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Kenny Lo

Professor Raymond Hawkins

Econ 199

13 December 2015

The U.S Political Process as a Gift Economy and its "Phishing" Equilibrium

In the study of macroeconomic theory, monetary policy often dominates discussions of

institutional responses to fluctuations in the U.S economy rather than fiscal policy. The focus on

the understanding of the former, from many economists’ perspectives, is not without

justification. The Federal Reserve is an independent, forward-looking entity that has established

the credibility to fulfill its mandate of maximizing employment, stabilizing prices, and

moderating long-term interest rates. On the other hand, one does not need to look hard for

evidence of the extreme ideological divide and congressional gridlock that mark today’s U.S

government. “The clue that something is very wrong is the endless list of troubles that sit on our

collective plate that never get resolved:” Harvard Law Professor Lawrence Lessig elaborates in

Republic Lost: How Money Corrupts Congress -- and a Plan to Stop It, “bloated and inefficient

bureaucracies; an invisible climate policy; a tax code that would embarrass Dickens; health care

policies that have little to do with health; regulations designed to protect inefficiency;

environmental policies that exempt the producers of the greatest environmental harms; food that

is too expensive (since protected); food that is unsafe (since unregulated); a financial system that

has already caused great harm, has been left unreformed, and is primed and certain to cause great

harm again."1 Therefore, one can also see that economics, with a quantitative emphasis and

aspirations of scientific rigor, is a field in which analysis of political gamesmanship could be

1 Lessig, Lawrence. Republic, Lost: how money corrupts Congress--and a plan to stop it. Twelve, 2011. 1-2.

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viewed as better left up to its counterparts in social science. But what if the political process is

itself a type of economy? Do the “market” forces in politics produce an equilibrium of

government? Is it that of a competitive democratic process, or is it one of a different makeup?

This paper explores these questions in order to examine the political distortions in this country

from an economic perspective.

As demonstrated by Lessig, the political process in the U.S can be understood a gift

economy in which relationships are used as the currency instead of money.2 In a gift economy,

parties engage in repeated exchanges that are not necessarily equivalent nor demanded, but

nonetheless reinforce their relationships through the act of reciprocating. In contrast, an

exchange economy is an economy of commodification in which money serves as the currency.

Parties participate in transactions of a good or service for a certain amount of money that is

demanded and deemed equivalent to the value of the good or service. The key difference

between the two economies, according to Lewis Hyde in The Gift: Creativity and the Artist in

the Modern World, is that a gift exchange strengthens the bond between two parties while no

such feelings necessarily result from a commodity exchange.3 Although reciprocity is less

transparent in a gift economy than it is in an exchange economy, the obligation to reciprocate is

no less important as the stakes of losing relationships that had been repeatedly cemented can be

even higher than that of losing money. Consequently, players in this economy are able to gain

power as they accumulate obligations that can be utilized to accomplish goals in the future. In

the political process, the lobbyist who represents private interests contributes to a campaign not

to demand an equivalent return from the politician, but to fortify their relationship and mutual

2 Ibid, 108-124. 3 Hyde, Lewis. The gift: Creativity and the artist in the modern world. Vintage, 2009. 3.

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obligations. “Campaign contributions are best understood as gifts, not bribes.” Dan Clawson,

Alan Neustadtl, and Mark Weller explain the purpose of initial donations in Dollars and Votes:

How Business Campaign Contributions Subvert Democracy, “They are given to establish a

personal connection, open an avenue for access, and create a generalized sense of obligation.”4

Once this is achieved, the dynamic that ensues is described by Martin Tolchin and Susan J.

Tolchin in Pinstripe Patronage: Political Favoritism from the Clubhouse to the White House and

Beyond: “Lobbyists and members of Congress often become tied to each other through

relationships based on mutual favors. These ties have become much stronger in recent years as

election 'reform' necessitates more and more fundraising interdependence."5

The necessary condition for a gift economy to work is that as the exchange is repeated,

the obligation to reciprocate becomes increasingly more of a norm and is eventually depended

upon.6 This development requires a means by which commitments can be secured at some point

in the future, namely in the form of earmarks. Earmarks are defined by the Office of

Management and Budget as “funds provided by the Congress for projects, programs, or grants

where the purported congressional direction circumvents otherwise applicable merit-based or

competitive allocation processes.”7 Their use was first pioneered in 1976 by Gerald Cassidy,

renowned lobbyist and founder of Cassidy & Associates, in order to provide a grant to a nutrition

research center at Tufts University. Soon after, various private interests caught on to the value of

being able to direct and specify government spending through the earmark process. By 1984,

