The Secret to Better Public Transit? Make Drivers Pay for It
In Chicago, a combination of policies could generate substantial improvements for the average traveler.
The Secret to Better Public Transit? Make Drivers Pay for ItJosh Stunkel
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Hal Weitzman: The ability of voters to lobby their elected representatives is a critical part of government. It helps keep politicians informed and in touch with public opinion, as well as making them aware of the consequences of their policy making.
But to many observers, lobbying all too often skews policies toward wealthy special interests with friends in high places, and the close relationship between government regulators and the industries they monitor frequently leads to regulatory capture, in which regulators go easier on private companies and even effectively act as lobbyists for their interests. Regulatory capture was widely seen as one of the causes of the financial crisis.
So does lobbying lead to economically inefficient policies, and what should be done to prevent regulatory capture?
Welcome to The Big Question, the monthly video series from Capital Ideas at Chicago Booth. I’m Hal Weitzman, and with me to discuss the issue is an expert panel.
Marianne Bertrand is the Chris P. Dialynas Professor of Economics at Chicago Booth. She’s a research fellow at the National Bureau of Economic Research, as well as at the Center for Economic Policy Research, and the Institute for the Study of Labor, and she’s a coeditor of the American Economic Review. A codirector of Chicago Booth’s Social Enterprise Initiative, she won the 2012 Society of Labor Economists’ Rosen Prize for outstanding contributions to labor economics.
Luigi Zingales is the Robert C. McCormack Professor of Entrepreneurship and Finance and the David G. Booth Faculty Fellow at Chicago Booth. He’s president-elect of the American Finance Association, and the author of the books, Saving Capitalism from the Capitalists and A Capitalism for the People.
He also wrote, “Preventing Economists’ Capture,” a chapter for [Harvard’s] Daniel Carpenter and David Moss’s recent book Preventing Regulatory Capture: Special Interest Influence and How to Limit It.
Panel, welcome to The Big Question.
I wanna start by defining what we’re talking about, and some of the advantages and disadvantages. Luigi Zingales, what are the, broadly, what are the dangers of lobbying and regulatory capture?
Luigi Zingales: First of all, we need to understand that petitioning the government to redress grievances is protected by the First Amendment of the Constitution, so it’s part of what freedom is about. However, I think that over the years, lobbying has moved from getting the government off your back to getting the government in your pocket. And I think that this sort of evolution, it is an involution if you want, is very dangerous, and it’s not fully appreciated.
So a lot of Libertarians, for example, see lobbying as something good and don’t understand that it’s actually something that can destroy the very functioning of our economy, because as the return for lobbying goes up, and if you have opportunities, more and more people dedicate resources to that rather than to produce. I think that lobbying has become the highest-return activity in this country, and not surprisingly, Washington has become incredibly rich.
In the old days, Washington was like a provincial town with not much entertainment. Today, it’s one of the most wealthiest part of the nation, and we know nothing is produced in Washington except law, so all this wealth is just one city.
Hal Weitzman: OK, Marianne Bertrand?
Marianne Bertrand: Yeah, I think, going back to his point, I very much agree with Luigi. At the core of the First Amendment is the idea that we can petition our government. I think that the key issue in my mind is, in a sense, not everyone has the ability to petition the government as well as others, in issues of organizations and resources, that can be very important.
To be able to petition the government, you need to be organized. You need to have resources. And that really creates some core asymmetries. Some voices are heard, and other voices have a much more difficult time being heard.
Hal Weitzman: So you think it exacerbates the kind of haves and the have-nots?
Marianne Bertrand: I think, if you think about a given issue, where you’d like to hear from business, you’d like to hear from unions, but also citizens, taxpayers should also have their voice.
Unfortunately, citizens and taxpayers, because of traditional free-riding problems, just, I’m not going to go and fly to DC to say, this is my opinion on this. But companies and unions will have a much easier time doing that. And I think that that is really the core of the problem from my perspective.
So it really goes back to all theories about interest groups and what makes some groups more organized than others.
Hal Weitzman: Is it all bad, Luigi Zingales?
