By Jordi Blanes i Vidal, Lecturer in Managerial Economics and Strategy at London School of Economics; Mirko Draca Research Economist at the Centre for Economic Performance, London School of Economics; and Christian Fons-Rosen, Assistant Professor of Economics at Universitat Pompeu Fabra. First posted at VoxEU.
Lobbying in the US, as well as other democracies, is big business. This column investigates the extent to which former government officials “cash in” on their political connections when working as lobbyists. It finds that once the politician for whom they worked leaves office, their revenue falls 20%, or $177,000 per year, suggesting that lobbyists are paid more for “who they know” than “what they know”.
Lobbyists – paid advocates who aim to influence the decisions of legislators or government officials – play an increasingly important role in the political system of the US and other democracies. In 2008, for example, $3.97 billion was spent on lobbying US federal officials – more than twice the amount spent ten years earlier.
The recent US debates on healthcare and financial reform have been marked by sharp criticisms of the role of staffers-turned-lobbyists in watering down the bills. For example, in academic circles, the political economy of financial reform has recently been discussed by Johnson and Kwak (2010), Mian et al. (2010), and Igan et al. (2009) among others.
The movement of political staffers from roles in the government to lucrative jobs in the lobbying industry is often described as a “revolving door”. This flow of money and staffers towards Washington’s lobbying firms has led to concerns that corporations and other organisations are able to buy influence and acquire privileged access to serving politicians. Furthermore, ex-staffers gain private benefits in such transactions, and this may have a negative impact on their incentives before leaving Congress.
To what extent can former government officials “cash in” on the personal connections acquired during their periods of public service? Our recent research (Blanes i Vidal et al. 2010) provides the first quantitative evidence of how former congressional staffers benefit from Washington’s “revolving door”.
Is it what you know or who you know?
The most common criticism of former staffers is that they are simply trading on their political connections. But lobbyists often dispute this notion. They claim instead that their earnings reflect expertise on policy issues and the inner workings of government in general. In other words, they argue that it is “what you know” not “who you know” that matters.
Empirically, the issue of separating the “what you know” from the “who you know” is a challenge for researchers. A plausible argument can be made that former staffers would be high earners even if political connections did not matter. The specific problem here is separating the effects of ability and expertise on earnings from those of acquired political connections. Generally, earnings or revenue data only allow us to observe the effects of both factors together.
Our research addresses this founding of causes by focusing on situations where the knowledge doesn’t change but the connections do. Specifically we look at the impact on lobbyist income when a serving politician’s leaves office. The point at which a politician leaves office provides a window for examining the specific role of political connections. If a politician is no longer serving in Congress, then the political connection held by their former staffers should in effect be obsolete.
This is because the politician in question no longer has direct influence over legislative outcomes or the content of congressional debates. In turn, this means that in cases where gaining access is a goal of special interest groups, lobbying spending will move away from lobbyists affiliated with former politicians and towards those with still current connections.
Our estimates based on this “identification strategy” indicate that the value of political connections to lobbyists is high. Lobbyists suffer an average revenue loss of over 20% when their former political employer leaves Congress. In dollar terms, this translates into $177,000 per year for the typical lobbyist’s practice. Furthermore, this effect is persistent for at least three years – it seems that it is difficult for lobbyists to offset the impact of a lost political connection.
Studying the effects
This impact is demonstrated in Figure 1 which shows the semester-by-semester change in lobbyist revenues for the periods before and after a Senator leaves office. The Figure shows that there is a sharp drop in revenues in the period immediately after the Senator’s exit (around 50%). Furthermore, there is only a small “mean reversion” over the next 5 semesters.
[Yves here. The chart was not included in the VoxEU post; you can find the underlying research paper here]
We believe that our identification strategy is sound. A key concern for our approach is that there may be “shared trends” between politicians and their former staffers-turned-lobbyists. For example, low ability staffers could sort towards employment with low ability politicians whose political fortunes may be in decline. In turn, the revenue shock we pick up may be the result of an ongoing downward trend associated with a particular politician. However, the clear discontinuity we observe at the point of exit rules out the presence of such trends.
