The central point that emerges from our research is that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while mass-based interest groups and average citizens have little or no independent influence.
Martin Gilens and Benjamin Page
Perhaps the most sinister and damaging aspects of the growing conflict of interest between electors and elected over the last thirty years have been the growing cost of campaigning, the rise of the lobbying industry and the attack on the regulatory frameworks put in place to defend the interests of the many against the few.
These three changes have led to the effective capture of the political system by well-resourced special-interest groups. We have gradually moved from one citizen, one vote to one dollar, pound or euro, one vote. In some cases it is difficult to distinguish between a company or industry seeking to influence political outcomes that will affect them and outright corruption, especially if there is an implied link between the cooperation of politicians and promises of campaign funds. While the extent of this phenomenon varies from country to country, and is widest in the US, the effects have been felt throughout the West.
Bernie Sanders remarked during the 2016 US presidential campaign that nothing that was said would make any difference unless the influence of ‘millionaires and billionaires’ was ended. In 2018, according to Oxfam, twenty-six people owned as much as the poorest half of humanity – 3.8 billion people. Further, the top 1 per cent now have more money than the bottom 99 per cent.1 Although there has been some progress, 10 per cent of the world’s population still lives in extreme poverty – an income of less than $1.90 per day.2 People all over the world are losing their faith in democracy – government by the people, for the people and of the people. ‘They increasingly recognise that the global economy has been rigged to reward those at the top at the expense of everyone else, and they are angry.’3
One of Sanders’ solution is the reform of US campaign funding. Not surprisingly, the system has never pursued this with any vigour, preferring the status quo. Rules limiting direct campaign contributions from individuals have been in place in the US since 1972’s Watergate scandal, when President Richard Nixon took secret corporate donations in exchange for ‘accommodating government treatment’, but these are not watertight.4 Individuals can still aggregate and channel individual contributions through ‘bundlers’, who are not legally required to disclose their activities if they are not registered lobbyists and often collect money in exchange for political favours; then there are the more recent ‘super PACs’ (political action committees), which can spend without limit as long as they act independently of a candidate’s official campaign.
The system is supported by the US Supreme Court’s ruling that paying to advertise your political views is a form of freedom of speech. In April 2014 the court also ruled that aggregate limits on campaign contributions were unconstitutional under the First Amendment.5 Unlike in other democracies (French presidential candidates are limited to a paltry $30 million spend for example), money has always been big in American politics. Even back in 1895 Senator Mark Hanna acknowledged, ‘There are two things that are important in politics. One is money and I can’t remember what the other one is.’
The 2016 elections revealed that both Democratic and Republican campaigns were bankrolled by billionaires with big stakes in the outcome. Bloomberg reported,
They include Republican casino owner Sheldon Adelson, who has opposed proposals to legalise online gambling, and Democratic investor Tom Steyer, who advocates for clean energy. Some wealthy players, notably industrialists David and Charles Koch, whose company lobbies to loosen regulations on oil and gas, run their own political operations. All this has pushed up the costs of campaigns. The amount spent on the 2016 Senate race in Pennsylvania alone was at least $139 million.’6
It is clear that as the cost of getting elected continues to spiral, so politicians are increasingly dependent on financing from private sources. This provides large donors with powerful direct or indirect influence. The money for campaigns for federal office comes from four broad categories:
• small contributors (individuals who contribute $200 or less)
• large contributors (individuals who contribute more than $200)
• political action committees (PACs)
• candidate’s own money
The sources of campaign contributions in the 2018 Congressional races are broken down in Table 8.2 overleaf.
Table 8.1: Campaign spending in US elections 1998–2018
*Presidential election cycle
Table 8.2: Donations by range ($ millions)
*Millions of dollars
The figures clearly show that the biggest share of campaign contributions comes from predominantly large donors i.e. the wealthy, who have more at stake and more to lose from the threat of a change to the system. Around 0.47 per cent (1.3 million) of the population contributed 71 per cent of campaign funds, with the lion’s share coming from about 46,000 large donors of $10,000 and above. The 2018 Congressional elections managed to burn nearly 50 per cent more money than in 2014. A total of $6.5 billion was spent on the 2016 elections, of which the presidential election alone accounted for $2.4 billion.
The jury is out when it comes to the extent to which campaign funding affects election results, although the Center for Responsive Politics reports, ‘Candidates with most financial support generally win,’ as shown in Figure 8.1.
Figure 8.1: Candidates with most financial support generally win, US elections 2000–16*
*Excludes races with no opponent, but does include races where opponent spent nothing.
They noted however that the presidential race appeared to be an exception to this rule. Rather than financial support increasing candidates’ chances of winning, it may be that better candidates attract more financial support.
