TEN

HOW POLITICS SUBVERTS ECONOMICS

What is the relationship between the economic system called capitalism and the political system called democracy? Many believe that capitalism is the natural companion of democracy. But it depends on the type of capitalism. If capital is widely held by the citizens in the country, then citizens truly know their interests and can vote accordingly. But if capital is mostly in the hands of a few (say, in a country where one percent of the people own half of the capital), the democratic concept of “one person one vote” is a sham. U.S. capitalism today is essentially Corporate Capitalism. Capitalists are free to move their capital to wherever it will earn the most money for them. Corporate capitalists need not have loyalty to any community, state, or nation. Their interests can differ widely from the interests of the citizens. This one percent will have a disproportionate influence and impact on the country’s policies and direction.¹ The issue, then, becomes whether democracy runs capitalism or capitalism runs democracy.

LOBBYING

“Lobbying” describes the effort of people representing a particular interest group to influence decisions made by government officials such as legislators, regulators, or judges. The term comes from the fact that “influence peddlers” would appear in the lobbies of legislative buildings to “buttonhole” legislators and influence their voting on behalf of the lobbyist’s clients. Most lobbyists are lawyers and many are former congress-persons, senators, and government officials.

Lobbying takes place at every level of government, including federal, state, county, municipal, and local governments. In 1971, there were only 175 registered lobbying firms; in 2009, there were over 13,700 lobbyists spending more than $3.5 billion annually to influence legislators. Francis Fukuyama has labeled the U.S. system of government a “vetocracy” bordering on “interest group capitalism.”² He sees lobbyists as representing a multitude of interest groups that dominate and direct the legislators on how to vote, making the executives (the president, governors, and mayors) fairly impotent. This causes the country to stultify and stagnate and miss the real issues affecting the future of the country.

Views About Lobbying

We tend to view lobbying activity as bad because it leads elected officials away from voting in the interests of the people in their district and toward voting in favor of the lobbyists’ clients. We tend to see the influence of lobbyists as pernicious and favoring the interests of corporations and wealthy families over the common citizens.

Nevertheless, we must recognize instances of “good lobbying” by those trying to counter the misstatements and misinformation of other lobbyists and represent advocacy groups such as environmental, educational, and health care groups. For example, the American Medical Association lobbied Congress to pass laws against tobacco advertising or sales to minors, and most citizens would consider this to be a good lobbying effort.

In the “bad” category are the lobbyists for major industries, particularly oil, agriculture, pharmaceuticals, and defense. Lobbyists for the oil industry have managed to get the government to provide strong subsidies and privileges for that industry. Lobbyists for the agriculture industry basically serve the corporate owners of vast agricultural land rather than small farmers. Lobbyists for the pharmaceutical industry have helped achieve high drug prices in the United States by keeping out foreign drugs and delaying generic drugs. And lobbyists for the defense industry keep legislators actively voting for more military goods even when the military generals don’t need or want them.

Campaign Financing

Campaign finance is the real source of corruption of our democratic ideal. Legislators face mounting costs to get elected or reelected—costs that are beyond their personal income and the income of friends and acquaintances. Each legislator needs campaign donations beyond what his or her political party can supply. Lobbyists are able to make campaign donations that come from their client corporations. Lobbyists cannot ask for the legislator’s vote in return for a campaign donation. But clearly legislators will know the size of the donation and will want to somehow thank the lobbyists for the campaign support. Legislators also know that voting favorably for the interests of certain companies will increase their chances to become lobbyists after their legislative career is over. A congressperson can make several times his or her former annual salary of $187,000 by becoming a lobbyist.

All said, raising enough campaign finance money is a cancer that gets legislators to focus more on the interests of big corporations and wealthy families than on what best serves the interests of the voters in their district. Here is how economist Richard Wolff sees the relation between big politics and big wealth:

A rather vicious cycle has been at work for years. Reduced taxes on the rich leave them with more money to influence politicians and politics. Their influence wins them further tax reductions, which gives them still more money to put to political use. When the loss of tax revenue from the rich worsens already strained government budgets, the rich press politicians to cut public services and government jobs and not even debate a return to the higher taxes the rich used to pay. So it goes. . . .³

We must recognize lobbying as essentially a marketing activity. The client hires a lobbyist with an issue in mind and the lobbyist identifies the key legislators, their voting tendencies, and their susceptibilities, all in order to develop the right information, communication, and persuasion strategy. Successful lobbying requires deft persuasion skill and therefore has much in common with such activities as management consulting, marketing, and public relations. Lobbyists hope to develop a close and trusting relation with various legislators and supply them with helpful information. Lobbyists must not commit the error of feeding dishonest facts to the legislator and thereby embarrassing the legislator, who will never again deal with that lobbyist. Although the facts they supply are usually correct, lobbyists put them into a context that favors voting a certain way.