Luigi Zingales: No, it’s not all bad, but I think it’s getting worse. I think that, first of all, as I said, lobbying is learned by doing. I think that in the old days, probably also for an ideological restriction, you didn’t have so much influence of business in Washington. Today, both political parties are very open, and they actually compete to be friendly with business. The result is there is a competition where who is more prone to business wishes, as Marianne was saying, the interests of society at large, of consumers, the taxpayers, is not really well represented.
Marianne Bertrand: One thing, I’m not sure, Luigi says it’s getting worse over time. I’m not sure where the evidence is for that. What I think is true about the US actually is that we’ve made progress in terms of disclosing lobbying. So I think there was a major change in 1995, which was the Lobbying Disclosure Act, which at least made the process somewhat—and we can go back to that—somewhat transparent. We know since the late 1990s who is spending money on lobbying. We did not know that before.
So we have no sense what the situation was like prior to the late 1990s. We know since the data is available, that the amount spent on lobbying has essentially doubled, has gone from $1.5 billion to like $3 billion a year, today. But I think it’s hard to point at the evidence and say that things have gotten worse.
We can go back to Citizens United—and maybe that’ll be another topic, and that’s somewhat different—but where do you see evidence of things getting worse over time?
Luigi Zingales: I think that the number of lobbying organizations has been going up. Registered lobbying in Washington has gone up. As you said, the amount of lobbying has gone up. The amount of targeted law, what is called pork barrel, has gone up. And I think there’s also a feeling over all the country. One of the things that shocked me the most is that in 2009, some students who were trying to start a company approached me, and I didn’t understand why they approached me, and then at the end of the day they approached me because they wanted to lobby the government to get some TARP money for their enterprise. So the idea that even startup companies think about lobbying before they even have a defined business plan is pretty scary.
Marianne Bertrand: Now, on the other hand, I think that evidence that lobbying is effective is much less clear. So there’s been a lot of studies that particularly take the form of looking at voting behavior by congressmen on a set of issues. Because the data is available, we essentially know which congressman gets money from whom or is being lobbied by a special interest.
Some studies would find that this lobbying seemed to affect the way these congressmen vote, but I think as many studies don’t seem to find an effect. So I think the evidence that lobbying has an impact on voting behavior is not, I don’t think, so overwhelming.
Now, I’ll caveat that myself. I think a lot of what lobbying does is essentially preventing things from even being discussed in Congress, stopping things in committees and subcommittees, and that obviously cannot be studied, because there’s never a vote associated with it.
But I think research, so far, somewhat permitted by the data, as I just mentioned, I don’t think there’s been so much overwhelming mentioning or finding that lobbying is effective.
Luigi Zingales: But we know that companies are spending more and more on lobbying, so unless they are completely stupid, there must be return to it.
Marianne Bertrand: Yeah, but no, one could take . . . you know, some people have actually reversed the argument, if you think about the $3 billion dollars that’s spent in lobbying, that is peanuts compared to the amount of money that is at stake. Some people have said the small amount spent on lobbying, same point is being made about PACs, about political contributions by companies, direct political contributions, that those very few companies, think 5 percent of companies, are the max in terms of how much they can spend directly on campaigns, and all that would say, again, given how much is at stake, maybe it’s not working so well.
Again, I can reverse that argument and say, maybe you don’t actually need to spend that much money to influence if you’re influencing a congressman, that might be true, but I think the jury’s still out.
Luigi Zingales: Yeah, but the [late] Gordon Tolluck’s argument that they use too little money in politics, I think that—
Hal Weitzman: Just explain what you’re talking about there?
Luigi Zingales: So, Gordon Tolluck, this was 1972. I think it was a brilliant idea. He looks at the overall amount of money that the government allocates. We did this calculation in 2008, and the argument is still true in 2008. Basically think about, in 2008, the government was spending what, like, roughly $5 trillion dollars, of which $1 trillion was in a nondiscretionary spending, like interest and retirement benefits. So you can’t influence that much. So think about $4 trillion, and if you buy every congressman and the president—so you basically spend all the money in the actual campaign—2008 I think the total amount was like $5 billion. So with $5 billion you get to control a flow of $4 trillion, at least for two years, probably for more, but at least for two years. So basically, you have a return of one to what, more than 1,000.
