Is lobbying good or bad for the economy and society?

 

Lobbying - Friend or Foe?

By Rishabh Sidana

INTRODUCTION

Lobbying describes attempts to influence government decisions by private-interest economic agents. In principle, the case for lobbying appears simple: governments are not omniscient. They are unaware of the needs of firms and citizens, leading to imperfect policies, and political disengagement. Lobbying serves a salient solution to filling this information gap – albeit one far from perfect. 

LOBBYING: A STEP TOWARDS THE RIGHT PATH

It would be reductive to examine lobbying’s harms without first acknowledging its merit. 

Economically, developing nations with weak institutions may benefit from lobbying-induced efficiency gains. Contrarian views posit lobbying has universally negative impacts, yet this need not be the case. In extremely weak institutions, extractable rents eventually grow insufficient; firms that cannot depend on government influence are forced to raise productivity or open themselves to trade (which tends to reduce inequality and spur growth). In smaller economies, the opportunity cost of lobbying is outweighed by these gains.

Socially, lobbying also poses gains. Amidst rapid societal transformations, government methods of information collection can prove inefficient, time-consuming and costly. Lobbyists, with their wide-ranging connections and verified information sources, streamline this process. As nations develop, lobbying may further strengthen institutional quality, emerging as the replacement to bribery as a means of influence and providing a channel for the ruling party to understand the opposition’s qualms.

DO THE BENEFITS REMAIN?

The above, however, describes lobbying in its infancy. In more prosperous countries with higher levels of economic freedom, opposing effects are observable.

This may be due to there being more at stake - on a large scale, allocating resources towards lobbying indubitably incurs larger opportunity costs (curtailing productive potential and hence long-term growth). The aforementioned productivity gains are also unlikely to materialise, considering the relative efficiency of high-income countries, and the change in the intent of lobbying from informative to special interest. As developing countries strive to rapidly increase national income, perhaps the benefits will fade for them too. The rationale for lobbying in developing nations may be less indicative of its merit, rather of it being the ‘lesser of two evils’ when evaluated against bribery.

         

Now that it has been discussed what may erode lobbying’s benefits as a nation develops, it is logical to progress to the detriments of modern lobbying.

MODERN LOBBYING AND ITS HARMS

Modern lobbying has developed such that government petitioning isn’t uniformly accessible. With sizable profit incentives at stake, special interest groups are willing to expend large sums for lobbyists to garner political support. Committing comparable levels of time, dedication and money is infeasible for the general public, and this disparity has led to ‘signal jamming’of their woes in being conveyed to legislators. The role of wealth in determining access to these political liberties seemingly violates Rawls’ egalitarianism.

Precedent demonstrates the harms of modern lobbying, economically and socially.

Whilst some posit high-income countries to better control special interest groups, the greater potential for rents encourages rent-seeking behaviour. In the US, a study found a 1% rise in lobbying expenditure to be met by anywhere between a 0.5% and 1.6% reduction in corporate effective tax rates. 

The negative effects are again passed down. The reduction in tax receipts may necessitate contractionary fiscal policies through departmental cuts or the possible removal of some benefit provision to low-income groups; both can have regressive impacts.

State-administered projects may also rely on lobbying. With federal projects more likely to be awarded to the greatest contributors, selection of firms grows less meritocratic. This may promote monopolistic dynamics by not providing opportunities to more efficient firms, increasing government waste of tax receipts.

Finally, it is worth examining lobbying’s impacts on regulation. Stigler’s theory likens regulation to a product obtainable by industries for only their own benefit, instead of the public interest. This can prove detrimental in emerging industries lacking regulatory frameworks, such as the gig economy. Bolt, wishing to maintain low wages and exploitative working rights, lobbied the Estonian government to oppose labour reforms in the EU’s Platform Work Directive, culminating in the watering down or removal of ambitious proposals. Stiglitz’s proposal of a “Green GDP account” to track natural resource depletion was also blocked upon lobbying from coal firms. This regulatory capture (illustrated below) deteriorates welfare for present and future generations, be it hardworking platform workers unable to rise up social ranks, or the natural calamities inflicted by climate change. This can fuel resentment: how can it be that special interest groups are given disproportionate influence over legislation, when the public disproportionately bears the cost?

L - Function describing costs incurred by lobbying

T - Function describing costs saved (benefits) from less regulation

ML - Marginal L

MT - Marginal T

ML1 - Marginal L altered to account for a higher level of state oversight

Figure 1: As shown above, lobbying (e.g. the Bolt case study), at either ML or ML1, can reduce regulation from R* - the social optimum - to R or R’ , hence resulting in a socially inefficient outcome. Source: Nicolaides (2013)

POLICY REFORMS

There is no immediate panacea for these troubles. 

Self-regulation has borne disappointing results. However, accessibility and transparency-oriented reforms may offer recourse.

One widely-suggested reform is stronger, more effective transparency regulations. Present attempts such as the UK’s Register of Lobbyists are inaccurate, covering less than 4% of lobbyists and omitting too much relevant information about lobbying activities. The resulting loss of public trust is substantial; 67% of UK adults feel the public should know more about the lobbyists seeking influence. Greater data collection, and expanding the scope of registries to include ‘in-house’ contributors to lobbying may prove effective.

The second reform lies in re-establishing equal access to lobbying, and reviving political engagement. To ‘unblock’ the signals of the general public, technology will be a valuable tool. Drutman’s proposed solutionappears promising: a forum wherein lobbyists and constituents can discuss bills, with tallies for politicians to gauge overall sentiments. He further proposes lobbyists be required to declare their affiliations (for-profit, non-profit), helping consolidate transparency. Critics may raise the possibility of grassroots lobbying, but even that would mark an improvement since it would need to pass the test of public opinion.

CONCLUDING THOUGHTS

In sum, whilst lobbying principles are a key tenet of democracy, its usage in enforcing special interests is antithetical to that same democracy. I judge the aggregate impacts of modern lobbying to be negative, given the resulting alienation (both politically and in the ‘process of labour’) – 

but not beyond the point of recovery. Special-interest lobbying will likely continue to circumvent ‘de jure’ interventions (albeit, hopefully, to lesser extents). Increasing accessibility and ‘lobbying for good’, however, may render lobbying more beneficial for all of society.

Word Count (excluding titles, headings, footnotes and figure labels) : 999 words

Bibliography

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