4 Clawson, Dan, Alan Neustadtl, and Mark Weller. Dollars and votes: How business campaign contributions subvert

democracy. Temple University Press, 1998. 91. 5 Tolchin, Martin, and Susan J. Tolchin. Pinstripe patronage: Political favoritism from the clubhouse to the White

House and beyond. Paradigm Pub, 2011. 81. 6 Lessig, Lawrence. Republic, Lost: how money corrupts Congress--and a plan to stop it. Twelve, 2011. 111. 7 United States. the White House. Office of Management and Budget. Earmarks. Office of Management and Budget,

14 June 2001. Web. 2 Dec. 2015.

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fifteen universities and twelve large corporations were paying Cassidy & Associates directly and

members of Congress indirectly monthly retainers for earmarks. Thus the modern lobbying

industry was created, selling the possibility of channeling fiscal spending to designated projects.

It “brought something new to an old game,” Washington Post editor and correspondent Robert

Kaiser states in So Much Damn Money: The Triumph of Lobbying and the Corrosion of

American Government, “by stationing themselves at a key intersection between a supplicant for

government assistance, and the people who could respond.”8 Over time, the range and scale of

earmarks have grown substantially along with the size of the lobbying industry, both of which

have weakened politicians’ ability to objectively evaluate the requests. When asked to chair a

commission to review over almost sixty earmark requests by former congresswoman Jackie

Speier, Lessig found that they “ranged from streetlights to sophisticated defense technologies”

and “the size ranged from the tens of thousands to the many, many millions.” As a result, he

concluded that being able to assess one against another based on merits would be “impossibly

difficult.”9

On the other side of the exchange are campaign contributions, which play a symmetrical

role to that of earmarks in a gift economy. Direct donations from the lobbyist are packaged with

indirect contributions from his or her clients and sent to the politician's campaign through

channels that identify who should be thanked in the future.10 As the exchange is repeated,

gratitude turns into obligation, and obligation turns into a norm that is depended upon. The

wheels of a gift economy are then set in motion: the politician relies on the lobbyist's bundled

contributions to win elections that have become increasingly costly over the past three decades

8 Kaiser, Robert G. So damn much money: The triumph of lobbying and the corrosion of American government.

Vintage Books USA, 2010. 72. 9 Lessig, Lawrence. Republic, Lost: how money corrupts Congress--and a plan to stop it. Twelve, 2011. 113-114. 10 Ibid, 120.

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(explored later in the paper), and the lobbyist's clients contribute to boost their chance at securing

earmarks. Evidence abounds of such an investment to be quite profitable for private interests. In

"Academic Earmarks and the Returns to Lobbying," John M. de Figueiredo and Brian S.

Silverman estimate an average return of $11-$17 dollars and $20-$36 for each dollar spent by an

average lobbying university with representation on the Senate Appropriations Committee and the

House Appropriations Committee, respectively.11 In 1992, General Dynamics retained Gerry

Cassidy at $120,000 a month to lobby against President Bush's proposal to withdraw funds

appropriated for its construction of two Seawolf nuclear submarines. By increasing its

congressional campaign contributions by only $198,000 over the 1989-1990 election cycle, the

defense company was able to prevent the proposed $2.8 billion retraction.12 As a response to the

financial fraud preceding the 2008 financial crisis, Congress passed the Fraud Enforcement and

Recovery Act of 2009 and authorized $165 million to the white-collar crime division of the

Department of Justice. However, only up to $30 million was appropriated in the budget in order

to maintain the flow of contributions from Wall Street.13 Huge returns have propelled the private

interests' investment in the lobbyist's gift exchange with the politician and in turn, the lobbying

industry's success. "The number of reports filed by firms lobbying Congress on budget and

appropriations issues swelled from 1,447 in 1998 to 4,013 in 2005." according to Tom Finnigan

in All About Pork: The Abuse of Earmarks and the Needed Reforms, "Washington has nearly

11 De Figueiredo, John M., and Brian S. Silverman. "Academic earmarks and the returns to lobbying." Journal of

Law and Economics 49.2 (2006): 597-625. 12 Kaiser, Robert G. So damn much money: The triumph of lobbying and the corrosion of American government.

Vintage Books USA, 2010. 229-237. 13 Akerlof, George A., and Robert J. Shiller. Phishing for Phools: The Economics of Manipulation and Deception.

Princeton: Princeton UP, 2015. Print. 79-80

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35,000 registered lobbyists, more than twice as many as it had in 2000."14 This leaves the

incentive of the politician to participate in a gift economy to be discussed hereafter.