Now, of course, not all of the money spent is profits, but even if you do all this adjustment, you see that the return to investment in lobbying is potentially very, very high.
Hal Weitzman: I mean, you’re talking there about lobbying on particular issues, ’cause—
Luigi Zingales: No, no, this is like, how much money is spent to, “buy Congress.”
Hal Weitzman: Including donations to campaigns.
Marianne Bertrand: Yeah. Yes. The classical example was the agricultural subsidies, I think that’s the one that Tolluck used at the time. So much money is associated with them that you get returns on investment that are just incredibly high. If you really believe there’s a causal link between the lobbying or the campaign contributions and the outcome.
Luigi Zingales: Yeah, but there are a lot of studies. There is one study showing, for example, remember the 2004 law where they allowed the repatriation of foreign profits for companies, and they reduced tax rates?
You see that the total amount of lobbying for that particular event was of the order of $200 million? And they saved, like, $56 billion in taxes. So, again, if you take the ratio, you see that the return to lobbying is disproportionate.
And I think that part of the answer is what Marianne was saying, is that one side is so rich, it doesn’t need to spend all that money. In a sense it’s like, you know there is a lottery, and the price is big enough that if you buy all the tickets, you make money. But you don’t need to pay the full amount if some people are liquidity constrained. And I think that that’s part of the world we’re in.
But I think the ideology creates a restriction to that, because some people, believe it or not, are not up for sale, and so that creates some restriction. But I think that Gordon Tolluck was very insightful because he foresaw in 1972 the pattern, and the pattern is increasing, and companies figured out more and more. And there are a lot of lobbies that said, oh, we told companies how to use this more effectively, and they are doing it.
Hal Weitzman: So is increasing money necessarily a bad things? We think about the idea of a marketplace of ideas. You could imagine that more money was being spent, but more good ideas were coming forward, and the best ideas were rising to the top, why shouldn’t that be happening?
For two reasons, first of all, if you take this to the extreme, why don’t we put congressmen out for auction? And we’d pay with money. We don’t think that in the political market you wanna play with money. Why? Because it’s not a market in the traditional form. This is something that goes back to Milton Friedman. The difference is that when I decide to buy which type of tie, I don’t really have an impact on everybody else. When I vote in a certain way, I impact the final outcome, because there is a public decision, and there’s a kind of winner-take-all market.
So there is . . . and again, Gordon Tolluck showed, was I think the first to show, that there is no guarantee that the amount of investment that people make in this game is efficient. In fact, it can be either underinvested or overinvested, because of the nature of the game. So it is a market where known control of competition leads to bad outcomes, and that’s the reason why we need regulation.
Hal Weitzman: One of the reasons that the Constitution protects the right to lobby government is because of this flow of information, isn’t it. People who are actually affected by the legislation get to say how they’re gonna be affected and their concerns, etc. Now, Marianne, you’ve actually done research that speaks directly to this informational aspect of lobbying. Tell us about—
Marianne Bertrand: I mean, I think it really is that big question that one would like to know. Go beyond just saying lobbying happens, try to understand what happens within the lobbying process, and what . . . is it really a process of, like, exchanging information with congressmen? And I think one could make the argument there that that could be really useful with the caveats of that Luigi just raised. Think about congressmen essentially having to be on top of many, many different fields that they know nothing about, and that lobbying could actually be a very useful process of informing them about issues and helping them think through the consequences of voting one way versus the other.
Then there’s the other view of lobbying, which actually has got nothing to do with information. Essentially, I will help you out with your campaign. I’ll help you raise votes— and without the explicit quid pro quo, because that clearly is illegal—but if I help you out, you vote the way that is in favor of mine.
So we’ve been trying in one research project to try to open that box of the lobbying process, and trying to answer, what do lobbyists actually do? So we have one research paper that essentially starts with trying to make relationships between, establish relationships, personal relationships between congressmen and lobbyists, which we can proxy for, pretty well, so who knows whom, essentially, personally, who is friends with whom. And because of this lobbying data that is now available, it’s also possible to try to categorize lobbyists in terms of their expertise. So this is someone essentially who works on health issues. This is someone that works more on military issues.
