The author contends that the US economy is morphing into crony capitalism, whereby business success is fostered by relationships between business and government. He cautions that crony capitalism has decimated economic growth in other countries and worries that the United States is following the same path, with dire consequences likely.

According to this provocative book, the US economy is morphing into crony capitalism, a system in which business success is fostered by relationships between business and government. To gain a competitive edge or to limit competition, business interests lobby the government to tilt—rather than level—the playing field by granting their particular companies special favors. The end result is a system in which the few are enriched at the expense of the many. Hunter Lewis, co-founder of the investment firm Cambridge Associates, begins Crony Capitalism in America: 2008–2012 with cautionary tales of how crony capitalism has decimated economic growth in such countries as Argentina, Zimbabwe, and Russia. He is concerned that the United States is following the same path, with dire consequences in the offing.

There is a widely held belief that many of our economic woes are due to the intrusion of the government into the private sector. As Lewis correctly points out, however, these woes are often the result of private interests intruding into government policy making. When facing crises or competition, businesses implore the government for handouts or for protection from the competitive forces that have made the free-enterprise system so productive. Economists refer to this activity as rent seeking. Such behavior does not make the economy bigger; rather, it reallocates the pie by making some richer at the expense of society at large. A current example of rent seeking is the lobbying of state legislatures by automobile dealers to prevent Tesla Motors from selling cars directly to the public.1

The reason behind complex tax laws and government regulations is that complicating such rules makes it easier for politicians to trade favors for campaign contributions. By design, congressional bills take years to shape; politicians can seek campaign donations along the way in return for provisions favoring special interests. Large businesses benefit from dense and onerous regulations because they discourage new competitors, which would typically be small companies unable to afford armies of accountants, lawyers, and political advisers.

An entire chapter of Crony Capitalism in America is devoted to scrutinizing the revolving door between Goldman Sachs and the US government. The participants include Robert Rubin, who Lewis contends was responsible for the initiative that led to the repeal of the Glass–Steagall Act, and Hank Paulson, who made the transition from CEO of Goldman Sachs to secretary of the US Treasury. Lewis alleges that Paulson was responsible for saving Goldman Sachs during the 2008 financial crisis under the guise of “too big to fail” while allowing Lehman Brothers to fail. With Lehman Brothers gone and Merrill Lynch a shadow of its former self, says Lewis, Goldman Sachs now enjoys a near monopoly, as evidenced by the recovery of its salary and bonus pool to pre-crash levels by the summer of 2009. But there are other possible explanations for Lehman Brothers’ demise. Lewis fails to mention that the lack of support for saving the firm may have been due to mounting public resistance to bailing out Wall Street.

The author roundly criticizes price fixing in a host of provisions in the Patient Protection and Affordable Care Act (ACA). He believes that only a free-pricing system can allocate resources efficiently. Lewis fails to recognize, however, that the free-pricing mechanism works well only when there is information symmetry between buyers and sellers. The rub against market-driven prices in health care is that many of the transactions between sellers and buyers abound with informational asymmetry. Patients rely on their health care providers’ diagnoses in buying their providers’ services and are often informed of the cost after the services have been performed. In 2012, the CBS program 60 Minutes broadcast an exposé of a hospital chain that pressured its doctors to admit patients regardless of their medical needs.2

Lewis decries the ACA as a “Soviet-style” health care system that will lead to higher health care pricing and expenditures. But he neglects to mention that most developed countries with universal coverage spend far less on health care as a percentage of GDP than the United States, which ranks 10th on the Heritage Foundation’s Index of Economic Freedom.3 Many of the countries that rank ahead of the United States—including Canada, Australia, Denmark, and New Zealand—have some form of government-mandated and government-controlled health care. Perhaps these countries have realized that free enterprise and free pricing do not work well for health care.4

The author is a strong proponent of the charitable sector on the ground that it does a far better job of aiding the poor than the government does. He argues that contributors to social service charities should receive a tax credit instead of a tax deduction, which would produce a torrent of funds for philanthropic institutions. Yet there is little mention of the oversight mechanism needed to police the huge sums of money that these charities would receive. Not all who serve the charitable sector do so with altruistic intent. An investigation by the Tampa Bay Times and the Center for Investigative Reporting found that the great majority of funds raised by numerous charities were kept by the solicitors.5

The last chapter of the book offers a laundry list of prescriptions to limit crony capitalism. Such proposals as repealing and radically simplifying the tax code have been discussed extensively by academics and practitioners. But there has been little progress on this front because of entrenched special interests. Could Lewis have provided particular insight on how to overcome such barriers? Probably not, because although most politicians and the citizens who elect them may pay lip service to the principles of fairness and efficient government, they are all opportunists when it comes to their own economic interests.

Lewis is prone to hyperbole with some of his opinions. For instance, he states that John Goodman of Southern Methodist University, an opponent of the ACA, is the leading health care analyst in the country. An online search of Goodman’s achievements, however, does not uphold that assessment. Lewis states that standard Keynesian economic doctrine is supported by neither logic nor economic evidence. Yet a majority of recently surveyed academic economists concurred that the US unemployment rate was lower at the end of 2010 than it would have been without the American Recovery and Reinvestment Act of 2009, which is a classic example of Keynesian economics.6

Crony Capitalism in America reflects the partisan leanings of its author. Lewis limits his observations and commentary to events during the first term of the Obama administration, which may lead readers to believe that crony capitalism is practiced predominantly on one side of the political aisle. The overall thesis of his book would carry more weight if his investigation had covered the time span between, say, 2000 and 2012. Let us not forget the alleged special favors bestowed on Halliburton by the previous administration.7

—M.J.A.

Reviewer Information

Murad J. Antia, CFA, teaches financial statement analysis and investments at the University of South Florida, Tampa.

Book Review Editor Information

Martin S. Fridson, CFA, is CEO of FridsonVision LLC, New York City.

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