Mafia in Pinstripe: The Real GE Scandal

The transition from street thug to state mafia took a decade in Russia. I was an eyewitness to the Russian process: In 1992, I saw businesses being shaken down by bullies in jogging suits and shaved heads. Six years later, I talked with business owners harassed by crooked tax, sanitation, police, and fire inspectors. Under Putin, these petty thugs were replaced by officials in pinstripes, politely shaking down businesses in meetings in government offices and swank hotels. It has become civilized, but the outcome is still the same.

What does the Russian story have to do with GE?

GE is unique among American corporations. Since its founding, it has been consistently in Fortune’s Top 10 – the only long-term survivor of Schumpeter’s creative destruction. GE adapted better than others to changing tastes and technology under executives like Gerard Swope, Charles Wilson, and John Welch Jr., who wrote the book on the art of corporate management.

GE is still in the top ten under CEO Jeffrey Immelt, but it is a different GE. Instead of adapting to the marketplace, GE structures its businesses to harvest government subsidies, tax preferences, and bailout money. GE fits Schumpeter’s pessimistic forecast of bureaucratized, influence-peddling capitalism, which he had the temerity to call socialism.

A casual glance at GE’s annual report shows that most of GE’s businesses depend on favor with the government. Energy generating windmill turbines make money because of government subsidies and state orders. Nuclear power requires government licenses. Energy-saving turbines receive subsidies. GE’s lending arm may again need a quiet $140 billion bailout. Its huge medical services division must receive favorable treatment under a new health care law. Even its competitive jet engines could use a diplomatic boost when foreign airlines buy new aircraft. Its NBC division needs broadcast licenses and other forms of protection.

The GE scandal is not that it paid no U.S. taxes. It was simply following the social-engineering instructions of our tax code, which its tax department is able to nudge at times. The true scandal is that the once mighty GE has become a crony capitalist in its “partnership” with Washington. The hundred million or so in campaign contributions is chump change compared to the cost of its lobbying behemoth and its vaunted tax department.

The new winners in creative destruction at first naively think they have no need of government. The Microsofts, Apples, Googles, and Facebooks create products no one had ever dreamed of. They can outstrip the competition on their own. They are then baptized by fire. Government agencies politely worry that they have grown too big; an anti-trust suit may be in the works. Revenue-hungry politicians may decide that taxing the internet is a good idea. Facing this reality, the creative-destructors open expensive offices on K-Street and join the crowd. An ounce of protection is worth a pound of cure, they reluctantly conclude.

There is an invisible cost to all this that few of us notice or understand. The mighty GE has been diverted from innovating and developing products that stand on their own to producing those things that its Washington partners want for the “good of society.”