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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I m not a big fan of how the elections are financed in Australia.In France the elections cost around $AUD200MM altogether( here it more than a billion hence the “donations” if I remember for 1/3 of the pop) and the gov pay pretty much all of it, party cannot advertise (beside few billboard) and each party has exactly the same tv time/interview/whatever, measured by the second.
“party cannot advertise (beside few billboard) and each party has exactly the same tv time/interview/whatever, measured by the second.”
I like the sound of that.
What would be even better is if no tv/media/news time was allowed and the political parties could only release their policies/platform for election in book form. That way only those prepared to sit down and actually digest each parties differences completely would be able to vote, rather than relying on MSM sound bites.
You’re more optimistic than I am. I’d expect most people to just continue voting for their team.
Good point. There would need to be some sort of test to prove that you’ve read both books & non-compulsory voting (obviously).
What ever happened to becoming a politician for the love of your country. Are there any political parties out their that have a core belief in small government and therefore all the reduced spending and tax that goes along with it.
Doesn’t government expenditure equate to 35% of GDP?
It’s probably a lot larger if you include industries subsidiesed by the government such as the motor industry… All the workers there are really just working for welfare.
The best way to combat poor government spending and rent seeking is to reduce the size of the government.
With so much government interference we might as well become communist….
http://www.ldp.org.au/policies
Are there any political parties out their that have a core belief in small government and therefore all the reduced spending and tax that goes along with it.
Sure. The problem is they’re inevitably based around the myth of “the self-made man” and come along with beliefs like “people are only poor if they’re lazy”, “if your parents can’t afford to put you in school you shouldn’t go to school”, “employees have equal bargaining power with employers”, and “can’t afford treatment for that cancer ? Sucks to be you, should have saved more.”
Donations are low because they don’t really matter – with the exception of Union related donations to the ALP (which I understand to be the highest to any party in Australia).
I wonder if what you are looking at above is the second-tier effect; some modest advantage obtained.
When real influence is required to direct ‘big issues’ it is not the functionaries that do the job, however they do attend to technicalities generated.
Important decisions that have significant financial impact are engaged by the most senior people eg Government is considering policy which has direct impact, particularly financial, on major sector – CEO or better still, Chairman will contact relevant Minister or higher and establish relationship; followed by discussion on topical issue where preference is clearly delineated.
It doesn’t matter which party is in government, contact at that level is not ignored. Donations are irrelevant.
I did provide a psychological background as to how this works previously at MB, however it was deleted.
Nonetheless, as you note, we are wise to observe post-political appointments along with intra-political appointments.
“Donations are irrelevant.”
Yes, that’s the impression you get from their low value. So why bother donating?
It must be some kind of signal.
I agree wholeheartedly that direct contact is the avenue for influence. But that still needs a theory as to why some groups get better access then others.
Do you have an example in mind of one group gaining preferential access?
One thought – low level donations by large corporates ensure parties some funds for existence, neither the recipient nor the giver can be accused of seeking influence and ensure transactions appearg reasonable. Each fully aware real influence exists elsewhere.
so maybe a trust signal?
nicely argued. I had been of the same mind that as bribes the donation levels were too far short of the mark which a prudent corrupt person would need.
To answer you Q – Political donations: bribery or group trust signals?
Answer: Bribery.
‘Donations’ have no place in a modern democracy, as they serve no purpose other than to curry favour, or, as you indicate, to let the pollies know that the corporate interests out there are thinking of them (usually in a hedging style, sit on the fence, equal measure).
How touching. In fact, a tear is rolling down my cheek as I speak.
End solution:
- No donations;
- No lobbyists;
- No gifts of any description or of any monetary value to be receivable by the pollies;
- No secret meetings between politicians and lobbyists & powerbrokers;
- Rationalisation of any system of personal meetings between pollies and non-political folk: billionaire or pauper, it shouldn’t matter. This also needs to be 100% transparent and open to public scrutiny at all times (put their diary up on the internet or similar);
- No revolving door between politics and high flying corporate jobs: have an absolute ban of say 10 yrs post politics of occupying any private CEO position related to your portfolio e.g. no more I’m a treasurer one minute and now I work for X, Y, Z hedge fund or investment group.
The fact the 2d mining bot states ‘donations are irrelevant’ should tell you all you need to know, as he is the perfect contrarian indicator for the truthfulness of any given economic or political argument of significance.
I think that goes a little too far, because I think there needs to be a mechanism for new groups to gain prominence, without having to burden the public purse into funding every crackpot group with an axe to grind.
My limitations on donations to political parties would be:
* Donations allowed from natural persons only. Not from companies, organisations, trusts, or anything else. Just people.
* All donations are recorded in a publicly available register.
* Donors must be enrolled to vote.
* The combined annual maximum donation is equal to four weeks income on minimum wage.
Are corporations persons in Oz
I don’t believe our system has made that particular leap of legal insanity yet.
However, there’s a reason I used the term “natural persons” – precisely to make it irrelevant.
Political donations for the 2011-12 year almost halved – to both parties – although Katter did surprisingly well!
Do the parties want to end political donations, of course not. I have no problem at all with comprehensive disclosure requirements – in fact they should be mandatory (I thought they were).
I suggest you are ignorant on the question of how real influence on important policy is secured. Every one of the criteria you list above could be implemented, influence would still be obtained – although possibly with some transparency.
Bobby Fischer’s list looks a lot like what has been tried elsewhere – The Netherlands for instance. With much greater transparency, many reforms have been made. They know exactly the income of all public servants and elected officials, and if these officials earn income from elsewhere, it gets deducted from their salary. All their income sources are publicly available for scrutiny.
Unfortunately, a theory of signalling suggests that alternative means of cooperation will arise. New signals will emerge as old ones lose their value. Thus, the game of reducing privilege becomes a never ending battle.
Agree.
OK – I have to agree with your points there Smithy and Rumple. So, adopt a Netherlands style approach with political reforms that do not allow for career politicians e.g. term limitations. Also, donations with very strict criteria attached.
If we can also break the back of the sleazy pre-selection contests which appear for all intents and purposes (thanks Smithy) to be just fostering political dynasties of the most ideologically narrow kind, then maybe we can get somewhere. This may require banning of the parties – probably leading to signalling of a different kind in the first instance ie political allegiances – and form parliaments of independents which then only engage in conscience votes on every issue, based on evidence and the interests of their electorate (not always in the same direction I know).
I think decades of being run by clueless lawyers (something in the order of 70% of parliament) with traits of sociopathy or psychopathy have shown us that we can do better than this.
Personally I prefer the Guy Fawkes method for political reform, as it would be a damn lot quicker, but I guess we can wait a generation or two for the above…