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Crony Capitalism

Crony capitalism is not the same as free markets, it is a politicized economy.

Cronyism diverts resources away from the wants and needs of consumers and toward political purposes. Cronyism occurs when an individual or organization colludes with government officials to create unfair legislation and/or regulations which give them forced benefits they could not have otherwise obtained voluntarily. Those benefits come at the expense of consumers, taxpayers, and everyone working hard to compete in the marketplace.

What is Cronyism?

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Crony Capitalism Index

Crony capitalism is another reason we need a Revolving Door Tax (RDT).

Would this be a money-making proposition, allowing an investor a piece of the upside as the companies use the power of the government to their advantage? Or would it be a money-losing proposition, because the companies whose CEOs are spending their time cultivating government relationships are doing so only as a desperate tactic because their firms are otherwise unable to compete successfully in the marketplace on the basis of the value they offer their customers?

So I spent some time running the numbers. Suppose one began this strategy at the beginning of the Obama administration, buying one share of each publicly traded company with an executive appointed by the president on February 6, 2009 to the President’s Economic Recovery Advisory Board. That would be UBS, GE, CAT, and ORCL. In the nearly two years since then (using the Monday February 7 closing prices, and using Yahoo! Finance historical price data that adjusts for splits and dividends), the gain would have been 145% — far outperforming the 52% return of the S&P 500 Index over the same period.

Suppose that later that year, you decided to buy one share of each American publicly traded company that had a top executive attend President Obama’s first state dinner at the White House, in honor of Prime Minister Singh of India. GE and CAT are on the list again, along with Honeywell, Pepsi (CEO Indra Nooyi) and Ethan Allen (ETH) CEO Farooq Kathwari.The return through day’s end February 7, 2011 would have been 46%, versus a 19% gain for the S&P 500 over the same period.

Or suppose you wanted to invest in the publicly traded companies whose executives President Obama appointed on July 7, 2010 to the President’s Export Council. Buying UPS, Boeing, Met Life, Disney, Pfizer, Dow Chemical, Ford, Verizon, United Airlines, ADM, and Xerox would have earned a 30% return over a period in which the S&P 500 gained 24%.

So far, it looks like a pretty good way of outperforming the market.

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