Gifts, hospitality, and political or charitable donations will be bribes if they are given or received with the intention of influencing business decisions.
The practice of rent-seeking—leveraging campaign contributions and lobbying to influence government policy for private gain—has several negative effects on the U.S. economy.
The practice of rent-seeking—leveraging campaign contributions and lobbying to influence government policy for private gain—has several negative effects on the
The U.S. Supreme Court struck down two campaign finance provisions in the past few years that limited independent political expenditures by corporations and other organizations and placed aggregate limits on individual donations. The Court found that the provisions infringe on the right of free speech and that the aggregate limits do not prevent a narrowly defined version of corruption. Since then, federal courts have begun overturning state lobbying regulations under the logic used by the Supreme Court. While there is considerable disagreement about whether the Court was correct in finding that those campaign finance rules failed to prevent corruption, imposing limits on campaign financing and lobbying may be justified for another reason—promoting productive economic activity.
The primary way that campaign contributions and lobbying may dampen economic growth is via a practice known as rent-seeking—the process of seeking income through special government favors rather than through productive economic activity. When firms and individuals engage in rent-seeking behavior, it has several negative effects on economic growth. Not only do people spend more time and money trying to get a bigger piece of the economic pie for themselves rather than trying to enlarge the pie, but the policies they seek are often wasteful, inefficient, or even harmful. If rent-seeking is a successful strategy for businesses or individuals, it can impose great harm on society by slowing or even stopping economic growth. As Nobel Prize-winning economist Joseph Stiglitz explains, rent-seeking not only wastes tax dollars on unnecessary or inefficient projects—redistributing money from one part of society to the rent-seekers—but it is a “centripetal force” that hollows out the economy because “the rewards of rent seeking become so outsize that more and more energy is directed toward it, at the expense of everything else.”
While it is impossible to quantify the economic harm done by rent-seeking to the American economy, this issue brief reviews the literature and finds that the harm is likely quite significant.
Certainly, not all money in politics is spent for the purpose of capturing private favors, but there is evidence that at least a significant percentage of it is. Most Americans do not make campaign contributions or lobby politicians. Rather, the vast majority of money spent on these activities comes from wealthy citizens and business interest groups. Moreover, studies find that businesses with the most to gain from favorable public policy engage in the most political activity.
Even worse, research indicates that campaign contributions and lobbying often help shape policy outcomes, which suggests that rent-seeking efforts are often successful. While disagreement exists about how much influence campaign contributions and lobbying have, money in politics seems to be most effective in shaping the outcomes of issues that are less visible and less ideological, exactly the type of special favors one would expect rent-seeking to target. Furthermore, there have been several findings that show a clear relationship between specific instances of lobbying or campaign contributions and government favors.
from 2003 to 2009, with another $155,000 spent on lobbying in 2013 alone. Unfortunately for Tesla, their business model does not currently include independent car dealers. Instead, Tesla sells cars directly to customers, cutting out an intermediary that the company believes will not sell their cars as effectively.
Incumbent car dealers, through their lobbying efforts, are both protecting their place in the car market and raising the costs of a new competitor. For a new firm such as Tesla to enter a market, it would either have to go through an incumbent dealership that it does not trust to sell its cars—considering the profits dealerships make offering service of gas vehicles—or it would have to support new franchises, which would involve a significant cost for Tesla. Commentators have argued that the behavior of incumbent car dealers constitutes rent-seeking that hurts consumers and solidifies inefficiencies in the car market.
A well-functioning economy counts on new firms to enter a market and, through innovation, either offer a better product or a lower price, forcing older firms to compete to match them on one of those fronts. No matter who wins the competition, consumers come away with a better outcome than they had prior to the new entrant. By engaging in rent-seeking and raising costs for potential rivals, however, firms are able to capture a larger share of the market—not by offering a better or cheaper product, but by preventing the entrant from doing so.
