Corporate lobbying has a well-earned slimy reputation. Lobbyist is a four-letter word. Yet major businesses of all-stripes have representatives stalking the halls of government.
The practice is tolerated because we expect corporations to act in the interest of their shareholders and there can be a legitimate purpose in helping shape government policy. The sums spent on lobbyists and other forms of government influence are often small change for big business, and we’re often not sure how effective their lobbying efforts are. Sometimes we take false comfort in the idea somebody is keeping corporations in check by fighting hard on the other side of every piece of legislation or regulation.
I think the potential harms of corporate lobbying would garner a lot more attention if we examined them with a broader lens. Especially if we look at who benefits and who loses.
The Spoils of Lobbying
Whether corporate lobbying always benefits shareholders is a matter of debate. Borghesi and Chang (2014) and Cao et al. (2018) find mixed results on the link between lobbying and corporate performance. Executives may lobby for their own self-benefit or political ideology. Such efforts exact a cost on the corporation with little or no benefit.
The benefits of lobbying are most evident for firms that are faster growing, are capital intensive, and/or require substantial investment in research and development (R&D). Studies from Romero (2019), Richter (2009), and Alexander et al. (2009) show that higher lobbying expenditures are associated with lower future effective tax rates. These lower effective tax rates are achieved primarily through narrowly defined tax credits and capital depreciation schedules. Government contract awards, changes in government subsidies, or tariff protections might also be traced to lobbying efforts in some cases.
A lack of good data makes it more difficult to tie corporate lobbying to other potential benefits, such as relaxed regulation or fewer restrictions on market dominance. It is hard to evaluate policy changes that affect labor practices and product safety procedures. The same is true for anti-trust standards, licensing requirements, and intellectual property rights. Though Rayfield and Unsal (2019) match lobbying efforts to increases in the speed of FDA drug approval as well as a higher level of product recalls.
Some firms may not gain from their lobbying efforts. But it is likely that corporations with regular spending on lobbyists or political campaigns are getting something for their efforts.
Why is it important to try and measure the benefits of corporate influence? Because of the social cost imposed.
The Wrong-Way Wealth Transfer
One of the key functions of modern government is to redistribute income and wealth. The idealist hangs his hat on the concept of diminishing marginal utility to justify this purpose, while the cynic may believe it a necessary evil to preserve order.
Corporate lobbying effectively counters this redistribution effort. Government budgets are finite (unless you subscribe to dubious ideas like Modern Monetary Theory). Every dollar given back to a corporation in the form of a lower tax bill or increased subsidy is a dollar taken away from a government program budget elsewhere.
The extra dollars secured by corporate lobbyists ultimately reach individual shareholders. These shareholders are overwhelmingly likely to be on the higher end of the income spectrum — 77% of household wealth is held by the top 10% of families according the Federal Reserve’s 2016 Survey of Consumer Finances (SCF). Only three out of ten U.S. households with income below the median level have a stake in the stock market.
The families that benefit from government programs like Medicaid in the U.S. or assistance with food and housing are unlikely to have any stock at all. In the U.S., eligibility for most government aid programs is based on the federal poverty level — approximately $26,000 for a family of four. Most families receiving government help have annual incomes well below that mark.
We know intuitively that a dollar is more meaningful to a family in poverty than a millionaire household. Social scientists have combined theory and empirical evidence to measure just how different the impact is. More specifically, they’ve measured the shape of the household utility curve. If you want to get into the weeds on this, read here, here and here (I know — more paywalls. Sorry.).
According the latest SCF, the median income of the top 10% on the household income scale is $251,500. Yes, the top families by wealth don’t perfectly overlap with the top families by income. But the idea that high income families gain the most from stock investments still holds. The median income of the bottom quintile family is $16,200. Most of these households likely qualify for one or more government assistance programs.
I derive estimates for the marginal utility of an additional dollar for households with incomes of $251,500 and $16,200 using the research referenced above. One extra dollar is worth approximately 20x to 80x more to the poorer household.
A good central estimate is roughly 40x. This means every dollar extracted from the government by a corporation is equivalent to taking about $40 from a family in poverty.
The Social Cost of Corporate Lobbying
What does a socially responsible investor do with this? I think the most appropriate approach is to incorporate a social cost of corporate lobbying into each company valuation. This social cost needs to reflect the utility lost by society’s most vulnerable when aid and government protection is weakened by corporate influence.
At the company level, this will be as much art as science. The Center for Responsive Politics’ OpenSecrets website is a great resource for digging into U.S. lobbying. Investors need to sift through all the lobbyist reports to determine what may meaningfully help the corporation at the ultimate expense of lower income families. This may include inferences between corporate lobbying activity over time and reported measures like the effective tax rate. But lobbying is about much more than tax rates and government subsidies. The impact of softer regulation in particular is difficult to quantify.
A more consistent approach to measuring the social cost of corporate lobbying might be to apply a multiplier to reported spending. If I assume the corporate benefit of lobbying matches its cost, on average, then the typical social cost should be a multiple of that spending to reflect the much higher marginal cost to the families indirectly harmed. I suggest 40x for a point estimate. This may be conservative for companies have enjoyed big returns on prior lobbying — it may better serve as a lower bound of the social cost for faster growing, innovative, and capital intensive firms.
I estimate the social cost of U.S. federal lobbying alone at more than $100 billion each year. Corporations spend more than $3 billion annually on federal lobbying in the U.S., according to the Center for Responsive Politics. This doesn’t include the other billions donated to political campaigns, political action committees, and dark money groups. Nor does it include all the lobbying done at the state and local levels.
And of course corporate influence spending occurs in every country around the world. Most is still not reported — though steps like the Lobbying Disclosure Act in the U.S. and the EU Transparency Register are helpful.
It is important to capture the spending done by industry associations and business lobby groups besides what is traceable directly to companies. Spending by large industry groups like the Pharmaceutical Research & Manufacturers of America or Edison Electric Institute can dwarf that of their members. The biggest lobby in America by far is the US Chamber of Commerce, largely funded by several dozen corporations. Relative size could be used to allocate this group spending among member companies.
Not all corporate influence spending carries a social cost. Sometimes, the goals of the corporation and society are fully aligned. Grey (2018) points out that political support for environmental regulation is most valuable when it comes from business, citing DuPont’s efforts to fight against chlorofluorocarbons in the late 1980s. In some cases, there may be a social benefit to weigh into the mix.
The Sources of Lobbying Are Concentrated
Corporate lobbying efforts tend to be concentrated among a few industries. Heavily regulated industries may see lobbying as essential. Health care, communications, and electric utility companies fall into this camp. Businesses for whom the government is key customer, such as defense contractors, are certain to invest heavily in “public affairs”. Companies under scrutiny for their market dominance, like Amazon or Facebook, often step up their lobbying presence. And some businesses view lobbying as critical for survival — think fossil fuels and tobacco.
The social costs of lobbying are often substantial for these types of companies. And when the social costs of lobbying are integrated into the valuation of a socially responsible investor, it could knock down the company’s value by 5%, 10% or more.
Corporate lobbying may be an issue that rivals greenhouse gas emissions and workplace inequality for many companies. The investment analysis of a socially conscious investor is not complete until it is taken into account.