How companies try to influence governments
Source: Grey eminences | The Economist
Special report: Companies and the state
How companies try to influence governments
Feb 22nd 2014
LOBBYISTS SOMETIMES FEEL unloved. Jeremy Galbraith of Burson-Marsteller, a lobbying firm, tells the story of a taxi ride he took in Oslo. The conversation was flowing nicely until the driver asked him what he did for a living. The rest of the journey passed in silence. Heather Podesta, a lobbyist in Washington, DC, defiantly wears a badge displaying an L to demonstrate pride in her profession.
It is natural for companies to want to present their case to government to ensure that their voice is heard. In America the right to petition the authorities about grievances is guaranteed by the constitution. And the more that governments interfere in their economies, the more there is to lobby about. But what may make sense for an individual company could lead to a mess at the aggregate level.
Lobbying creates its own momentum. A company that sees its competitors doing it will follow suit to avoid losing out
Mancur Olson, a political scientist, argued that small groups of producers have a strong incentive to band together to protect existing tax breaks and subsidies because such perks are highly lucrative for them. He elaborated his theory in a book published in 1982, “The Rise and Decline of Nations”. Conversely, the millions of taxpayers and consumers who bear the costs of these privileges will each pay only a negligible amount, so they have little incentive to lobby for them to be removed. Over time, therefore, the power of special-interest groups will steadily grow, reducing the economy’s potential.
The drip-drip-drip principle
Lobbying is still dominated by the producers’ interests. An analysis by the Sunlight Foundation of lobbying related to America’s Dodd-Frank financial reform found that, between June 2010 and June 2013, federal regulators met banks 14 times more often than they met consumer groups. Goldman Sachs alone attended 222 meetings; the top 20 pro-reform groups combined met regulators 287 times. In the list of the most frequent participants, the leading pro-reform group appears in 30th place. In Britain, drinks companies held 130 meetings with the government between 2010 and 2013; eventually a plan to introduce minimum prices for alcohol was shelved.
America’s lobbyists, gathered around K street in Washington, DC, are considered to have the most influence, but their success is of fairly recent origin. Fifty years ago few big companies employed professional lobbyists or kept an office in Washington. The activist administrations of Lyndon Johnson, Richard Nixon and Jimmy Carter expanded the role of government and increased the impact of regulation.
In the mid-1960s, when Ralph Nader campaigned against poor car safety, General Motors did not have a single lobbyist in Washington. The fightback is often dated to 1971 when Lewis Powell, a corporate lawyer, wrote a memo accusing American capitalism of responding to attacks by “appeasement, ineptitude and ignoring the problem”. Businesses started to band together. Membership of the Chamber of Commerce grew from 36,000 in 1967 to 80,000 in 1974 and doubled again to 160,000 by 1980.
Lobbying creates its own momentum. A company that sees its competitors doing it will follow suit to avoid losing out. Moreover, it seems to work. Among Fortune 100 companies, the ten that lobbied most in 2010 paid an average effective tax rate of 17%; the 80 that lobbied least paid an average of 26%.
Lobbying might also be needed to head off unfavourable legislation pushed by political pressure groups. The financial-services industry has only recently woken up to the need to get organised in Brussels, where the 2007-08 crisis provoked a lot of political hostility.
Lee Drutman of the Sunlight Foundation argues that professional lobbyists benefit from an information asymmetry. Companies rely on lobbyists to find out what is going on in government. Their informants have every incentive to play up threats and opportunities that call for more lobbying. It also suits them to argue that businesses should lobby individually rather than rely on industry associations. When the law is altered to suit individual companies, it becomes more complex, which creates a need for more lobbying to deal with the complexity. Mr Drutman’s research shows that the best predictor of a company’s lobbying activity in any given year is its lobbying activity in the previous year.
It seems likely that all this has made the regulations and tax laws more complex. The number of pages in the American tax code doubled between 2001 and 2011, and the number of words grew to 3.8m. This complexity weighs on the economy, as predicted by Mr Olson 30 years ago.
Discussions about lobbying tend to focus on America, but that is largely because the country is so open about it. In China, for instance, lobbying is not considered a profession, but it is hard to believe that Chinese businesses do not have the ear of their government; after all, many of them are part-owned by the state.
In Europe lobbyists gather in Brussels, where Rue Belliard has become the equivalent of K street. The disclosure rules are far laxer than in Washington; listing on a lobbying database is voluntary, so there may be many more lobbyists than the roughly 30,000 the register suggests. But at least Europe, unlike America, imposes strict limits on political-campaign contributions.
Since lobbying is mostly confined to large, established companies, the question is whether it discriminates against small, innovative groups. Complex regulations act as a barrier to entry. And at a time when many voters are angry about a decline in living standards, some also wonder whether the prevalence of lobbying has favoured the rich.
What money can buy
As Mr Drutman points out, “nobody buys anybody in a straightforward quid pro quo. But money acts as a filtering or gatekeeping mechanism.” Those with money are more likely to gain access to congressmen than those without it. This may result in policies that favour the wealthy, or big business, giving them more money with which to fund more lobbying. It is telling that the five biggest contributors to Mitt Romney’s 2012 presidential campaign worked for financial-services companies, and employees of Microsoft and Google comprised two of the top five donor categories to Barack Obama.
This kind of feedback loop was already worrying President Woodrow Wilson 100 years ago. In his view, “it is of serious interest to the country that the people at large should have no lobby and be voiceless in these matters, while great bodies of astute men seek to create an artificial opinion, and to overcome the interests of the public for their private profit.”
America’s rules were tightened in response to the Abramoff scandal in 2006, when a lobbyist was jailed for conspiracy to bribe public officials. These days lobbyists are required by law to say who their clients are and how they pay. But some elements of the rules are bizarre. For example, lobbyists have to disclose which part of the government they have talked to (for example, Congress) but not which individual (say, a particular congressman). And although lobbyists can no longer buy congressmen lunch, they can contribute to their campaigns. In his book, “So Damn Much Money”, Robert Kaiser revealed that Gerald Cassidy, a leading lobbyist, together with his wife handed over $1.3m for congressional campaigns during his career.
Whatever the concerns about it, lobbying is not going to go away. As Ms Podesta points out, “Washington picks winners and losers every day; they don’t always mean to but someone is up and someone is down. Clients who are out of sight are out of mind. There are a number of diverse voices talking to Congress at all times about issues; there are people on both sides of the argument, and it is up to congressmen to decide between them.” She argues that no congressman wants to be seen acting against the interests of his constituents. Mr Galbraith, for his part, blames the industry’s dodgy reputation mainly on the politicians, not the lobbyists.
The problem is not so much outright corruption as opacity; citizens cannot tell whether political decisions are made for objective reasons or because politicians have been influenced by the best-funded lobbyists. And companies feel they cannot withdraw from lobbying for fear of losing out. As Mr Drutman writes: “If (politics) is a market, it is most like a Byzantine bazaar in which one never knows what will be for sale and in which the merchandise comes and goes unpredictably. Prices are unmarked and ever-changing. One must pay a price just to enter.”