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Lobbying, Subsidies, and U.S Multinational Corporations

June 30th, 2008

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In 2006, U. S. interest groups spent $2. 44 billion on reported lobbying expenses- approximately $5 million per Congressman. [1] A large portion of that expenditure came from multinational corporations (MNCs), the famed special interests who generate and control large amounts of money and are behind the sinister conspiracies in action thrillers. Notwithstanding fantastical story-telling, it is important to investigate why these corporations spend so much money on Capitol Hill. For a basic starting point, if we know that an agent is profit-motivated, and time after time he spends money on an activity, there lies only one inevitable conclusion: that he believes he would be worse off without doing it. Furthermore, long histories of political lobbying in the world also have shown that, on average, such expenditure pays off. For all the literature on corporate strategy, one area of theory that has been covered in comparatively less detail is that of the political relationship between a MNC and its home country, specifically in terms of the role of the MNC in ultimately affecting its home government’s policies. –more–>Lobbying can be generally defined as the expenditure of resources by a firm or group of firms in order to secure a favorable political or legal environment for their activities. Though lobbying actions are most frequently geared toward achieving preferable domestic policies, larger governments with regional or international influence can be petitioned for favorable foreign policies. Domestic interest groups attempt to gain, often indirectly, economic benefits through a government’s exclusive diplomatic channels. Governments often hold a great deal of information unknown to the private sector, as well as direct contacts with officials and lawmakers of foreign countries. As monopolists of force, states also reserve the threat of war as a means to their ends. Economic interest groups can, instead of expending resources on adjusting their business to market conditions, expend those resources on adjusting market conditions to their business (“rent-seeking”).

For markets, lobbying has profound implications. The law has nearly limitless potential to interfere in the economy. Where there is this capability, laws become a commodity to be bought and sold. A fundamental error to make is to think that politics are non-quantifiable and non-economic. To quite the contrary, political structures are simply markets in which the rules are different (albeit radically at times). “Political entrepreneurship” becomes as much a skill as innovation in one’s industry: if the principal goal is profit for a group of people, then a dollar earned productively or coercively is, other things equal, the same.

The United States is the prime example of a powerful nation whose foreign dealings and economic policies are highly responsive to special interests. Both the structures of the electoral system and the government’s coercive powers grant a significant level of policymaking access to private organizations. A thorough examination of the government’s scope of powers, the structure of policymaking institutions, and the long-term trend of increasing reported lobbying expenditure reveals considerable evidence that political proficiency is part of an essential set of skills for the modern U. S. multinational corporation.

General Theory Concerning Multinationals and Lobbying

The political sphere is even more immensely complicated in the absence of the premises upon which the free market functions. Political structures frequently alienate the agent from the results of his actions (or inaction) in some way. The chief structure that causes this alienation is bureaucracy, partly via “diffusion of responsibility” effect. While this phenomenon occurs to some degree in free markets with large firms,[2] it is less of a problem, because productive deficiencies are more quickly answered by declines in profits and labor market adjustments. The obstacle is most often described as the principal-agent problem, which is especially pronounced in government. Whereas in the private sector, the “principal” at hand is concerned with easily quantifiable profits, the objectives of government institutions are much more specific, varied, and difficult to measure. On one hand, firms are naturally controlled by productivity, and in turn, profits; on the other, governments are validated simply by force and by the cost inefficiency of rapid change (revolution). Though democracies require input from the entire population, their input is channeled through a central decision-making and enforcement process; this should not be mistaken for the kind of integration of dispersed information that markets have. The end-state of a market is the product of an aggregation of many individuals associating in ways that benefit them individually, each person possessing a small amount of resources (relative to the rest of the economy). Alternatively, the end-state of government is the product of a pre-established institutional structure (e. g. a constitution) determining how to allocate a large amount of resources.

That the agents involved in government seek the maximization of their individual utility should not be ignored. In fact, this is the core assumption that does not differ between private and public activity. The agent does not change; only his constraints do. Though this view may appear to some as cynical, the basic intuition behind it is that while the costs of some kinds of choices may differs, an agent’s preferences generally do not change upon attaining public office. As might be argued, a sense of duty or responsibility (conscience? may develop, altering the agent’s utility function. Nevertheless, it is clearly too limited to overcome the bureaucratic risk-reward gap.

For purposes of simplicity, we will assume that firms as a whole attempt to maximize their profits, without the risk of individual actors in the firm placing their own individual benefit above the firm’s profit (e. g. no corrupt CEOs trying to swindle shareholders). The objective of this investigation is to examine the specific nature of the relationship between rational market actors and government institutions.

It was stated earlier that laws can function as a commodity to be bought and sold. Beyond mere metaphor, we can construct a model that recognizes that political institutions are entities that possess the ability to, ceteris paribus, exogenously impose any desired condition of operation on market processes. Because these institutions are operated by individuals who are factually no different than market actors, the result is that these individuals possess some degree of that exogenous power for use at their own discretion. They are liable for what they do with it, but not completely. It is this discrepancy that subjects policymaking to a certain level of autonomy, and thus subjects it to market forces. From these assumptions, we can model the lobby-subsidy process.

The interaction between firms and the government can be summarized by the following model, beginning with a firm’s basic profit function:

pd pm s – EL (1)

A domestic firm’s profit, pd, is a linear function of the firm’s exogenous market profit (pm), plus subsidies (s), minus lobbying expenditure (EL).

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