans pay on sugar – by as much as $3 billion every year. The program hurts economic growth, and redistributes wealth from the American people to a handful of corporations who effectively control regulation over their industry.
Though these partnerships between big government and big business are especially offensive, big non-profits play the same game.
The myriad federal laws that advantage big labor unions can be just as pernicious as those that privilege corporations. The auto bailouts and the Davis-Bacon Act are merely two prominent examples of this pathology. Another is the Mad Men era exclusion of private-sector employees from popular comp-time benefits.
Even our education system is distorted by special-interest privilege, breeding inequality within the very institution that’s supposed to be our society’s “great equalizer.” Across the country, lower- and middle-income families are priced out of the best elementary and secondary schools, and denied affordable alternatives. Meanwhile, our higher-education policies entitle existing universities to inflate prices while denying access to non-traditional students and more affordable schools.
And of course, there is the epic cronyist disaster movie, Obamacare, which:
- privileges certain corporations by penalizing Americans who don’t buy health insurance from them;
- subsidizes the purchase of those products;
- protects those corporations from true price competition and market innovation;
- exempts special interests like labor unions, government employees, and large corporations from various mandates under the law; and,
- may even guarantee those corporations’ survival - even if they lose money - through an open-ended taxpayer bailout.
The lesson for conservatives in all this is that big government is worse than inefficient – it’s unfair.
Now the Left, they see Big Government’s consolidation and redistribution of economic opportunity as a feature, not a bug. Liberals have no problem privileging special interests, so long as they’re liberal special interests. And if and when it all blows up in their faces, they can always advocate… even bigger government.
This kind of corporatism, by which large, established players in government, industry, labor, and special interests work together to “manage” the economy, has always been part of progressive ideology. Herbert Croly, one of the intellectual founders of progressivism, put it bluntly over a century ago, when he wrote: “In economic warfare, the fighting can never be fair for long, and it is the business of the state to see that its own friends are victorious.” That’s how liberals today still think.
But for conservatives, this thinking is a trap. Because properly considered, there is no such thing as a conservative special interest. It’s progressives who slice the country into politically assigned subgroups, manipulating cooperative citizens into selfish special interests. It’s big government that divides us – picking “friends” and “enemies.” Freedom unites us.
And freedom depends on equal opportunity for all. To conservatives, there should be no such thing as “our” people. There is just the American people… all in this together…ve in a free-enterprise economy and voluntary civil society… working hard and playing by the rules… helping each other and especially those who can’t help themselves.
That ideal is part of what has always made America exceptional. After all, cronyism has been the norm throughout human history. Friends of the king have always prospered. What makes free enterprise special is that it allows everybody else to prosper, too.
And so, just as a new Conservative Reform Agenda should seek to once again allow the poor and middle class to compete on a level playing field, it must once again force the wealthy and well-connected to do so as well. The level playing field works only when it works for everyone.
And I mean everyone, including the rich. Make no mistake: conservative, anti-cronyist reform should never be confused with – or descend into - the cheap, ugly populism of class warfare. We want successful Americans to succeed. All we ask is that they earn their success on a level playing field, subject to the judgment of the market – as truly successful Americans always have.
Just as the real victim of the baseball steroids scandal was the marginal player who never got a fair chance because he didn’t cheat, the true victims of crony capitalism… are the true capitalists: honest entrepreneurs, employees, consumers, and investors who are today unfairly forced to play uphill in a rigged game.
So it seems to me, given the scope and consequences of America’s Opportunity Deficit – and of the benefits of reform - the only option for conservatives today is a clear and simple zero-tolerance policy toward cronyist privilege of any kind.
That means first and foremost tax reform, to simplify the code and rid it of special treatment for special interests. One of the best aspects of the tax reform proposed by House Ways and Means Committee Chairman Dave Camp was its simplification, cutting unfair and unnecessary special-interest carve-outs.
Last year, I introduced legislation to eliminate most credits and deductions from the individual tax code, while lowering the mortgage-interest deduction to $300,000 worth of principal. My plan also increased the child tax credit to help equalize treatment for working parents, who today face an unintended policy inequity of their own.I have also begun working with Senator Marco Rubio on a broader pro-family, pro-growth tax reform proposal to eliminate special interest privilege from the corporate code and level the playing field for small and large businesses.