Some historical background is helpful for seeing how the demand of campaign money

has come to motivate the politician to find its supply in a gift economy. The election of 1994

marked the first time the Republican party won the majority of both the Senate and the House of

Representatives since 1954. It had raised a historic total of $618.42 million of campaign

contributions, dwarfing the $488.68 million that the Democratic party had raised. Compared to

the respective $534.64 million and $498.45 million the two parties had raised in the previous

election of 1992, the Republicans more than tripled the gap between their campaign donations

and that of the Democrats in 1994.15 Thus, the significance of winning Congress extended

beyond its anomaly in time. It planted a seed of confidence in the Republican party that it could

accomplish what had once been deemed politically impossible, as long as it could raise enough

money. The same seed was simultaneously planted in the Democratic party, albeit of fear rather

than confidence. From 1995 to 2010, Republicans and Democrats took as many turns in winning

control of Congress as they did in the previous 45 years16, and campaign contributions have

ballooned to around $901,51 million and $735.99 million for the respective parties in 2014.17

Besides the rise in political stakes, the increase in the costs of advanced political

strategies along with a crucial Supreme Court decision have boosted the politician's demand for

campaign money. “Campaigns dependent on pollsters, consultants, and television commercials,”

Kaiser describes, “were many times more expensive than campaigns in the prehistoric eras

14 Finnigan, Tom. "All about pork: the abuse of earmarks and the needed reforms." Policy Briefing Series (2007). 9. 15 Kaiser, Robert G. So damn much money: The triumph of lobbying and the corrosion of American government.

Vintage Books USA, 2010. 272. 16 Lessig, Lawrence. Republic, Lost: how money corrupts Congress--and a plan to stop it. Twelve, 2011. 94. 17 "2014 Election Overview." Opensecrets RSS. Center for Responsive Politics, n.d. Web. 11 Dec. 2015.

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before these inventions took hold."18 Since the Federal Election Campaign Act of 1974 limited

the size of individual contributions, the only way the politician can meet his or her growing

demand is to expand the range of supply. Exacerbating this need was the Supreme Court decision

to uphold the limits on individual contributions while striking down limits on campaign

expenditures in Buckley v. Valeo, effectively leaving the exploding demand for money without

the supply.19 In the Texas Law Review, Pam Karlan and Sam Issacharoff state that “the effect is

much like giving a starving man unlimited trips to the buffet table but only a thimble-sized spoon

with which to eat: chances are great that the constricted means to satisfy his appetite will create a

singular obsession with consumption.”20 Under mounting pressure and appetite to fundraise, the

politician turns to the one friend who is always going to be there to commiserate. "This is the sort

of sympathetic understanding that we get from our best friends and confidants," George A.

Akerlof and Robert J. Shiller write in Phishing for Phools: The Economics of Manipulation and

Deception, "It is thus no coincidence that lobbyists are most typically drawn from ex-staffers,

who have held that role in the past, and also from former Congress members themselves."21

Between 1998 and 2004, more than 50 percent of senators and 42 percent of representatives went

into the lobbying industry compared to 3 percent for both houses in the 1970s.22

Now that the incentives of the private interests, the lobbyist, and the politician are all

aligned in a gift economy, examining if the political process produces an equilibrium of

18 Kaiser, Robert G. So damn much money: The triumph of lobbying and the corrosion of American government.

Vintage Books USA, 2010. 201. 19 Levit, Kenneth J. "Campaign Finance Reform and the Return of Buckley v. Valeo." Yale Law Journal (1993):

469-503. 20 Issacharoff, Samuel, and Pamela S. Karlan. "Hydraulics of campaign finance reform." Tex. L. Rev. 77 (1998):

1723-26. 21 Akerlof, George A., and Robert J. Shiller. Phishing for Phools: The Economics of Manipulation and Deception.

Princeton: Princeton UP, 2015. Print. 79. 22 Gerson, Elliot. Democracy and the Discontented: American and Global Challenges to Democratic Governance,

and a Plea for Expanded Political Engagement. Proc. of Global Scholars Symposium 2012, Oxford. The Aspen

Institute, 12 July 2012. Web. 27 Nov. 2015.

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government is possible. According to political scientist Anthony Downs, two opposing

candidates running in a competitive democratic system will converge their platform to a pareto

optimal equilibrium of the preferences of the median voter.23 This model assumes that all the

voters have perfect information and half of the voters hold views to the left of the political

spectrum while the other half hold views to the right. Therefore, neither of the two candidates

can "profitably" deviate from the middle compromise as doing so in either direction will give the

deciding vote(s) to the opponent who stays put. "That is what we would ideally like democracy

to do," Akerlof and Shiller state, "So it would be very nice if Downs's description of voter and

candidate behavior described reality."24 In the U.S, however, the reality is that the two parties'

messages have diverged from the supposed equilibrium to a striking degree. The Republican

party has become extremely right-wing while the Democratic Party has adopted many platforms

to the left of the median voter's preferences despite the normal distribution the majority of

Americans' political views follow.25 Lessig suggests that the division might be explained by the

negative correlation between extremism and the difficulty of fundraising discussed previously.

