Bought and paid for – Free exchange

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IT HAPPENS often enough that it scarcely elicits comment. After an election, some politicians leave government—only to reappear on the payrolls or boards of large companies. Such firms argue that they need to understand the political process and to engage in lobbying so they can extract themselves from a tangle of red tape. Tech giants, in particular, see themselves as champions of innovation and productivity within economies that have too little of either. But precisely because the biggest firms are increasingly dominant and profitable, the connections between the corporate and political worlds merit close scrutiny.

That such connections exist is not necessarily a problem. Firms that use political influence to obtain relief from stifling rules may thereby contribute to growth. Uber’s ride-hailing services often flouted the spirit, and occasionally the letter, of rules governing the hired-car business. To shield itself from legal action, it required influence. To build that influence, it hired political operatives. Such ride-hailing services have increased competition in many markets and improved riders’ experience.

But firms’ political ties can also be used to weaken rules that protect consumers and to squash competition. In a new paper Ufuk Akcigit, Salomé Baslandze and Francesca Lotti try to distinguish between such malign purposes and benign ones in the case of Italy. They combine datasets on employment, the performance of companies and the number of patents they issue, the outcomes of local elections and companies that hire local politicians. To isolate the effect of connections, they look at politicians in office who are hired by companies (as is legal in Italy) right before close elections. In sufficiently tight races, it is essentially a matter of chance whether a company’s hire winds up in the political majority (and thus in a position to help) or not. Differences in companies’ performance after such elections thus provide evidence of the effect those connections have on the market.

If political influence were being used to cut through red tape, rule-bound Italy would be a good place for a link between connections and higher productivity to show up in the data. But the researchers find the reverse. The larger and more dominant companies are, the more they invest in political connections. As their market position strengthens, they engage in more political hiring but register fewer patents. Political connections appear deadly to economic dynamism. Firms with lots of them are much less likely to go out of business; and industries with lots of politically well-connected firms see fewer new firms enter. After a close election, employment growth in firms connected to the winners is nine percentage points higher than in those connected to losers, suggesting that the “winning” firms gobble up market share.

There is no strong link between connections to politically successful parties and productivity growth, in other words. Almost all the value of cultivating politicians seems to come from a more secure market position, rather than a lighter regulatory load.

Italy is perhaps exceptional in the extent of its links between business and politicians (though the period studied by the authors starts after the Mani Pulite, or “clean hands”, episode, which exposed vast political corruption). But it is not alone among advanced economies in suffering from a stagnant business environment. The past decade has seen weak growth in productivity across the rich world. In America, for example, the rate of entry of new firms has been falling since the late 1970s, as has the share of employment accounted for by young firms. Pricing power and profits have risen and the share of income flowing to workers has declined, at large firms in particular.

Corporate political spending in America is hard to track, given the many routes by which firms can exercise influence and the explosion of “dark money” donations and spending since 2010, when the Supreme Court decided that corporate political spending counts as free speech. Figures published on October 2nd show that more big firms are curbing their political spending, and disclosing a larger share of what they spend. But both campaign spending and measurable corporate outlays on lobbying have soared since 2000.

It may be inevitable that ties between government and the corporate world are growing tighter. Sectors where the government plays a big role, such as health care and education, account for a rising share of output. And the network effects underpinning the dominance of platforms such as Facebook and Amazon ensure that they play an important social and economic role: the more people rely on them, the more attractive it becomes for others to do the same. This naturally draws regulators’ gaze, particularly as the effects of such dominance become clearer. Tech firms then seek to defend themselves in turn.

Pol position

This helps explain political spending by firms, but does not mean it should be excused. There is ample evidence that lobbying fuels rent-seeking. An analysis of tax reforms in America in 2004 found, for example, that firms which spent money lobbying for special tax benefits enjoyed a return on their investment of roughly 22,000%. Another analysis found that financial institutions that spent more on lobbying benefited disproportionately from bank bail-outs during the financial crisis.

To a growing extent, the productivity gap between technologically advanced firms and laggards suggests anti-competitive behaviour rather than the superior innovative capacity of top firms. Productivity-enhancing innovations are supposed to spread, raising growth and incomes. That they no longer seem to accomplish this reflects barriers to competition that are supported by powerful firms, including non-compete clauses, overly tight intellectual-property rules and an accommodating attitude to acquisitions by market leaders. It seems ever clearer that, when corporations open their wallets to politicians, the public loses.

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