Cronyism isn’t exclusive to big business

OPINION

BY LEN CABRERA

As an economist, I am often frustrated that so many people believe that corporations somehow favor free markets or a particular political party and that only big business can be greedy. In reality, simple economics and basic self-interest explain why corporations don’t support free markets and why they cozy up to any political party in power in order to prevent competition. Cronyism is the opposite of free markets: the beneficiaries use the power of government to coerce money from the public rather than through mutually-beneficial transactions.

The simplest definition of a free market is one in which all trades are voluntary and there is free entry into and exit from the market. The free entry/exit provision results in zero economic profit*,  so businesses with political connections try to limit entry. 

For example, if a business uses a vehicle to transport people from the airport to local hotels and it is making more than other firms using similar vehicles for other purposes, those other firms will divert their vehicles to pick up passengers at the airport. The increased supply (competition) at the airport will drive down prices (and profits) until airport vehicles no longer make more than the other uses for the vehicles.

In response, the original business will lobby the local government, the airport authority, or anyone with the power to limit the competition in order to prevent the new entrants from eroding its profits. It obviously won’t say that is the purpose of these new restrictions, but it will push for them in the name of “safety” or some other nebulous claim to protect the established order (and profits).

Free entry into a market is what keeps companies honest, and it benefits consumers by keeping prices as low as possible. All firms maximize profits by minimizing their costs; free entry ensures that the only firms that can operate in a market are those with the lowest costs. 

Whenever you see companies pushing for more government regulation, it’s a safe bet that they’re just looking to prevent entry into their industry. Smaller companies pose a threat to market share and profits, not just because they might be more nimble or innovative, but simply by increasing the supply in the market, which tends to lower prices. Creating or changing regulations forces massive compliance costs that smaller companies are not equipped to deal with, since they cannot afford dedicated legal departments or full-time compliance officers. 

People have been conditioned to fear the purported excesses of free markets. Even “mainstream” publications like The New York Times lament the dangers of “unfettered capitalism.” In reality, the danger comes when a single entity controls the majority of a particular market, either as a buyer or seller. That situation rarely happens without government intervention.

The more control government has over any aspect of the economy, the more opportunity there is for an individual or a company to influence that power to enrich themselves at the expense of others. It’s not just “evil corporations” that take advantage of government power. 

Recently, the Florida House subpoenaed 13 people associated with the Florida Coalition Against Domestic Violence. The organization may have a noble mission, but it also has a sole-source public-private partnership with the State of Florida, which FCADV abused to funnel $7 million to its former CEO over 3 years.

The incident caused Governor DeSantis to issue Executive Order 20-44 to deal with “exorbitant executive leadership team compensation.” The order tasks Florida agencies to identify “all entities named in statute with which the agency must form a sole-source, public-private agreement,” as well as entities that receive 50% or more of their budget from state and federal funds. In other words, there are so many agencies feeding at the public trough that no one knows how many or who they are. That is a system ripe for corruption and cronyism (C&C).

Another potential source of C&C comes from the “affordable housing” push by the Gainesville City Commission and Alachua County Commission, which seem eager to implement every failed West Coast policy from the last two decades. As just one example of how this has “worked” in California, Los Angeles voters approved Proposition HHH in 2016,  authorizing $1.2 billion to construct 10,000 units of “affordable housing.” Three years later, only 72 units have been built, costing $690,692 each. The city controller said an “unusually high” 35 to 40 percent of the spending has been on “soft costs” including “consultants and public outreach”. The city spent $619 million on homelessness last year, twice the budget of the previous year, and homelessness grew by 16 percent.

The bottom line is that the more we ask government to do, the more opportunities there are to abuse the system. Remember that Greed Isn’t Unique to Capitalists.

* This is a difficult concept for some to grasp because they think in terms of cash flows. Economists consider all costs, including opportunity costs, which are not often directly measurable. Zero economic profit does not mean that the firms are not making money, but that their return on investment is not in excess of the average market return for the assets employed in their business.