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Why We Should Tax and Shame Excessive Corporate Lobbying

Does a CEO have a duty to lobby?

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By Luigi Zingales

We need not only more disclosure, but also more work in alerting people in general (and students in particular) about the distortive effects of lobbying and the extent to which it takes place.

“To petition the Government for a redress of grievances” is a right inscribed in the First Amendment of the U.S. Constitution. This right equally belongs to individuals, organizations, and corporations. Thus, a CEO has the right to use corporate resources to petition the Government for a redress of any grievance her company might have. But does this right translate into an obligation? Does a CEO have a duty to lobby? Does this obligation follow from the shareholder value maximization principle, as Larry Fink seems to suggest in the Davos debate reported here?

If we limit ourselves to describing what businesses do (what we call positive economics), then the answer is obvious. Most CEOs lobby heavily. Not only do they do it, their main investors tell them to do so, as confirmed here by Larry Fink, CEO of Blackrock and one of the largest institutional investors in the world. They lobby not just to redress grievances, but to shape the rules of the game to their own advantage. Alphabet (Google) is not a regulated company (at least in the classical sense of the word), but it is one of the companies spending the most on lobbying. Why? Not only to defend the right to use the massive data it collects, but also to proactively shape the business environment in its favor. Whether one supports “net neutrality” or opposes it, he has to agree that net neutrality greatly favors Google, which fears being charged directly for the massive internet use it generates, while it penalizes telecom companies, which cannot price-discriminate to recover the fixed costs of the network they build. Not surprisingly, Google lobbies very heavily in favor of net neutrality, while telecom companies lobby against it. 

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When economic giants fight among themselves, not only does the right to lobby fulfill a constitutional right, it is also efficient.  This is what Nobel Prize winner (and late University of Chicago professor) Gary Becker thought: competition among lobbies leads to efficient outcomes 1). Yet, for this result to be true two conditions need to be fulfilled. First, the different interests (or view points) should have equal ability to organize and finance their lobbying effort. As Mancur Olson (a Maryland economist who died too young to win the Nobel Prize) wrote, dispersed interests face a bigger hurdle in getting organized 2). Thus, citizens interested in clean water have a harder time lobbying Congress than chemical companies who pollute it (see the DuPont case described here). Second, lobbying is efficient if it is entirely dedicated to providing information to the legislator. While some lobbying certainly performs this role, not all of it does, as shown in this paper. If lobbying is (mostly?) about influencing rather than about informing, then it is a tantamount to an arms race, which leads to inefficient outcomes with too much lobbying 3).

Thus, under realistic conditions lobbying tends to be excessive from a social point of view: not only does it waste resources, but also might lead to the wrong decisions: favoring the strongest player, not necessarily the one with the most valid claim. If this is the case, then there cannot be an economic duty to lobby, at least not one based on sound economic principles, since this prescription would lead to outcomes that are inefficient. 

This conclusion seems to contradict the traditional theory of the firm. If the goal of a CEO should be to maximize long-term shareholder value and lobbying does produce this outcome (see for example), for evidence that lobbying firms have higher returns), why shouldn’t CEOs do so?  Yet, in his famous piece where he advocates that firms should have a single-focused goal of maximizing shareholder value, Milton Friedman was very careful in stating the assumption that “the basic rules of the game” were off limits to firms. Thus, implicitly even Milton Friedman recognized that– when lobbying is present and effective– his prescription does not necessarily hold.

Then, the question is not whether firms have a duty to lobby but whether from an economic point of view the cost of putting restrictions to firms’ lobbying activity (if this were constitutionally allowed) is superior to the potential benefits of these restrictions, with the understanding that–left to themselves—firms will lobby aggressively and probably lobby too much. Some people (including my colleague and friend Steve Kaplan) think that lobbying activity is a minor and inconsequential part of firms’ activity. Thus, it is not worth changing our prescription for it. This belief is certainly supported by the absolute value of the amount spent in lobbying. Alphabet, a company with a $515 billion in stock market capitalization, spends only $17 million a year in lobbying. Why should this be such a big deal?

