September 9, 2010
With Responses From
Sep 9, 2010
4 Min read time
Lawrence Lessig is right to highlight Citizens United’s threat to American democracy: lobbyists’ booze is plying a figuratively alcoholic Congress, which drives the ship of state while drunk.
But Citizens United imperils not only our democracy. It also threatens the U.S. economy. Citizens United adds to the existing institutional tools that encourage a “corruption economy,” long known to waste social resources and reward inefficiency. This economy also systematically disadvantages startups and “disruptive innovators”—companies and individuals whose ideas productively displace entrenched alternatives.
Economists have long understood how corruption harms an economy. In 1776 the intellectual father of capitalism, Adam Smith, wrote about the corrosive effects of the British government conferring monopolies on the politically connected. These monopolies, like most state-granted monopolies, resulted in artificial scarcity, higher prices for consumers, and misallocation of societal resources—but the monopolies were beneficial to politicians and their benefactors. Today international institutions are targeting corruption in developing countries, which disadvantages foreign and domestic competitors, for these same economic reasons.
Despite the Supreme Court’s assurances to the contrary, the United States follows the same logic identified by Smith and today’s development institutions. In 2007 David Cay Johnston, a Pulitzer-prize winning New York Times reporter, devoted his book Free Lunch to exploring, in the subtitle’s words, “How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill).” He details how certain laws transfer wealth to the politically powerful by, among other methods, capping corporate liability, shifting tax burdens, and generously subsidizing billionaires at the average citizen’s expense.
Taking this one step further, researchers have attempted to quantify the return-on-investment (ROI) of this corruption. A widely cited study by professors at the Universtiy of Kansas shows a 22,000 percent return on $283 million spent lobbying for tax holidays. Another study demonstrates that large companies got a 600–2000 percent return lobbying for tax breaks. Both of these estimates far eclipse the average ROI for Fortune 500 companies, which is less than 10 percent. As Johnston puts it, corporations can more easily “mine gold from the government treasury than the side of a mountain.”
Corporations likely realize that their investments in government—called “influence” or “corruption”—tend to pay off. Indeed, corporate executives might face lawsuits from shareholders if those executives invested in government with no expectation of returns, or even with an expectation of returns lower than those anticipated from the market. Executives are supposed to put every dollar to its highest investment use, and they consider every dollar they spend in D.C. to provide greater value there than it would in the market. Even the most ethical executives must engage in defensive spending; if a competitor is lobbying to disadvantage you in the marketplace, the D.C. game requires that you respond. This is why some U.S. businesses have complained that the Foreign Corrupt Practices Act disadvantages them abroad: competitors from other countries can invest in foreign corruption to win business.
The ruling imperils not only our democracy; it also threatens the U.S. economy.
The corruption economy that emerges from lobbying on the domestic front is not good for the country. First, a corruption economy disincentivizes investment in new technologies, human capital, and socially useful products and services. It instead encourages companies to invest in lobbyists, political action committees, and campaign ads. This means that resources that could be directed toward social benefit are misallocated. Second, a corruption economy rewards those most adept at the D.C. game, not market competition and innovation. The result is higher prices for inferior products and services.
Finally, the corruption economy disadvantages disruptive innovators. In his classic book about management and innovation, The Innovator’s Dilemma, Clayton Christensen argues that established companies are likely to produce incremental innovations meeting the needs of their established customers, while at the same time they will refuse to cannibalize their high-margin lines of business by developing new products. Meanwhile, upstarts are generally the catalysts for disruptive innovations that radically change the cost structure of an industry and that attack high-margin businesses with products customers did not even realize they needed. Christensen exhaustively details how society has relied on the improvements of these disruptive innovators in businesses ranging from computer hardware and software to motorcycles.
In a corruption economy, established companies are given the upper hand. They have legions of lobbyists, revenue to allocate to campaign expenditures, and deep and long relationships with legislators. Upstarts usually have none of that, so established companies use their greater access to government and legal avenues to kill off young competitors. For instance, when a new data format (from home video to YouTube) hits the market, established content providers often file copyright complaints. Following similar logic, established telecom companies attempt to interfere with Internet traffic. This changes the behavior of new companies for the worse. An upstart’s first idea should be a product or service, not an appropriations rider; its first employees should be engineers, inventors, and management, not lobbyists and lawyers.
So the Supreme Court’s decision in Citizens United has profound economic effects. The decision does not favor competition, but rather D.C. rent-seeking and the companies that can excel at it. In other words the companies that lead the U.S. Chamber of Commerce gain at the expense of those in a venture capitalist’s portfolio. In our global economy, Citizens United encourages innovation abroad rather than innovation and investment in the United States.
In this way Citizens United has even more in common with Lochner than Lessig reveals. By invalidating redistributional laws, Lochner protected the market’s most powerful—redistribution of economic power was off-limits. Citizens United does the same, though in a slightly different way. By laundering protection of the status quo through corporate expenditures, Citizens United acts as a Lochneresque bulwark against redistribution of economic power from the established giants to upstarts and consumers, no matter the costs of a corruption economy.
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