As everyone knows, friends in high places are good for business. Firms with access to politicians can influence policy or secure special advantages over their competition. A new National Bureau of Economics working paper from Jeffrey Brown and Jiekun Huang quantifies the extent to which such access benefits companies.
The large role that political access plays should trouble proponents of transparency and free-market efficiency.
Brown and Huang of the University of Illinois use the Obama administration’s White House visitors’ logs from 2009 to 2015. They find evidence that visits improved company performance such as stock price or obtaining government contracts.
The Obama White House is not unique. Regardless of the administration, companies will seek and receive access to federal officials. The danger arises because more regulations and discretion in the executive branch allow firms to leverage this access into special benefits.
The outsized role of political access and influence impede the operation of free markets. Instead of ideas competing and the best ones winning out, a White House visit can be an even bigger determinant of a company’s fortunes.
Brown and Huang show that meetings with White House officials are “followed by significant positive cumulative abnormal returns” in the form of a stock-price increase of 1.185 percent in the 70 day period surrounding the visit. The actual meeting seems to be the key parameter, as companies with a scheduled meeting that was canceled saw no such boost.
Companies that meet with federal government officials receive more government contracts and are more likely to receive regulatory relief.
Reliance on access could harm firms as well. Following the unexpected Trump victory in the 2016 election, the stock-prices of firms that had visited the Obama White House underperformed in the three days following the election.
There are two possible underlying causes that might be producing these results. In the benign scenario, firms provide relevant information that then allows politicians to craft better, more-informed policy.
A darker, more likely explanation is that access to politicians “may enable firms to gain undue influence over elected officials and attract political favors.” The authors suggest that more research is necessary before we can disentangle these two potential explanations.
While the latter explanation is more explicitly troubling, individual companies exerting influence on the crafting of regulations or other policy could still introduce adverse unintended consequences. In the recent case of robot delivery, one company (Starship Enterprises) played an outsized role in helping policymakers in Virginia and Idaho craft the bills to regulate the industry. The bills that were passed contained a weight provision for the robots that may have locked out competitors.
Even if we accept the benign explanation that the company did not know the parameters of its competitors, the bills it helped create may have locked out competitors.
In the latter scenario firms attempt to leverage access to politicians to their benefit, whether it is through reducing uncertainty over policy environments or regulatory relief. The authors find that larger firms, those with greater market share, and those that spent more on lobbying efforts were “more likely to have access to influential federal officials.”
Startups and new entrants are least likely to have the resources to get access. This creates a spiral where incumbents use access to further their advantage over would-be competitors.
Incumbent firms can use special access to insulate themselves from completion. Special access also makes it harder for companies to adapt to changing opportunities by shifting their investments to industries with more opportunities. The next potential Apple could get stuck making personal computers instead of having the flexibility to focus on IPhones.
A transparent policy process would reduce the incentive for companies to leverage their access. Fewer regulations reduce the need for such access. Let us hope that the current administration makes progress in this regard.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes.
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