Further results indicate that that proximity to power matters for lobbyists. Specifically, we find that the size of the revenue effects increases with the importance of a politician. For instance, Senators are more valuable than Representatives and, even within the two chambers of Congress, more senior politicians – defined in terms of either tenure or committee status – are more valuable than their junior counterparts.
Future research?
Our study points the way to a potential new wave of research using data released under public disclosure laws. The basic data we use were made available as part of the Lobbying Disclosure Act of 1995. Since then, non-partisan organisations like the Centre for Responsive Politics and LegiStorm have done important work improving access and promoting usage of the data.
Researchers now have the possibility of combining datasets across a number of sources to search for statistical patterns such as those we find for politically connected lobbyists. As a result, this takes public scrutiny to a new level. We can try to find important information and behaviours “hidden” in the data. Hence, one major consequence of laws such as the 1995 Act is that they make independent research and evaluation of political questions possible.
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Here’s my experience with lobbyists during my tenure as an executive of a public company.
What makes a lobbyist valuable is knowing who to talk to. Whether the lobbyist is a friend of the legislator who needs to be contacted is important, but the failure to know the target personally can be compensated for by knowing somebody who does. The real value of the lobbyist is identifying the target and providing a solid path to him or her, and being plugged into the power grid can be enough to do that.
The lobbyist we used was not a staffer but a former congressman. I thought he was a good guy, actually, in part because he gave his best advice whether or not his client wanted to hear it.
It strikes me that the researcher could find results a lot faster by asking companies who engage lobbyists what they look for while asking lobbyists how they’re actually used across the full spectrum of activities they engage in. These people will talk. They have nothing to hide because they’re just doing what is allowed by the current system.
“It strikes me that the researcher could find results a lot faster by asking companies who engage lobbyists what they look for while asking lobbyists how they’re actually used across the full spectrum of activities they engage in”
Yeah like asking Al Capone how he was using “paid cops” to run his business. Really
Wonderful post.
I love the statistical parsing. Moreover, the parsing itself is more valuable than polling lobbyists and or the industries or corps that hire them.
Let the stats stand on their own merits, without the polluting of that data with biased opinions from the revolving door lobbyists (hired hands) or the corp interests they work for.
Strike me dead if I am wrong here….I am just saying what is allowed by the current system under the 1st amendment, until advised otherwise
If roughly $4 billion was spent lobbying in 2008, and if Arne Duncan has about $6 billion to ‘retool’ public education in the US, then all the talk about education reform (and FinReg reform) are mostly lip service unless we also get campaign finance reform.
But given the lucrative nature of lobbying, and the revolving door incentives, I can’t quite fathom what it will take to produce meaningful change.
What You Know vs. Who You Know is largely a false distinction by now, since more and more the “what” is not reality-based but rather dictated by the criminal interests of the “who”.
This piece seems to think the “what” of today’s system isn’t simply extortion on top of embezzlement on top of robbery.
“Lobbying” is part of the extortion racket.
Therefore, this:
A plausible argument can be made that former staffers would be high earners even if political connections did not matter.
is false, since the entire careers of most of these worthless persons are based on nothing but being functionaries of a parasitic criminal system which has been set up for the sake nothing but its own preservation and aggrandizement.
It’s long been a truism (and is true) that the law is made intentionally complex for the professional benefit of lawyers. This is just a modern version of the Church’s old monopoly of knowledge on how to stay out of hell. This knowledge too was made gratuitously complex, was forbidden to be translated into the vernacular, etc.
Today we have the same thing with financial sector “products”, the whole insane complexity of the global financialization. None of it serves any purpose whatsoever but the direct profiteering of the banks and the tollbooths they’re able to set up everywhere thanks to their own totally artificial and unproductive system and the “laws” accompanying it.
Thus we had the many real-economy companies lobbying against the proposed changes in derivatives regulation, not because the system benefits them but because they’re unable to understand the existing system and are intimidated. The banks can always plausibly threaten to subvert or blow up the existing system if they’re not given free rein.