Lobbyists often say that they don’t approach a legislator and offer a political contribution. Most often the legislator phones them and asks for a political contribution, even stating the desired amount. The total cost of federal campaigns has skyrocketed in recent years, and elected officials today spend countless hours on the phone raising money for their campaigns. The real story here is not one of lobbyists corrupting some otherwise honest policymakers, but one of elected officials hitting on lobbyists in what resembles legalized extortion.

Lobbyists are paid a salary and given a budget to cover expenses and also contributions to legislator campaigns. One of the most damaging indictments of lobbying and campaign finance is found in Lawrence Lessig’s book Republic, Lost: How Money Corrupts Congress—and a Plan to Stop It.⁴ The U.S. Supreme Court decision in Citizens United v. Federal Election Commission ended up declaring that businesses were persons with a right to influence other citizens. The result is special interests funnel huge amounts of business money into influencing Congress and, therefore, business interests control the legislatures. Although there is little evidence of overt bribery, a lobbyist statement (“If you aren’t able to vote for X, I’ll have to contribute $1 million to your opponent”) is likely to have a strong effect.

Does the lobbying activity really pay off? Some studies have tried to show that legislators were not overly influenced by campaign contributions. But Lessig shows that influence can occur in other ways, such as delaying or modifying certain bills or voting them down. He shows how legislators adjust their views in advance before asking for contributions, so there is no explicit evidence of a change in a legislator’s view as a result of receiving contributions.

Other studies show lobbying has a great impact on congressional bills and policymaking. A 2011 meta-analysis of research findings found a positive correlation between corporate political activity and corporate performance.⁵ A 2009 study found that lobbying brought a substantial return on investment, as much as 22,000% in some cases.⁶

Proposed Solutions to the Lobbying Problem

Clearly governments must pass laws regulating the influence of lobbyists. The activities of lobbyists must be reported and be free of overt bribery. Lobbying is subject to extensive rules that, if not followed, can lead to penalties, including jail. Yet lobbying is legal and is interpreted by court rulings as free speech, protected by the U.S. Constitution. Among the solutions proposed are the following:

1. A cooling-off period that makes elected and nonelected government officials, members of their staff, and others wishing to enter the lobbying field wait a year or more before they can become lobbyists
2. Requiring lobbyists to register their contacts and expenditures and report which businesses and organizations lobby, how, to whom, and for how much
3. Establishing a ban on personal gifts
4. Putting a limit on campaign contribution amounts
5. Requiring political candidates to voluntarily agree to take only small ($100 maximum) contributions
6. Allowing federal tax payers to check off a certain amount to go to specific congressional candidates

BRIBERY AND CORRUPTION

Most fields have a dark side its practitioners hardly mention or deliberately bury. I’ve just described how lobbyists representing special interest groups attempt to influence legislators to vote on behalf of their clients. The tools that lobbyists use to influence legislators are all legal, except for one—namely, paying a direct bribe for their vote. Offering a payment to influence a vote or get a favor done is defined as bribery, and it is one of the main forms of corruption found around the world.

Bribery and corruption impose great costs to society. Corruption slows down economic development and burdens democratic institutions. People in power in countries rich in oil, gas, and minerals loot billions of dollars. Ships line up in ports and have to pay heavily for a chance to expedite the unloading of their cargoes. Honest businesses and citizens have to pay others who create no real value for the right to conduct business or handle their normal affairs. The result is a misallocation of resources because the most valuable and efficient transactions do not take place.

There are different levels of bribery, from small-time bribery to grand bribery. An Indian friend told me this story about small-time bribery. Clerks in the Sales Tax Office in India are supposed to give citizens forms to apply for sales tax registration. The Indian government gives the forms freely because it wants sales taxes to be paid. But a clerk told my friend that the forms were not available. Come back next week, he said. However, he would make the forms available for a small fee, which the clerk would keep for himself. My friend asked, “Why do you do this?” The clerk said salaries are low—and paying minor fees won’t hurt those who have plenty of money. My friend asked another tax officer if this bribery practice bothered him. He said no. The salary is too small to let him send his children to a good private school. It has to be supplemented with a “little extra.”

Even small-time continuous bribes can add up to a lot of money. My Indian friend told me about Sukh Ram, the Union Cabinet minister who had ties to the telecommunications industry and was caught with millions of rupees in his home. He adopted an air of injured innocence. “There are others who take far more than I have,” he complained to the press. “Why don’t they go after them first, rather than hound me?”

