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Crony capitalism can extend to tax write offs for NASCAR drivers. Getty Images
by John Kehoe
A well-known Australian businessman on a visit to Washington made an enlightening remark to me a little while back.
If you analyse the very richest Australians, beyond lucky inheritance, many have have built their enormous wealth in industries heavily influenced by government regulation.
Media, gaming and real estate development dominate the CVs of the upper echelons of the BRW Rich List.
There is little doubt many of these wealthy individuals have made very good businesses decisions over the years.
It is also true that governments grant licences and approvals to operate in such areas, often in parts of the economy that have concentrated-ownership, a limited supply of government-sanctioned competitors and monopoly-like status.
The imputation from the source, who most observers would consider to be centre-right in their political ideology, is: It can be – and likely has proven - very profitable for such business oligarchs to rent-seek and heavily lobby federal, state and local governments, even at the expense of market competition, consumers and taxpayers.
Now, a cautionary lesson from the United States is emerging on why Australians should be on alert against crony capitalism.
The greatest threat is that people lose faith in the capitalist free market model that has overwhelmingly served our society so well since the 1980s.
The US, the ostensible bastion of free markets, is experiencing a backlash against capitalism. Some 55 per cent of Americans now believe that capitalism makes the condition of the poorest people worse, according to a detailed report by the Legatum Institute.
Some 65 per cent agree that most of the big businesses in the world have "dodged taxes, damaged the environment or bought special favours from politicians".
Such striking sentiment may even explain the rise of populist politicians like Donald Trump and the anti-free trade rhetoric sweeping the US political discourse.
The figures are devastating, says the report's author, Tim Montgomerie, who wrote about the findings in Rupert Murdoch's Wall Street Journal.
"At the very least they suggest that people no longer believe that capitalism is the universal engine for social mobility that it was," Montgomerie says in his report.
"The findings are also at odds with reality. The rich are getting rich but so, too, are the poorest," he adds, drawing on World Bank data.
No doubt, there is an element of class warfare or simply resentment from some of the survey's respondents.
Yet the fact that a majority of Americans feel negatively towards capitalism and big business should ring alarm bells for supporters of the free market.
One of the problems Americans are so disenchanted about is the perceived privileges that certain well-connected special interests obtain from Washington.
There is a growing consensus among credible libertarians that powerful vested interests are skewing the game in their favour at the expense of the public.
The 11,000 lobbyists in Washington trying to wrangle special government favours and $US3 billion-plus likely to be donated to candidates for the 2016 presidential election, add to the perception that rent seekers and political financiers are wielding more influence than ever.
Desmond Lachman, scholar at the conservative American Enterprise Institute, attributes the rise of crony capitalism to the growth of government and lobbying, along with the increasing costs of election campaigns whereby political donors can buy influence and favours.
"If left unchecked, crony capitalism will continue to sap vitality out of the US economy and to undermine public support for the American model of capitalism," Lachman says.
One only has to look at the curious slew of spending and anti-competitive regulations passed by Congress to better understand the concerns.
The protection of the US automotive and sugar sectors from proper foreign competition, the US government's Export-Import Bank siphoning cheap loans to commercial giants Boeing, Caterpillar and Gina Rinehart's iron ore mine, the persistent "too big to fail" problem of taxpayer-insured Wall Street banks, excessive patent protections for pharmaceutical firms and corporate welfare like $US78 million in tax write-offs for NASCAR drivers head a long list of dubious measures.
Fortunately in Australia, we are yet to venture as far down the American path of vested interests holding as much sway.
Though there are public signs, and probably far more hidden peddling beneath the surface, to suggest that certain industries, trade unions and interest groups can hold too much sway at the cost of broader economic prosperity.
The mining sector killing a profits-based resources tax, trade unions block greater labour market flexibility and cosseted industries like taxis and the pharmacy guild are getting in the way of competition trade reforms.
Meanwhile, the behind the scene art of business oligarchs protecting their oligopolies persists.
In Sydney, a new casino licence was granted by the NSW government without a competitive public tender, while a prominent media mogul reportedly stymied the Abbott government's plans last year to reform the archaic media laws.
Fortunately, a new breed of technology innovators entering the BRW Rich List ranks, like Atlassian co-founders Mike Cannon-Brooks and Scott Farquhar, is cause for optimism.
This disruptive breed is the type of genuine free-market innovators who are adding value to society, disrupting cosseted incumbents and not merely seeking to carve the existing fixed pie in their favour.
At its very essence, capitalism is designed to interrupt incumbent business models via unrelenting competition, producing better and lower-cost goods and services for consumers.
Government favouritism and rent seeking impede economic adjustment, to the detriment of the broader community.
A measure of Australia's success to avoid replicating America's flirtation with crony capitalism will be the arrival of more Atlassians and the political class eschewing currying favour with powerful entrenched vested interests.
John Kehoe is US correspondent for The Australian Financial Review in Washington
Read more: Crony capitalists are killing faith in the markets
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