Crony capitalism vs. market morality: finding an ethical lobbying line in a fallen age of corporatism.

• Author: Carney, Timothy P.

Scenario 1: It's 2005. While Republicans are fighting to permanently repeal the estate tax (or "death tax," in their phrasing), a nonprofit called the Coalition for America's Priorities spearheads the counterattack, deriding the proposed repeal as the Leave No Heiress Behind Act. One television spot, run by a coalition partner called United for a Fair Economy, features a lithe, flaxen-haired, Paris Hilton-esque narrator named "London" thanking the GOP for trying to maximize her inheritance.

The anti-repeal campaign is suffused with populist rhetoric. ("This is not a country of inherited wealth," coalition head Steve Ricchetti tells USA Today. "This is a country of earned wealth") Yet the entire thing is funded by the life insurance industry.

Why? Because the death tax creates business for life insurers. A major selling point of life insurance is that its benefits, unlike inherited money, can be totally tax-free. Take the estate tax away, and that selling point disappears. Hence the campaign.

Scenario 2: It's 2010. William Hambrecht, a Bay Area financier, has donated more than $1 million to Democrats since 1993. More than $13,000 of that money has gone to Nancy Pelosi, a San Francisco congresswoman who once gave a House floor speech praising "a business pioneer, a philanthropist, and a longtime friend, Bill Hambrecht."

She could have added "business partner." When Hambrecht founded the United Football League in 2009 to try to compete with the NFL, Paul Pelosi Sr.--Nancy's husband--invested $12 million in one of the league's first four teams. In a fortuitous coincidence, Hambrecht's small investment bank has employed Paul Pelosi Jr., the congresswoman's son, for years.

In the waning days of Pelosi's term as speaker of the House, Hambrecht comes to Capitol Hill to testify before the Financial Services Committee. The committee is meeting to discuss a proposed tweak to regulations that govern initial public offerings (IPOs). Hambrecht's company would be the prime beneficiary of the proposal.

Committee Chairman Barney Frank (D-Mass.) pointedly notes at the beginning of the hearing that the regulatory change was not his idea. "I should note also that it was Speaker Pelosi who first called this to our attention earlier in the year.... It is something that the speaker has taken a great interest in because of her interest in job creation, so we have had to find a way to have this hearing."

Both of these scenarios sound sleazy: the kind of influence-peddling, insider-colluding tales that make Americans cynical about Washington. But in fact, only one of the two lobbying campaigns is genuinely objectionable. Explaining why means tackling one of the most important questions for libertarians observing our modern crony-capitalist economy, where the government's tendrils are so...