Tuesday, August 18, 2015

How crony capitalism works...

How Crony Capitalism Works
By Walt Rollins (Wallyworld)

We all know about the popular shoe company UGG in Australia. Their sheepskin boots are all the rage here in the states. They are expensive. A pair of their Classic Luxe sell for $250. Yet, they sell millions of pairs due to their style, comfortability and quality. They wouldn’t be able to sell these boots at such a price if they were cheaply made and fell apart after a month’s wear. That’s why consumers buy them. UGG sells a quality boot that consumers are willing to pay a high price for. No one forces anyone to buy a pair of UGGs. Consumers voluntarily spend their hard earned money in exchange for them. Thus, the market place and the consumer has decided how many boots UGG will make and how much they can sell them for. That is the free market. That's how it works or should work for everything we buy.

Okay. Now, let’s say an American company, let’s call them the UGLY Company, wants to make a knock off version of UGG and sell them for a cheaper price here in the states. They look like UGGs with the same stitching, general appearance and style. But, they sell for $100 a pair. A smart consumer might say, hey, I can buy two pairs of UGLYs for less than the price of a pair of UGGs. At first, that what happens. Tens of thousands decide to give the UGLY boot a chance. The shoes fly off the shelves. The UGLY Company hires more workers and expands their manufacturing facilities to meet the demand. The town where the UGLY factory is located sees a tremendous growth in its’ standard of living and economic well-being as a result. Restaurants, shops, stores, and the housing market are booming due to the jobs brought in by having a profitable business located in their community. It appears that the free market has spoken again, and consumers are content to replace their expensive UGGs with the cheaper UGLY, benefiting all. This is all done voluntarily. No one forced a single person to buy either a pair of UGGs or UGLYs. The invisible hand of the market place has again spoken.

A few months go by and those who bought a pair or two of UGLYs start to notice that the boot is turning a funny color. The imitation sheepskin material is easily damaged by moisture causing the stitching to come apart and the boot to seep water when it rains or snows. The sole of the shoe wears down rapidly and soon breaks away from the bottom of the boot. Word soon spreads that the UGLY boot does not live up to the hype. Consumers gradually stop buying them and return to purchasing the better, more expensive, foreign made UGG.

Well, the UGLY Company now has some choices to make. They can choose to improve the quality of their boot or face going out of business. They can also choose to lay off some workers to cut costs to maintain profit margins. Since the owner of the UGLY Company is a big contributor to local and state government leaders and their political campaigns, he decides instead to contact several of them to ask for their help in saving his business. He needs some money to meet payroll and to pay his accumulating debts. He asks his government friends for a cash bailout funded by tax money. He convinces his political cronies that growing unemployment and a shrinking tax base brought on by his failing company are not a good thing for a politician up for reelection. They agree and provide him with a $500,000 government subsidy to stay in business approved by the legislature. This happens several times. Some of the politicians start to call for a tariff on UGGs to protect the near bankrupt American UGLY Company. A tariff is passed and UGGs now cost $300 a pair. It appears the American consumer and worker has won a great victory over foreign competition. But, is it a great victory for the American worker, taxpayer and consumer?

Who really pays for this policy of bailouts and protectionism? Every person who pays taxes in that town or state, whether they wish to buy or not to buy a pair of UGLYs or UGGs for that matter, now must contribute to keep the UGLY Company going. The transaction is no longer voluntary. It is forced upon every resident by law and backed by government coercion. The free market has been destroyed in the arena of buying boots. This will cost taxpayers and consumers thousands of their hard earned money to prop up a failing company. It will result in higher consumer costs due to the tariff on UGGs. In other words, government intervention in the free market, which was instigated with the good intention of saving American jobs, has resulted in higher taxes and consumer costs for everyone. Folks no longer have a choice as to where to spend their money. It has been decided by government at the behest of their financial benefactor.

To top things off, ultimately, the UGLY Company realized it could no longer compete with the superior product produced by the UGG company, despite the tariff and the bailouts and shuts its’ doors laying off hundreds of workers and crushing the local economy. What was gained? Well, it is pretty obvious that nothing was gained in the long term. A temporary fix was achieved by throwing hundreds of thousands of dollars of taxpayer money at a failing enterprise, but nothing that would be long lasting and beneficial for all involved. Government officials played favorites with taxpayer dollars, deciding for the consumer how to spend his or her money, with the inevitable result being that market forces eventually would rule the day forcing the UGLY Company to bite the dust. The consumer spoke and the UGLY Company failed, but only after throwing millions of dollars of good money after bad.

Under a free market, customer driven economy, the Ugly Company would have been allowed to die a natural death by declaring bankruptcy or been forced to make drastic voluntary internal changes in its’ production quality and pricing to stay afloat in an attempt to remain a viable player in the shoe market. It would not have had the option to limp along by receiving bailouts or the benefits from high import tariffs imposed on a competitor through government intervention and force. The UGG Company might even have been forced to cut its’ prices if the UGLY Company offered a boot that consumers were satisfied with. That’s how the free market is supposed to operate if it is allowed to.

Another benefit of the free market in any scenario similar to the one just described, is the affect a successful, profitable business will have on the wages of its’ employees. If the UGLY Company’s market was sustainable and profits soared and the product was in high demand, so would be the need and demand for workers skilled enough to produce the product in an efficient and timely manner. When there is a big demand for any product or service the price goes up. If a demand for more workers was a result of this hypothetical example, as in the real world, the UGLY Company would have had to offer better wages and working conditions to draw potential employees and to keep those they already had from being stolen from any existing or up and coming competition. Again, the invisible hand directs the market in ways no government economic planner could ever attempt to anticipate or duplicate.

This is but one simple explanation in my attempt to illustrate what is wrong with the American economy today. Cronyism is rampant. Political entrepreneurs and their politician friends run a large portion of our economy. This is not free market capitalism. It is crony capitalism and is supported by both the left and the right from both political parties. Until and unless this is stopped, nothing will change in this country. We need to restore market entrepreneurship and let consumers and the invisible hand of the free market regulate our economy. Anything else is just repeating the same old failed policies that have plagued our country the past 100 years. When one repeats the same action over and over expecting different results, this action is often referred to as an insane act. Maybe it's time to stop the insanity.

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