Walker: What Is Crony Capitalism?

August 5, 2015

by Greg Walker

What is crony capitalism? Why is this phrase used derogatorily of government schemes to raise capital for investment?

Most would agree that governments should serve to raise funds for capital goods constructed to satisfy public interests — roads, bridges, sewers, etc. But the list is too short for some folks. What about national defense? Is that still a public asset, an investment in the public well-being? What about post-secondary universities? Libraries?

Policy pundits accept these as public goods today, but each existed in the past strictly in the private sense.

If we can find something listed in the phone directory (or Google it), as delivered by a private enterprise, economic conservatives argue that governments should abstain from making public investments in endeavors that crowd out the private sector. The result can hurt everyone, not only the displaced private owner and investor, but the consumer buying government-monopolized output, which might be cheaper and better if the private sector delivered it.

Tax Increment Financing (TIF) proponents see investment that benefits a community — made possible by an infusion of tax dollars to make infrastructure improvements of some sort — that otherwise would never occur due to overwhelming financial impediments to private-sector investment.

TIF is not the only tool that can be manipulated to select the winners and losers (cronyism) but is a popular budget device that wields tremendous influence — at a high delivery cost and a high opportunity cost.

In fact, the most agonizing aspect of crony capitalism is the influence of powerful people over the decision-makers who may be genuinely seeking the best investment for the public good. They might advance the use of TIFs, however, with only a weak appreciation for the unintended consequences, often receiving poor economic signals of how successfully these investments actually improve quality of place. Some recent examples of TIF expenditures beg the question of whether anyone’s quality of place was improved save for the campaign contributors proposing the deals.

But cronyism has its place. I am reading a biography of J. Irwin Miller, a Columbus, Indiana, legend. The first chapter of the book, written by Charlie Rentscher, is titled, “A Long Line of Christians and Capitalists.” It describes how the Miller family, when J.I. was a small boy, invested heavily in their mechanic-chauffeur’s machine shop, an investment with little expectation of financial gain.

The shop was operated by a young Clessie Cummins. If you have never heard of the name, Cummins Inc., it is now a diesel-engine manufacturer with a market cap of over $23 billion with headquarters in my Columbus. Yet, Clessie could not turn a profit for decades with his “little engine that could.”

What makes this remarkable is the insistence by the Miller family in persevering with their young chauffeur because the family saw the choice as a long-term investment in the community. They did it so that young men graduating from local schools would have a great opportunity for work in an emerging field, with an employer who would give back to the town from which it got its start.

At a 1939 investors meeting, Mr. Cummins stated the corporate goals of Cummins: “to create a school . . . . setting down as No. 1 matter of policy the building of as nearly as perfect a machine as is humanly possible . . . second, training and development of the manpower of the community . . . and third . . . a non-paternal but very earnest interest . . . in the affairs of the employees.”

Days later, Mr. W.G. Miller handwrote a note to Clessie: “All of us (the Miller family) are greatly pleased with your reply to the policy statement . . . had it not been our desire to have a place to develop the young men around Columbus, we should not have taken the risks that we did.”

Mr. Cummins was a close family friend, and he was a bit of a salesman. Some might have believed the Millers were being duped with Cummins consistently plying for advancements to be poured into a losing business. Clessie Cummins used his personal talents at promotion to win the affections of his successful benefactors, who had the money to take a charitable approach to investing for the sake of the rest of the city. There was little talk of return on investment, nor were there any “clawback” provisions if Cummins failed to hire the numbers of projected employees he hoped.

As a general rule, capital today is not concentrated in the hands of individuals with the vision of the Miller family. So, are TIFs an attempt to recreate the success of the past, copying the foresight of those early benefactors who had sufficient resources to make such long-term commitments?

Redevelopment board members would salivate at the chance to rack up the kind of community success found in the Cummins-Miller partnership. No one can seriously argue Columbus, Indiana, would be as blessed a southern Indiana city without this history. Can TIFs accomplish the same goal today? Without mission creep? With credibility? With success?

Obviously, the Cummins investment was a private one, not a public one. The Millers were financially rewarded by the ultimate success of Cummins, and took the risks upon themselves. The Millers and Cummins, on a handshake, did what today takes a series of proposals, projections, meetings and reams of data, all grounded on the debatable “but for” argument; that is, “but for” a willingness to pool our property-tax dollars, none of what we all wish to happen — growth, opportunity, quality of place — will occur.

If our local governments won’t participate, the argument goes, won’t we just lose future bids for investment to states with excessively generous incentives? If we cannot afford the high cost of crony capitalism, are we deferring to other cities and towns what could have been our future potential? Will the next Clessie Cummins settle in our state if we refuse to play the incentives game, as long as geographies around us are willing to play? Won’t legitimate, honest, potential success in human capital chase even phony-baloney rigged systems if the incentives are grand, and genuine market funds are unavailable?

Tough questions. The goals are laudable. The intent, usually honorable. But the execution?

Greg Walker, a longtime member of the foundation, represents the 41st Senate District. A Republican, he was first elected in 2006. He wrote this for an upcoming issue of quarterly Indiana Policy Review.

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