New York-based Strategas Asset Management believes that lobbying is so profitable for corporations that it launched an EFT (exchange-traded fund) based on the stocks of the most lobbying-intensive companies. “If it works,” notes a Financial Times journalist, “small investors will now at least be able to grab their share of the spoils” (Steve Johnson, “Corporate lobbying ETF seeks to profit from influencing politicians,” Financial Times, February 7, 2022).
Dan Clifton, lead portfolio manager of the new EFT (symbol: SAGP), defends the ethics of lobbying with a simple argument. Everybody (or at least every group) can be involved:
The beauty of the American system is that everybody is involved. NGOs, labour unions … I would argue there might be more power on that side than on the corporate side.
We believe in lobbying. It helps avoid mistakes. If you are not at the table, you are going to be on the menu.
At any rate, he adds, “we don’t make the rules, we just figured out there was alpha there.” (“Alpha” is a finance term meaning excess returns over and above the average return on financial markets.) This remark is interesting in itself: many people think that the system is so stable that they can try to game it as much as they want in their own interests and no systemic consequences will follow. In a free society, it is true… up to a point.
The existence of government lobbying is easy to explain. One doesn’t lobby a pauper, but only a person, group, or organization that has much to give away. The more government has to give in terms of money or privileges, the more profiteers will come to eat at the trough. The bigger the treasure, the more treasure hunters and the more resources they will spend in their quest. We expect government growth to be accompanied by an expansion of lobbying and, in turn, the latter to fuel the former.
This last point (the effect of lobbying on the size of Leviathan) only applies to “bad” lobbying. “Good” lobbying is the sort that companies and other participants in the economy do to protect themselves against the higher taxes or competitive handicaps imposed on them by the bad lobbying of their competitors. For example, objecting to a competitor’s subsidy or market protection (regulations that restricts entry into the industry) would be good lobbying. Bad lobbying, also called rent seeking, consists in trying to gain privileges for oneself to the detriment of others.
But why is rent seeking bad? As well studied by public choice economics, rent seeking has wasteful economic consequences. If producer A obtains a production privilege (say, a subsidy) that harms producer B, the latter may be tempted to ask for a compensating privilege (a subsidy or some other privilege for itself). In this special case, the net result would be that none of the two producers get any net benefit, but the taxpayer ends up paying the bill with some “deadweight loss” given the reduced incentives to work or other distortions. If all producers in an industry obtain a subsidy, the lower prices and increased quantity demanded that follow will divert resources away from other industries, which wastes scarce resources on producing a good that is, in reality, more costly (a deadweight loss again). Disadvantaged consumers or producers will try to get some compensating privileges.
As co-blogger David Henderson explains about rent-seeking expenditures by businesses,
Although such an expenditure is rational from the narrow viewpoint of the firm that spends it, it represents a use of real resources to get a transfer from others and is therefore a pure loss to the economy as a whole.
And as Mr. Clifton suggested above, if you don’t try to devour your competitors through lobbying, they will eat you up with the government’s teeth through their own lobbying. An unlimited democracy is a real political jungle.
As rent seeking spreads, each company or individual is harmed and harms others, in multiple and convoluted ways. In this churning, an individual will typically be unable to know whether the effect of all government actions translates into a net benefit or a net loss for him individually. Yet, deadweight losses reduce the total production and consumption in the economy.
What would be the ultimate end of the process of competitive rent seeking if nothing stops it? Anthony de Jasay developed an interesting model to answer this question. As the government becomes the focal point for all grievances and the source of all solutions, more and more demands for special privileges and assistance are addressed to it. Because of political competition, the government will try to respond to all the demands (or, at least, to all politically-imperative demands), however contradictory: to increase the minimum wage and reduce unemployment, to increase the money supply and fight inflation, to help businesses and regulate them, and so forth. Otherwise, a new political party or demagogue will win the next election by promising to cater to the frustrated demands. The government, argues de Jasay, becomes a drudge who has to use all its power merely to satisfy the clienteles necessary to stay in power—or to bring it to power, and the process continues. The only way out will be for the state (of which a particular government is a “tenant”) to restrict political competition more and more. At the end of the process, the state will control everything and will be to the “citizens” what the master was on a Southern plantation–sort of the dictatorship of the proletariat by another route.
There are other economic models of how politics works. Which one is the closest to reality represents a crucial question.
READER COMMENTS
Craig
Feb 9 2022 at 11:59am
“As the government becomes the focal point for all grievances and the source of all solutions, more and more demands for special privileges and assistance are addressed to it.”
True and to expound here I would also suggest the entire process erodes the governments’ (plural) basic legitimacy.
Favoritism breeds resentment, doesn’t it?
Pierre Lemieux
Feb 9 2022 at 1:33pm
Collective decisions (at least those that don’t respect general rules unanimously consented to) bring dissension and conflict. The only way to avoid overt conflict is to totally crush individuals: think North Korea.