The best case scenario for incumbent firms, such as the car dealers lobbying for dealership requirements, would be to raise potential rivals’ costs enough that they forego the market entirely, opting instead to focus on another geographic area. With fewer competing firms, car dealers are able to protect a larger share of their profit—not through innovation, but by denying consumers a better alternative, which hurts the economy.
the partisan outcomes of elections. Similarly, other researchers have noted the difficulty of determining whether money causes electoral victories or the likelihood of winning induces campaign contributions by donors who want to support the winner. Still, contributions have a significant effect on elections—particularly in shaping who will run in the first place. “The most powerful effect of money on elections is on the selection and competitiveness of challengers,” according to the report for the Task Force on Inequality and American Democracy of the American Political Science Association. The fact that contributions have a greater effect on the types of candidates who run for office than on the partisan outcome of the election is consistent with the idea that donations are most useful on issues that are less noticed by the average voter.
Despite significant evidence indicating the influence of campaign contributions, the literature on the topic does not unanimously hold the idea that campaign contributions are made to buy policy outcomes. Stephen Ansolabehere, professor of government at Harvard University, John M. de Figueiredo, professor of law at the Duke Law School, and James M. Snyder Jr., professor of government at Harvard University, argue that under a competitive market for government favors, more money should be expected considering the size of government budgets and the supposed return on political investment. The authors similarly review the lack of strong evidence in the literature that campaign contributions affect roll-call votes. Since relatively little money is spent on candidates compared to the size of government budgets and campaign contributions do not frequently change roll-call votes, they argue that political campaign contributions are better understood as consumption spending by wealthy individuals, often through businesses they control, rather than an attempt to buy favors.
There are several critiques of this view—including some made by the authors themselves—that explain how donations to candidates lead to policy favors even if a competitive market for those favors has not emerged. First, the authors focus their analysis on roll-call votes, which are often highly visible public affairs in which contributions are thought to have less impact, rather than on less visible acts such as committee votes, letter writing, or the amount of effort or time put into pursuing a legislative outcome.
Second, campaign contributions can skew policy proposals toward the preferences of the affluent. Rather than buying a legislative outcome, contributions work as a weighting mechanism that gives donors’ preferences greater importance. Evidence for this view has been found in subsequent research, showing that the policy preferences of wealthy individuals and business-oriented interest groups exert a large influence over U.S. public policy.
Finally, contributions are especially helpful in buying access. Rather than paying for a certain outcome, contributors are paying for the right to get their policy arguments heard. As the American Political Science Association’s task force put it: “Money does ‘buy’ something—privileged access for contributors and the special attention of members who reward them with vigorous help in minding their business in the committee process.” Access means that lobbyists can visit politicians to explain their preferences for governmental policy, indicating that campaign contributions help make lobbying efforts more successful. And researchers have found that donating to political campaigns can grant access to legislators that would not otherwise be given. Furthermore, if contributions can buy access to lobby, then lobbying victories would necessarily increase the incentive to engage in campaign funding.
With billions spent on lobbying the federal government in 2013, it is unlikely that businesses and other organizations are spending this amount of money without realizing some benefit. Indeed, one commentator has noted that if lobbying was not profitable, it is likely that more shareholder lawsuits would have emerged attacking the practice. Instead, lobbying is conducted by firms looking to affect government policy and can be quite successful. Similar to other political activities, firms that have a greater stake in policy outcomes most commonly engage in lobbying. The effectiveness of lobbying shows up through the channels described above. It is associated with moving bills through committees, stopping policies from passing, and achieving ultimate legislative outcomes.
Conclusion
Economic growth depends upon an efficient use of resources. As this brief has outlined, however, rent-seeking is inherently inefficient because it diverts resources from potentially more-productive activities and thus imposes significant economic costs.
Sadly, the evidence suggests that there is significant rent-seeking in the U.S. economy. Not only are large sums of money spent on campaign contributions and lobbying, the research indicates that these efforts can and do shape policy outcomes. To be sure, not all effort to influence policy is clearly rent-seeking and harmful to the economy, but at least some of the policy changes brought about by money in politics have been wasteful, inefficient, or directly harmful. Additional research is needed to help clarify the scope of the harm that rent-seeking does to the U.S. economy. But as this brief’s review of the literature suggests, the harm is likely quite significant.
Even worse, the economic costs of rent-seeking are likely to grow in the future. With the barriers that limit money in politics falling in the courts, it should be expected that even more money will be directed toward rent-seeking activities in the future.