The set-up and continuation of the current economic crisis in America has numerous sources. A particularly aggravating one is best described as crony capitalism, in which a supposedly free-market system is actually undermined by blatant political favoritism. The government picks winners and losers in the economy at the expense of the market and what benefits consumers. High-profile and massively expensive examples of this type of cronyism can be seen in the Too Big To Fail bank bailouts and the federal intervention to prevent GM from floundering. Another can be seen in Obamacare, a.k.a the Patient Protection and Affordable Care Act, in which individuals are forced to purchase health care coverage from large insurance companies and face penalties if they don’t.
This type of economic intervention can also be found in smaller, though no less maddening doses. My home state of Indiana has some of the most onerous “blue laws” in the nation. While a dozen states prohibit the sale of distilled spirits on Sundays, the Hoosier State is the only one that also bans the sale of beer and wine as well. In addition, it’s the only state to regulate the sale of alcohol based on temperature—although grocery stores can sell beer, only liquor stores can sell it refrigerated.
This NPR piece details the current struggle in Indiana between convenience stores and liquor stores. Predictably, the dispute is about money and market share, a battle too often fought through cronyism. Convenience stores and gas stations, represented by the Indiana Petroleum Marketers & Convenience Store Association, have filed a federal lawsuit for the right to sell cold beer. Liquor stores are lobbying to preserve the blue laws in order to maintain their monopoly.
Dave Bridgers, vice president of Thorntons, an Indiana chain of gas stations and convenience stores, says that the laws reduce choice for customers and eliminates competition, leading to changes in how his company will do business. Bridgers states:
Not having the ability to sell what our customers want impacts our bottom line. We will continue to invest in other states, where laws are more business friendly to our company, and where it makes the most economic sense.
Following through on his promise, Thorntons hasn’t opened a new store in Indiana since 2006. The company has instead decided to expand into Ohio and Kentucky, with many stores located near the border in or around Louisville. Many Hoosiers, and I happily include myself as one of their number, frequently cross state lines to circumvent Indiana’s blue laws.
John Livengood, president of the Indiana Association for Beverage Retailers, argues that eliminating the blue laws would be ruinous for the liquor store industry. He estimates between 25-50% of stores would be shuttered were it not for their existence. He argues that since Sunday is a popular day to go grocery shopping, allowing consumers to purchase groceries and alcohol in one stop would render the liquor stores obsolete. By lobbying the government to preserve the blue laws, he thinks he can keep these stores in business.
This is the crux and curse of crony capitalism: Rather than competing for customers by providing superior products and services, two rival industries are instead lobbying to curry government favor—one to repeal a law and the other to maintain it.
Both sides feel a very real need to divert valuable resources into politics. They are both aware of the government’s formidable power to pick winners and losers in the market. With Washington’s blessing and intervention, even shoddy business models can—perhaps briefly—be successful in the market. For examples of this in one industry alone, look at Solyndra and at least 18 other green companies that went bust despite receiving substantial financial assistance from the Fed.
As tempting as it is to blame businesses and K Street for the problems of political favoritism, the blame truly lies with the government itself. Lobbyists ask Washington for special treatment that would help their industries because they know the government has the power to grant those favors. If the government were truly restricted in its power, say—if they actually followed the Constitution, businesses would cease to lobby because they would know that it would be unprofitable to continue to do so.
Ginning up government favor with promises of both votes and money, lobbyists can be viewed as a teenage kid with a heroin problem. The kid goes to his parents—Washington in this analogy—and asks them for cash to help him out, with the promise that he’ll go to rehab and clean up next week. The kid doesn’t ask his neighbors because he knows that they have no reason to give it to him and that it would almost assuredly be a waste of time. The parents end up forking the money over. They are encouraging their kid’s behavior and will likely see him again with his hand held out wearing a fake-sorry frown.
This “Gimme! Gimme!” behavior needs to be punished if we are to see less of it, however, it is unfair to punish the special interests groups, as they are only asking for favors. Politicians are the ones actually granting them in return for campaign donations and loyal votes. Just like the kid with the smack problem, why shouldn’t lobbyists ask for special favors? The gravy train is certainly flowing, as Congress spent $16.5 billion on special pork projects in 2010 alone. For this behavior to stop, the politicians need to be punished for doling out unconstitutional favors.
Blue laws are written by state and local legislatures (famously, Jack Daniel’s is distilled in dry-as-a-bone Moore County, TN) and they operate under a different set of rules than policies dictated by Washington. However, the current struggle in Indiana is indicative of the larger problem of crony capitalism in the nation. More and more industries are fighting for market share and favorable treatment by lobbying legislatures rather than competing for customers by lowering prices, increasing quality or providing additional services.
However, when the government gives out billions of dollars of special favors each year, it’s awfully hard not to put your hand out, with a wink and a smile, and shout “Gimme!”