Of Rent-Seekers and Rent-Givers

Instead of looking for ways to constrain and shape the way firms ask for privileges, we should be looking at ways to keep policymakers from dispensing them.

President Grant liked cigars and brandy. And he liked to enjoy them in the lobby of the Willard Hotel in Washington, D.C. What he did not like was the parade of favor-seekers who beseeched him while he took in his vices. From his perch in the Willard’s lobby, he called them “those damn lobbyists,” and—according to legend—thus coined a new term.

The story is apocryphal; the term appears to have been around for a few hundred years before Ulysses S. Grant was born. But like so many legends, its repetition tells us something about ourselves: that lobbying is a widely despised, even damned, business. It also shows that we consider politicians to be as much the victims of this business as the people whom they serve.

Too many writers on this subject come to their task with that prejudice, which is one of the things that is so refreshing about the exhaustively researched new book, The Business of America Is Lobbying: How Corporations Became Politicized and Politics Became More Corporate. Author Lee Drutman starts with an open mind, viewing lobbyists not as venal manipulators but as people. They are people who make decisions that are shaped by the incentives imbedded in their institutional environment. The focus on institutions sets the stage for a productive discussion of institutional reforms instead of an emotionally satisfying but ultimately unhelpful jeremiad. (The reforms proposed here miss the mark in my view, but more on that later.)

Another benefit of Drutman’s open mind is that it makes him willing to sit down and talk with 60 real, live business lobbyists to get a deep qualitative understanding of corporate lobbying. This qualitative analysis is supported by mounds of quantitative data (some useful, some less so), and an impressive command of the economic, social, and political science literature. I predict that your reading list will grow significantly as you make your way through this book.

It defines lobbying “quite broadly,” as “any activity oriented towards shaping public policy outcomes.” Its focus is on business lobbying, though along the way, the political activity of businesses is contrasted with that of more “diffuse interests.” Drawing on the late economist Mancur Olson, Drutman defines diffuse interests as consumer groups, taxpayer groups, and ideological groups that advocate on behalf of the “general interest” (think: Sierra Club or Heritage Action for America). Businesses, it turns out, spend about 34 times as much on lobbying as do diffuse interests and unions combined. Despite common perceptions, the vast majority of what businesses spend on politics is on lobbying, not on the financing of election campaigns (the ratio is about 13 to 1).

The author’s main thesis is that business lobbying is “sticky.” Once firms start to lobby, for whatever reason, they keep doing it. And the more firms do it, the better they get at it. To put it in economic terms, marginal costs fall and marginal benefits rise; there are economies of scale to corporate political activity.

Drutman also documents a steady increase in corporate lobbying, which seems to have begun in the 1970s and continued, with little pause, ever since. He shows that as firms have become more politically engaged, the nature of business lobbying has changed. It has become more proactive, more particularistic, and more pervasive. Firms have become more proactive in the sense that they help to set the agenda, more particularistic in the sense that they support policies that are tailored to their specific interests rather than to those of the industry or the economy, and more pervasive in the sense that they employ an ever-expanding array of tactics.

As a student of public choice economics, I found the most interesting—and depressing— implication of this book to be one not addressed directly in its pages. It has to do with the theoretical cost of what economists call “rent-seeking” when, as Drutman shows, political activity yields better returns the more firms engage in it.

First, we need some definitions. “Rent,” as an economist uses the term, has nothing to do with apartments. It refers to the above-normal gains that one makes from being an exclusive producer. Exclusivity can be natural, as when someone is born with a unique talent or a firm is a first-mover in a market. In this case, rent is socially beneficial as it encourages those with unique abilities to put them to use by creating value for others. But exclusivity can also be contrived by government and when it is, it is socially costly.

A firm might persuade a lawmaker or other governmental actor to adopt a regulation that discriminates against its competitors, or a tax change that benefits only itself, or an exclusive no-bid contract from the Department of Defense. These contrived exclusivities come at the expense of consumers and other producers. And as the late public choice economist Gordon Tullock noted, they create another social cost: rent-seeking.

Rent-seeking is the expenditure of valuable resources in an attempt to obtain artificial privilege. When firms lobby for particularistic policies, they are often rent-seeking (I say often, because it is also possible that they are simply trying to remove a particularistic burden). Rent-seeking costs resources. Firms spend money on lobbyists and on PACs, and they change their production patterns in order to attract political favors. Unlike investments in new product development or customer focus groups, these rent-seeking investments create no net value for society. They are socially costly. This is why researchers find that societies with rampant rent-seeking tend to be poor societies with slow rates of economic growth.

Now the interesting thing about rent-seeking is that it is possible, in aggregate, for firms to invest more resources into seeking rent than the rent is even worth! This is known as “over-dissipation” and it turns out that it is more likely when 1) more firms are seeking the exclusive privilege, and 2) there are economies of scale in rent-seeking. In other words, Drutman’s chief findings—that there are economies of scale to business lobbying and that corporate lobbying has become more proactive, more particularistic, and more pervasive—are precisely the sorts of conditions that make rent-seeking more costly.

Drutman is most convincing when advocating his “stickiness of lobbying” theory. It is buttressed by a wide array of quantitative data, a series of short case studies, and statements by lobbyists themselves. One reason for this stickiness has to do with the informational advantage that lobbyists hold over their employers. Politics is a peculiar business, with messy and speculative connections between cause and effect. Lobbyists typically understand this business far better than the companies that employ them. And this means that, once a firm has invested in a lobbying team, the team is able to make a strong case for its continued value—stronger than the facts, in some cases, would warrant.

