Crony Capitalism Is Not Free Markets: Why Government Picking Winners Hurts Your Portfolio

The Government Is Not a Venture Capitalist

Let me be crystal clear about something that far too many people on both sides of the aisle seem to be confused about. When the government takes a minority stake in private companies, guarantees loans, or hands out subsidies in exchange for favorable policy treatment, that is not free market capitalism. That is crony capitalism. And crony capitalism, at its core, is no different from socialism. You cannot split the difference on this. You cannot get a little bit pregnant.

Last week, the Commerce Department quietly announced it will designate more than $870 million in federal incentives for semiconductor manufacturing in exchange for minority stakes in seven companies. The National Institute of Standards and Technology signed letters of intent with seven companies to provide a combined $874 million in federal funding. And there was barely a word about it in the mainstream financial press.

I have been vehemently against this kind of government intervention from the start, and I want to be clear that my position does not change based on which party is doing it.

Why Government-Picked Winners Almost Always Lose

Here is the fundamental problem with government picking winners in the private sector:

• Competition is destroyed. How do you compete against a company that has the federal government, federal regulators, and federal money behind it? You cannot. The playing field is tilted before the game even starts.
• Capital is misallocated. When money flows to companies because of political relationships rather than market merit, it crowds out businesses that could have used that capital more efficiently.
• Taxpayers carry the risk. When these deals go bad, and many of them do, the losses are socialized. The profits, if there are any, go elsewhere.
• It sets a corrupt precedent. Every subsidy, every loan guarantee, every government stake in a private company signals to every other company that the path to success runs through Washington, not through innovation.

I have watched this play out countless times at the local level too. I lived in Sarasota, Florida for a period, and I watched local government officials fall all over themselves to subsidize a movie studio venture. Tax deals, land, breaks on everything. The whole thing collapsed. Just like I said it would. Because if a business cannot stand on its own two feet, propping it up with public money does not make it viable. It just delays the inevitable and wastes everyone’s resources in the process.

The Debt Question Nobody Is Asking

Here is what bothers me most about the argument that these government investments are making us wealthier. If that were actually true, why are we further and further into debt?

If the government’s portfolio of stakes and subsidized companies is generating such spectacular returns, why not liquidate some of those positions and pay down the national debt? Why not sell off some of these holdings and offset the cost of the programs and military commitments we are already running?

The answer, of course, is that the math does not work that way. These are not investments in any traditional sense. They are political decisions dressed up in financial language.

What This Means for Investors

For anyone managing a portfolio, here is what you need to understand about government intervention in markets:

• Subsidized sectors create artificial valuations. When government money flows into an industry, prices reflect political support, not underlying fundamentals.
• Regulatory favoritism is a risk factor. Companies that depend on government relationships can lose that support as administrations change.
• True price discovery is distorted. Markets cannot accurately price risk when one competitor has a government backstop and others do not.

The government’s role in a free society is to be the referee, not a player on the field. The law is supposed to be applied equally to everyone. The moment the government starts picking winners and losers, we no longer have a free market. We have something else entirely, and it costs all of us, investors included.