What we do in this paper is try to, in a sense, document which lobbyists are the best paid. Are the best-paid lobbyists those that actually know something, have information that could be valuable to the congressmen? Or are they the ones that know people?
And our research, really it seems to find that the premium that lobbyists receive is tied to their connections more than their expertise. In fact, there’s one finding in that research project that I find particularly interesting, which is, we look at lobbyists that have a relationship with a given congressman, and look at whether these lobbyists actually changed committee assignments as those congressmen changed policy assignments. So you’ve got Congressman X who used to cover health care, now he’s moving to military issues. What we find essentially is that the lobbyists that are connected to that congressman follow the congressman as he switches from one committee to the next.
So what determines what lobbyists work o, is not what they know, if you believe that, but in fact, who they know. Which I think tells something about the fact that what makes lobbyists special is their connections rather than their expertise.
Now I’ll caveat this with the fact that behind a given lobbyist, there might be a whole company, a K Street firm that is made of experts, and those experts may give the lobbyist some information that he’s gonna go and communicate to the congressman. That we cannot really observe, but the lobbyists, per se, the ones that are registered in those, in the Senate, in the Senate office, the lobbyists per se seem to be more valuable for who they know than their expertise.
There’s another great paper, kind of related to ours, that looks at the premium that lobbyists that are ex-staffers, so they were—we might talk about this later—but there’s a revolving door. So lots of lobbyists started their career, in fact, working as congressional staff. In that paper, they look at the premium that these ex-staffer lobbyists get, and how that premium changes when the congressman they are connected to retires, or leaves office. What they find is just a really striking drop in how much business those ex-staffers get when their contact in Congress disappears.
Same point. I think the connections are really central, and it’s much harder to find direct evidence that lobbyists are special because of what they know.
Hal Weitzman: So the idea being, who you know is more important than what you have to, what information?
Marianne Bertrand: Certainly the research, I think both of those pieces of research go very strongly in that direction.
Hal Weitzman: OK, and when we turn to regulation, the mirror of that is regulatory captures, concern about regulators going easy on companies, because there’s this revolving door of jobs back and forth, was that one of the causes of the financial crisis, Luigi Zingales?
Luigi Zingales:I think it was a contributing factor to the financial crisis in a sense that there is no question that some regulation was very light and that especially some subgroups, for example, investment banks, they lobbied hard to be “regulated” by the SEC, who basically did nothing to supervise them. And we know there was a lot of sort of shopping.
Hal Weitzman: You’re attributing that to regulatory capture rather than understaffing or incompetence or anything else?
Luigi Zingales: I think that it was pretty clear that investment bankers wanted to be regulated by the SEC. I think that they knew that it was more friendly.
Hal Weitzman: But I mean the SEC failed to stop Bernie Maddoff, even though they were warned about it. That wasn’t an example of regulatory capture.
Luigi Zingales: I think that certainly there was also some incompetence. There is no question about it, but I think the combination of the two was pretty bad. So now allocating the blame between the two is sort of hard, but I think both contributed for sure.
Hal Weitzman: So in the legal response that we’ve had to the financial crisis, have we dealt at all with this question, or has it been brushed aside?
Luigi Zingales: I think it’s been brushed aside. And this is, first of all, I think much of the regulation of Dodd-Frank was to reregulate the sector that was regulated, and the shadow-banking sector was basically left untouched in the process. So that’s problem number one. Problem number two, I think that there is not enough understanding, in my view, of how the industry creates a culture that is in a certain way. So I think that we heavily rely on the expert, but need to be afraid that experts tend naturally to be pro-industry, in the sense that if you are an expert in nuclear power, it is very hard that you are sort of anti–nuclear power. Human capital is so invested in that sector that you are predisposed to see the policy only for its benefit.
One thing that actually struck me about England is that when they created a commission to analyze the financial problems, they put there a couple of people who were not experts in the industry. They were very smart people, but not experts in the industry, to provide a balance. And I think we need to think more strategically in that direction.
When Sarbanes-Oxley was approved, I don’t know whether it was done on purpose or a coincidence, but when they created the board of the PCOB—for full disclosure, I’m a consultant of the PCOB—but they created the board—
Hal Weitzman: That’s the accounting regulator.
