Business and Public Policy

1
Business and Public Policy

• How does government shape the business
  environment?
• What factors affect the nature of political
  competition?
• How do corporations influence public policy?
• When is corporate influence inimical to social
  welfare?

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Business and Public Policy

• How does the US political system differ from
  democratic systems in most other developed
  countries?

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Business and Public Policy

• How does the US political system differ from
  democratic systems in other developed countries?
• Presidential v. parliamentary democracy
• Two part v. multiparty democracy
• Electoral college v. popular vote
• You can lose an election even if more people vote
  for you than the other guy
• Private financing of electoral campaigns v. state
  financing

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Business and Public Policy

• What is Public policy ?
• Sum of
• Regulatory, and
• Non- regulatory activities of the government

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Business and Public Policy
Nature of political competition Wilson-Lowi
matrix
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Business and Public Policy
Nature of political competition Wilson-Lowi
matrix

• Benefits/costs are said to be concentrated if
  they are high per capita
• Widely distributed if they are low per capita
• Qualifications while using the matrix
• Magnitude of costs and benefits
• Costs of organizing and supplying political
  action

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Business and Public Policy

• Interest group politics
• When both benefits and costs are concentrated
• International trade policy
• Take NAFTA as an example
• Business groups v/s labor unions
• Profits v/s jobs
• How do the qualifications apply here?

8
Business and Public Policy

• Client politics
• When benefits are concentrated, and costs are
  widely distributed
• Politicians can serve their clients without risk
  of substantial opposition
• Agricultural subsidies
• American taxpayers pay 60 billion every year to
  American farmers to not produce more output, so
  that prices remain high for the farmers output
• Most subsidies go to rich farmers and
  agribusiness corporations, approximately 25,000
  in number
• Beneficiaries have stronger incentives to take
  political action than opponents
• NRA lobbies
• Gun companies benefit hugely the costs are
  rather indeterminate and diffuse

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Business and Public Policy

• Entrepreneurial politics
• When benefits are widely distributed, and costs
  are concentrated
• A political entrepreneur is required to mobilize
  those with dispersed interests
• Nuclear power station location
• Communities that are affected have stronger
  incentives to take political action than
  proponents of nuclear power
• One reason why alternate energy sources have not
  caught on, despite a great deal of hype

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Business and Public Policy

• Majoritarian politics
• When both benefits and costs are widely
  distributed
• Outcome is then determined by the preferences of
  a majority of the people
• Social security changes
• Each individual benefits from social security but
  is also taxed to support it
• Changes to status quo, even if necessary, will be
  at best incremental and rarely radical
• Bush plan calls for private accounts, but does
  not explicitly mention privatization
• Social security is called the third rail of
  American politics any politician who touches it
  gets electrocuted

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Business and Public Policy

• How do firms influence policy making?
• Tools for corporate influence of public policy
• Lobbying
• Attempts at direct influence by inducing
  officials to pass, defeat, or change the contents
  of legislation
• Interest groups
• Skilled professional firms
• Goals
• Influence legislation
• unearth information by gaining entry into
  administrative agencies

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Business and Public Policy

• Lobbying
• Attempts at direct influence by inducing
  officials to pass, defeat, or change the contents
  of legislation
• Interest groups
• Skilled professional firms
• Goals
• Influence legislation
• unearth information by gaining entry into
  administrative agencies
• Lobbying functions
• Socialization with legislators
• Providing information
• Presenting the clients view point
• Assistance in drafting legislation
• Testimony before agencies

13
Business and Public Policy

• Tools for corporate influence of public policy
• Campaign finance
• Corporate contributions to campaigns are used to
  affect election outcomes, obtain access and
  influence legislative voting
• Federal election financing is regulated by the
  Federal Election Commission
• Corporations can form PACs (Political Action
  Committees) for fund collection and distribution
• Established by corporations and labor unions as a
  vehicle for donations to election campaigns
• Corporations prohibited from direct contribution
  since 1907
• Corporate PACs must obtain funds from executives,
  shareholders and employees

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Business and Public Policy

• Tools for corporate influence of public policy
• Campaign finance
• Campaign financing law distinguishes between
  expenditure in electoral campaigns and
  contributions to those campaigns
• Buckley v. Valeo Supreme Court ruled that limit
  on campaign expenditures violates freedom of
  speech
• Contributions, however, are limited. Hard money
  contributions by PACs cannot be more than 5000
  per candidate

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Business and Public Policy

• Tools for corporate influence of public policy
• Campaign finance
• In the past, soft money contributions were
  permissible
• Corporations could directly contribute money for
  party activities provided those funds are not
  used to urge a vote for or against an individual
  candidate
• Soft money was unlimited
• In 2002, the Bipartisan Campaign Reform Act
  (BCRA), popularly called the McCain-Feingold Act,
  outlawed soft money

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Business and Public Policy

• Tools for corporate influence of public policy
• Campaign finance
• But this election year, a new vehicle gained
  currency
• 527s (Swift Boats was a non-corporate 527)
• BCRA forbids federal candidates and national
  parties from raising unlimited contributions from
  corporations labor unions, and wealthy
  individuals. But 527s have no such restrictions
  they can receive unlimited donations from
  corporations, unions, and individuals and use
  them to influence elections. The key constraint
  is that 527s can't endorse specific candidates,
  and must be totally independent from the
  political parties
• George Soros backs some Democratic 527s

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Business and Public Policy

• In the US Air case, can we analyze this case
  using the Wilson matrix?
• Do you think that lobbying increased social
  welfare in this case? What were the costs and
  benefits of the Bush administrations decision in
  this case?
• In general, is corporate influence over
  government good for social welfare? Are there any
  deficiencies in the political system that present
  opportunities for pernicious intervention by
  business?

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Business and Public Policy

• In the US Air case, can we analyze this case
  using the Wilson matrix?
• Concentrated costs of open skies fall upon the 3
  carriers
• Concentrated benefits only for US Air
• Diffuse benefits for US passengers in the form of
  competition and possibly lower prices
• So Big 3 only need to out-lobby US Air they can
  be confident that passengers will not organize
• Why did the Clinton govt. permit the investment?
• Possibly because post-retaliation, the costs on
  the 3 carriers are now offset partially by the
  concentrated benefits of access to the British
  market. Now the costs on the Big 3 may not
  justify the cost of lobbying furiously

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Business and Public Policy

• Do you think that lobbying affected social
  welfare in the US in this case? What were the
  costs and benefits of the Bush administrations
  decision in this case?
• Depends on whether open skies produce utilitarian
  benefits
• Costs would be increased competition in the US
  skies, leading to bankruptcies and job losses in
  the industry
• Protectionism by other countries would mean that
  no gains would accrue to US carriers
• Benefits would be job savings at US Air, and
  lower prices for US consumers
• If the benefits outweigh the costs, then lobbying
  would have proved to be socially inefficient

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Business and Public Policy

• Is corporate influence good for social welfare?
• What is good for business is good for the average
  American. 50 of Americans are invested directly
  or indirectly in shares of corporations
• But most corporations today are American only in
  name, and have no cause for any particular regard
  for the ordinary American except as an economic
  entity
• History teaches us that two powerful forces
  combined together can lead to corruption.
  European monarchies were characterized by a lack
  of separation of religion and state. The result
  people were led to believe the earth was flat,
  and that the sun revolved around it, despite
  scientific evidence to the contrary

21
Business and Public Policy

• Some interesting proposals for campaign finance
  reform
• Anonymous contributions
• Free television advertising