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.”

NYT’s Expose: But GE Is Doing Exactly What is Expected of Them

President Obama’s appointment of GE CEO Jeffrey Immelt as his job czar signaled his “move to the center.” The pro-business President declared a “government-business partnership” to create jobs, green technology, and other good things. Now a NYT investigation reports that GE paid no U.S. taxes, aggressively lobbied Congress for subsidies and sweetheart deals, and spends millions (billions?) to minimize its tax bill. The NYT was shocked, as was Claude Rains in Casablanca, to find such skullduggery, from GE, no less. The NYT concludes that one of the most striking advantages of GE is not its jet engines and washing machines but “its ability to lobby for, win and take advantage of tax breaks.”

A more realistic interpretation is that GE is faithfully pursuing Obama’s vision of, what is called in other countries, crony capitalism. Under this philosophy, “crony corporations” should follow where government incentives lead them. If Obama wants green jobs, they will build windmills, with healthy subsidies of course. If the government wants more lending, crony corporations will lend with a bailout if the loans go bad. A “green car” should be no problem. The government will pick up most of the price tag for leery consumers. Insofar as crony corporations, like GE, can “negotiate” their tax bill with Congress, they are a ready source of campaign contributions or other perquisites.

Such crony capitalism changes the normal rules of economics. Those who play the “business-government partnership game” better than others win. Those who do not play well lose, even if they are superior entrepreneurs or innovators.
From an economic perspective, it is not even clear that GE is a real “winner.” In pursuing subsidies and tax advantages, GE engages in activities that yield lower returns than other alternatives. The government payoff compensates them for making otherwise unwise economic decisions. The GEs of the world also have to waste enormous resources on the lobbying game. If we factor in all these economic costs and losses, GE may have been better off not playing the crony capitalism game after all.

The NYT’s disclosures, coupled with Obama’s appointment of Immelt, are an embarrassment, but they offer a rare backroom glimpse of crony capitalism in action. Our crony capitalism takes place, respectably and legally, in board rooms, in congressional and executive offices, or “on bended knee” before Charles Rangel. In other less civilized countries, it takes the form of shakedowns, threats of violence, and arbitrary prosecutions, but the game is played with the same results.

In Russia, it is called State-Mafia capitalism. In the U.S., it is corporate welfare.