“Revolving door” lobbyists: The value of political connections in Washington

Jordi Blanes i Vidal, Mirko Draca, Christian Fons-Rosen 28 October 2011

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Editor’s Note: The following note updates the column “The value of political connections in Washington, DC” originally posted on 1 October 2010.

The recent resignation of Liam Fox, the UK's Defence Minister, has put lobbying once more into the spotlight. This is the latest challenge to public confidence in the UK's political system after the scandal over the expenses of members of parliament (MPs) and controversy over the political power of News International Limited. It also follows severe criticism of former Labour cabinet ministers in 2010 over the ‘cabs for hire’ lobbying scandal.

But what can we feasibly say about the returns to lobbying activity in the UK? The figures from our 2010 study of US lobbying can be used as something of a benchmark value for calculating the value of being connected to a serving UK cabinet minister. Like senators, cabinet ministers have a lot of strategic power in policymaking and they seem to be the main target of lobbying activity in the UK political system. Applying our US estimates directly suggests that the median return to a high-level UK connection could be around £122,000 per year. But it has to be said that our estimate is speculative. This is because there is no serious, publicly reported data on lobbying in the UK. We cannot conduct the same type of research here because there is no UK equivalent of the US Lobbying Disclosure Act (LDA).

In practice, the UK lobbying industry is likely to be much smaller than the US industry, which is worth $3 billion annually. This is partly because there is less voting along party lines in the US Congress and representatives are therefore more open to influence from lobbyists. In the UK, cabinet ministers (rather than non-cabinet MPs) are the focus of lobbying because of their direct decision-making power. The emerging scale of Liam Fox associate Adam Werritty’s business dealings suggests that the return to cabinet-level access could be very high.

That said, Werritty’s case is unusual because it appears that he was functioning as a lobbyist and as a political adviser at the same time. This would have been difficult to achieve in the more transparent US and Canadian systems. Again, this underscores the need for a UK Lobbying Disclosure Act. Furthermore, transparency in the UK needs to go beyond a simple ‘register’ of lobbyists (the main current proposal) and embrace the US model where each lobbying contract is reported on a quarterly basis.

Original column

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.

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.

References

Blanes i Vidal, Jordi, Mirko Draca, and Christian Fons-Rosen (2010), “Revolving Door Lobbyists”, CEP Discussion Paper No. 993:

Igan, Deniz, Prachi Mishra, and Thierry Tressel (2009), “A Fistful of Dollars: Lobbying and the Financial Crisis”. IMF Working Paper, December No. 289.

Johnson, Simon and Kwak, James (2010), 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, Pantheon: New York.

Mian, Atif, Amir Sufi, and Francesco Trebbi (2010), “The political economy of the subprime mortgage credit expansion”, VoxEU.org, 11 July.

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Topics:  Politics and economics

Tags:  US, Political Economy, lobbying, political influence

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

Christian Fons-Rosen

Assistant Professor of Economics at Universitat Pompeu Fabra