The common sense interpretation of political donations is that they are payments for political favour. Bribes. But this begs the question – why are donations so low?
If I were a politician I would extort all I could from the financial beneficiaries of policies I was promoting. Yet the average donation is a pittance, less than $10,000 a year, especially when compared to the value of political decisions being made in favour of particular interest groups.
Economists don’t really have a good answer to why donations are so low. The mainstream model of rent-seeking assumes that donations and lobbying are investments in a lottery for favourable political decisions. The greater the lobbying effort, the greater the chance of having decisions swung in your favour. The rational outcome is for lobbying expenditure to roughly equal the value the rents being allocated by policy makers.
But that doesn’t gel with real work evidence. A single tax change could be worth many billions annually to a particular group. Yet the total value of the lobbying industry including donations, even by generous estimates, would be worth a mere half billion annually.
The economic story also suggests that individuals are more likely to donate to the government in power in order to sway decisions. We might also see lobbying of both sides of politics, almost at random, in an effort to maximise the individual expected pay-off of heterogenous interests with various sides of politics representing different levels of government at any point in time.
The data tells a much different story.
Around a third of all political donations come from firms and individuals who donate equally to both sides of politics. And I mean equally – a near exact 50:50 ratio almost every time a firm donates to both sides of politics. And these ‘hedging’ firms donated on average $163,000 each between 1998 and 2012.
The remainder of the political donations come from partisan loyalists who donate to their preferred side of politics irrespective of which side of politics is in power at any point in time. These partisan loyalists had much smaller donations – an average of $23,000 for the Liberals, and $38,000 for Labor for the period between 1998-2012.
These patterns in the political donations data could go some way to explaining their true purpose.*
The chart below shows that by far the most common donors are loyal to their party. However, once we weight the frequency of donation ratios by the value of donations at that ratio, we see a massive bulge in political revenue from these ‘hedging’ donors.
The question is, how would one explain these two distinct strategies for political donations – hedging or partisan – in economic terms? As I have argued before, the concept of groups and social networks are critical in economics, and I believe they directly apply to this puzzle.
Put simply, donations and lobbying can be seen as signals of loyalty to political groups, from individuals and interest groups This loyalty is needed because payment for favourable policy cannot be immediate – that’s a bribe. It must ‘put on credit’ and paid at a later date through reciprocal favours. These signals are used to show that the informal social credit is good, and the game of reciprocal favours is being committed to.
We need to believe a number of things for this model of group signalling to explain the data. First, we need to believe that donations are not bribes, but signals of group loyalty and trust. If players in that industry continue to donate to my group, they are signalling that their social credit is good, and they want the game of reciprocal favours to continue.
Second, we need to believe there are actually three main groups in politics – party loyalists for each party, and a core elite group that transcends party boundaries. Each of these groups will provide favours for different private interest groups depending on the group association and loyalty strategies. One gets the feeling such groups exist by observing the corporate winners following a change in government. In Queensland, we can see the Labor mates losing their favours, while Liberal mates are getting into the pay-off period of the game they have played for many years while the Liberal Party was in opposition. These same loyalties can been seen the data on lobbyists, who fall into strong loyalty patterns, and where lobbyists able to play both sides of politics command a premium fee.
Third, we need to add in a social norm that unless you donate exactly 50:50, it won’t be an effective signal to the core group because any imbalance in donations is also a signal that you are trying to play off the two sides of politics against each other. There is a degree of fairness in all this.
I guess the key question here is whether this mental model provides a much better explanation of observed political donating and lobbying behaviour than the mainstream model.
My answer is obviously yes. The distinct signalling strategies, the low value of donations compared to the value of political favours, and loyalty of lobbyists. But then what value does it add to policy questions about regulation of political donations and lobbying?
This new theory unfortunately suggests that if donations are simply signals of trust, that are needed to ensure groups will act loyally for future payments in social credit, eliminating them simply leaves room for new signalling strategies to evolve. Perhaps political involvement at industry functions, corporate sponsoring of community events, memberships of exclusive clubs and societies and the like will become more important loyalty signals.
It does however suggest that favours by politicians to interest groups will be repaid in the future. The revolving door of former politicians into cushy corporate advisory positions could be one way the social credit is repaid. Tighter monitoring of post political careers would be useful.
Better monitoring and publication of the financial interests of elected members and senior bureaucrats at all times would be useful. Perhaps also better public access to company information, so that corporate ties to politics can be scrutinised in public forums. The current disclosure regimes are next to useless – they are distractions. Even the Queensland Integrity Commissioner has said as much.
Maybe shedding light on this dark world of signalling trust in political groups is the only way to go. But I can’t see how we get from here to there when the interests of those making the decisions are not aligned with greater transparency.
I’d be very keen to hear suggestions in the comments and any first hand stories about signalling and social credit in a political context.
*I have used LobbyLens data, scraped from each State’s electoral agency to create the graph.
It is worth briefly commenting about LobbyLens. The website is a compilation of information scraped from various government agencies about lobbyist, clients of lobbyists, political donors, and government contractors. Most importantly it tracks the relationships between contractors, lobbyist and donations. The data in there could keep a team of journalists busy for years – if there are any investigative journalists left.
One example of the value of the LobbyLens data is this analysis of the corporate winners from policies surrounding detention of asylum seekers. Serco Australia is a multi-national company that predominantly earns its income from managing former government services. It has been a great winner from the global push towards privatisation. They also currently have a $2.5billion contract for providing detention services to the Department of Immigration and Citizenship.
While I have no reason to doubt that this company has extensive experience and is an efficient provider of services, the question is, why do they still feel the need to employ lobbyists in each State, and to the Federal Government? Why bother donating, wait for it, $2,500 in Queensland as a once off donation?. Why pay good money to Halden Burns, John O’Callaghan, Government Relations Australia, Enhance Corporate, Hawker Britton, and GRA to whisper in the ear of politicians if your track record should be evidence enough of your superior service provisioning? More likely the policy pendulum is being swung in favour of particular financial interests.
All this you can find out through LobbyLen’s public online repository of collated information.
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