The Corner

Politics & Policy

Cronyism, Kodak, and DFC

A worker cleans a Kodak booth at a convention center in Las Vegas, Nev., January 6, 2019. (Steve Marcus/Reuters)

My beef with cronyism, or what my colleague Matthew Mitchell calls government granted privilege, is well known the readers of this blog. Today, I would like to talk about another government entity with crony aspirations and actions. The agency is the U.S. International Development Financing Corporation, or DFC. It was recently created when Congress merged the Overseas Private Investment Corporation (OPIC) with the Development Credit Authority of the United States Agency for International Development, along with a few other smaller entities.

While OPIC was in the business of extending financial products to American companies operating in the developing world and competing with foreign companies, DFC is purely a development agency. As I understand it, its focus isn’t to extend loans to American companies operating abroad, but it is to dole money out for projects in lower- and middle-income countries.

At least, that was the case until last May, when the president signed an executive order as part of its broader efforts to expedite domestic production of drugs that can treat a variety of medical conditions and loosen the U.S. reliance on foreign sources (a goal I do not share in principles but also because it is based on many faulty assumptions and data). That led to the recent announcement of a $765 million loan to Kodak from the DFC, made possible by the Defense Production Act. With this deal, for the first time in its history, the DFC, a development bank, is making loans in the U.S., which has nothing even remotely to do with development.

Now, I will admit that I would abolish the DFC in a heartbeat independently of this. Ryan Young wrote about the all the problems with OPIC here. We can expect many of these same problems with DFC, because that’s always what happens with government loan programs. In addition, let me remind you that this is not the role of the federal government. I realize that this is a 1990s argument to make in today’s world, but that’s a rant for another day.

When it comes to this deal, however, the problem everyone is concerned about is the personal connections to many involved in this deal, and the lucrative effect of this deal to company that appears to be an odd choice for the project. People are suddenly concerned that the DFC is being used as a piggy bank to reward friendly businesses and donors. As the Daily Beast‘s Lachlan Markay reports:

Kodak’s in-house lobbying team had officially dissolved in early 2019, according to disclosure filings submitted to federal regulators. But on April 1 of this year, the company started it back up, and proceeded to plow $870,000 into its D.C. influence machine. That sum, which went towards influencing both Congress and the administration, was more than twice as much as Kodak had ever spent on lobbying in any quarterly reporting period.

In addition, the head of the DFC, Adam Boller is a close friend of the president’s son-in-law. Then, Kodak shareholders authorized CEO James Continenza to acquire 1.75 million in stock options, options he received the day before the deal was announced on July 27th.

The SEC is looking into this, and so is Senator Warren. Meanwhile, many in the media, who are always willing to scrutinize this administration closely (while being quite loose with other administrations) feel that this deal sounds very fishy while others assume that this is evidence that administration officials who may think they could be out of office soon are trying to grant as many favors to their friends as possible before they go.

But the truth of the matter is that, as shocking as this is to most people, these unhealthy relationships between people in government and corporations are par for the course. How cozy do you think some in the Obama Administration were with green energy like Solyndar and others? How cozy do you think the people at Boeing are with the bureaucrats at Export-Import bank or the FAA? How cozy the heads of the big defense contractor firms are to the different administrations? How cozy are regulators with the banks they are supposed to oversee? I could go on and on, but the answers to all these questions is: very cozy.

This happens all the time in government, and it is always a very big risk with any government agency under any administration when it starts to hand out money to private companies. Why? Because government decisions about where capital should flow are fundamental political decisions; they aren’t guided by economics, price signals, or profits and losses. This is why many of us are skeptical of the claims that industrial policy can ever work. The whole point of the exercise is that it allocates money to favored industries, sometimes the same industries and firms that have friends in high places, based on the judgement of politicians who aren’t spending their own cash and in order to satisfy their own preferred order of the world.

To all of you out there who are outrage by this deal, please continue being outrage when the next administration comes around, because things like these will continue to happen.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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