An example of a grand bribery is when Lockheed gave major bribes to buyer committee members in Japan who were choosing an aircraft. Or consider the African country where the president gave a personal loan to the country to save it from going bankrupt. But did anyone ask where the president got his money from? Did anyone ask where the late President Ferdinand Marcos of the Philippines and his family managed to accumulate such fabulous wealth? And what about Nigeria? This country is so oil rich that it now has the largest economy in Africa, but continues to have a vast number of poor people and a significant number of super-rich former army generals.

Bribery is a widespread practice, but I don’t mention it in my textbooks. Why? I certainly don’t advocate bribing the customer. Nor do I want to advise any company on how big a bribe they need to pay to win a particular contract. At best, I would want my students to know that one or more of their competitors may be offering bribes. They should report it to the authorities or desist from bidding.

I remember a professor friend at the London Business School who decided that the extensiveness of bribery as a practice needed to be exposed. He collected data during his executive management classes. He asked executives in his evening class to raise their hands if their company used bribery to win contracts. No hands were raised. Then he switched the question: “Raise your hands if you know that one or more of your competitors gives bribes.” Almost all hands went up. The funny thing is the class contained managers from the same companies that didn’t raise their hands when the first question was asked.

The professor went further and asked members of his class to send in anonymous descriptions of how specific bribery episodes were performed. He only wanted to know how the bribe was delivered in a specific situation. He received hundreds of cases over the years. He decided to codify the types of bribing arrangements and even figure out the best ways to bribe and optimal amounts to offer as a theoretical exercise. He planned to publish a book on his findings and told his wife. She panicked and warned him not to do it. He would get a reputation that would draw many unsavory characters to seek his advice on how to optimize on bribery. He decided not to write a book or article and locked away all of his research on the subject.

The terrible truth is that bribery is quite extensive. A business that is planning to enter another country should consult Transparency International to see how the country ranks in bribery and corruption. The Corruption Perceptions Index states the perceived levels of public sector corruption in 176 countries and territories around the world.⁷ In 2012, the ten most corrupt countries were Somalia, North Korea, Afghanistan, Sudan, Myanmar, Uzbekistan, Turkmenistan, Iraq, Venezuela, and Haiti. These countries contrast sharply to the ten least corrupt countries: Denmark, Finland, New Zealand, Sweden, Singapore, Switzerland, Australia, Norway, Canada, and the Netherlands.

The fact that China and India are not mentioned in the top ten most corrupt countries does not mean that corruption is a minor problem in those countries. Actually it is a major problem, even though China ranks only No. 80 and India ranks No. 100 in the list of the 176 countries. Given the huge size of these two countries, corruption imposes a major burden on both of them. Even a relatively clean country, such as Germany, in the past allowed its businesspeople to write off any bribe they gave as an expense of doing business.

Most companies do not want to get into the bribery business to win contracts or facilitate performance. The problem is when a company knows that its competitor is engaging in bribery as a practice—should it offer a larger bribe, report what is going on, or desist from bidding?

Honest government ministers in poor countries are constantly offered bribes and saddled with bribery-accepting bureaucrats and venal military officers. The ruling elites sell their resources (e.g., oil, diamonds) to the highest bidders and put their ill-gotten gains into Swiss bank accounts, with little or none of this wealth going to the working class.

Proposed Solutions to Bribery and Corruption

Most corrupt nations have been ineffective in reducing corruption. One step they could take is to explicitly outlaw corruption and set high penalties on bribers. The U.S. passed the Foreign Corrupt Practices Act in 1977 so that any evidence of a corrupt act would lead to the perpetrators being heavily fined or jailed. On the whole, U.S. companies have behaved ethically under this law.

A second approach is to appoint a high-level government agency to investigate bribery occurrences and bring perpetrators to justice. This agency needs to run a public relations campaign against corruption and invite the public to report bribery incidents. The agency could even offer to pay whistleblowers who identify major bribing activity.

A third approach is to make it difficult for those who extract bribes to hide their ill-gotten money. Police and legislative effort is now moving to reach into the money-hiding centers of Switzerland and the Caribbean banks that manage ill-gotten money. The best piece of news is that many Swiss banks have agreed to pay taxes on the amount of money held in secret accounts. These banks are also facing increasing pressure to reveal the names behind large accounts.

GOVERNMENT REGULATION AND TAX POLICIES

A third way that politics can distort the outcomes of capitalism occurs when government interferes too much in the operation of the free market. Understandably, the government has to set up some regulatory agencies to ensure safe food, safe drugs, limited pollution, safe waste disposal, and safe public and private transportation. Economist John Kenneth Galbraith believed that economic regulation was necessary to keep the capitalist system fair and safe and to prevent large businesses from dominating the market. He saw government and unions as a needed “countervailing” force to prevent business excesses.⁸

The powers and responsibilities of regulatory government agencies are normally spelled out carefully. There should be provisions for bringing regulatory agencies to court if their power becomes excessive or abusive. Free-enterprise economists argue that much government regulation costs more than it’s worth. Liberal economists take the position that businesses will cut corners to maximize their profits and business behavior must be monitored and regulated.

