Pseudo-Economic Sentences

Someone has been sipping a bit too much from the health care debate brew.

Pres. Obama has pledged several times to reduce lobbyists' influence over Washington. Since conservatives are supposed to believe in the separation of state and business, they ought to think this is a pretty good thing. Debate has instead been over whether or not he has been successful, and as usual the answer depends on your statistic, as discussed here, hat tip for the link to MR.

Lobbyist spending is up, but the number of lobbyists is down. The article indicates the economy may well be largely to blame.
Legislation is closing loopholes, but he backtracked modestly on his no lobbyists in my administration decision.

His chief ethics counsel, Norm Eisen, fired a salvo that shows a weak understanding of economics: "We think people are actually leaving the business," Eisen said in a recent interview. "We have bent the demand curve of the special interests."

Bent the demand curve? Hokay, let's think about what this would look like. It takes an unfortunate amount of verbiage to do this, so more is under the fold. The conclusion: Pres. Obama's ethics officer is claiming that they have preserved lobbying for the wealthiest. Now that's change we can believe!

First we have to wave away the lumpiness of legislation, the competition for opposite legislation by different industries and firms within an industry, the differences in rules vs. discretion held by different government officials, the degree of transparency, the need to map lobbyists' several dimensions of payment support (e.g. campaign donations, lunches and use of private jets, direct under-the-table slush money, good press, personal influence, etc.) into one dimension, and the need to map the multiple dimensions by which a government could benefit industry into another single dimension. Let's ignore the principal/agent problem too and make lobbyists purely the arm of the firm. If we can't do all this, then the statement is largely meaningless.

So we have a representative lobbyist and a representative government official. Firms try to maximize profits by hiring workings, investing in capital, and hiring lobbyists to change the rules of the game to something more favorable. A government official gets substitutable utility from income and from maximizing a social welfare function. Both are maximized over an infinite time horizon with a non-0 probability of dying or being fired.

Imagine a continuum of "legislation" on the x-axis and the price of getting what they want on the y-axis (as in the figure). It makes sense that as the price of legislation goes up, any firm will desire less legislation -- that money would be better invested in workers and capital -- so the "Demand" curve ought to be downward sloping. The "Supply" of legislation is reasonably upward sloping also either because of imperfect substitutability, marginal decreasing utility of income, marginally increasing probability of being fired, or if government officials are heterogenous as it takes more and more money to bend the marginal senator/executive/bureaucrat/etc to your way of thinking.

Steps that make it more costly for lobbyists to get their way shift the supply curve to the left, resulting in a higher price and lower quantity demanded. That even looks a little like what we have: increased spending by fewer people. Had he said that they had shifted the supply of lobbyist-induced legislation to the left, that would have made great sense and been a boon to the administration's appearance of ethics.

Instead he claims that they have "bent the demand curve." If this is a small kink point, then the demand curve is still negatively sloped everywhere, just more inelastic over one part than the other. If it's a large kink point, then for some reason firms want more and more legislation the harder it is to get. I can't see the latter without a lot more structure.

If this kink has changed the slope of a segment of the demand curve that does not include the equilibrium, NOTHING CHANGES. In order for this 'bending' to have any meaning, what it really has to imply is that the part of the demand curve where the current equilibrium is has been shifted.

If the kink point is at a lower price/higher quantity point than the equilibrium (below the eqm, in red), then the demand for legislation has become more elastic. Small changes in the costs of getting legislation have larger effects on the quantity demanded. If on the other hand the kink point is above the equilibrium (black line), then the demand for legislation has become more inelastic (the amount of legislation demanded won't change much with price). Either way, price and quantity decrease. Depending on the elasticity of supply, the total amount spent on lobbying could go up or down.

Which is more likely? That the largest, richest corporations have smaller, more price-sensitive interest in legislation (the red line), or the that the smallest, poorest corporations have been affected (the black line)? Let's throw in a smattering of sociology to the mix and guess the black line:

"The big dogs will eat," said Dow Lohnes Government Strategies' president, Rick Kessler, a Democrat who added that he has mixed feelings about Obama's anti-lobbying efforts. "They will always find a way to fly their people in, to funnel their money in. It's smaller interests and nonprofits who are going to suffer and have a hard time."

So if we take the statement at face value and look at what it means if it's true, what we're really talking about is reducing the access of small firms and nonprofits to influence legislation and increasing the oligopoly of the largest firms to influence policy.

If any legislative change brought about by lobbying is bad for social welfare (an assumption that requires defending), then this is still a good thing because the quantity is down. If we relax some of the restrictions needed to get this thing into two dimensions, such as little firms having different interests than large firms, this could increase the total amount of legislation or make it more onerous to social welfare because it is harder for the weaker side to pull back the other way.

In saying that they have "bent the demand curve," Pres. Obama's ethics officer is claiming that they have preserved lobbying for the wealthiest. Now that's change we can believe!