From Red Hat to Red Chinese: Looking for Friends in All the Wrong Places

Making “Crony Capitalism” Work

Governor Bev Perdue started 2010 by donning a red hat and announcing almost $20 million in taxpayer money being given in the form of “incentives” to software maker Red Hat.[i] By early April she was no longer wearing a red hat, but getting help from the “Red Chinese” in her effort to raise taxes to support higher spending.

Perdue wants to raise taxes to support a state spending plan $600 to $800 million larger than the budget being proposed by the North Carolina legislature. Looking for help, she found it in a multi-national corporation that has received millions from state taxpayers.

Perdue has been arguing that her budget plan is better than the plan being proposed in the legislature. She was looking for major companies to speak out in support of her efforts to increase taxes which she said would help maintain spending levels in education. While most companies will not come out directly and call for higher taxes, several lent their voices to support Perdue. In effect, they are supporting her call for new taxes to maintain higher spending in the budget. To justify its support, Lenovo, the Chinese computer company, said it could locate its operations anywhere, but depended on the “educated workforce” to keep its operations in Morrisville, said Tom Looney, vice president and general manager.[ii]

According to news reports, Perdue got her help in a fight with the legislature over budget issues after she called together the N.C. Business Committee for Education Roundtable, which was started by former Democratic Gov. Jim Hunt.

In Lenovo, Perdue found no ordinary partner. The Communist Chinese owned firm was already a partner with the state and the recipient of what Site Selection magazine called “…one of the top deals of 2005” when Lenovo demanded a $14 million dollar package of incentives and government obliged by opening the taxpayer’s wallet.[iii]

The Communist Chinese government is the largest single shareholder of Lenovo. It is ironic that on Tax Day 2011, a company owned in large part by the Communist Chinese government, which extracted money directly from the taxpayers of North Carolina, is now publicly aiding governor Perdue in her effort to increase taxes and spending here.

Lenovo’s reason for support for the governor is disingenuous, if not an outright lie. Lenovo was quoted saying they could locate its operations anywhere, but depended on the “educated workforce” to keep its operations in Morrisville.

But back in 2005 Lenovo told a different story. It threatened to move unless it was given $14 million in incentives by state and local governments. At that time, there was no mention of education or of an “educated workforce” in its consideration to staying in North Carolina or near the Research Triangle Park (RTP).[iv]

But this is how crony capitalism works. Government does for business and business does for government.

According to Investopedia, crony capitalism is a capitalist society based on the close relationships between businessmen and the state. Instead of success being determined by competing on a level playing field to most efficiently meeting the needs of consumers, the success of a business is dependent on the favoritism that is shown to it by the ruling government in the form of tax breaks, government grants and other incentives.

Both socialists and capitalists have been at odds with each other over assigning blame to the other for the rise of crony capitalism. Socialists believe that crony capitalism is the inevitable result of pure capitalism. This belief is supported by their claims that people in power, whether business or government, look to stay in power and the only way to do this is to create networks between government and business that support each other. On the other hand, capitalists believe that crony capitalism arises from the need of socialist governments to control the means of production. This requires businesses to operate closely with the government to achieve the greatest success.[v]

Crony capitalism, whatever the origin, is bad for our economy and bad for taxpayers.

In truth we do not know the total cost to taxpayers for the Lenovo deal and there may be good reason to be suspicious of what taxpayers will ultimately pay for this deal. In February of 2007, the University of North Carolina – Chapel Hill announced a four year contract with Lenovo to supply desktop and laptop computers. While the contract was an open bid contract, anyone who has worked around state government can explain how contracts can be written and approved in a way that predetermines an outcome. With the way incentive deals work behind the scenes it is hard to say what is and is not part of an overall deal.

Perhaps the real reason why a Communist Chinese company wanted to stay in the RTP area (and get paid taxpayer money to do so) was explained in 2005 when the U.S. government required Lenovo to find new office space as a condition of approving IBM’’s sale of its PC division. Officials worried that Lenovo employees, if allowed to stay on IBM’’s campus, could spy for the Chinese government and steal sensitive technology secrets.[vi]

If the U.S. government’s fear is in fact true, then the taxpayers of North Carolina have not only enabled “crony capitalism,” but also subsidized a company engaging in espionage against U.S. interests. This is not good for our economy, our state or our country. In the future, hopefully Governor Perdue will stay away from companies that have taken part in bribery crony capitalism incentives when looking for endorsements for higher taxes and spending.

As Ronald Reagan taught us with Communists, “trust but verify”. We probably need to add “crony capitalist” to this warning as well.

From Red Hat to Red Chinese: Looking for Friends in All the Wrong Places

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