The other issue is that government must decide on sales and income tax policies. How much tax should be borne by the working class and how much by the wealthy class? The sales tax falls harder on low-income groups than if the same amount of tax dollars were raised through income tax. Poor people and lower income groups do not pay much in an income tax. There is the question of how steep taxes should be for the rich and super-rich. There is also the question of how much corporations and businesses should pay in taxes.

Conservatives argue that income taxes are too high and that leads to profligate government expenditures. They see too much spent on welfare and “entitlements.” Liberals see entitlements spent on education and health and relief for the poor as necessary and desirable, and a way to make up for the excessive income disparity. Liberals point out the many tax loopholes and exemptions favoring companies and the rich at the expense of the poor.

Even the government’s policies on foreign trade will have a deep impact on the welfare of different income groups. Low tariffs will benefit the poor in allowing lower-priced goods to enter the country. But it may mean lower employment at home because more goods will come in from abroad. How do we measure the net short-term and long-term impact on the poor coming from our foreign trade policies?

Clearly, government regulations and tax policies need to be subject to a periodic review process. Every regulation that is passed needs to include a stated time when the results of the regulation will be reviewed and the regulation might be revised or eliminated. Tax policies also require a frequent review to make sure that they are accomplishing the intended results and not depressing economic growth.

THE INFLUENCE OF THE SUPER-RICH

Finally, let’s not discount the influence of the small group of very rich people in the country having a highly disproportionate influence on public policy. The Koch brothers spend billions of dollars to get Republicans elected. Sheldon Adelson, whose wealth is estimated at $22 billion, presides over a global empire of casinos, hotels, and convention centers. His fortune was the wellspring of financial support for Newt Gingrich in his run for the Republican nomination for president in 2012. Gingrich received over $17 million in political contributions from Adelson and his wife, Miriam, including $10 million in the last few weeks of the campaign for the nomination that went to a “super PAC” supporting Gingrich’s candidacy.

Plutocrats give lie to the democratic ideal of one person, one vote. They want to desperately preserve and enhance their wealth and stop any efforts to increase their taxes. They refer to the “47 percent,” which Mitt Romney alluded to when he was running for president, as lazy citizens preferring to live off food stamps and handouts rather than put in an honest day of work. They assume jobs are available to everyone who wants to work. They also feel they give a lot to charity and are not selfish about their wealth, although rarely do they demonstrate philanthropy on the scale of what Bill Gates and Warren Buffett are doing to improve the lives of others.

The main issue is that the super-rich have a major influence on who gets elected and what policies get passed in Congress. They can hire the best lobbyists and distribute campaign finance money to achieve their political agenda.

Proposed Solutions to the Influence of the Super-Rich

The most direct method of taming the wealth and influence of the one percent class is through more stringent tax systems. Here are possible measures:

1. Put higher taxes on luxury goods.
2. Pass a more progressive tax system, where the tax rate increases for higher incomes. For example, the tax may be 40 percent on an annual income between $100,000 and $500,000; 50 percent on an income between $500,000 and $1 million; and 60 percent on an income between $1 million and $5 million.
3. Set some agreed-on number so that, for example, no annual income can be more than $10 million. The excess will either go to the government or can be directed to some specific social problem.
4. When it comes to estate taxes, allow the surviving member of a family to retain $5 million without paying any taxes. The remainder can be distributed up to $2 million each to offspring (i.e., living children, grandchildren, and great grandchildren). Anything beyond this amount goes to the government.
5. Regarding gift taxes, allow the family to give an annual gift to family members of no more than $20,000 a year to each person. (Those receiving the gift must pay taxes on the gift.)

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In his Republic, Plato described the original concept of democracy as a system of elected representation by an “enlightened electorate.” Initially, women and slaves were excluded from voting. Over time, democracy morphed into the idea that every citizen can vote, whether rich or poor, man or woman, educated or not. Citizens only need to be able to sign their names. Many politicians have a strong interest in keeping voters ignorant and even buying their votes. Corruption is rampant in many “democracies.” When we add the play of politics into the picture, the expected fruits of capitalism are further reduced. As shown in this chapter, politics distorts the outcomes of capitalism in four key ways:

• The role played by lobbying
• The extent and high cost of bribery and corruption
• The need for government regulations and appropriate taxing policies
• Dealing with the disproportionate power of the super-rich

Clearly all of these issues and proposed solutions warrant extensive research and discussion, although the partisan nature of our political system and the gridlock it has caused leaves little hope that this will happen any time soon.