Certainly, Donald Trump won in 2016 having only raised $350 million (including $66 million of his own money) directly, about a third of Obama’s 2012 re-election campaign, and considerably less than his opponent Hillary Clinton’s $585 million, as reported by the Federal Election Commission. This equates to about $5 spent per vote. In total, including joint party raised funds and super Political Action Committees (PACs), Trump raised a modest $647 million compared to Clinton’s $1,191 million. According to Bloomberg, ‘She spent heavily on television advertising and her get-out-the-vote operation, but in the end, her fundraising edge wasn’t enough to overcome Trump’s ability to dominate headlines and the airwaves.’7
The fact remains, however, that it requires large sums of money to campaign with a chance of success in the US, and that campaign funding, as we saw in Table 8.2, continues to come primarily from large donors. Unsurprisingly, a 2016 experimental study reported in the American Journal of Political Science found that politicians made themselves more available for meetings with individuals when they believed the people had donated to their campaign.8
In 2011 another study found that ‘even after controlling for past contracts and other factors, companies that contributed more money to federal candidates subsequently received more contracts’.9 And a 2016 study in the Journal of Politics found that industries overseen by committees decreased their contributions to Congresspeople who recently departed from the committees and that they immediately increase their contributions to new members of the committees, ‘evidence that corporations and business PACs use donations to acquire immediate access – suggesting they at least anticipate that the donations will influence policy’.10
Other research, by Anthony Fowler, Haritz Garro and Jörg L. Spenkuch, found no evidence that corporations that donated to a candidate received any monetary benefits from the candidate winning an election.11 Of course, this depends on how and over what period of time one measures benefits. One benefit may simply be the preservation of the status quo. A somewhat counter-intuitive 2017 study found that relatively unpopular industries provide larger contributions to candidates. The authors of the study argue that this is because candidates lose voter support when they are associated with unpopular industries and that the industries therefore provide larger contributions to compensate for this.12
While the data does not conclusively prove that quantity of money automatically determines electoral success, nor that those elected craft policies that benefit their donors, it stretches credibility that wealthy individuals and corporations would donate as they do if they did not obtain some financial benefits or influence for their investments over time.
Michael Traugott, a political science professor at the University of Michigan, has claimed that the traditional US model for picking presidents might seem odd to people in other nations, where campaigns are shorter and require less cash. ‘The system is clearly broken,’ Traugott said.13
Perhaps one of the most hotly contested special interest groups in America recently is the National Rifle Association (NRA). While it is not one of the big spenders, it has consistently contributed to predominantly Republican lawmakers as well as paid for advertising defending the constitution’s Second Amendment, the right to bear arms. With every mass shooting, a cry to change the law or tighten regulations is left unheeded by the political class, in spite of the outrage.
In the 2016 election the NRA spent $11,438,118 to support Donald Trump and another $19,756,346 to oppose Hillary Clinton, a total of more than $31 million on one presidential race.14
The sheer breadth of campaign support provided by the NRA over the years helps explain just how deeply the organisation is ingrained in the election universe. Among the 535 members of Congress in 2018 in both the House and the Senate, 307 have received either direct campaign contributions from the NRA and its affiliates or benefited from independent NRA spending like advertising supporting their campaigns. Eight lawmakers have been on the receiving end of at least $1 million over their careers, 39 have seen $100,000 or more in NRA money flow their way, while 128 lawmakers have received $25,000 or more. Only six current Republican members of Congress have not received NRA contributions.15
Florida Senator Marco Rubio is one of those who has received over $1 million from the NRA. When asked by a student at a school in Florida where a mass shooting had taken place whether he would now refuse to take further campaign donations from the NRA, he said no.
The NRA’s influence also derives from the negative advertising campaigns it runs which can quickly destroy a political career. In 2014 one of these ads targeted US Senator Mary Landrieu, who supported a bill to expand federal background checks to include gun purchases made at gun shows and over the Internet. The NRA ad showed a mother putting her daughter to bed while her husband was away from home. An intruder enters; the police don’t arrive in time, and suddenly the house is a crime scene. The message was clear. ‘Mary Landrieu voted to take away your gun rights.’ She lost the election.16
According to Vox, the NRA disbursed $144 million on advertising between 1998 and 2017, ten times its direct political contributions. US politicians know not to cross the National Rifle Association.
Expenditure by parties and candidates on elections is generally lower in other Western democracies. For example, since 2000 in the UK rules require transparency from donors: political parties must report all permissible donations above £7,500. There are also rules limiting expenditure. For the 2015 general election, total expenditure by political parties was £37.3 million, including £22.6 million by candidates and £2.8 million by registered non-party campaigners. The conservatives won and outspent Labour by around £15.5 million to £12 million. In total, this is equivalent to less than $90 million for a population around one fifth of that of the United States, and so seems more than proportionately modest, although it is true that UK election campaigns are shorter than in the US. Total donations to UK political parties over the 12-month period leading up to the 2015 election were about £90 million (around $130 million), still much lower than the US on a per-elector basis. Two years later, total spend was £41.6 million for the 2017 general election, of which over £18 million was spent by the governing Conservative Party, which still managed to lose seats to its Labour opponents.
In France, spending was limited in the 2017 presidential election to €22,509,000 for the two presidential election finalists, Emmanuel Macron and Marine Le Pen. In the event, they spent around €16.7 million and €12.4 million respectively, or around $35.5 million combined, which seems like a bargain. Individual donations are capped at €4,600, and companies or legal entities other than political parties are barred from contributing, precisely to avoid pressure from commercial donors.
In Germany in the 2012 election the expenditure by the two main political parties, the SPD and CDU, amounted to less than €30 million each. As in other European countries, the formal campaigns run for a short time. This, and their relative cheapness, means that politicians don’t have to spend much of their time fund-raising for the next campaign and so have more time for the job in hand. There are no limits on individual or corporate contributions to politicians’ campaigns but self-restraint seems to be exercised. There are a few officially sanctioned TV and radio slots for each party, and a large slice of campaign financing comes from public funds roughly based on the number of votes gathered at the last election. In 2006 it is estimated that around 30 per cent of parties’ income came from public funds, 28 per cent from membership dues, 10 per cent from individual donations and only around 4 per cent from corporate contributions. The balance came from elected officials’ donations and income from investments and commercial interests.17 However, political parties do not have to declare immediately contributions below €50,000, so companies can game the system by contributing below-threshold amounts regularly throughout the electoral cycle.