Yet, this conclusion relies heavily on a very narrow definition of lobbying. In reality, the amount of resources most firms spend in influencing public policy is much larger. It includes a big chunk of the advertising many firms do–otherwise why would many firms with no consumer products, like ADM, engage in massive advertising? It also includes a lot of philanthropy, like many oil companies do to acquire brownie points with local communities in case of an oil spill. It includes also campaign donations and all the time and resources companies dedicate to help political candidates. During the last presidential election, Google’s CEO Eric Schmidt offered technological help to the Obama campaign. Is it just a coincidence that the FTC commission appointed by his administration decided not to proceed with an antitrust case against Google, in spite of the favorable opinion of the FTC research department?           

If the definition of lobbying is broadened and the consequences are potentially so ominous, it is neither minor nor inconsequential. And if this were the case, it would be hard to argue that consumers can offset Google’s lobbying. The call for papers that the Stigler Center (in conjunction with HBS) has launched tries to answer precisely these questions and to stimulate a debate on what should be done.

 In the meantime, my modest proposals (which I advanced in my 2012 book A Capitalism for the People are as follows. Even if the Constitution allowed for laws to restrict corporate lobbying (and, in the United States after Citizens United, it is not), it would be a practically impossible task to achieve. Thus, one potential remedy is to introduce a progressive tax on lobbying expenditures. The proceeds of this tax could then be used to strengthen the advocacy of public interest groups, which are poorly coordinated and poorly financed, to level the playing field. This money could then be allocated to various groups using a voucher system, along the lines of Larry Lessig’s proposal for campaign financing reform. 

The second remedy is a combination of naming and shaming. Most people feel it is socially legitimate for a company to lobby to redress an injustice, like a higher tax rate that penalizes one company vis-à-vis the rest. At the same time, I suspect many people would feel uncomfortable with a company lobbying to protect an unjustified tax loophole that benefits it greatly (certainly I do). Thus, exposing excessive lobbying can play a role in mitigating it.

For this to take place, however, we need not only more disclosure, but also more work in alerting people in general (and students in particular) about the distortive effects of lobbying and the extent to which it takes place. Academia (and in particular business schools) should play a key role in this direction. This is one of the key missions of the Stigler Center.    

With a clear social norm on what constitutes acceptable lobbying, the legal principles of corporate governance do not need to be changed. As I already discussed here, the American Law Institute’s principles of corporate governance states that a CEO “may take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business” (emphasis added). Thus, there is no way a shareholder can sue a manager for breach of her fiduciary duty if the CEO does not undertake socially inefficient lobby.

Yet, who decides what is reasonable and responsible? Once again Academia plays a big role here. Hence the importance of the conference we are organizing on this theme.

Originally published here.

References

  1. Becker, Gary.  1983. “A Theory of Competition Among Pressure Groups for Political Influence.” Quarterly Journal of Finance 98(3):  371-400
  2. Olson, Mancur. 1965. The Logic of Collective Action:  Public Goods and the Theory of Groups. Cambridge:  Harvard University Press
  3. Tullock, Gordon. 1972. “The Purchase of Politicians.” Western Economic Journal 10: 354-355

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  • Derryl Hermanutz

    Lobbying is an ancient art. Here is Adam Smith’s take on transnational corporate lobbyists — like the British East India Company whose successful lobbying for a tax on competing American tea merchants sparked the Boston Tea Party — exploiting asymmetric information in 1776 Britain,

