Small Businesses and Lobbying

Lobby is an act we primarily associate with the largest corporations of America. Corporations that can spend hundreds of thousands of dollars to get a tax break, but even small businesses utilize lobbying. A problem for small businesses though is that lobbying isn’t cheap. $5,000 to $20,000 a month with an expectation that the lobbying effort may last more than a year or could fail is the contract you make when you hire a lobbyist.  To afford these efforts, small businesses have set aside competitive interests and worked together. There is a very real risk of free riding which is why industries like the expediters in New York City are only a group of seven. Expediters are paid by contractors to get various building permits approved and don’t work well with together in a competitive market, but after legislation that was threatening to end their businesses appeared they were able to quickly construct a coalition to pool lobbying efforts.

Simply put, rival companies can and do work together to when the legislative agenda is contrary to their business model. This matter can be further explained using Becker’s policies on pressure groups. On a local government level, the total taxes and subsidies being debated are small enough where local owners can spend, m, a meaningful amount for significant pressure, p. The national policies are dealing with numbers of far greater magnitudes of which small businesses don’t have the resources to apply significant pressure. Secondly, the glossed-over variable, ‘x,’ got mentioned, as Legislatives are instrumentalist institutions. This factors in considerably when thinking of the cost of influence. For example, the film industry in NYC wanted a tax credit and after one year had received a 10% credit but this did little to increase business so next year they went and secured a 30% credit which was the ultimate goal. This makes the cost of influence significantly higher even in our democratic system when we look at it from the end goal perspective.

Acquiring Liquor Regulation

Last semester, in Professor Larson's Auction Theory class, we studied Washington State's auction of their liquor stores as part of our final exam, and the story had lots of public choice implications.

Washington used to have a state monopoly for liquor sales (why this would have been the case in the first place is an interesting topic for public choice study, but I won't get into that here). As has been the case in many states, there was a movement to upend the public monopoly and allow for private sales. What many people don't realize, however, is that these efforts have been largely spearheaded by big-box retailers, namely Costco and Target. Their lobbying efforts meant that when the voter referendum to disband the state monopoly was finally on the ballot, it created a new regulation: the state would no longer be involved in liquor sales, but from that point forward only stores greater than 10,000 square feet in size would be allowed to sell liquor.

When I learned about it, this blew my mind: this regulation seems so obviously detrimental to public welfare and so clearly designed only to serve the interests of the lobbyists that it was honestly surprising to me. It hides behind the veil of

public concerns that gas stations and mini-marts would be allowed to sell liquor, 

but more realistically seems directed at preventing competition from smaller entrants. Perhaps I shouldn't have been surprising - Stigler's analysis of how firms acquire regulation to keep out new competition and support themselves appears to fit this situation perfectly.



(Note: Also of interest, though not necessarily as closely related to public choice, is the auction process that went on in this case. The existing state stores were auctioned off to public buyers, and they were granted special exemptions to the 10,000 square foot rule and allowed to continue operation.)

A Lobbying Bonanza

Talks of a debt deal in Washington have lobbyists flooding the new congressional debt committee. This summer, after hours of seemingly endless debate, Congress agreed that it would cut $1.5 trillion from the federal budget. A debt supercommittee composed of 12 members was created for this purpose and also perhaps to avoid placing the blame on members of Congress that are up for reelection in 2012.

After President Obama signed the compromise deal to prevent the nation from defaulting on its debt, members of Congress anticipated the lobbying blitz that would ensue. K Street lobbyists will try to protect their industries because every line of the federal budget is up for the ax. In other words, every sector will fight to protect their rent. As one lobbyist in the article stated "You'd be foolish not to be involved to defend your priorities if you care about the federal budget or taxes, and I suspect that is everybody". When I read this I immediately thought of Tullock's article on Welfare Costs of Tariffs, Monopolies, and Theft. Tullock is concerned with the resources diverted from other uses to rent seeking. Clearly there will be a lot of resources diverted because the size of the prize is very large. In class we mentioned that this is one of the factors that determines the magnitude of rent dissipation. The debt supercommittee will attempt to reform the tax code and there are so many special favors or rents in the tax code that this could sweep up every industry and lobbyist in Washington. Since the size of the prize is large, this particular type of socially wasteful investment called lobbying will be large as well. The holders of these special favors will be willing to invest large resources to protect their rents because the capital value is worth much more.

There are several industries looking to protect their priorities including the telecomm industry, the defense industry, and the technology sector. There will be an unprecedented lobbying blitz because the mandate includes possible cuts from the entire federal budget. This also shows the magnitude of rent dissipation when bids are non-refundable. We can expect to see the same kind of wastefulness that Professor Coppock tried to illustrate in class when he held an open air auction where the bids were non-refundable, only this time there's a lot more at stake than just a couple of dollars.