We also need a broad regulatory-reform agenda, to make sure big government and big special interests are not rigging the rules for each other and against the public. Here, Senator Rand Paul’s “REINS Act” is an excellent start. The REINS Act would introduce transparency and accountability to the system by requiring congressional approval of any major new executive-branch regulations.
While REINS provides an excellent solution to new regulations, we need complementary reforms to deal with cronyist manipulation already in place.
Toward that end, Senator Rubio has proposed a Regulatory Budgeting mechanism to bring more accountability into the system. And I’m working on my own plan to create a new, annual Regulatory Authorization process. This process would require Congress to prioritize and approve the cost and content of all regulations Washington imposes on the economy every year.
On the other side of the Capitol, House Budget Committee Chairman Paul Ryan has been a longtime champion of anti-cronyist reform, and made the elimination of special-interest privilege a point of emphasis in this year’s Budget Resolution.
But beyond broad tax, regulatory, and budget reform, conservatives need to start identifying and eliminating specific policy privileges as well.
Some already have.
For instance, Congressman Mike Pompeo has introduced a bill to end special tax treatment in the energy sector: to level the playing field for green energy and fossil fuels.
Senator Rubio has proposed legislation to protect taxpayers from the implicit health-insurer bailouts in Obamacare. A Senate vote on his proposal could help clarify the law and the politics, and further the cause of full repeal.
House Banking Committee Chairman Jeb Hensarling is leading the fight in the House against the reauthorization of the cronyist Export-Import Bank this year – to level the playing field for all American exporters, not just the well-connected few. The fight against reauthorizing the Ex-Im Bank is probably the most important and winnable anti-cronyist effort conservatives can take up this year.
We also need to break up federally created cartels that protect insiders and disadvantage taxpayers and consumers.
Last fall, I proposed legislation to introduce competition and innovation in higher education accreditation – to lower prices and increase access to college.
And Congressman Tom Graves has proposed a bill to let state and local governments build their own roads and infrastructure without having Beltway bureaucrats, labor bosses, and federal eco-cronies inflate the costs and skim off the top.
We need to modernize federal labor law, to give independent and union workers equal access to comp-time and the right-to-work.
And we’re also going to have to do something about “Too Big To Fail,” which still appears to be providing an implicit subsidy from taxpayers to Wall Street’s biggest banks.
How we go about fixing the perverse incentives in our financial system is still an open question. But it’s one conservatives must answer before the next crisis comes.
Perhaps the solution is a new bankruptcy process – like the one proposed by Senators John Cornyn and Pat Toomey – that would transfer authority over failed banks from political regulators to more impartial courts. If we can’t be sure there will never be another bailout request, perhaps changes to capital-reserve requirements – an approach supported by Senators David Vitter and Sherrod Brown – could force big banks to operate more responsibly, preventing the next crisis from ever emerging.
But whatever we decide, the purpose of reform should not be to protect the rich and powerful in ways that encourage them to take foolish risks with other people’s money, but to protect the taxpayer in ways that encourage both entrepreneurial dynamism and corporate responsibility.
Taken together, these reforms would begin to eliminate cronyist privilege, create opportunity, and drive down the inflated costs of the staples of middle class aspiration and security, including housing, education, health care, and child-rearing.
Anti-cronyist reform is more than good policy. It’s an issue that can unify conservatives, at a time when we need more of them. That’s why, for the moment, the policy specifics in many ways matter less than the larger political commitment of the conservative movement to make this cause our own.
Just like the crises of lower-income immobility and middle class insecurity, the crisis of special-interest privilege is not Barack Obama’s fault. It predates his presidency. And though his policies have made it worse, past Republican presidents and Congresses share some of the blame.
The policies that contribute to America’s Opportunity Deficit have deep roots and powerful friends. Reforming them won’t be easy or pleasant. It will require closing the G.O.P.’s lucrative branch of the Beltway Favor Bank, and learning a hundred ways to say “no” to former staffers and colleagues with large accounts in that bank.
This may sound like a heavy lift, a fundamental transformation of how our party and this city function. But that’s what they used to say about earmarks. And much more to the point, this is stuff we are already supposed to believe.