But while the direct power of money in election campaigns is less evident in Europe, there are two other methods through which business seeks to influence or modify the laws and regulations affecting them for their financial benefit: lobbying and regulatory capture.
Lobbying takes its name from the tradition of meeting British parliamentarians in the lobbies or corridors of the Palace of Westminster. It is not a new activity; however, its growth and professionalisation since the 1970s has been rapid. In essence, lobbying is a paid activity in which special interests – business, groups like the NRA, even foreign nations – hire well-connected professional advocates to plead their case with politicians, with the aim of influencing policy, legislation and regulation. Lobbying has become big business, and its effect on politics has been significant. For example, in 2016 Taiwanese officials hired American senator-turned-lobbyist Bob Dole to set up a controversial phone call between president-elect Donald Trump and Taiwanese President Tsai Ing-Wen, resulting in a shift in US foreign policy.
In 2014 Martin Gilens and Benjamin Page suggested that special-interest lobbying enhanced the power of elite groups and was a factor shifting the USA’s political structure towards an oligarchy in which average citizens have ‘little or no independent influence’. In fact, even when a substantial majority wants policy change, they generally do not get it if it clashes with the elite or organised interests. Gillen and Page term this ‘economic elite domination’.18
US lobbyists have taken the art to its highest level. They are well connected with the Washington political elite, well versed in the issues of the day and in it for the long term, patiently cultivating networks and contacts, building trust and confidence. Many will get directly involved in campaign finance by fundraising, assembling PACs and seeking donations from other clients.
Brian Ballard, a Florida fundraiser with ties to Donald Trump, reported receiving $9.8 million in federal lobbying fees in 2017. This was the most successful debut by a new lobbying firm in Washington, trumping the $8.1 million first-year income earned by Breaux-Lott, the firm set up by ex-Senators John Breaux and Trent Lott in 2008. Despite Trump’s promise to ‘drain the [Washington] swamp’, spending on lobbyists increased to $3.4 billion in 2018, up from $3.15 billion in 2016.19
Given the legal and regulatory framework within which finance operates, it’s unsurprising that the sector is one of the big employers of lobbyists. Influencing how law and regulation is written and interpreted can set the rules of the game and transform their profitability. With so much at stake, it is no surprise that the financial industry has been one of the top spenders on lobbying in recent times: ‘The financial industry reported spending a total of $897,949,264 on lobbying in 2015 and 2016. This puts the sector in – close – third place, behind the Healthcare sector, which spent $1,022,907,176, and a category of “Miscellaneous Business,” a sector that itself probably includes some Wall Street lobbying by business groups with a broader focus than only finance.’ Big banks such as Wells Fargo, Citigroup and Goldman Sachs each spent over $10 million.20 Although the pharmaceutical and healthcare sector appeared to top the lobbying spend in 2018 at $283 million, adding up the insurance, real estate, securities and investment and commercial banking industries that comprise ‘finance’ reveals a record-breaking spend of $443 million that year.21 These sums do not include ‘dark money’ – contributions to non-profit groups which are not directly linked to a candidate, do not have to disclose their donors and which do not have limits on donation sizes
An article in Bloomberg Businessweek exposed the work of ex-Undersecretary of State James Glassman, who works for a public relations firm called DCI Group on behalf of the hedge fund industry.22 He was part of a decade-long ‘influence campaign’ aimed at reshaping public opinion in Washington and around the world of Argentina’s government. He ultimately helped DCI client Elliott Management to turn a $2 billion profit on its holdings of Argentinian bonds. The magazine hailed the practice as yet ‘another way in which skyrocketing inequality is giving a few individuals an outsize role in public life’.
Crucially, it was political donations and the lobbying power of the finance industry that succeeded in emasculating the 1933 Glass-Steagall Act, which, as we saw in Chapter 4, separated investment banks from commercial banks following the 1929 crash. Lobbying pressure succeeded in provoking its repeal by President Clinton and Congress in 1999. We now know to our cost the effects of allowing retail banks to indulge in a bit of casino banking on the side, although the merger of Citicorp with Traveller’s to form Citigroup in 1998 showed how Glass-Steagall had already become a paper tiger.
The influence of lobbyists on the repeal of Glass-Steagall – with everything this unleashed – is another facet of the pervasive moral hazard built into the system since the Greenspan era at the Fed, prioritising the welfare of Wall Street over Main Street. Quite apart from the reigning ideology, any attempt to curb the banks’ freewheeling habits was smothered by their constant efforts to influence the political process.
