By 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; and Christian Fons-Rosen, Assistant Professor of Economics at Universitat Pompeu Fabra. First posted at VoxEU.
Lobbying in the US, as well as other democracies, is big business. This column investigates the extent to which former government officials “cash in” on their political connections when working as lobbyists. It finds that once the politician for whom they worked leaves office, their revenue falls 20%, or $177,000 per year, suggesting that lobbyists are paid more for “who they know” than “what they know”.
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.
[Yves here. The chart was not included in the VoxEU post; you can find the underlying research paper here]
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.
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.