Lobbying, Free Lunches, and Liquidity

People frequently speak of the “return of investment” on lobbying, pointing out that companies can often see returns in the range of 1000x on a strategic donation to the appropriately placed congressman. However, as far as I know no one has taken this to its logical extreme, which is to actually think about campaign donations as investments. As investments, campaign donations have a number of highly undesirable aspects that would horrify any Wall Street portfolio manager:

  • Extreme illiquidity. When you invest in a politician, you can’t redeem your stake or for that matter sell your investment to a third party. The principal is locked up forever and is not freely convertible back into the cash you paid for it.
  • Nontransparency: You cannot have any objective basis to judge the likelihood of payment. Obviously the politician in question will promise you the moon, but you as an investor have little visibility into whether he’ll deliver. Of course you can look at his past record, but have you ever seen a mutual fund commercial? “Past performance is no guarantee of future results” is basically Wall Street’s motto.
  • Uncertain payment schedule: You have no idea what you might get, when you might get it, and in what way it might arrive. It’s all up to the (nontransparent!) whims of the politician as well as the vagaries of legislative schedules and all that sort of thing. Not to mention unforeseen circumstances which tend to something something the best-laid plans of mice and men.
  • No book value: Due to the above characteristics, it’s not even a real investment! That money is best recorded as just spent, rather than remaining on your books as an asset.

Do these crazy payout values and investment characteristics remind you of anything? They should! It’s just like venture capital, which also features nontransparent, illiquid investments that are impossible to value with totally uncertain payout schedules. And venture capital only works because the investments that do work out often have 1000x or more payouts. Much like campaign donations!

Also of note – it’s really hard to prove that the money drove the payout. West Virginia congresspeople will lobby for coal no matter what. If they win, did coal companies’ donations pay out huge, or were they wasted?

This is all a bit tongue-in-cheek, but there’s a real point here. If you believe that there are no free lunches, that also extends to buying off legislators. Making campaign donations isn’t just guaranteed free money for large corporations, because free money gets arbitraged away. It’s not like congresscritter’s appetite for money is a secret, and everyone has seen these reports of the huge returns to lobbying. On the other hand, if you consider how terrible the investment characteristics of investing in politicians then the absurd return makes more sense! It’s a risk premium.

Also food for thought: in most of these situations you have businesses with a core competency in something other than politics trying to exploit a political animal. Who is likely to be exploiting who?

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