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Crony Capitalism XL

Tuesday January 24th, 2012   •   Posted by Emily Skarbek at 3:40pm PST   •  

© Alexandr Denisenko |

Crony capitalism is the theme of tonight’s “State of the Union” address. Warren Buffet’s longtime secretary, Debbie Bosanek will be seated next to Michelle Obama at tonight’s speech. Bosanek has recently become the White House’s new symbol for higher taxes and what the administration terms “economic fairness”. But fairness couldn’t be farther from the truth.

Last week, the Obama administration decided to reject TransCanada Corporation’s Keystone XL oil pipeline permit which would have allowed the company to build a more efficient oil pipeline from Canada to the Gulf of Mexico. Railroads instead will carry the oil. Who’s railroads, you ask? Warren Buffett’s Burlington Northern Santa Fe LLC is among the direct beneficiaries of the decision.

The San Francisco Chronicle and Bloomberg report Burlington Northern spokeswoman Krista York-Wooley saying “whatever people bring to us, we’re ready to haul,” If Keystone XL “doesn’t happen, we’re here to haul.”

The State Department did not grant the permit despite the fact that rail shipping would be more costly and cause more greenhouse gas emissions. In fact, according to the article, shipping oil using tanker cars on rail costs about $3 more a barrel than pipeline transport (using prices in North Dakota as measure) and currently there is a lack of readily available tanker cars. Higher costs of production and distribution translate into higher prices and less oil for consumers.

So Obama wins. Buffet wins. Consumers lose. That’s Crony Capitalism.

When politicians get to pick winners and losers, that’s not capitalism. Profits and losses are no longer determining which suppliers meet consumer needs in the best ways possible. Crony capitalism replaces the disinterested (and efficient) mechanism of the price system with the arbitrary (and inefficient) pet policies of those in power. Success in business comes to depend on close relationships between business people and government officials. Business people must now engage in “rent seeking” to acquire favoritism and privilege for legal permits, government grants, special tax breaks, etc.

Crony capitalism stifles growth, innovation, and prosperity. So tonight, when you are watching the State of the Union address, remember that real economic fairness does not entail granting the politically privileged preferential treatment. Real economic fairness requires letting competition, profit and loss, determine what goods are produced, how those goods come to market, in what quantities and of what qualities. Free trade is the only form of fair trade.

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January 2012