Crony Capitalism Comes to Vermont

Textbook capitalism is an economic system where the government establishes some basic rules, such as rights to property, enforcement of contracts, liability for damages, an independent judiciary to settle disputes, and a stable and predictable tax system. The government also provides a basic transportation infrastructure, backs a stable currency, and brings lawbreakers to justice.

Given these ground rules and public services, individuals and corporations invest their funds, produce goods and services, and offer them on the market. If consumers respond, they earn a return on their investment. In such a system it doesn't matter who you know. The rules apply fairly and equally to all, and who succeeds and who fails is determined in the marketplace.

Now consider "crony capitalism", the traditional name that describes most non-communist Third World economies (plus, one might argue, Arkansas and Louisiana). In such countries the only way to have your business succeed is to become a crony of the political leadership, through family and social ties, bribes, kickbacks, and political support.

With the passage of the "economic progress act" of 1993, the "economic advancement incentives" of 1998, and the "downtowns bill" of 1998, all coupled with Act 250 (1970), Vermont is on the way to a unique Yankee brand of "crony capitalism". The difference between Vermont and, say, Brazil is that in Vermont, at least for now, state permission, assistance, and subsidies will be given out for high-minded public reasons, not for corrupt individual benefit. But the aspiring entrepreneur who has no interest in cozying up to Vermont's political leadership will have just as much success as his or her counterpart in Mexico or Brazil.

The goal of the people who are bringing crony capitalism to Vermont is to control economic activity "for the people." And here is how it works. First, the barriers to new enterprise must be raised - raised so high that no one can afford the time and money to get over them without government support. Business taxes are a barrier, but not an insurmountable one. The real barrier is the state's byzantine, costly, expert-intensive, arbitrary, and seemingly endless regulatory process. This process features Act 250, wetlands rules, labor and industry rules, workmen's compensation rules, and many others (most recently, new rules about curb cuts onto public highways). This is a state where it takes 25-30 permits to run a little grocery. Not only are there numerous permits and rules to be complied with, but the enforcing bureaucrats often seem to feel little urgency about giving timely and definitive answers to applicants, even when the fate of a small business owner's enterprise is hanging in the balance.

Once the barriers have been raised to daunting levels, the friendly state government offers assistance - provided the applicant does all the politically correct things. That assistance may include payroll tax credits, R&D tax credits, workforce development credits, export incentive credits, small business credits, training assistance and property tax stabilization. Also available are pointed messages from "upstairs" to the regulatory bureaucracy that a project should go forward, or be stopped. Husky is the classic example of a major project that sailed through the process, because the Governor created a high-level task force to see that it did. The proposed gas station at Exit 9 of I-91 is the current example of the opposite; the Governor vowed that it will never be built.

But these benefits to business don't come without a price. The price is that the applicant must locate the business where the state wants it, hire Vermont residents, pay high wages, offer extensive benefits, use Vermont resources, comply with state plans, be receptive to union organizing, and "strengthen the quality of life". Making contributions to organizations which promote these goals couldn't hurt, either. For most of the tax benefits the applicant must prove that he or she satisfies all these requirements to the "Vermont Economic Progress Council", nine appointees of the Governor who serve at his pleasure and are not confirmed by the Senate. This device is only one step removed from Gov. Howard Dean's original 1993 proposal that anyone wishing to enjoy the benefits of the "economic progress" tax credits had to obtain the governor's personal approval.

Is this "crony capitalism"? Well, if you can't overcome the many barriers Vermont's tax and regulatory system impose without obtaining special government benefits and advantages, it's hard to see why it's not. And no matter how high minded it may seem at first, the inevitable result of such a system is not capitalism. It is a corrupted pseudo-capitalism that will drive off the entrepreneurs who despise making political deals to ensure business success. It will encourage those most eager to get rich by making mutually profitable deals with those in power in the government. At least Vermont's version is likely to be much less violent than Guatemala's.

September 1998