And we’re all too familiar with the fraudulent “state secrets” doctrine and the general Big Lie that we need to trust and obey our betters when they claim there’s some peril only they have the mystical knowlegde to avert. The “war on terror” has been the main example in recent years, though they’re trumping up “cyberwar” as we speak.
Today when somebody says “you need to hire me to give you advice” it’s usually a stick-up. It’s someone who placed a bomb on your car now offering advice on how you can drive without detonating it.
Even where it’s not directly a matter of who one knows, most examples of what a lobbyist/consultant/professional etc. knows really boil down to which gang he’s from. It seldom involves any reality-based need for real knowledge.
The best piece of real knowledge we can learn today is that we don’t need these elite advice-givers and knowledge monopolists at all, for anything. To purge ourselves of them and of all the complexity they themselves gratuitously and maliciously constructed would constitute the great liberation for us. The only knowledge we need which we don’t already have is this, and the only action we then need is to act according to this true knowledge.
The only “who” should be the people, and the only “what” should be our reality.
Oh dear! With the economy in trouble and unemployment so high, we must do whatever we can to protect the few remaining high-paying jobs in America. If lobbyists lose income when incumbents leave DC, then there is only one solution.
All sitting elected officials in America should automatically and instantaneously be allowed to hold their office for life. If they choose to leave office, they can appoint anyone they want, including their favorite lobbyist. That way, the lobbyist, now a Senator, can guaranty good income for his replacement at his old firm on K Street.
It’s a win-win and, more importantly, it’s the American way.
I am more concerned with the data($’s) outside of that reported to meet the Lobbying Disclosure Act of 1995.
I figure the black market in and the bartering of such access to power, dwarfs the population of data sampled to reach the authors conclusion.
Too true John, data sums only work if you can get your hands on all of it.
Skippy…I would like to see_all_the *financiers* that brought about our currant demise fund, build, man and execute a space launch W/ all attending with in the blast radius if…shit goes wrong.
PS. is America the most corrupt nation on the planet…just with better PR provided by MSM et al…eh.
Great post – would it be too much to ask even to keep a public record of such appointments, of some kind, a single website that allowed anyone to track career movements of the big names?
The OECD did a good study of this as well, inc. naming names…
http://www.oecd.org/dataoecd/22/15/43264684.pdf
As bad as revolving door lobbyists are, even worse are former Fed officials who still get privileged, early access to Fed meeting minutes and data which they then re-sell to their consulting clients before it’s made publicly available.
Reuters broke the story yesterday, and I comment on it here:
http://www.disequilibria.com/blog/?p=145
Bribery and prostitution in government? Shocking! I imagine people would be quite upset if they only knew.
This study is very flawed.
The data is skewed. You are ignoring the huge chunks which fall under attorney-client privilege and trade associations work. Also, ignores how private lobbyists work. Typically take a small monthly retainer (500 or 1000) for numerous clients. Gives a brief report on what is happening of interest that month.
And also the real money is lobbying is executive branch and independent agency lobbying, not Congress.
The job of lobbyists is not to influence legislation. Usually the best you can do is delay it so more. Once things get to the HIll anything can happen. A lobbyist at that point can buy access but not much more.
You looking at about 5% of the money flows and trying to figure out a system. Fail.
So now we know the going rate, 177K per connection. Trading in influence is out of the bag. UNCAC Article 18, supreme law of the land, ha, ha, wily diplomats snookered Bush into it with a proffer of totalitarian financial-surveillance measures. With all this data there’ll be lots of fun embarrassment ahead in the Conference of States Parties and implementation reviews.
What is the point of this research? We know that politicians need substantial amounts of campaign funding. And we know they get it from the wealthy, corporations and organized vested interests not from average Americans. We also know that donors demand (and receive) great returns on their ‘investments’. We also know that that mostly results in undermining or contravening the common good. Lobbyists represent those organized interests. Indeed, from a perspective of political economy America is usefully seen not as a collection of citizens but a collection of interest groups. No doubt much research can be squandered on the nuances of the relationships but that will not change the fact that money buys legislation and regulation or its absence—such as the legislative effluent from Obama and congress called “financial reform”.