Jose Pablo
Feb 9 2022 at 6:45pm
Particularly well timed now that another headline grabbing “record deficit with China” is all over the news.
Sure enough “local producers” are screaming that this means “local jobs” being lost to China and lobbying for the enforcement of the sanctions imposed by the devil Trump administrations … and then some. Sanctions the new administration has not lifted, by the way.
Always amazed by the politics world of unlimited hypocrisy
Partially to blame are the economists. In their “science” of “buts” and “ifs” and “maybes” and “but onlys” and “externalities” and “Gini’s” … there is always room to make arguments that, at least, sound right and support your cause.
You can ask your favorite question on political economic to Piketty / Krugman and them to Mankiw / Cochrane and be sure that somewhere between their answers you will find “technical” support for your favorite virtue signaling and/or economically self-interested cause.
Jaime Manzano
Feb 10 2022 at 3:33pm
“God Father economics.” Pushed to its limits, one side kills off the other…., imperfectly, which starts the game all over again. It is a choice between a Nevada, or a Cuba economy….., a drug free, vs a prohibition government. Colluding well together, a “free market” and a “Deep State” bureaucracy can actually co-exist. They do today. Check your pocketbook. The crooks, and the government, are winning. You, as a taxpayer, lose.
David Seltzer
Feb 10 2022 at 6:43pm
“Dan Clifton, lead portfolio manager of the new EFT (symbol: SAGP), defends the ethics of lobbying with a simple argument. Everybody (or at least every group) can be involved.”
Mr. Clifton may have an arbitrage here, but I suspect not for long. If rent-seeking, regulatory capture and DWL reduce competition, it’s already priced in the market and alphas will be zero to negative after expenses and management fees.
vince
Feb 10 2022 at 8:08pm
Another way is to get money out of politics.
HAHAHAHAHAHAHA ….
HAHAHAHAHAHAHA…..
Pierre Lemieux
Feb 11 2022 at 12:08am
If I read your Sanda Claus ho-ho-ho correctly, you are wrong. People without money will continue to battle for money in the government. And just at other countries where it is forbidden for an individual to spend his own money to defend his opinions in an election. If you are an economist or an economist-to-be, read de Jasay’s The State to have an idea of that. If you are not an economist, Jouvenel’s On Power is a distant second. (My Econlib reviews linked here are only a enticement to read the real books.)
vince
Feb 11 2022 at 3:29am
If you read my laugh to mean that getting money out of politics will never happen, then you read it correctly. But we could lessen the sting. Here’s a start:
https://billmoyers.com/2014/11/21/8-ways-get-money-politics/
Pierre Lemieux
Feb 11 2022 at 11:13am
Vince: I would challenge the post you linked to on many levels. It is not true that “wealthy donors are now able to drown out your voice,” for two reasons: (1) there is statistical evidence that money exerts little influence on elections (and many anecdotal examples: Mitt Romney is only one); (2) “your” voice is completely drowned anyway because no individual has a decisive vote. Moreover, giving to multiple government bureaus the power to limit expression is a way to limit political competition (à la de Jasay) not to favor it. Perhaps the major point: There is no electoral gadget that can change a totalitarian democracy into a liberal democracy: see my recent TIR article, “The Impossibility of Populism.”
Jose Pablo
Feb 15 2022 at 3:01pm
“big money is distorting our politics.”
That’s a sentence always intended to end a debate but that can only start one. Actually it should be read:
a) My political position is the only one that make sense and so in a world of “non distorted politics” should always win
b) My political position and the position I assume “big money” has differ substantially.
The risk or a) and/or b) being wrong is significant.
But, in any case, the first question to be asked is how is big money distorting our politics? Potential answer: because the party supported by “big money” will win the election.
In the 2020 cycle “big money” contributions (the top 100 donors in particular) went to the two main parties in a 44/55 split (democrats / republicans) … and the democrats won. In the 2016 cycle the split was 49/50 and the Republicans won …
https://www.opensecrets.org/elections-overview/biggest-donors?cycle=2016&view=fc
It seems (not trying to reach conclusions out of a sample of 2) that most of the “big money” contributions just wash out each other, being evenly distributed among parties. And if not totally balanced, the party getting more donations is, very likely, the one losing the elections … which, could make sense since you tend to spend more when being behind in the polls.
“big money is distorting our politics.” raise much more questions than answers.
You can even say that “big money” ALLOWS politics. Not clear to me what “politics” is but sure it needs money to “happen” (for parties to have internal organizations, for parties to build “knowledge” on topics, to reach to constituencies …) and part of this money is provided by “big money”.
vince
Feb 11 2022 at 2:42pm
This brings us back to the thorny Citizens United question. Money talks, but is money speech?
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