Luigi Zingales: Yes, they required that three out of five of the board members are nonaccountants, and I think that’s an excellent idea. I think we should see more of this along the way. I’m not aware that Dodd-Frank did anything in that direction.
Marianne Bertrand: I think that seems very, in terms of changes, I think anything, so, we talked very early on about the very different kind of numbers of voices you hear in Washington coming from business versus coming from, say, public-interest groups, like NGOs, organizations that may have a view, for example, on nuclear power, or on climate change. And that is, I think, a reflection of the different kind of resources that these kind of organizations have. So I think, when I think about changes that may help the process, I think anything that would empower, financially empower some of these organizations to also have a voice. I mean, we cannot get rid of the First Amendment.
Hal Weitzman: You mean even more lobbying.
Marianne Bertrand: Well, I mean, I think we cannot get rid of the First Amendment, so I have a hard time thinking that there will be a time in the US where we will break down the idea that you can talk to a congressman. So, yes, I think in a sense, even more lobbying so that—
Hal Weitzman: To level the playing field.
Marianne Bertrand: Yeah, I think the EU actually has that in place, as I understand it. I’ve never seen any kind of numbers, but I understand that the EU has a process where they actually subsidize some of these NGOs that may have a say on a given matter. And they view it, I think, as particularly important in their context, because even if we think that our congressmen don’t know much, and are understaffed, and don’t have the ability to understand problems. I think in Europe, that’s even more of a concern. So I think that’s why they have this process in place.
I think something like that, which is in a sense even more lobbying to solve the problems of lobbying, might be, might be a practical solution.
Hal Weitzman: Taxpayer-funded lobbying is gonna be a hard sell in the United States. Luigi Zingales, though, I wanted to ask you about something you’ve written about, the idea that academics, economists could be subject to a kind of form of capture. They need to get data for their research. Journalists need to get sources for their stories, and these are exactly the kind of sources that politicians use to inform their debate. Is that a broader danger of capture?
Luigi Zingales: Yeah, I think it is a broader danger. Especially, I think, in a business school because by definition, we study business, and we need to interact with business. So I think that we cannot avoid a problem by being separate, because that will really kill our very profession and activity. But we need to be very much aware of that, and I think disclosure is a very important step.
But also, I think more intense competition with similar access to data. I think that one of my pet obsessions is that I would like to have data more publicly released, so that a lot of people can use them and debate them. Because, it is true . . . think about in the medical profession, it is true that the tobacco industry used a huge amount of money trying to convince that smoking was not bad for you.
They failed, so. It took 20 years for people to realize, but they failed. So I think that . . . I’m not hopeless, that probably is why I’m in academia, I’m not hopeless about the role of academia. I think that when the data are overwhelmingly in one direction, it’s very difficult to get somebody to say something else. But it takes time and discipline because the debate, looking in the past, the debate on smoking was very much distorted by money in the industry.
We discovered publicly the damage of smoking and second-hand smoking late with respect to what would have been optimal. So I think we have to be very much aware, and this is not a problem just for economists. This is for every academics. But as I said, economists, because they deal with a lot of important interests, they’re particularly exposed. And business professors like we are are particularly exposed. So I think the best recipe, in my view, is self-awareness.
Marianne Bertrand: I mean, as an editor of a journal, I think this has been certainly a great push over the last few years is to have more disclosure. If you are gonna go and study a certain industry and write a paper on that, that you have to disclose any kind of relationship that you have with the firm that has been providing data. And on the issue of data access and replication, I think that’s also very, very central, but sometimes quite difficult, because you get into a relationship with a company to get data, and part of that relationship is you’re not gonna share this data with anybody else. So that really limits the extent to which one can do this kind of replication exercise which he’s talking about. But I think this is key. I think the transparency and disclosures are really, really important.
Hal Weitzman: And you think that’s a model that might be able to be reproduced in government?
Luigi Zingales: Yeah, and I think that the capture in the economic profession is not just by business, but also by government organization.