Lobbying by the financial industry has recently borne fruit with Congress approving Trump’s push to pare back the regulations imposed on the sector post-GFC, embodied in the 2010 Dodd-Frank legislation. In March 2018, less than a decade after the crisis, Congress watered down the law, freeing thousands of small to medium-sized banks from the stricter federal oversight and regulatory burden that had been introduced. White House officials called it ‘an important step toward ridding the economy of regulations that have held back growth’.23
In 2019 the Fed announced the watering-down of its stress tests on major banks, thereby freeing up more capital for them to pay higher dividends to shareholders or conduct share buy-backs.24
In their 2014 book Fragile by Design Charles Calomiris and Stephen Haber characterise banking as a rent-seeking racket between bankers and the political establishment, extracting wealth from those outside this partnership and dividing it between them.25 They certainly have a symbiotic relationship: governments need banks to keep deposits and make loans; banks need governments and central banks to act as lenders of last resort and to enforce contracts. That basic relationship leaves plenty of room for governments to constrain what banks do. However, if governments and politicians want to ensure decent growth in order to satisfy the electorate and maximise their chances of re-election, being permissive with the banks – allowing them to create credit, especially at times of recession or low growth in underlying incomes – creates a win-win situation for both. Banks lobbying governments to unshackle them has been like pushing against an open door.
It may seem surprising that in 2009, the year banks nearly crashed the system, New York mayor Andrew Cuomo reported ‘that nine financial institutions that received a combined $175 billion in federal money [to save them from bankruptcy] handed out almost $33 billion in bonuses’.26 Two of the banks, Citigroup and Merrill Lynch, lost $54 billion in 2008, received $55 billion of government bail-out money, and yet paid out bonuses of $9 billion.
Although fiscal and monetary action during 2008–9 may have prevented a full-blown depression, direct government support for the US financial sector totalled approximately $12.6 trillion, more than 80 per cent of 2007 GDP.27
UK government support for banks, including guarantees, rose to £1.162 trillion at its peak in 2009 of which around £1 trillion was in the form of guarantees, in a bail-out that began with the collapse of Northern Rock in 2007.28 This was equal to over £20,000 for every UK resident. Meanwhile, the government’s budget deficit ballooned to 12.4 per cent of GDP, crippling its finances and ensuring a massive squeeze on public spending and services for the next decade. Although the Office of Budget Responsibility has calculated that the bail-out costs have come down to only £23 billion as of January 2018, principally due to a loss on the rescue of RBS, the government’s debt position has remained nearly twice as high as before the crisis due to social security outlays to support incomes and falling tax revenues during the crisis.
This was replicated across the Western world. The authorities spent whatever money it took to bail out the banks while at the same time squeezing their populations through reduced welfare, infrastructure and public services spending, higher taxes and reduced pensions in order to repair government finances. In the Eurozone this was imposed on deeply indebted countries such as Greece, whose biggest creditors were German bankers and investors, as the price of remaining part of the club. Robert Strauss expressed concern that it seemed to be more ‘moral’ to save German bankers than Greek pensioners; German policy in relation to the Greek bail-out was ‘no more morally just than letting bankers off scot-free for causing the financial crisis’. Eighty per cent of the hundreds of billions of euros lent to Greece after 2009 was actually used to repay those very German bankers.29
The big winners were the owners of capital. Not only were they saved once again from the consequences of their own folly, but they subsequently made even more money as central banks printed money furiously to help governments fund their whopping deficits and bring down interest rates and borrowing costs.
As we have seen, the Bank of England printed £375 billion of fresh money to keep bond yields, and so borrowing costs, close to zero. In the US, the Fed more than quadrupled the size of its balance sheet to $4.5 trillion by purchasing treasuries and mortgage-backed securities. By 2017 the Bank of Japan had accumulated an extra 400 trillion yen (about $4 trillion or 96 per cent of GDP) of assets it had purchased by printing money since 2011. In the Eurozone the ECB embarked on a money-printing programme to buy €60 billion of assets a month from March 2015, temporarily increased to €80 billion per month from March 2016 to March 2017, since scaled back from 2018 to a monthly €30 billion. Faced with renewed economic weakness, the ECB announced in October 2019 a resumption of its bond buying programme. The ECB and Eurozone national central banks had accumulated assets of over €4.5 trillion by the end of 2018 from printing money and pinning Eurozone government bond yields close to zero, while imposing negative interest rates on bank deposits.30
These extraordinary measures had to be taken to save a market economy from a catastrophe of its own making. So much for the ideological purity of the free market, unfettered from government intervention.
Stock market speculators made a killing as the markets rose again on a sea of central bank liquidity. Not only were interest rates cut to historic lows, in some countries to previously inconceivable negative rates, but the major central banks embarked on a policy of creating money with which to buy assets such as bonds in the open markets, thereby raising prices and bringing down yields. This was a direct infusion of cash into the financial markets, rather than into stretched households. This policy, dubbed quantitative easing or QE (a more respectable term than printing money), meant that the central banks’ own balance sheets greatly expanded with the purchase of trillions of dollars, euros, pounds and Japanese yen assets.
The world’s biggest and dominant stock market, as measured by the S&P 500 index in the US, at the time of writing has returned over 400 per cent since the crisis.31 While once again correlation does not prove causation, the depressing effect of this policy on interest rates would by itself support asset prices and funnel capital into equities as savers avoided the non-existent yields from cash and bonds. Real estate owners’ wealth reinflated, as almost free money catapulted some property prices back beyond the 2007 bubble peaks, placing them out of reach for much of the younger generation.
