Freeman

ARTICLE

High Plains Drifters: Politicians’ Lucrative Protection Racket

Politicians Have More Than One Way to Raise Money

JANUARY 01, 1998 by FRED MCCHESNEY

Filed Under : Special Interests

Fred McChesney teaches at Cornell Law School and is the author of Money for Nothing: Politicians, Rent Extraction and Political Extortion (Harvard University Press, 1997).

“Politicians are interested in people. Not that this is always a virtue. Fleas are interested in dogs.”

—P. J. O’Rourke

The idea that politicians sell special favors to special interests is no longer new, although it still makes news. Throughout 1997, newspapers and television reported daily on John Huang, various Asian connections, and a suspicion (at the least) that the large sums greasing politicians’ hands were purchasing favors. Thus, allegedly, was American foreign-trade policy distorted and, according to Senator Fred Thompson, the 1996 election influenced. Dispensing the goodies is a bipartisan effort, of course. The support for ethanol subsidies by Bob Dole and Newt Gingrich indicated to many that the 1994 Republican conquest of Congress was unlikely to change much over time.

In the popular rendition of politicians’ taking “special-interest” money, it is the private party who initiates the game and the politician who accedes. Besides, it’s all part of a process protected by the First Amendment. The money may be spent for “access” to politicians, but it is protected speech. The Supreme Court has said so. If, after hearing the special interests’ side of the story, the politician agrees to preferential trade treatment for some group, it is all part of a political process laid out by the Constitution. And of course, the Founding Fathers understood that this was an inevitable cost of democracy: not laudable, but nonetheless tolerated. So goes the orthodox journalistic account.

Social scientists studying politics also tend to work with models in which private interests purchase special treatment from politicians. In the now-orthodox version of the “economic theory of regulation,” popularized (if not pioneered) by George Stigler, would-be private beneficiaries demand government favors and politicians supply them. Thus, the market for political favors is like a private market, with consumer sovereignty in full operation. The standard phrase “campaign contributions” bespeaks the perceived process: special interests enter the market with money to exchange and politicians respond.

One can understand why both journalists and economists nearly always view political transactions in this way. For the media, the story fits their preferred view of the world, in which government would operate for the public interest but for the corrupting influence of private interlopers. Thus, but for that pesky First Amendment, the solution would be just to drum out private access to government whenever money is involved. (So-called public-interest groups that can deliver services rather than money—unions, the American Association of Retired Persons, and so forth—would have untrammeled access, however.)

For economists, government-influenced markets are treated as just a subset of markets more generally. The essence of private market behavior is exchange, a process that leaves both parties better off, increasing societal wealth overall. For lawyers, the process is similar: the perceived special-interest deal is just another species of contract. Both sides provide something of use to the other (money for services), again leaving both sides better off from the transaction.

But is this perception the only explanation of what goes on when private parties pay politicians? When Vice President Gore sits in the White House with his Democratic National Committee credit card, making dozens of calls to prospective “contributors,” is he dangling the prospect of special favors in return? Or might there be something else going on?

Cooperation or Exploitation?

Consider that contract is not the only basis on which parties interact in society. While contracts are mutually beneficial, things like theft and murder—also involving interaction between individuals—leave one side better off but the other worse off. Behavior, in other words, may be either cooperative or exploitative. Individuals seek voluntary bilateral transfers (contracts); they also guard against the possibility of involuntary unilateral transfers (theft).

Exploitative behavior need not involve stealth, as typifies theft. Take blackmail, where Person A agrees to forbear from some perfectly legal action in exchange for payment from Person B. For example, A may know of B’s extramarital affair and threaten to reveal it to B’s spouse and the rest of the world (as A is perfectly free to do), but agrees not to tattle in exchange for money. Superficially, the transaction resembles a contract, but there is a crucial difference. Commercial contracts between A and B would leave both better off than they were before A came on the scene. But B agrees to a blackmail deal to avoid being made worse off by A’s intrusion. When Bill Cosby contracts with a production company or television network, he gains; had he acceded to the demands of his alleged daughter, he would have been paying protection money to avoid her attempts to make him worse off. Had model Elle Macpherson agreed to the alleged demands for money in exchange for a promise not to post nude photos of her on the Internet, she likewise would have been paying to avoid being made worse off, not to gain.

