Crony Capitalism Stages a Comeback. U.S. Exceptionalism Will Take a Hit.

An Amtrak train in Kansas City, Mo., in 1971. The rail service has become a symbol of government intervention. (HUM Images/Universal Images Group/Getty Images)

About the author: Brian Gross spent 32 years in Washington working on Capitol Hill at the Securities and Exchange Commission and as special assistant to the Federal Reserve Board.

The Trump administration has crossed a line that ought to alarm Americans of every persuasion.

In the past two months, it has started taking equity stakes in private enterprise, including billions worth of Intel shares. That so-called partnership was pitched as a strategic investment. It has demanded a “golden share” in U.S. Steel and pressured AMD and Nvidia to funnel a portion of their China revenue into government coffers. Officials promise more such “deals” to come, including with TikTok. That forthcoming deal will reportedly give the government a seat on TikTok’s board.

This isn’t regulating, subsidizing, or industrial policy. It is state capitalism—and, in practice, little more than crony capitalism under a new label.

The dangers are familiar: When the government underwrites private risk, markets get distorted, lobbying supplants innovation, and taxpayers hold the bag. History is full of examples—none should comfort those who hope Washington can outsmart markets.

Three recurring themes appear when Washington plays investor. Moral hazards crop up, in which the companies that have won Washington’s favor take on more risk, confident that the government will rescue them. There is cronyism, in which political influence, not performance, determines who gets funded. And, finally, permanent subsidy machines emerge. Once created, these government-funded programs are impossible to unwind, no matter how costly or ineffective.

No case is more clear, more egregious, or more predictable than the mortgage giants Fannie Mae and Freddie Mac. For decades, they reaped enormous profits under the shield of an implicit government guarantee. Investors rightly believed the U.S. Treasury would never let them fail—so they loaded up on risk. In 2008, that assumption proved correct: Taxpayers were forced into a $190 billion rescue. The companies remain under government conservatorship today. Moral hazard couldn’t be plainer.

Another cautionary tale is Solyndra, a solar-panel company that received more than half a billion dollars in federal loan guarantees in 2009. The Obama administration said it was the “future of green energy.” But within two years, solar prices fell and Solyndra collapsed into bankruptcy. Taxpayers absorbed the loss. The problem wasn’t that clean energy was overly ambitious. It was the government’s hubris in picking a winner in a nascent and fast-moving industry.

Then there is Amtrak, created in 1971 as a temporary fix to keep passenger rail alive. More than 50 years and tens of billions of dollars later, it has become permanent. Political pressures make it impossible to cut routes or restructure operations, and the absence of an exit plan has left taxpayers subsidizing inefficiency indefinitely. What began as an interim stopgap has hardened into a symbol of how government rescues turn into obligations with no end.

Other countries offer a similarly grim tour of what happens when politics direct capital. Japan’s government-backed semiconductor push of the 1980s faltered against U.S. competition. Petrobras, Brazil’s government-sponsored petroleum company, is plagued with corruption. And British Leyland, an auto conglomerate, failed spectacularly after Britain’s government took a controlling stake. There are rare exceptions, such as the Department of Defense’s early backing of the internet, but that was an anomaly. The funding didn’t involve taking equity stakes in private firms.

These cases differ in scale and sector, but the thread is unmistakable: Government investment breeds dependency, dulls incentives, and diverts energy from innovation to influence. In each, the government convinced itself and its supporters that it was acting in the national interest. In each, taxpayers bore the losses while private actors reaped the gains.

Proponents of the administration’s recent moves argue that the U.S. must “invest” in strategic industries to promote national interests. But in a capitalist system, investment means risking private capital to earn returns in competition. When politicians are using tax dollars to pick which company wins or loses, investment is a bit of a misnomer.

The government is justified to be concerned about protecting strategic interests. That doesn’t mean it should anoint preferred champions. If the U.S. wants to reshore semiconductor manufacturing, for instance, the better path is to foster a competitive market—not to crown a politically connected firm as the nation’s chosen supplier.

Neither is the best path to accept lavish investment promises to settle trade disputes. Japan agreed to let Washington direct $550 billion of its capital into U.S. projects as the price of tariff relief —the president says he will choose which ventures get funded. Apple, too, pledged $600 billion in exchange for tariff relief.

Today’s experiments of state capitalism repeat the mistakes from the past. They swap neutral, rules-based policy—permits, tax expensing, broad research and development credits—for bespoke bargains that entrench political clients. They echo practices familiar in Beijing and, before that, the Soviet Union.

U.S. exceptionalism didn’t spring from government allocation of capital. It came from the freedom of entrepreneurs and investors to fail or succeed under the rule of law. It came from equal and open competition and protections against arbitrary state power.

The real promise of American capitalism has always been opportunity, not ownership by the state. We forget that at our peril.

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