Nevertheless, most politicians have been reluctant to abandon the free market and accept that the GFC has exposed its limitations. Hedge fund manager Paul Marshall was a brave lone voice when he acknowledged that anyone with assets – banks, hedge funds, property owners – ‘made out like bandits’ from quantitative easing. ‘If the increased money supply had been distributed evenly, it might have been used for consumption rather than making rich people richer and bailing out the banks … QE had clear wealth effects, which could have been offset by fiscal measures [ie tax the rich]. All political parties should acknowledge this. So should those of us who want free markets to retain their legitimacy.’32
As we saw in Chapter 6, the bail-out and QE system was a prolongation of a policy in place since the Greenspan Fed in 1987: every time the market overdosed on credit, threatening an economic meltdown, the money tap was opened even further, thereby inflating the next even bigger excess. And, according to economist Heinz Blasnik,33
the irony is the propping up of a deeply, intrinsically pathological and destructive financial system is not saving the economy, it’s the reason the economy is imploding … the truth is that keeping the zombie system from expiring and covering up the corruption with propaganda is what’s actually destroying the world as we know it … the Fed not only enabled, financed and corrupted the financial sector, but also provided it with the opportunity (through monetary inflation) to make outsized profits at the expense of the rest of the economy.
He goes on, darkly: ‘I believe American democracy is doomed, and that it will be replaced by fascism or a military dictatorship and that the financial system will sooner or later implode.’
That is a very determinist view of the world, but it could happen unless the political establishment is prepared to put aside its almost religious belief in unfettered free markets, (fake) free trade and finance.
It was not just the banks that needed rescuing from the financial heart attack they caused. Insurance companies playing in the financial casino that had lost their shirts, such as AIG, had to be bailed out to the tune of dozens of billions of dollars, and iconic American car companies had their customer finance divisions’ tails wagging the manufacturing dog. As credit markets dried up and business plummeted, the federal government bailed out Chrysler and General Motors to avoid bankruptcy and the loss of a million jobs. The US treasury spent $80.7 billion buying shares in the two companies as well as lending them money.
However, the finance industry’s millions spent on politicians through campaign funding and lobbying proved a shrewd investment. It was repaid in spades, with few of its executives suffering punishment for their recklessness or even having to return their bonuses, while society remains crippled by public debt and austerity policies.
Lobbying is not of course the exclusive preserve of the finance industry. Boeing, for example, is a big spender on lobbying, averaging around $20 million per year in the US. Disclosures filed with the federal government show that the US Chamber of Commerce, the National Association of Realtors (real estate), and the Business Roundtable spent more than $56 million lobbying Congress in the last quarter of 2017 in order to influence the changes to the American tax code passed at the end of the year.34
Technology is a big lobbyist. In Spring 2017 lobbying by Internet service providers such as Comcast and AT&T, and tech firms such as Google and Facebook succeeded in influencing a narrow vote to undo regulations protecting consumer privacy by barring ISPs from selling people’s browsing history. Republican senator Jeff Flake and Republican representative Marsha Blackburn raked in thousands of dollars in donations from these trade groups to sponsor the legislation to dismantle Internet privacy rules passed by the Obama administration just a year before.35
A Bloomberg article revealed that Google parent company Alphabet outspent its rivals in lobbying, investing $18 million, compared to $11 million by Facebook, ‘as lawmakers scrutinised the companies over questions including Russia’s use of their platforms to try and influence the 2016 election’.36 Apple spent $7 million lobbying that year and was a major beneficiary of the change in tax law passed by Congress at President Trump’s behest. The company had accumulated profits of around $252 billion outside the US by 2017, on which it would be liable to pay 35 per cent tax if it brought them back to the US under the old system. Under the new tax regime proposed by Trump and passed by Congress just before the end of 2017, Apple (and other US corporations with cash stashed abroad in low-tax jurisdictions) obtained a sweetheart deal enabling it to repatriate this cash upon a much reduced payment of $38 billion, still huge, but an effective one-off low rate of 15.5 per cent payable over eight years. Given the time elapsed between the generation of the profits and the tax payment, the effective tax rate is much lower in nominal terms and positively minuscule in inflation-adjusted money.
More recently, the ending of so-called net neutrality means several of the big cable companies such as Comcast and AT&T, which provide the infrastructure for the Internet, stand to make millions of dollars in extra profits from their new-found ability to fast-track more profitable traffic at the expense of that of private individuals, thereby destroying the democratic principle of the web. Unsurprisingly, Comcast, the largest broadband provider, was the second-biggest lobbying spender among single companies in the fourth quarter of 2017 (after Google), laying out more than $4.3 million.37
Just as sinister are efforts by food and drink manufacturing industries to protect practices that actually harm people. Take, for example, the battles between the food industry and healthcare lobbyists over school lunches in the US. Congressional representatives from potato-growing states worked quickly to block a new rule that would reduce the amount of starchy vegetables that could be served to school children in a single week. The industry also baulked at a recommended reduction in sodium. And lobbyists working on behalf of ConAgra Foods and the Schwan Food Company, both huge suppliers to schools of frozen pizza, are seeking to block changes to school food rules that would end the current practice of counting pizza as a vegetable.
The money–power relationship works both ways. Some accuse the US Congress of deliberately structuring certain laws, such as tax exemptions, so that they expire unless renewed. This keeps the campaign donations flowing. Harvard Law School Professor Lawrence Lessig has suggested that the complexities of the tax system are in part designed to make it easier for candidates to raise money to get back to Congress. ‘All sorts of special exceptions which expire after a limited period of time are just a reason to pick up the phone and call somebody and say “Your exception is about to expire, here’s a good reason for you to help us fight to get it to extend.” And that gives them the opportunity to practice what is really a type of extortion – shaking the trees of money in the private sector into their campaign coffers so that they can run for Congress again.’38
The representatives of the people are milking the system while in power, but are also getting ready to milk it from the lobbies once they leave politics. A steady stream of ex-congressmen finds its way to lobbying firms to exploit their experience and connections for large salaries – the famous revolving door between public service and private gain. A 2005 Public Citizen report found that 43 per cent of the 198 members of Congress who had left government since 1998 registered to lobby.
