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Revealed Preference and Political Contributions

Spoiler alert: the conclusion reached in this post may not be a news flash, still I think it’s worth considering the certainty with which we can make these assertions.

I recently heard a left-winger (forget who) on tv going on about how the government is in the pockets of corporations and so forth.  Also, much has been made lately (mostly on FOX) about the amount of donations made to Obama’s campaign by such unpopular interests as Goldman Sachs and BP (who apparently got an exemption on certain environmental impact procedures).  Interestingly, I completely agree with the left on this subject.  So let’s consider two questions, first: what evidence is there to support this claim?  and second: why is this the case and what should be done about it? 

One of the tricky things about economics is that everything is dependent on people’s motivations and these are very difficult to observe.  One method of doing this is called revealed preference whereby we observe people’s choices under different conditions (prices, income, etc.) and use these to construct limits on their preferences.  I won’t get into detail about what this means in more complex situations but it turns out the question we are considering is very simple.  Consider the two competing hypotheses about a corporation’s political  preferences:

1.  The corporation expects to gain no particular influence from their contributions but simply prefers one candidate over the other.  This may be because the candidate openly favors policies which they believe will be beneficial to them but is not because they expect to gain personal favors in return for their contribution.

2.  The corporation does expect to gain personal influence with their contribution. 

The thing that makes it so easy to test between these two sets of preferences is that if the first one is true, then contributions to one campaign are a “good” and contributions to the other are a “bad” (or nongood if you prefer).  This means they will always prefer more of the former and less of the latter.  In other words they would only contribute to one campaign.  If however the second hypothesis is true, then the corporation may want to hedge their bets by giving to both campaigns so that no matter who wins, they will still have some influence.  In this case we may see them giving more to one than the other.  This might mean that they prefer one candidate to the other or that they think that candidate has a better chance of winning but this would only happen if they expect to get some form of quid pro quo.

So what do we observe?  Well if you follow the link from the ABC story above to the Center for Responsive Politics, you will see that Obama got the most money from BP in the last election.  Guess who was second.  Clearly they are hedging their bets here.  If you look at Goldman Sachs, Obama is first and McCain is fourth with Hillary Clinton and Mitt Romney coming in second and third respectively.  In fact if you look at the heavy hitters, it’s hard to find a corporation that doesn’t have Obama and McCain within a few spots of each other on their recipient list (most of the top donors are unions which donate almost exclusively to democrats). 

Alright, so let’s all admit that corporations (and unions for that matter) do get influence in exchange for money.   And I think most of us can agree that this is not how our system is supposed to work.  So what happened?  Well the answer is simple, government has accumulated all kinds of powers that it wasn’t supposed to have.  With these powers comes discretion.  Discretion opens the door to influence.  The left will say that the problem is that government is controlled by corporations (remember to look at the heavy hitters list).  Their solution is to put people in control who won’t use these vast powers to help people they don’t like but to help them instead.  This is a fantasy.  They may get this for a few years at a time, but power will always swing back and forth and in the end this paradigm will collapse from corruption.  The only real solution is to take these powers away from the government.  They should have no ability to favor any particular party over another.  When we do this, we won’t have to worry about who contributes what to whom.

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