So, too, with politicians. They may well take payments to make private parties better off, such as providing tariffs or subsidies. Occasionally, these payments cross the legal line and are actionable as bribery. Prosecutions are few and far between. They largely target not the true substance of the transaction—payment for special favors—but some failure to follow the prescribed legal methods of payment for the favors. Campaign-spending laws provide the blueprint for perfectly legal bribery.

But a politician has an alternative for raising money: selling protection. He can agree not to do something that otherwise he says he would do, something that would reduce the wealth of the potential donor. The most obvious burden that can be threatened is a tax, but there are any number of others that a politician can propose and then withdraw for a price. A private citizen will be just as willing to pay for a special favor worth $1 million as he will to avoid a $1 million tax. (This assumes constant marginal utility of wealth; with declining marginal utility of wealth, a citizen will pay more to avoid the $1 million loss than for the $1 million gain.)

This, then, is the essence of the political protection racket. Superficially, selling special favors and selling protection do look the same: payment is made to the politician in both cases. But in the extortion racket, citizens are made to pay, not for special favors from Uncle Sugar, but to protect private wealth that they have earned the old-fashioned way, outside the political process.

Milking, Juicing, and Fetching

One observes this sort of protection being sold routinely, at all levels of government. Legislative extortion is commonly practiced through so-called “milker bills,” to use a term popular in California. A bill is drafted and submitted, not because there is any legitimate need for it, but because it threatens some private person or group that predictably will pay to have the bill withdrawn. “Juice bills” is another term for those legislative proposals intended to squeeze private interests for cash.

In Illinois, the name “fetcher bill” is apparently the more common designation for legislative proposals intended purely as shakedowns of monied interests. Even in Washington, D.C., Illinois politicians play the fetching game adeptly:

Rep. Jim Leach quietly introduced a bill a few days ago aimed at reducing speculation in financial futures. Barely 24 hours later, the Iowa Republican learned that Chicago commodity traders were gunning to kill his proposal. Rep. Leach said one Illinois lawmaker told him the bill was shaping up as a classic “fetcher bill,” a term used in that state’s Legislature to describe a measure likely to “fetch” campaign contributions for its opponents. Sure enough, one of the first to defend the traders was Democratic Rep. Cardiss Collins of Illinois, recipient of $24,500 from futures industry political committees. She called on colleagues in the Illinois delegation to beat back the Leach bill and watch out for similar legislation. (“Chicago Futures Industry to Fend Off Attack, Rallies Lawmakers Who Received PAC Funds,” Wall Street Journal, Nov. 12, 1987, p. 64)

While sale of special favors and sale of protection may look the same to outsiders, those milked or squeezed, of course, know the difference. Political scientist Larry Sabato reports that to political action committee directors, invitations to purchase tickets to congressional receptions “are nothing but blackmail.” Some time ago, the Wall Street Journal reported that “House Republican leaders are sending a vaguely threatening message to business political action committees: Give us more, or we may do something rash.”

Mud Farming and Political Extortion

In responding to politicians’ minatory messages, private parties are actually paying “money for nothing,” in the words of the song. The money is “contributed” in exchange for politicians’ doing nothing, when legally they could do something. The practice resembles the “mud farming” described in William Faulkner’s The Reivers. Mud farming was a simple but lucrative rural extortion scam. By night, farmers plowed up and then hosed down stretches of the dirt roads out in the country. By day, after cars sank into the nocturnally produced mud, the victimized drivers had a choice: abandon the cars or hire a mud farmer and his animals to pull the vehicles out.