Various scandals have prompted attempts at transparency and formulating rules to limit the excesses of lobbying, but these appear to be ineffectual as it is in the interests of neither party to make them work. This is perhaps the most acute example of a conflict of interest between elected representatives and those they represent. Lobbyist and convicted fraudster Jack Abramoff bragged on television that his colleagues could ‘find a way around just about any reform Congress enacted’ and gave an example. You can’t take a congressman to lunch for twenty-five dollars and buy him a hamburger or a steak, but you can take him to a fundraising lunch and not only buy him that steak, but give him $25,000 as well, call it fundraising and have the same access and all the same interactions with that congressman.39
In the EU there are at the time of writing only seven countries out of the twenty-eight members (the UK, Ireland, France, Austria, Lithuania, Poland and Slovenia) where there is legislation covering lobbying, including legal codes of conduct and the registration of lobbyists. Although the situation is gradually improving, with more countries becoming aware of the need for transparency and rules, lobbying is a largely unregulated and opaque activity. A report from the non-profit group Transparency International suggests that the lack of transparency with respect to contacts between lobbyists and public or elected officials means that it is almost impossible for citizens to gauge lobbyists’ effect on policy. Furthermore, while the seven countries have instituted registers of lobbyists, and in some cases a code of conduct governing contacts, there is little enforcement as the registers provide minimal information and detail concerning the interactions between officials and lobbyists. And although a majority of the nineteen EU countries surveyed had some sort of revolving-door policy, restricting how quickly ex-public officials could move into lobbying, the level of oversight and enforcement was feeble. Only one country (Slovenia) has firm rules governing ex-politicians.
The third lever business employs to bend the rules to its liking involves influencing the regulators that are supposed to safeguard the public interest, while the Stockholm syndrome is the phenomenon whereby hostages become accomplices of their captors, defending them against accusations. A similar phenomenon occurs when regulators set up by governments to safeguard the public interest get too close to the industries they regulate and get turned. In effect they start working to protect the interests of these industries to the detriment of society.
This is private interests’ last line of defence. If you can’t buy the right electoral outcome and your lobbying does not succeed in preventing unfriendly and restrictive legislation, then you can at least ensure those charged with enforcing the rules interpret them in your favour or simply look the other way. Regulatory capture is most notorious in the areas of food, medicine (the Food and Drug Administration in the US) and of course, once again, finance.
Public regulators targeted by the finance industry have included institutions set up to protect the public from some of its predatory practices, such as, in the USA, the Consumer Financial Protection Bureau (CFPB), created in the aftermath of the GFC. This agency sought to ban the forced arbitration provisions in the small print of credit agreements that effectively deprived debtors of the ability to go to court. It also worked to rein in so-called payday lenders, requiring them to verify a borrower’s ability to repay a loan. ‘Since 2011, Republicans have introduced 135 bills and resolutions aimed at killing or weakening the CFPB in the House and Senate.’ The Consumer Bankers Association spent $3.2 million on lobbying in 2016, but was outspent by ‘the American Bankers’ Association which spent $9.8 million that year on the services of 58 lobbyists that same year’.40
In 2016 Wall Street found an ally in newly elected President Donald Trump, who promised to ‘do a number’ on financial regulations. Trump appointed ex-Goldman Sachs top executives Steve Mnuchin and Gary Cohn (since resigned) as treasury secretary and chief economic adviser and has replaced most regulatory agency heads, often with former finance industry executives. In May 2017 the administration appointed Keith Noreika, a lawyer who built a ‘career protecting banks’, as acting head of the Office of Comptroller of the Currency (OCC).
According to Bloomberg News,
The Office of the Comptroller of the Currency (OCC) recently circulated a blueprint to other regulators for making the [Volcker] rule more friendly to banks …Wall Street critics will take exception with the fact that the architect of the OCC proposal was Keith Noreika, a long time bank lawyer who served as the regulator’s acting head in 2017 … Named for former Fed Chairman Paul Volcker, the controversial regulation was meant to prevent banks from triggering another financial meltdown by prohibiting them from making speculative bets with their own capital.41
In 2018 Federal Reserve Vice Chairman Randal Quarles said US financial regulators are working quickly to make ‘material changes’ to the Volcker rule, one of Wall Street’s ‘most hated post-crisis restrictions’.42 In May 2018 the Fed voted to ease the restrictions imposed on banks by the rule, and another barrier set up to protect society from the insatiable appetite for profit of the finance industry came down.
At the CFPB itself in late 2017 Trump had appointed as acting director his budget director Mick Mulvaney, a self-described ‘right wing nut job’. While still in Congress, Mulvaney had gone on record with ‘I don’t like the fact that the CFPB exists.’ Less than a decade after the banks nearly blew up the world economy, in January 2018 Mulvaney wrote in the Wall Street Journal that the CFPB would no longer assume that ‘the bad guys’ are the financial services firm it supervises. He pledged to tone down the agency’s aggressive regulatory and enforcement stance.
