Monday, May 10, 2010

Bailouts, the Supreme Court, and a Tax on Lobbying

In Citizens United v. Federal Election Commission (, the U.S. Supreme Court overturned existing law and precedent and ruled in a 5-4 decision that for-profit corporations can spend as much money as they like on political advertisements at election time. Some see the decision as a great victory for free speech while others claim it will spell the end of the republic itself. Both extreme views are extremely wrong, rooted, like the Court’s decision, in hackneyed readings of tired secondary sources. What the decision should do is encourage Americans to reconsider the role that political influence plays in their material well being.

Instead of Homo sapiens, it might be wiser to think of humans as Homo ereptor, or man the thief. Given the chance, most humans like to get something for nothing, or to engage in “rent seeking” as economists term the activity. When directed at the government, rent seeking by individuals is generally ineffective and hence innocuous. When individuals with similar economic interests combine efforts, however, they often manage to obtain substantial favors from the government, including tariffs, subsidies, and favorable regulations.

For that reason, the Founders feared that “moneyed corporations” threatened the existence of the Republic. It was not that corporations would sway public opinion through advertising or publicity but rather that they could directly buy or coerce votes, a viable threat in a land where viva voce and other forms of open voting held sway and where landlords, employers, and creditors traditionally leveraged their economic power on election days.

By essentially eliminating direct corporate influence on voters, the “Australian” or secret ballot reforms of the late nineteenth century destroyed the threat that businesses would elect their own slate of candidates. The Court’s decision, however, makes it easier for corporations to co-opt whichever politicians the electorate happens to vote into office by allowing them to promise substantial resources when they are needed most, just before the next election. Money can’t buy happiness or elections, but it sure helps!

In other words, lobbyists just got a lot more powerful and that is not likely to be a good thing. Lobbying is nothing new and is generally considered a form of free speech that should be protected under the First Amendment. But does that mean it should be strengthened? I think not. In fact, lobbying should be taxed. The “free” in free speech does not mean gratis: the government has long taxed newspapers, TV stations, book publishers and authors, protest permits, and other forms of speech.
Tax is a dirty word but there is a very good economic rationale for imposing a tax on lobbying and other activities that create what economists call “negative externalities” and everyone else calls “pollution.” By definition, negative externalities impose costs on third parties not reflected in the market price, leading to a more than socially optimal level of output. Unsurprisingly, almost all Americans not directly benefited from lobbying activities believe that too much lobbying is produced, a good sign that such activity does in fact create negative externalities as palpable as belching smokestacks. The most efficient way to reduce such pollution is to tax it, thereby imposing appropriate costs on its producers.
The recent financial crisis and subsequent rash of bailouts is a good example of the pollution created by untaxed lobbyists. As shown in Bailouts: Public Money, Private Profit, the most recent addition to the SSRC/Columbia University Press Privatization of Risk series, statistical evidence that government bailouts since 1970 have sped economic recovery after financial panics is lacking. Historical case studies suggest that government interventions were sometimes successful, as in 1792, but at other times, like in the mid-1760s, they clearly made matters worse and the New Deal was a mixed bag at best. The book also demonstrates that most financial crises were not caused by market failures, like asset bubbles, alone but rather stemmed from hybrid failures, or complex combinations of market and government failures. Throughout history perverse incentives, most created at the behest of lobbyists on behalf of special interests, constituted a leading form of government failure and the most recent financial cataclysm was no exception to that rule.

Venal investment bankers (actually, bankers rewarded for maximizing personal short term returns due to a change in bank ownership structure from partnerships to joint-stock corporations), incompetent rating agencies (like Moody’s), distortionary tax incentives (mortgage interest deduction plus pre-tax 401K contributions), weak financial and economic education (don’t get me started), homeownership initiatives (like the Community Reinvestment Act), degeneration of creditors’ rights (non-recourse loans and silent second mortgages), low interest rates (due to the Federal Reserve and GSEs), and most of the other major causes of the housing bubble and subsequent subprime securitization crisis were the direct results of special interest lobbying, not widespread public opinion or the labored conclusions of a benign technocratic bureaucracy. The form (and size) of the bailouts was also largely a product of special interest pressures. Those bailouts may not cost taxpayers as much as once feared but clearly resources were redistributed from the many and innocent to the few and culpable. The bailouts also increased moral hazard, or risk-taking at another’s expense, and hence the probability of future troubles.
Giving lobbyists yet more power therefore seems an unpromising way to improve the quality of already dubious public policies. So why not tax the pollution created by lobbying activities? Give every U.S. citizen and organization the right to lobby anyone in the federal government tax free up to, say, $100 per year (indexed to inflation), more than enough to cover the cost of phone calls, letters, and emails made by typical individuals and small businesses. Beyond that, impose on lobbying activities a tax approximating the size of the rents sought after. Reduce the expected benefit of rent seeking and we’ll see less of it. Homo ereptor will not go extinct but we can then at least make a case to keep our species name as is.

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