As I often find with empirical work, the author is less convincing when attempting to dismiss competing ideas. In particular, he wants to reject the theory that businesses lobby more in response to increased governmental attention. To assess this theory, he counts the number of times Congress passes bills or holds hearings relevant to a particular industry. He then compares these patterns to each industry’s “lobbying presence,” defined as the number of in-house lobbyists and external lobbying firms on contract. In regression analyses he finds something counterintuitive: more bills and hearings are associated with less, not more, lobbying. From this he concludes that governmental attention does not lead to more business lobbying.

It isn’t clear, however, that the causation runs from hearings and bills to lobbying. It could run in the opposite direction. Earlier in the book, Drutman cites important work by political scientists Peter Bachrach and Morton Baratz, who argued that much of political power is about keeping items off the agenda. His regressions might simply be picking up that firms with more active lobbying shops are successful at avoiding hearings in order to maintain the status quo and not that more governmental attention is associated with less lobbying.

Puzzlingly, while his data analysis leads Drutman to reject the governmental-attention hypothesis, much of his qualitative analysis supports it. As I said, he documents the “political awakening” of businesses in the 1970s. This awakening followed “the mid-to-late 1960s,” when “public opinion and public policy turned against industry, and a new regulatory climate imposed new costs on business. Feeling threatened, business leaders turned to politics and individual corporations devoted substantial attention to politics for the first time.” Twenty years later, the same pattern emerged when the politically naïve tech sector suddenly felt a need to get engaged following Microsoft’s antitrust suit.

As Drutman acknowledges elsewhere in the book, variation in political activity across industries follows this same pattern:

It would be easy to determine why telecom, banking, defense, and pharmaceuticals are among the most politically active industries. Government regulations and/or purchases are critically important to these industries.

Given this cross-industry evidence, the historical evidence of the 1970s and 1990s, and the possibility of reverse-causality in his regressions, it certainly seems the author should be more skeptical of his estimated coefficient on “government attention.”

What’s more, the governmental-attention story and the lobbying-begets-more-lobbying story are not mutually exclusive. It is entirely possible that firms might begin lobbying as a defensive response to unwanted government attention and then continue and expand their lobbying operations taking a more proactive, particularistic, and pervasive approach as time goes on. As my colleagues Adam Thierer and Brent Skorup demonstrate, the political activity of the tech sector certainly follows this pattern.

The last 14 of the book’s 239 pages speculate about solutions. This section starts strong, with Drutman saying he takes “very seriously James Madison’s argument in Federalist #10 that the problem of faction is inherent to all political systems, and that any attempt to limit the participation of factions is a cure worse than the disease.” Given its monopoly on the legitimate use of force, government has the power to both privilege and punish particular firms. If firms are limited in their ability to participate in the political process—such as through campaign-finance regulations—we can expect government to mete out more punishment than privilege. And this can, like rent-seeking, be extraordinarily costly. (I’m guessing that those who recently introduced a constitutional amendment to allow regulation of political expenditures do not share Drutman’s appreciation of Federalist 10.)

Having dismissed “any attempt to limit the participation of factions,” Drutman then lays out what he considers three better solutions: First, a federal subsidy to underrepresented interests so they can hire their own lobbyists or perhaps employ a government lobbyist on loan from a newly-minted agency (what he calls an “Office of Public Lobbying”). Second, a set of uniform processes for lobbying that would require firms to disclose details about their lobbying activities. Third, more resources for lawmakers and the agencies that advise them so that they are not so easily overwhelmed by the analysis and argumentation of lobbyists.

None sounds workable to me. The federal subsidy would flow to any position supported by a threshold share of the population (he suggests 25 percent). His aim is to empower the diffuse interests who typically bear the cost of bad policy. But I don’t think it’ll work out that way since most diffuse interests don’t know they are diffuse interests.

Take the Export-Import bank. Economic analysis is quite clear that a diffuse group of taxpayers, borrowers, and consumers bear the cost of this agency, which bestows privileges on a handful of wealthy and politically powerful firms. Do 25 percent of Americans even know the agency exists? Do they have a solid enough grasp of “deadweight loss” analysis to realize that they bear these costs? More likely is that the concentrated interests who benefit from the Ex-Im Bank (mostly Boeing) will find a way to capture this subsidy and use it to maintain their privileges.

The uniform lobbying processes idea is probably more benign. But why not require policymakers to disclose whom they and their staffs meet with rather than require citizens to comply with potentially burdensome and complicated disclosure rules? Again, I’m guessing Boeing would find it much easier to file a lobbying disclosure form than would a bunch of taxpayers or consumers.

Lastly, while I don’t much object to more analytical resources for lawmakers, I’m skeptical that this would go very far in solving the problem.

Here is my suggestion, and it has to do with Ulysses S. Grant’s cigar time. Most of the bothersome lobbyists who interrupted Mr. Grant in the lobby of the Willard were seeking jobs. The main reason for this is that Grant’s administration—like all administrations of that era—was known to hand out jobs on a noncompetitive basis. Jobs would go to friends, to family members, to campaign boosters, and even to the highest bidders. Lobbyists asked Grant for privileges because he was known to hand them out (his administration had a reputation for corruption).

Much of this changed when the Pendleton Act finally introduced civil service reform in 1883. The Act established the competitive civil service exam and made it more difficult for policymakers to dispense privileges to whomever they wanted. In so doing, it closed the most important avenue for rent-seeking in the 19th century.

There are many more avenues for rent-seeking today, to be sure. Policymakers regularly dispense privileges through the tax code, the regulatory code, and the congressional appropriations process. Instead of looking for ways to constrain and shape the way firms ask for privileges, we should be looking at ways to keep policymakers from dispensing them.

Though I quibble with some of the analysis in these pages, and find the prescriptions for reform less than persuasive, let me stress how edifying and entertaining I found The Business of America Is Lobbying. Anyone interested in gaining a better understanding of business, politics, and the growing intersection between the two should read Lee Drutman’s book.