Unsurprisingly, it did not take long for the agency to perform a spectacular U-turn. On 6 June 2019, under new director Kathy Kraninger, the CFPB proposed to rescind some of the new requirements on lenders due to take effect that August, announcing that it would delay compliance with new regulatory rules for short-term, high-interest loans (payday loans) to 2020.43 The reassessment was presented as part of a broader push to rescind the bureau’s most aggressive regulations and refocus the agency’s work on promoting consumer freedom.
‘The CFPB’s decision to revisit its small-dollar rule is welcome news for the millions of American consumers experiencing financial hardship and in need of small-dollar credit,’ said Richard Hunt, president and CEO of the Consumer Bankers Association.
The last bulwark against regulatory capture by the finance industry and the Trumpian push to reduce bank regulation was Martin Gruenberg, head of the Federal Deposit Insurance Corporation (FDIC), responsible for guaranteeing bank deposits and one of three federal bank regulators in the US. The Trump administration had not altered regulation as much as Wall Street had hoped until now, as the FT made clear with its headline FRUSTRATED LOBBYISTS PIN SOME OF THE BLAME ON MR GRUENBERG.44 Gruenberg was replaced by bank lawyer Jelena McWilliams in June 2018.
The independence of other US regulatory bodies is also questionable, including the Food and Drug Administration. In a damning 2013 article, researchers Donald Light, Joel Lexchin and Jonathan Darrow confronted the corruption they saw at the heart of the FDA:
It is our thesis that institutional corruption has occurred at three levels. First, through large-scale lobbying and political contributions, the pharmaceutical industry has influenced Congress to pass legislation that has compromised the mission of the Food and Drug Administration (FDA). Second, largely as a result of industry pressure, Congress has underfunded FDA enforcement capacities since 1906, and turning to industry-paid ‘user fees’ since 1992 has biased funding to limit the FDA’s ability to protect the public from serious adverse reactions to drugs that have few offsetting advantages. Finally, industry has commercialised the role of physicians and undermined their position as independent, trusted advisers to patients.45
In other words, contributions to Congressmen have resulted in the squeezing of the public funds available to the FDA, which has had to switch to earning fees from the very drug companies it is supposed to be regulating.
Writing from the Edmond J. Safra Center for Ethics at Harvard University, Donald Light suggests that the overfamiliar relationship between companies and FDA officials also affects the agency’s assessments of what makes a drug safe or effective, and how these are communicated: ‘The … corruption of medical knowledge through company-funded teams that craft the published literature to overstate benefits and understate harms, unmonitored by the FDA, leaves good physicians with corrupted knowledge.’46 This results in his damning conclusion: ‘about 90 per cent of all new drugs approved by the FDA over the past 30 years are little or no more effective for patients than existing drugs’.
Worse, while the approval of new, expensive but useless drugs is an economic cost to the rest of society extorted by the drug companies, Light also believes that over the past thirty years the bar for drug safety has come to be set too low, with approved drugs causing serious harm even when properly prescribed. ‘Every week, about 53,000 excess hospitalisations and about 2400 excess deaths occur in the United States among people taking properly prescribed drugs to be healthier. One in every five drugs approved ends up causing serious harm.’
The FDA has also come under criticism for its tolerance of certain practices by the food industry the safety of which has not been proven. For example, it permits meat manufacturers to use certain gas mixtures during packaging to prevent discolouration of the meat; these may conceal signs of spoilage. It also allows the use of bovine growth hormone in dairy cows; these have then tested for high levels of a factor in their milk which may sustain the growth of certain tumours. The FDA justified its approval on the grounds that humans are unlikely to ingest sufficient quantities of the hormone to be dangerous. An EU scientific opinion maintains that there is a potential risk to humans from the use of six hormones in cattle, including growth hormone, which has been banned in Europe.47
Finally, the FDA has been criticised for permitting the routine use of antibiotics in healthy animals on a preventative basis, which may give rise to evolution-resistant strains of bacteria. So, the foxes have been let into several hen coops by the farmer. No wonder the animals are getting suspicious.
America does not have the monopoly on anti-social lobbying or the corruption of regulators. In Europe a powerful lobbying industry has grown up in Brussels to influence the drafting of rules and regulations and, perhaps more sinisterly, promote their lax implementation. An infamous example is Dieselgate, which exposed how the European car manufacturing industry successfully subverted the application of emissions tests on European cars, resulting in on-the-road nitrous oxide emission levels from diesel engines five to ten times higher than the legal limits, thus exposing citizens to dangerous levels of pollution.
A paper published by the Corporate Europe Observatory and Friends of the Earth investigated the European Parliament’s inquiry into Dieselgate and revealed a culture of regulators looking the other way.48 The scandal came to light in 2015 when investigations in the US showed that European car manufacturers had been gaming the system, using ‘defeat device’ software in diesel engines to reduced observed emissions during testing.
Back in 2005 the European Commission’s Better Regulation Agenda had set out to ensure that the ‘regulatory burdens on business … are kept to a minimum’. A subgroup of the newly created Competitive Automotive Regulatory System for the 21st Century (CARS21) group, comprising industry and government representatives, was tasked with simplifying the regulatory framework.