    “Such as they were, however, those arguments convinced the people to whom they were addressed. They were addressed by merchants to parliaments, and to the councils of princes, to nobles, and to country gentlemen; by those who were supposed to understand trade, to those who were conscious to themselves that they knew nothing about the matter. That foreign trade enriched the country, experience demonstrated to the nobles and country gentlemen, as well as to the merchants; but how, or in what manner, none of them well knew. The merchants knew perfectly in what manner it enriched themselves. It was their business to know it. But to know in what manner it enriched the country, was no part of their business. The subject never came into their consideration, but when they had occasion to apply to their country to apply for some change in the laws relating to foreign trade. It then became necessary to say something about the beneficial effects of foreign trade, and the manner in which those effects were obstructed by the laws as they then stood.” Book IV Chapter I, On the Principle of the Commercial or Mercantile System

    “It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interests have been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.” Book IV Chapter VIII, Conclusion of the Mercantile System

    Just prior to the last quote Smith describes how the military cost of supporting transnational corporations is far higher than any benefit to the nation whose taxpayers are paying those costs. It is simply a net transfer of money from the nation to the mercantile corporations.

    {Paul Kennedy fleshed out this theme of military cost in his 1988 book, The Rise and Fall of the Great Powers. “Defense” corporations get rich as the Great Power’s military spends the nation into bankruptcy.}

    Earlier Smith had explained how transnational corporate trade policy sacrifices the interests of domestic producers — who hire the domestic economy and pay out the national earned income as their costs of production — by bringing in cheap imports and bankrupting domestic producers whose cost price of production is higher than the final sale price of the competing imports. The importing corporation gets richer, at the expense of the importing nation. This looks like a good deal for consumers, to a myopic short-sighted corporate profiteer. But without incomes earned by working at domestic production, how are those consumers supposed to “pay” the everyday low prices of cheap imports?

    Our ‘solution’ is they pay with trillions of dollars of “household debt”: credit-money that entered the economy’s money supply mostly as mortgaged real estate purchases. Lenders created new credit-money, real estate buyers borrowed and spent it; real estate sellers earned it as their “money”. Government debt adds further trillions of credit-money to keep the Ponzi going. What happens when all those debtors start using their earned incomes to pay for past consumption rather than to purchase present production? Financial system collapse.

    What was Adam Smith’s solution to the concentrated wealth and power of very large scale predatory corporations? A competitive free market populated by myriad individual entrepreneurs practicing “free enterprise”. As contrasted with the oligopoly and monopoly market power of corporate capitalism.

    “It is to prevent this reduction of price, and consequently of wages and profit, by restraining that free competition which would most certainly occasion it, that all corporations, and the greater part of corporation laws, have been established.” Book I Chapter X Part II, Inequalities Occasioned by the Policy of Europe

  • Radical Philanthopy

    Discussions of this issue should also include how campaign finance laws and lobbying intersect. Politicians desperate for campaign funds and the support of well-funded SuperPAC’s become very friendly with companies willing to assist. If politicians didn’t have to spend so much time and energy raising money for their own careers, they would be less susceptible to these same lobbying efforts.

    Politicians are now more answerable to those who can afford to finance a constant effort to get re-elected instead of the actual voters. That’s a systemic weakness for both parties.

  • Swami

    As long as the same rules apply to organized labor, government service unions, lawyers, and other potential rent seeking groups, then, if the rules are reasonable and fair, and politically balanced (unlikely in any academic group today which has long since ejected most non progressives from their midst) then I say let us explore further.

    I certainly do not find any value in rent seeking political cronyism in any of its manifestation.

  • Douglas Levene

    I’m not so sure you can distinguish all that easily between socially efficient and inefficient forms of lobbying. It usually turns out to be a case of whose ox is being gored. For example, is it socially efficient for big corporations to lobby against legislation prohibiting transgenders from using public restrooms of the sex with which they “identify?” That type of lobbying seems to meet with universal approval in the media, even though it is completely unrelated to increasing shareholder value.

  • Adam Pierce

    TLDR: Excessive lobbying distorts the law, but rather than remove the pervasive system of special benefits and privileges we should punish those who try to navigate it to their benefit. Naturally, my friends and I should be enshrined in the Constitution as a barrier between Congress and the people, to decide who gets punished.