For supporters of the free market, one of the highlights of the year is Congress’s summer recess. It’s normally a time to relax and relish the fact that Congress isn’t passing laws, plotting to pass laws, and throwing away taxpayer money.
This year summer recess is even better. First, the recess is two weeks longer because of the national conventions. Second, one of the most well-known cronies of modern times, Bill Ackman, who shorted Herbalife’s stock and then attempted to attack them, just lost.
The common crony works the halls of Congress to give their company an advantage. Most of the time that means asking for special gifts like tax breaks or waivers, but occasionally the request is more aggressive. Sometimes instead of asking Congress to help you, you ask them to hurt your competitor. In both circumstances cronyism is bad for the economy. Not only does it divert government resources and waste taxpayer money, but it also damages pure market competition. That means fewer jobs are created and everyone pays more for the same product.
While it is obviously bad, Cronyism is still a tough political issue. For politicians on the left cronyism is a problem because as government grows, so does the necessity of businesses to fight for control. With government spending growing from 34 percent to almost 40 percent of GDP since 1998 and lobbyist spending growing from $1.45 billion in 1998 to $3.22 billion in 2015, if cronyism isn’t out of control now, we are on the way. For politicians on the right, who tend to be more business-friendly, they are also forced to walk a fine line between being pro-business and a pro-a specific-business.
The long-run answer to this problem is a smaller, less powerful, government, but for now we are forced to go after the cronies one-by-one.
Bill Ackman, founder of hedge fund Pershing Square, shorted Herbalife’s stock to the tune of $1 billion. He did so because he thought that he could prove that their business model is a pyramid scheme. (Spoiler: He couldn’t and it isn’t.)
Making the $1 billion short isn’t the problem. That’s just business. The problem is that $1 billion is a lot of money and no company is just going to leave that kind of investment to chance, so Ackman did what any crony worth his salt would do and recruited Congress into his fight. A few letters, here and here, from a few members of Congress and unsurprisingly the Federal Trade Commission decided to open an investigation.
Dragging on for two years, the investigation alone has hurt Herbalife’s stock. But, the real effect is more than just pushing down the stock’s value for a few years. It has also forced the company to target assets toward defending their company instead of adding jobs or selling more products. That has a multiplier effect through the economy and, with a market cap of $4.2 billion, the effect is significant. The end result of the multi-year attack? Herbalife isn’t being labeled a pyramid scheme, which was Ackman’s primary thesis.
In a way, this kind of wrongful attack is defamation of character. Should the members of Congress who aided the crony be held accountable?
Yes, by their voters. This was a waste of taxpayer dollars initiated by a man who has taken out a $1 billion short on the company and has a financial interest in the company’s demise. Cronyism doesn’t get much clearer than that. But, with more than $1 billion at stake, the elected officials were easy targets.
In fact, this is one of the biggest issues with cronyism: the money, power, and information is all greater on the outside. So legally it would be hard to hold any specific member’s feet to the fire, but their voters should hold them accountable for both the waste of taxpayer money and the economic damage they enabled.
Cronies like Ackman give capitalism a bad name, and this is just another example that our government is too big. Congress shouldn’t be in the business of policing business models. If an individual doesn’t think a specific business model is good then they should build a different one. That $1 billion could have gone a long way toward building a business to compete with Herbalife. And Congress should focus on facilitating the right incentives for future enterprises instead of tearing down existing ones.
For now, Congress is finally in recess. The good guys won and the crony lost, so it is time for a relaxing summer.