Every Republican candidate in the country campaigns on free enterprise, equality of opportunity, and the rule of law. Crony capitalism is even singled out for condemnation in the party platform. And yet, Republican votes have helped pass many of the unfair, cynical policies mentioned above. Too many in Washington have convinced themselves that special-interest privilege is wrong only when the other side does it. But not surprisingly, they have not convinced the public.
Americans intuitively understand that crony capitalism is not a form of private enterprise; it’s a form of public corruption.
To the hundreds of millions of Americans who believe in a level economic playing field – most especially to the working families of the poor and middle class whose aspirations and opportunities utterly depend on it – self-dealing among political and economic elites is not compromise. It’s a monstrous betrayal. And from the party that advocates the moral and material superiority of free enterprise, it’s rank hypocrisy. Whether we realize it or not, we are the ones whose ideals cronyism corrupts, and whose arguments cronyism discredits.
The Left openly supports special-interest favoritism, while the Right claims to reject it. So the fact that both parties engage in it is a much more powerful indictment of Republicans than Democrats. As long as our economic agenda can plausibly be mocked as “low tax rates and protected profits for the One Percent,” the American people have good reason not to trust us.
To win back their trust – and we must - it’s not going to be enough to merely atone for past transgressions. We will have to “go and sin no more.”
To the conservatives who hope to lead congressional majorities in 2015, or seek the presidency in 2016, this is more than a matter of talking points and tactics. It’s about first principles: the fundamental morality of our cause, and the purpose of our coalition.
It seems to me that a principled, positive agenda to remove government-created barriers to upward mobility and middle-class opportunity - to level our economic playing field and put economic elites back to work creating jobs and growth for everyone else – represents everything conservatism should stand for.
It further seems to me that in the twenty-five years since Ronald Reagan left office, we have tried it the establishment’s way. We have tried being a party of corporate connections and special-interest deal-making. And we’ve lost five of the six presidential popular votes since.
And so it is reasonable for conservatives to put the onus on the establishment to explain why we don’t need fundamental course correction, starting with a commitment to basic fairness, equal opportunity, and a zero-tolerance policy toward special-interest privilege – consistent with our own stated principles.
To the professional consultants and pundits who habitually cast a skeptical eye on anti-establishment ideas: this is not some quixotic purity test or fund-raising gimmick. Anti-cronyist reform is at once pro-growth, principled, and popular – unclaimed political high ground.
Substantively, it’s necessary to get the economy growing again, creating jobs and opportunities for working families and communities too short on both. Morally, a wary American public has ever right to expect that conservative welfare reform ought to start with corporate welfare. And as always, good policy makes for good politics. Re-aligning our agenda with our values will realign it with middle-American aspirations. It would expose the Left’s addiction to government-driven inequality, and force progressives to finally choose between their populist rhetoric and their corporatist agenda.
For every well-heeled ally a new, anti-cronyist G.O.P. might lose on K Street, it stands to make a thousand new friends on Main Streets, all over the country. It would signal to the forgotten families of America’s middle class that someone in Washington is finally standing up for them again.
That Republican Party could not only unify and inspire the Right – from libertarian populists to compassionate conservatives - but also appeal to hardworking families in the purple and blue communities that President Obama’s cronyist economy is leaving behind.
For three years now, since my rambunctious class of legislators arrived in Washington, establishment leaders have challenged anti-establishment conservatives to accept political reality, engage the politics of addition, and produce a viable plan to make principled conservatism appealing and inclusive — to grow our movement into a majority.
Well, here it is: a commitment to economic fairness and competition at the top of our economy to help restore jobs, growth, mobility, and opportunity to the poor and middle class.
Though what I propose is a change, it’s not unfamiliar.
People sometimes forget that the British policies that lit the fuse of the American Revolution did not merely oppress the colonists. Indeed, the Tea Act of 1773 actually lowered taxes. The problem was, it only lowered taxes for one corporation, the politically connected East India Company, giving it an unfair, artificial advantage over smaller, local American competitors.
That is why the tea went into the Harbor.
In many ways, it was a fight for equal opportunity against special-interest privilege that made our nation.
A renewed conservative commitment to that same fight today can help re-make our nation… revive our movement, and rebuild a fair and prosperous American economy of, by, and for the people.