The Cato Institute Thursday ran a seminar on “The Culture of Enterprise in an Age of Globalization” which brought up the question: to what extent is the United States still a free market economy? It certainly was a free market economy in 1925, or even in 1995, but in the last decade the balance of economic power has shifted substantially from profit-seeking free businesses to rent-seeking operations dependent on subsidy and regulation. What’s more, the balance appears to be shifting further in that direction. In honor of the late unlamented energy company that to a large extent epitomized the new tendency, one can typify the new outfits as Enrons and the economy as having been Enronized.

Enron itself was never a truly free market operation. It began by a merger of two pipeline companies, back in the days when pipeline revenues were regulated and hence profits predictable. It expanded internationally into various public utility operations that were wholly dependent on permits from foreign governments, some of which were then countermanded by different foreign governments, as in its Indian Dabhol power plant which became a gigantic loss-maker. Its energy trading operation, which eventually forced it into bankruptcy, depended largely on the regulations imposed by various US jurisdictions as they haphazardly deregulated the energy market. It was never a free market operation, it wasn’t run like a free market operation and its death was caused, not by extraordinarily criminality in its top management deserving of quarter-century prison sentences, but by the collapse of a rent-seeking scam in energy trading that was never likely to last forever.

Derivatives themselves are one area where rent-seeking is essential to success. If the market is perfectly competitive, the returns available from derivatives transactions quickly arbitrage themselves away, making it a business of high risk and very little profit. Only where there are quirks in the playing field, tax advantages, regulatory requirements, relaxed capital requirements through the Basel II capital adequacy regulations etc. can a superior return be made, either by leveraging a small cost advantage many times or through utilizing less capital in trading than competitors. Similar considerations apply to Third World debt trading and to the “carry” trade in which low cost yen are borrowed to invest in higher-yielding currencies; both depend for their returns on the continuation of deal-friendly policies by the International Monetary Fund and the Bank of Japan respectively.

As Thomas Woods, author of “The Church and the Market” said at the Cato conference, it is a universal economic law that people will seek to enrich themselves by the easiest means available. In a sternly enforced free market, with small government and puritanical ethical standards in public service, it will be very difficult to achieve riches other than through productive market activity between willing buyers and willing sellers. In a big-government culture with questionable ethical standards, huge government programs, opaque capital markets with separation of ownership and control and distant, globalized business relationships, there is no question that rent seeking becomes easier than profit seeking. Probably the greatest indictment of the easy-money years since 1995 is that the United States has moved a great deal further down this road.

Farm subsidies, for example, are a rent seeking way of life, although to be fair this problem originated during the Great Depression, not recently. In the United States, the EU and Japan farmers have contrived to protect themselves from the vagaries of nature and the market by extracting subsidies from the taxpayer. This system appeared to be nearing its end at the beginning of the decade, with the momentum for a new Doha trade agreement and the libertarian Freedom to Farm Act of 1996. Needless to say, that progress has been reversed. Doha appears stone dead in spite of occasional feeble attempts to revive it, while the 1996 farm subsidy reduction legislation was gratuitously reversed by a Republican president and a Republican Congress in 2002. Subsidies are now to be greatly extended by a Democratic Congress whose constituents have been feeling left out in the cold. In Europe EU farm subsidies have been extended to 2013, and there is no reasonable prospect of their significant diminution in the near future.

However the worst extension of agricultural rent seeking has been the U.S. ethanol program, itself due to fear over oil supplies and hysteria over global warming. Instead of allowing the free market to ramp up supplies from sugar cane in Brazil, the Caribbean and southern Mexico, the Bush administration has chosen to subsidize domestic producers of ethanol from corn who are not only far less efficient than sugarcane-based ethanol producers but may even produce more greenhouse gases than they consume. Consequently, huge subsidies have been diverted from US taxpayers to corn growers, while in Mexico subsidies are simultaneously being diverted from taxpayers to tortilla eaters.

