Policy Reports
Carolina Cronyism: Introduction, Overview, and Reforms

July 18th, 2012

Executive summary

Every policy and decision by government has economic costs, and more so when the policy interferes with or, worse, prevents some market choices. Such negative economic effects are what make even more pernicious the practice of cronyism. Also called “crony capitalism,” a misnomer suggesting kinship rather than enmity to free-market capitalism, cronyism is reviled across the political spectrum — outside the chambers of power.

Cronyism is an umbrella term covering a host of government activities by which an industry or even a single firm or speculator is given favors and support that they could not attain in market competition. Such activities include, for example, regulations that help favored businesses, harm their competitors, or both; laws that restrict new competitors from entering a market or that raise the cost of remaining in the market; government-sponsored cartels and monopolies; wasteful and unnecessary spending programs; direct subsidies and loan guarantees to favored businesses; mandates requiring consumers to buy favored products; and high nominal corporate income tax rates with tax breaks, reimbursements, or other incentives targeted to specific businesses.

The problem isn’t just the recognizable corruption of politicians tipping the scales for their friends, however. It is when the political system itself is situated in ways that make corrupt — or at least ethically questionable — actions tempting. The failure of good-government safeguards opens the door: government straying into overregulation, usurping from consumers the right to pick market “winners” and paving the way for ever more intense lobbying; regulators becoming captured by the regulated industry to the enrichment of both at the expense of everyone else; special interests taking advantage of voter indifference to reap concentrated benefits against their diffuse costs; and media neglecting or subverting their role as watchdogs.

Political rewards, favoritism, use of politics for personal enrichment, and arbitrary doling out of tax revenues have been with North Carolina since it began under the rule of eight political cronies of King Charles II responsible for helping restore the monarchy to England. This report offers a brief rundown of recent, and sometimes notorious, examples of cronyism in North Carolina: former N.C. House Speaker Jim Black’s many machinations, former Gov. Mike Easley’s land deals and associations, the Currituck Ferry, the Randy Parton Theatre, a promise of state money to a cooking school, the Global TransPark, and multiple slush funds and incentives packages.

Overall, the state distinctly lacks transparency in government. Being able to conduct public business out of sight of the public invites corruption. North Carolina received an F grade overall on public access to information by the State Integrity Investigation, a project of the Center for Public Integrity, Global Integrity, and Public Radio International. NC Transparency, a project of the John Locke Foundation, gave every state agency but one a grade of D or F, and that one agency — the Department of Public Instruction — received a C.

Overregulation, a major factor driving cronyism, has been a growing problem in North Carolina. Over the past decade business leaders appeared to grow increasingly alarmed at North Carolina’s regulatory burden, ranking it second only to taxes in harming the business climate. In comparison with other states’ regulatory climates, North Carolina’s fared poorly, lacking mandates for cost/benefit analysis, periodic review, and small-business flexibility. By 2005, four out of five N.C. businessmen thought their state’s regulations weren’t justifiable based on costs and benefits.

The General Assembly has passed major regulatory reforms twice in the past two years, and Senate President Pro Tempore Phil Berger has promised more regulatory reforms in the coming years.

This report offers several reforms for consideration: 1) make state spending fully transparent; 2) make the processes of state governing open and transparent; 3) expand the Regulatory Reform Act of 2011’s fix of the administrative appeals process to apply to all agencies, not just environmental agencies; 4) strengthen the Rules Review Commission; 5) require agencies to conduct cost/benefit analysis of all proposed regulations and require rejection of rules for which the costs exceed the benefits; 6) require a periodic review of existing state regulations, using cost/benefit analysis, and rewrite or discard those for which the costs exceed the benefits; 7) implement small-business flexibility analysis for prospective rules to prevent regulations from running roughshod over small employers; and 8)eliminate the corporate income tax.

With this paper, the John Locke Foundation launches a series of brief and targeted research papers on different aspects of cronyism in North Carolina. This introductory paper defines the problem and gives an overview of the state’s recent experiences with cronyism. Future papers will examine state and local policies and programs that promote cronyism over good government.

 

Download PDF file: Carolina Cronyism: Introduction, Overview, and Reforms (12.49 mb)

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