U.S. corporations have rarely had it so good: Profits are at near all-time highs and valuations are rising. But what's behind this success? Are companies doing well because they're innovating with great products? Or, are they simply getting better at influencing the political system to maintain their gains?
Economist James Bessen bets on the latter explanation in a new paper. He says companies are seeing increasing returns from lobbying and that this could be harming economic dynamism (the ability of companies to compete) and increasing income inequality.
Bessen, based at the Boston University School of Law, writes in the Harvard Business Review:
I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase.
Though business groups tend to rail against regulation, the effect of new laws and executive oversight can actually be very helpful to corporations. For example, if a manufacturer has already complied with environmental regulations, it might put off a new player from entering the same space. Bessen writes that corporate profits have increased at a time when corporate PAC spending has risen 300-fold and the level of regulation—measured by the Regdata index—has jumped 50% for public firms. Previous research shows that lobbying pays off handsomely. One study found a $220 return for every $1 invested. Another, focused on lobbying for tax breaks, showed a positive impact on stock returns.
"While political rent seeking is nothing new," Bessen says, "the outsize effect of political rent seeking on profits and firm values is a recent development." In time, it's likely to slow economic dynamism still further, he writes, and reduce the ability of new entrants to compete on a level playing field. That's something that should concern everyone, whatever their political persuasion.
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