The free market has played almost no role in combating global warming so far, nor is it likely to. Instead of the sensible solution of a carbon tax, both the EU and the warming-phobes in the US have chosen to go for a “cap and trade” system, whereby the government sets an overall level for greenhouse gas emissions and issues tradable permits to industry. Since the government has no rational basis to determine what levels of emissions should in detail be permissible, this has resulted in the EU in an explosion of lobbyists and a massively political process by which emission limits are determined. Furthermore, instead of being sold, permits are handed out to potential polluters, a process which further inserts politics into what should be a market mechanism. The potential for rent seeking in the environmental area is immense. However great the dangers of global warming, it must surely be clear that to allow environmental lobbyists to control our lives in this way is a recipe for economic disaster far greater than any that could be caused by a global warming of at the most 3-4 degrees Celsius by 2100.

Lobbyists themselves are a sure indicator of the prevalence of “rent-seeking,” as is the level of “earmarks” – private spending proposals – in the federal budget. The number of Washington lobbyists has more than doubled since 2000, to around 35,000, a disgraceful statistic under a Republican administration, whereas the number of earmarks has increased by a factor of 10 between 1994 and 2005, again with Republicans in control. Needless to say, the $20 billion of earmarks in this year’s supposedly emergency $100 billion Iraq funding bill is sufficient indication that neither tendency will slow now the Democrats are back in control of Congress, nor would it slow with a Democratic Presidency in 2009. The explosion of lobbyists is fantastic news for Washington-area developers and realtors, who have been able to build and sell innumerable new homes of unsurpassable size and vulgarity, but very bad news for the U.S. economy as a whole. According to Paul Farrell of Dow Jones, a good lobbying firm expects to gain benefits for its clients of 100 times their multimillion dollar fees. Those benefits are your money, gentle readers.

Bilateral trade agreements are a further area where rent seeking has exploded. Under a multilateral agreement, whether global as in the 1994 Uruguay Round or regional as in the EU or NAFTA, since there are several countries participating in negotiations there are relatively few opportunities for private interests to structure a rent-seeking side deal, because there are too many parties involved. Under a bilateral agreement, particularly a bilateral agreement where one party such as the United States or indeed China is much stronger than its trading partner, all sorts of side deals can be done that benefit particular businesses. Either imports such as sugar that would normally enter the United States can be blocked, providing protection for domestic producers with strong lobbies, or trade provisions can be structured so as to block third parties from a market.

The first such bilateral agreement was the U.S.-Singapore Trade Agreement of 2003; they have exploded in number since then. They offer little or nothing to the world in terms of freeing up trade and huge amounts to well connected companies in terms of redirecting trade.

Further rent seeking takes place in the area of “anti-dumping” tariffs; Friday’s unilateral imposition of an anti-dumping tariff on Chinese coated paper was nothing more than a successful search for rent by the U.S. producer NewPage Corporation.

One could continue with many more examples; the increase in tort law suits in the 1990s, benefiting tort lawyers at the expense of the general public was another diversion of resources from profits to rents, as was the Kelo. v. New London Supreme Court decision in 2005, allowing condemnation of private property for politically connected redevelopment. The list is not a short one. However consider one final example that’s been in the news recently and is explosively increasing its control over the U.S. economy: private equity firms.

In its original incarnation, private equity was a relatively benign operation under which pools of capital would buy a company, strip out dead wood, restructure its operations and sell it, all within a couple of years. If the management of the private equity company was good, or the management in the company purchased egregiously bad, this added modest value to the economy – it was certainly very profitable indeed for the private equity firms’ partners, if less so for their investors.

However in recent years the expansion of private equity has led it to do deals in which the companies acquired are well run, the management is kept on and rewarded with a piece of the deal, and the turnaround to public shareholders is accomplished remarkably quickly, without any great corporate restructuring beyond a new logo. The value added of the private equity firm in these cases is its political contacts, which enable it to smooth the way for the acquisition, bring the acquired company some juicy licenses, pieces of government business or regulatory changes, and prime the market for a successful sale. This private equity investment by influence peddling, as practiced by the largest firms such as Carlyle and Blackstone, is crony capitalism in its purest form; it would fit well in the new Russia of Vladimir Vladimirovich Putin. Needless to say, it is utterly detrimental to the rights of outsiders, and to the long-term performance of the U.S. and world economies as a whole.

The U.S. economy has been held up for the last half decade only by the housing and consumption bubbles caused by cheap money. Much of its healthy capitalist tissue has rotted internally, and been replaced by corrupt politically-determined rent-seeking. Only when the cheap money finally disappears, and recession occurs, will we be able to tell the full damage caused by the Enronization of America.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)