In “The Broken Contract“, his essay in the latest edition of Foreign Affairs, New Yorker staff writer George Packer argues that the source of widening US inequality is to be found when…
Organized money and the conservative movement seized the moment back in 1978 to begin a massive, generation-long transfer of wealth to the richest Americans.
Economic accounts of rich-world income inequality tend to emphasise structural factors: technological change, free movement of capital, cheap consumer goods made in Asia, increased returns to high skill levels, and so on. “Although those factors played a part, they have not been decisive. In Europe, where the same changes took place, inequality has remained much lower than in the United States,” Packer writes.
For Packer, lobbying is key. In 1978, three union-backed “reform bills” were brought up for a vote in Congress, and despite Democratic control of the White House and of both houses, each failed. This marked the turning point: political spending by business was no longer “disinterested” and whereafter lobbying and campaign spending increased exponentially, Packer argues.
How and why this happened are explored in Jacob Hacker and Paul Pierson’s recent book, Winner-Take-All Politics. Their explanation, in two words, is organized money. Business groups launched a lobbying assault the likes of which Washington had never seen, and when it was all over, the next era in American life had begun.
Organized money did not foist these far-reaching changes on an unsuspecting public. In the late 1970s, popular anger at government was running high, and President Jimmy Carter was a perfect target. This was not a case of false consciousness; it was a case of a fed-up public. Two years later, Reagan came to power in a landslide. The public wanted him.
The transfer continued in good economic times and bad, under Democratic presidents and Republican, when Democrats controlled Congress and when Republicans did. For the Democrats, too, went begging to Wall Street and corporate America, because that’s where the money was. They accepted the perfectly legal bribes just as eagerly as Republicans, and when the moment came, some of them voted almost as obediently. In 2007, when Congress was considering closing a loophole in the law that allowed hedge fund managers to pay a tax rate of 15 percent on most of their earnings—considerably less than their secretaries—it was New York’s Democratic senator Charles Schumer who rushed to their defense and made sure it did not happen. As Bob Dole, then a Republican senator, said back in 1982, “Poor people don’t make campaign contributions.”
Packer is too keen to reject structural causes. “The same changes” didn’t take place to the same extent in Europe, at least outside the UK, for several reasons: ideology, stronger union power, more generous social safety nets, and different sources of comparative advantage (less services-dependent).
And while we agree with most of the points Packer makes, the essay is also a missed opportunity to cite the growing literature about inequality’s impact on the macroeconomy. When the likes of Rajan, Roubini and Wolf are warning of the dangers caused by disparities in wealth and income, there’s a chance to persuade those who might not otherwise agree that vast inequality is bad per se.
Furthermore, “organised money” didn’t appear overnight, as Dwight Eisenhower, among others, noted.
But at the risk of looking for turtles all the way down, there’s no hiding the staggering rise of money in US politics over the last three decades.
A paper released Monday by economists from Harvard Business School and the International Monetary Fund quantifies lobbying and makes an important finding: barriers to entry are high, therefore surprisingly few firms are able to directly influence the political process.
The authors first use several databases on lobbying expenditures by public companies to size the overall market. Then they perform a neat natural experiment looking at how firms reacted to the dramatic decline in 2004 of the H1-B visa cap, which meant fewer high-skilled foreigners could work in the US. Did affected firms lobby against it? If so, which ones?
Here are some facts mentioned in the paper:
– Total lobbying expenditure outnumbers campaign contributions by a factor of nine.
– Only 10 per cent of the sampled publicly traded firms lobbied at least once between 1998 and 2006.
– The probability that a firm lobbies in the current year given that it lobbied in the previous year is 92 per cent.
– Average (mean) yearly lobbying spend for active firms is $475,000.
– The average firm that lobbies is four times bigger by revenues and twice as big by assets as the average firm that does not.
This leads the authors to hypothesise that (i) few firms lobby, (ii) lobbying status is strongly associated with firm size, and (iii) lobbying status is highly persistent over time. And it turns out that their natural experiment supports these ideas:
Using a panel data set of 171 major firms over 2001-2006 with detailed information on lobbying activities, we find that firms dependent on high-skilled immigration adjusted their lobbying behavior towards immigration-specific issues in response to the shock. While the response was very áexible among firms already lobbying, we do not find adjustments on the extensive marginó i.e., firms that were not lobbying on any issue prior to the shock did not start lobbying in response to the shock.
The authors go on to explain the high costs of entry for firms wishing to lobby: not only hiring lobbyists but also the time it takes to “build relationships” with lawmakers.
This is only one study and one natural experiment doesn’t prove a broader point. However, we suspect it fits with how things actually work in Washington.
This concentration of power can’t ultimately be good for anyone save for the firms themselves and K-street. The voices lawmakers hear don’t reflect an accurate sample of affected people, and if politicians and lobbyists can predict who will kick up a fuss then it inclines politics to be depressingly predictable and transactional. Regulatory capture becomes commonplace. It took us a long-time to reach an open-access social order and it’s not a good idea to give it up.
When it’s folks from the IMF and HBS making these points, and not just New Yorker staff writers, it might be time to do look again at them rules.
Related links:
Lobbying looks like a risky business – FT
The cost of the revolving door – FT Alphaville