The mud farming analogy brings out one important feature of political extortion. The money paid to politicians to avoid their taking an even bigger bite is not simply a monetary transfer. There are real costs associated with the protection racket akin to the time lost and the labor expended in extracting cars from the mud. The time and money spent on executives’ visiting politicians, on lobbyists’ work on behalf of clients, and so forth are all time and money not devoted to the production of widgets. Perhaps more important, the possibility of wealth being legislatively expropriated creates a disincentive to invest in the first place (or an incentive to invest in less valuable activities that are easier to shield from political threats). Each extortion episode thus leaves society poorer for the time lost and resources diverted from more productive endeavors.

Selling Protection

That the protection racket is costly is a point made, very apocalyptically, in the Clint Eastwood western High Plains Drifter. Eastwood rides into Lago, a mining town that is about to be attacked by three killers just released from prison. Lago’s corrupt city fathers had hired the men to kill the town’s honest marshal, then trumped up other charges to put the killers in jail. They return for revenge. Eastwood himself has come to wreak vengeance on Lago for the marshal’s death. Unaware of Eastwood’s agenda, the townspeople implore him to protect them from the killers; Eastwood agrees, on condition that they do everything he says and give him everything he demands. Making himself mayor and sheriff, Eastwood gradually reveals his plan: fending off the killers, but only by destroying practically everything in Lago in the process. He rides out in the end, leaving the town “saved” but a smoking ruin.

Eastwood, the high plains drifter, selling protection to Lago is no different from Joe Politician selling protection, except that Eastwood wants to annihilate the town and utterly impoverish its denizens. For the politician, total devastation would not be possible politically nor desirable pecuniarily. If politicians could take everything, individuals would have no incentive to invest in creating assets in the first place, meaning there would be nothing to protect in the future and so no future protection racket.

The politician’s maximizing strategy, then, is to take just enough to benefit himself at the moment while leaving sufficient incentive for private parties to generate new wealth—which then will need political protection. The extortion game is analytically identical to a dictator’s nationalization of assets invested by foreign firms. Citizens of the more developed countries regard the expropriations of foreign despots as exotic, sometimes even laughable, antics indigenous to the “Third World.” But what difference is there really between an American company paying hundreds of thousands of dollars in soft money to the Democratic or Republican National Committee in return for tax exemptions and that same company acceding to having a factory or other assets nationalized abroad in return for being allowed to continue doing business there?

It is true that shakedowns practiced by American politicians may differ in the complexity, camouflage, and rhetoric surrounding their threats and ultimate exactions. Compare the extortion game as played in state legislatures or in Washington with the schemes of Brazil’s President Fernando Collor de Mello, who, as reported in the New York Times Magazine, ran “an extortion and influence-peddling system” so successful that it amounted to “an assault upon the state.”

Previously, as a local mayor, Collor sold tax relief worth $100 million to sugar-cane firms in exchange for $20 million paid to him personally. As president, however, it is estimated that he raked in several times that amount, much of it again in selling protection. For example, Collor froze all bank deposits over $1,200 for 18 months as a supposedly anti-inflation measure. Again to quote the Times Magazine, “The program was a colossal failure, producing suicides, heart attacks, a 4 percent plunge in economic activity—and barely a dent in inflation.” To Brazilians, the measure might have seemed just an unfortunate but well-intended mistake—until they learned that President Collor was selling companies the right to unfreeze their accounts for a 10 percent commission.

Crass as extortion in Brazil was, readers may not find it all that much different from American politicians broadcasting their message, “Give us more, or we may do something rash.” Take the current spectacle of politicians milking the tobacco companies. Common Cause recently labeled the millions of dollars that tobacco firms have passed to politicians in 1997 (primarily to Republicans) “astounding.” But exactly why is it so surprising? Newspaper accounts ascribe the “donations” to the industry’s desire to improve its image—as if the public viewed giving money to politicians as something praiseworthy. The real reason is much simpler and (one would think) more obvious. As the pols have demonstrated, they now have the power to crush cigarette firms if they choose to exercise it. But for a price, Washington’s high plains drifters have agreed to forbear from total destruction of tobacco. Not surprisingly, state politicians are racing to strap on their six-shooters and threaten tobacco firms, too. When tobacco antes up—as it surely will, because it must—it won’t be to improve its image.

