Sunday, August 16, 2009

Lobbying: Part III

The financial meltdown of 2008 was predicted well in advance by people who understood that the repeal of regulations incorporated in the Glass-Steagall Act of 1933 would result in an "oligopolistic situation" -- companies that are "too big to fail" in today's lexicon (Martin McLaughlin, posted November 1, 1999 -- complete reference available for those who inquire).

Could we, or should we, have known better? According to McLaughlin, "a financial deregulation bill was passed in the early 1980s under the Reagan Administration, lifting many restrictions on the activities of savings and loan associations...The result was an orgy of speculation, profiteering and outright plundering of assets, culminating in collapse and the biggest financial bailout in US history (at the time), costing the federal government more than $500 billion."

Why, then, did former Senator Phil Gramm of Texas and others push repeal of the 60-year-old law that had (except for the S&L situation) kept the country away from financial disaster since the Great Depression?

According to McLaughlin, in 1997 and 1998 alone, the banking, insurance, and brokerage industries spent over $300 million on lobbying. Gramm himself (or more correctly, his political action committees, but it's a fine point) collected more than $1.5 million from these three industries between 1994 and 1999.

Does lobbying buy results? Cause and effect is hard to prove. Common sense suggests that it does; in fact, if it did not, would the supposedly rational corporations continue to throw millions of dollars into it? Not likely.

Here's a typical recent news report, stating basically what we all already know: special interests exercise virtual veto power over legislation they strongly oppose. "To win industry support in enlisting more of his collegues, Mr. Durbin (Senator from Illinois) approached trade associations. Shortly after negotiations began, the American Bankers Association abandoned the talks, saying there was no compromise they could ever support. (Senator Durbin's) legislation went nowhere...There was no counterweight to that legislative muscle" (New York Times, 6/5/09).

Academic studies verify the phenomenon. David Parsley, professor of management at Vanderbilt's Owen Graduate School of Management (and his co-authors) "suggest that lobbying activities significantly and positively impact the bottom line of companies who do it. In addition, lobbying expenses appear to positively impact firms' stock prices and returns" (reference available). Kroszner and Stratmann theorize, in a paper published in the American Economic Review (Vol. 88, No. 5, Dec. 1998) that the entire Congressional committee structure facilitates the transfer of corporate contributions to powerful committe leaders.

If all this special interest lobbying worked to the benefit of the country as a whole, then who could possibly oppose it? But, for the most part, it doesn't. An entire treatise could be written on the efforts of utility and coal companies to derail environmental regulation, and the impact is dirtier air and the challenge of potentially cataclysmic climate change.

Here's a recent example: you're no doubt familiar with the "cash for clunkers" legislation that is providing large rebates to purchasers who trade in "old" vehicles for more fuel efficient models. But why were vehicles manufactured prior to 1984 excluded? According to the Los Angeles Times (8/13/09), "the restrictions were pushed by lobbyists for the Specialty Equipment Market Association, a group that represents companies that sell parts and services to classic and antique car collectors...The association opposed the entire concept because such a program could shrink the size of the market for aftermarket parts."

Is the 1984 limit in the national interest, considering that the legislation was intended primarily to reduce pollution and act as a stimulus for new car sales? "Experts at the California Air Resources Board say cars built before modern engine controls were fully developed in the 1980s are significantly dirtier than new cars. For example, a 1965 Chevrolet Malibu, when new, produced 400 times the smog-forming pollutants that a new 2010 Malibu produces...Older vehicles also are among the least fuel efficient. In 1975, the overall new-car fleet averaged just 13 mpg, compared to 22 mpg in 1985" (LA Times, 8/13/09).

Let me remind you that this series is about lobbying and its impact on achievement of national goals, e.g. "the general welfare." (Reference: Preamble to the U.S. Constitution.) Who's winning -- general welfare or special interests? It doesn't even seem to be a fair fight!

Could it be that evolution is playing a role? I'll have some ideas on that next week.

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