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Money and U.S. Politics

March 20, 2012

Every once in a while, it is good to confront one’s own biases. I have to admit, I enjoy it when I see a story about some corrupt politician changing a policy for a bribe. But as a social scientist, I have to admit that this tendency to look for the worst in politics is a bias. America is much less corrupt than most of the world. Despite all of the ruin, our economy still thrives.

Congressional Campaign Spending

In 1972, Gordon Tullock posed interesting question: Given the trillions of dollars of spending and taxes at stake, why is there so little money in U.S. politics? At first, $2 billion might seem like a lot, but really, it’s trivial compared to the $3,000 billion or so up for grabs. If politicians were really bought and paid for, spending would be a lot higher.

Lobbying by industry
Source: Sunlight Foundation

The Microeconomic Model
In the standard microeconomic model, firms will invest if the expected profit is positive, relative to the other investments available to the firm. Generally, firms only invest if they can expect fairly high returns. The higher the risk of loss, the higher the return required to convince a firm to make the investment. In this framework, lobbying is just another investment firms can make to increase future profits. Returns to lobbying, when successful, are sky high. That implies that lobbying “investments” are extremely risky, or more firms would crowd into the fray and bid down the returns.

Lobbying is an all pay or “Tullock” auction, which means everyone has to pay their bid, even if they don’t win. Such auctions frequently have combined bids far higher than the value of the prize. In the case of taxes, you have to pay, even if you don’t want to play the game at all. Congresspeople can shakedown firms who don’t lobby by threatening to tax those who don’t give them a certain amount. Perhaps lobbying costs are low because firms see this as a game they don’t want to play, and so stay out as best they can.

Intellectual Capture or Corruption?
The rich have far more political influence than the poor. In situations where the poor and middle class disagree with the upper class, the upper class is much more likely to get their ideas enacted into law. As shown in the graph below, if a policy is favored by 90% rather than 10% of the average median income person, that increases its chances of becoming law by about 5%. If the elites change their opinion by that much, the odds of getting a policy enacted increase by almost 30%. The poor are even less influential than the middle class.

Median vs elite influence
Source: “Inequality and Democratic Responsiveness” Martin Gilens (2005)

Perhaps politicians are influenced by the rich because they are the rich. They associate with other rich people, and they talk mostly to other rich people. It is no surprise that some of those beliefs and values influence their policies. Bryan Caplan has a theory that lower class people like destructive policies, so politicians are forever trapped between doing good policies, which they will be rewarded for because of outcomes, but punished because those policies are unpopular and doing bad policies, which are popular, but cost them votes later when the economy suffers. Such a dilemma will make it appear as though the rich have disproportionate sway.

Conclusion
Sometimes people vote because they like the politician, or the thing that they stand for, rather than what is in their narrow self interest. For example, someone might be loyal to a party and vote for them regardless of if their candidate was technically the best. The conclusion the authors of “Why is There so Little Money in U.S. Politics?” come to is that most lobbying and campaign contributions are like this too. Firms give to politicians who are relatively indifferent between two polices, and lobbying is relatively ineffective, on average. If the investment is highly risky, estimates focusing only on the successful cases will tend to overestimate the returns, especially if the lobbying was irrelevant to the actual outcome. Perhaps the system just isn’t that corrupt and firms who spend a lot trying to buy policies are just wasting their money. It’s not the most entertaining explanation, but it might be the correct one.

Further Reading:
Maybe money’s influence isn’t all bad.
Bryan Caplan comments
Money can’t buy elections
Garett Jones’ update on the 2012 elections

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