EU-wide car lobby group the European Automobile Manufacturers Association (ACEA) saw an opportunity to cut costs to help global competitiveness and called for self-testing to be introduced for certain emission and safety tests, along with EU-wide approval superseding national monitoring. This was finally approved by the EU’s Council of Ministers in 2010. On behalf of Germany, Chancellor Angela Merkel lobbied the European Commission to support the car industry’s demands. Leaked papers also show that the European Commission’s Directorate General for Enterprise intervened to delay the implementation of more realistic Real Driving Emissions (RDE) tests to 2019. The car lobby managed to persuade the authorities that tighter regulation would cost jobs and decrease the competitiveness of the European car industry, arguments that appeared weighty to lightweight European politicians.
In short, companies’ commercial interests were placed above public interests. Despite the Commission and EU states knowing since 2004 that there were discrepancies between emission test results for diesel cars and emissions in real-world driving (which exceeded legal limits), they delayed the introduction of RDE. Even after the cheating was exposed, member states were slow to apply penalties on car manufacturers.
Although food standards in terms of artificial additives and drugs administered to animals are relatively strict in Europe, lobbying by the chemical industry and farmers has no doubt contributed to the renewal by the EU of permission to use glyphosate (contained in the well-known weedkiller Roundup) in November 2017, in spite of controversial studies such as a 2016 report from the International Agency for Research on Cancer which stated categorically, ‘There is sufficient evidence in experimental animals for the carcinogenicity of glyphosate’ and, ‘Glyphosate … is probably carcinogenic to humans.’49
Use of this weedkiller has exploded, particularly in the US, where crops have been genetically modified so that they are not affected by it. This ability to target only undesirable plants has made glyphosate an easy sell to farmers and a huge cash cow for its producer, Monsanto (now part of Bayer). While the US Environmental Protection Agency, the European Food Safety Authority (EFSA) and the European Chemicals Agency have all ruled that glyphosate is safe, a court in California upheld a verdict that Roundup caused a school groundskeeper’s cancer in 2017. Since then, other juries have awarded large punitive damages to plaintiffs, noting that Monsanto failed to warn of the cancer risks.50
Whether or not the evidence in this specific case is conclusive one way or another, the fact is that regulators on both sides of the Atlantic appear quick to approve foods and chemicals on the basis of flimsy evidence, in some cases partly provided by the corporate sponsor. In 2017 the Guardian newspaper revealed that EFSA’s recommendations on glyphosate included pasted-in analyses from Monsanto’s own study.51 Alarmingly, research has found that the weedkiller is
so pervasive that its residues were recently found in 45 per cent of Europe’s topsoil – and in the urine of three quarters of Germans tested, at five times the legal limit for drinking water. Since 1974, almost enough of the enzyme-blocking herbicide has been sprayed to cover every cultivable acre on the planet. Its residues have been found in biscuits, crackers, crisps, breakfast cereals and in 60 per cent of bread sold in the UK … But industry officials warn of farmers in open revolt, environmental degradation and crops rotting in the fields if glyphosate is banned.52
Diane Coyle, professor of economics at UK’s Manchester University, is unequivocal about the failure of regulation and competition policy in the UK in recent decades, citing for example privately owned water companies focusing on profits for shareholders rather than reinvesting in infrastructure.53 In transportation, after years of safety problems on the railways, the UK government was obliged to take back control of the track network and its maintenance after the private sector skimped on maintenance, resulting in a spate of accidents.
The 2019 crashes of two nearly new Boeing 737 MAX aircraft in very similar circumstances has shone a spotlight on the US Federal Aviation Authority (FAA), an organisation that used to set the global standard for the certification of new aircraft. The disasters have uncovered the dirty reality of an agency starved of funds, understaffed, run by a temporary head and delegating a high percentage of its certification work to the manufacturer itself.
There are plenty of other examples of the problems caused by privatising infrastructure and natural monopolies and then appointing a weak regulator. Private interests are maximising short-term profits rather than long-term benefits to society and customers. As Professor Coyle says, it is hard to make natural monopolies competitive. Hence the suspicion that capitalists are doing too well from them. The fact is that private companies running industries where there is little genuine competition maximise their profits through high prices or, if they cannot persuade a soft regulator to acquiesce, through minimising investment and capital expenditure, thereby degrading the long-term quality of the service delivered.
Even in industries which are not monopolies, such as the provision of gas and electricity, competition has not been a success, with prices to the consumer often bearing little relation to changes in wholesale market prices and clearly manipulated between a few dominant providers. Prices ratchet up with the market but rarely come down significantly when the market does.
Nobel laureate Jean Tirole argues that the asymmetry of information between regulator and provider can never be wholly overcome. Providers simply know more about demand, supply and the technicalities, and will always be able to game the system. That is not to say that state-run railways and utilities necessarily function much better. But the touted benefits of privatisation and competition have been greatly exaggerated in practice (they were never robust in theory) or have simply not materialised in the form of better service and lower prices. In fact, since some popular British services such as the speaking clock and Yellow Pages were privatised for no good reason other than fashion and lobbying, they have been rejected by the public and have effectively gone out of use.
Probably the best option for natural monopolies is to be in public ownership with a long-term strategy including adequate investment to cater for demographic trends (one shudders to imagine how, given the attrition of transport services in rural areas, ageing baby boomers retiring to the countryside will cope once they can no longer drive). Unfortunately, this presupposes strong enough public finances to support such an enlightened policy. Indeed, part of the reason for privatising large swathes of the state’s economic activity was to raise money to compensate for the weakening of its revenue base as a result of ideologically driven tax cuts and weaker wage growth due to globalisation. It is to the issue of taxation that we now turn.