"Direct marketers told campaigns that a strong and clear message to the party base is more likely

to elicit a large financial response than a balanced, moderate message to the middle," he puts it,

"Extremism, in other words, pays -- literally."26 The politician's unmet demand for campaign

money could provide enough incentive to represent those with views strong enough for them to

supply contributions. There might be a certain degree of plausibility to such a view, but even

23 Downs, Anthony. "An economic theory of political action in a democracy."The journal of political economy

(1957): 135-150. 24 Akerlof, George A., and Robert J. Shiller. Phishing for Phools: The Economics of Manipulation and Deception.

Princeton: Princeton UP, 2015. Print. 74-75. 25 Ansolabehere, Stephen, Jonathan Rodden, and James M. Snyder. "Purple america." The Journal of Economic

Perspectives 20.2 (2006): 97-118. 26 Lessig, Lawrence. Republic, Lost: how money corrupts Congress--and a plan to stop it. Twelve, 2011. 97.

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Lessig admits that its single-minded pursuit could only be based on "correlation, not

causation."27

A more fleshed out antithesis against a quid-pro-quo equilibrium and perhaps a gift

economy is worth considering. Addressing the widely held view that campaign fundraising in the

U.S had been an avenue through which private interests purchased legislative favors for

donations, MIT’s Stephen Ansolabehere, John de Figueiredo, and James Snyder challenged the

underlying assumption of campaign contributions as a political investment in Why is There so

Little Money in U.S. Politics?28 If such an assumption were to hold, they argued, the

“astronomically high rates of return” of influence on policy would have resulted in a much

higher amount of contributions than what was actually given in the 2000 national elections, a

conundrum known as the Tullock’s Puzzle. One can understandably object to such a rationale by

citing legal limits as the source of the discrepancy, but even contributions through heavily-

criticized loopholes such as “independent expenditures” and “soft money” in 2000 did not come

close to reaching levels that their expected returns would have warranted. In addition, the authors

found that the large majority of campaign funds in 2000 came from individuals’ contributions

rather than that of Political Action Committees (PACs), trade associations, unions, and

corporations. Therefore, instead of looking at campaign contributions as a political investment

from private interests, the authors conjectured that contributions were a form of consumption or

participation by individuals. They tested this hypothesis by examining the relationship between

personal income and campaign expenditure. The reasoning for doing so is that consumption

generally grows with personal income and survey researchers have found income to have the

27 Ibid. 28 Ansolabehere, Stephen, John M. De Figueiredo, and James M. Snyder. Why is there so little money in politics?.

No. w9409. National bureau of economic research, 2003.

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strongest predicting power in one’s giving to a campaign. An alternative model was used to test

the argument of campaign contributions as a political investment by determining the explanatory

power of total government spending on campaign donations. Not only can fiscal policy have

substantial impact on private interests, the authors reasoned, but the threat of unfavorable

policies such as regulation may also incentivize private interests to contribute to campaigns.

They performed their analysis using the following data: the political contributions of highly paid

executives; a time series of campaign spending under the Federal Election Campaign Act from

1978 to 2000; a time series of candidate and party expenditures in presidential elections from

1884 to 2000; panel data of campaign spending by gubernatorial candidates from 1976 to 2000;

and cross section data on spending in House of Representatives elections in recent decades. They

found that campaign expenditure was generally explained by personal income rather than total

government spending, which supported their hypothesis of campaign contributions as

consumption by individuals rather than a political investment by private interests.

These findings call for a more complete picture than the quid-pro-quo equilibrium that

Lessig conveys. Akerlof and Shiller argue for what they call a "political phishing equilibrium,"

which is based on the assumptions that voters are not fully informed and prone to being

psychologically "phooled" by campaigning strategies that graft the politician's story onto their

own story.29 The equilibrium strategy for the politician becomes to 1) publicly support issues on

which the median voter is well-informed, 2) publicize private interests' views on issues on which

the median voter is ill-informed to those donors and their lobbyists exclusively, and 3) employ

campaigning strategies targeted at the median voter such as advertisements with the amount of

29 Akerlof, George A., and Robert J. Shiller. Phishing for Phools: The Economics of Manipulation and Deception.

Princeton: Princeton UP, 2015. Print. 74-75.

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contributions raised. This equilibrium is therefore consistent with a gift economy and the

conclusion from the study above.