The tobacco wars illustrate a point noted earlier: politicians will threaten and take what they can, but it is not in their interest—whatever they might threaten—to kill the goose laying the gold. That’s the good news. The bad news is that the politicians will certainly be back as new eggs are laid.

Opening the Tax Window

For those who find such a view too cynical, consider the sorry muddle that our tax system has become. Scarcely a year passes without at least discussion in Congress and the White House of tax “reform” or “simplification.” Yet, as politicians open the tax window annually, no true reform and certainly no simplification result—au contraire. The public seems bemused: why does each round of change only increase the number of special breaks and add new forms to the April 15 ordeal? Answer: it’s all part of this year’s round of extortion. The names of those purchasing protection from the taxman change—the 1986 tax “reform” legislation featured a “Gallo amendment” and a “Marriott amendment,” while the 1997 legislation included an “Amway amendment” in return for that firm’s reported so-called contributions of over $1 million. But the rules of tax “reform” remain the same.

Of course, the political threats must be credible. If private individuals think a threat is just a bluff, they have no incentive to pay. Thus, politicians may sometimes be forced actually to legislate; as Gordon Tullock puts it, “politicians may sometimes have to enact legislation extracting private rents from owners who do not pay up, just as the Cosa Nostra occasionally burns down the buildings of those who fail to pay its protection levies.” If payment ultimately is forthcoming, politicians can always repeal the legislation.

Threats can be credible (and politically attractive) only if they are constitutionally protected. Private extortion is illegal. However, there is no law against the political extortion discussed here: legislators themselves get to define what constitutes extortion, and obviously have chosen not to outlaw what they do. (True, when political shakedowns come to light, they occasionally prove embarrassing enough to force a legislator to resign.)

Constitutions exist precisely to establish rules to protect the citizenry against such political depredations. Were there constitutional obstacles to profiting from the sorts of threats that elicit private payments, those threats would be made less often, since victims would always have the counter-option of seeking refunds through constitutional litigation.

But the state and federal constitutions have provided little shield against the political protection racket. The Founding Fathers themselves seem not to have worried as much about politicians extorting from the voters as they did about factions of private citizens using government to take from other factions. The level of constitutional protection against legislative expropriation of basic contract and property rights has steadily diminished since the late nineteenth century. As noted earlier, the very right to “contribute” to politicians has been held constitutionally protected. As government regulation pushes into more and more areas, the scope for selling political protection expands apace. In effect, as courts have retreated from affording constitutional protection against threats of legislative takings, potential private victims have found it necessary to use their own self-help remedies, paying off politicians rather than endure even more dire regulation (including taxation).

Consider, for example, environmental regulation, an area of state and federal activity virtually unknown even a generation ago. The search for sites to dump toxic wastes, the wish to exclude certain land (woods, wetlands) from private development, and other environmental issues have created opportunities for politicians who can influence such decisions to harvest big contributions.

This leads to a perhaps unexpected conclusion. In a second-best world where government has already been allowed to grow large, toleration of the political extortion racket is actually desirable. If the politicians cannot be paid off to abstain from imposing costs on private parties, those costs will be imposed. Where government has too much power, then, the political protection racket can actually lighten the burden.

“All right,” one might say, “we should reduce or eliminate government’s ability credibly to threaten private individuals with pecuniary or other loss.” True enough, perhaps, but this position effectively boils down to reducing the size of the state, of reducing its power to do almost everything it currently does. In particular, it would mean an end to most taxation and programs to transfer wealth, the essence of modern politics. However desirable, any such reduction amounts to arresting a trend in government growth that has been gaining momentum for over a century. If that engine cannot be stopped and thrown into reverse, those of us along for the ride must sometimes resign ourselves to protecting our well-being with our own wallets.

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