Marianne Bertrand: I’m gonna fully second that, so you may not have liked my idea of taxpayers subsidizing more lobbying. But in terms of other changes I think are really doable, I think the lobbying disclosure act did not go far enough. The data is quite rich. I can see that a given company spent a given amount of money on lobbying a certain committee. But one could actually push this further and basically require that any kind of conversation between a lobbyist and a congressman, there’s transcripts associated with them. So maybe those transcripts are not made available immediately, for the reason that Luigi mentioned. But five years later, all this becomes available in the public domain. I think that would be tremendously useful in controlling behaviors that might not be behaviors that you wanna see, so. And I think that’s doable. But the problem is that we’re gonna have to get that passed into a law, and there we are dealing with lobbying, and it’ll be very hard to—
Hal Weitzman: I guarantee we’ll get some lobbying against such proposal.
Marianne Bertrand: Absolutely.
Luigi Zingales: Yeah, but I’m actually more hopeful, because I think that nobody likes this system—it’s kind of a rat-race—that most companies dislike the system, and most congressmen dislike the system. It’s just saying, they all are doing. I have to do it myself. So if you find a way to stop it, a credible way to stop it, they might come along.
Marianne Bertrand: But I’m not sure. I think I tend to disagree with that because of what I said earlier. I think that it is not even. I think some people have got more voice than others, and like the system because of that.
Luigi Zingales: Yeah, I think that some companies definitely prefer it. But I’m saying, if you take, most congressmen, I don’t think they like that system. And they are very much afraid, now, of that system, because the latest result of the Citizens United is that even the potential, they’ll attack you.
Hal Weitzman: Let’s just explain, that was the 2010 decision by the Supreme Court that basically had unlimited donations were allowed—
Marianne Bertrand: Independent, Independent expenditures, ’cause there’s still the same constraints on direct expenditures to a campaign. Essentially, you can . . . befor, individuals could spend as much as they wanted on ads on TV saying, I love this guy or I hate this guy. And since United, essentially companies and unions can also do that as well.
Luigi Zingales: And many super PACs use this strategically by basically attacking at the last minute, just before the election, somebody who has positions that they don’t like. So just the threat of a huge amount of money coming into your district and wiping out your advantage is enough for people to behave. They don’t even need to spend the money, it’s just the threat of the money that does the job. And that’s the reason why certain issues are never discussed. They’re not confronted because—and this is bipartisan, it’s not just a Republican or Democratic issue—none of the two wants to touch that.
Marianne Bertrand: And it changes, I think it changes congressmen as well, because they are so dependent on the money that they pay interest to issues that, from a societal perspective, are not going to be the most important one. I’ll go back to my climate-change example because there’s maybe not as much money associated with that, but there’s more money associated with the pet problem of a given company that could be solved through a new regulation, or the undoing of an existing regulation.
Hal Weitzman: And many of these problems come back to money. We’re all from Europe. There’s much less money in politics in Europe. Are things better there?
Luigi Zingales: I think it’s both better and worse. It is definitely the case that there’s less money, and so it’s easier for you to get elected without selling your soul to some vested interest. However, there are two aspects which are more negative. One, in many countries you have financing from the government, which tends to favor enormously the incumbent vis-à-vis the new challenger, so it’s less easy to have a change of ideas.
And in many cases, there is an ideology that makes lobbying not even an issue. In a sense, the idea of the national champions in Europe, if you are France or Italy or Germany, you are protecting your national champion against the other Europeans. And as a result, this is completely accepted, and there is a full integration between the lobbies of the firm and the congressmen.
Marianne Bertrand. I agree, I think better and worse. From a given perspective, I think there’s less money in the political process in Europe, and I think that’s a good thing, because as we discussed, that’s part of the problem.
On the other hand, for example, you take the EU, the registry I was mentioning before of lobbyists, and who’s spending how much on what, that is not even mandatory in the EU, so there’s much less transparency, in fact, in the EU than there is in the US.
Hal Weitzman: Well, on that note, we are out of time. My thanks to our panel Marianne Bertrand and Luigi Zingales.
For more research, analysis and commentary, visit us online, at chicagobooth.edu/capideas, and join us again next time for another The Big Question.
Goodbye.
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