Dingell Loses to Waxman, and Auto Stocks Dive -- Call It What It Is: Corruption
In a functional democracy -- one where lawmakers pursue the public interest -- the stock prices of politically connected companies or industries shouldn't be impacted by the changing fortunes of politicans with whom they're cozy.
But yesterday, Rep. Henry Waxman, D-Calif., wrested control of the influential House Energy and Commerce Committee from fellow Democrat John Dingell (Mich.), and auto stocks tanked on the news. It's an aspect of the story that will likely get little attention -- taken, with some justification, as just so much business as usual in Washington.
Dingell, who is quite progressive in some areas, is also firmly in Big Auto's pockets, and has clashed with Waxman on a number of issues over the years -- issues like beefing up regulation of vehicle emission standards. Over the course of his career, three of Dingell's top four contributors were GM, Ford and Daimler-Chrysler; his wife, Debbie, was an industry lobbyist until their marriage in the early 1980s and continues to work for GM today. According to disclosure forms, the couple owned more than a million bucks' worth of Big Auto stocks and options as of 2006. After the last election, Dingell hired a Daimler-Chrysler lobbyist whose previous job had been keeping Congress from increasing vehicle efficiency standards to serve as the committee's chief of staff.
Waxman is one of the most liberal lawmakers on the Hill and has fought tenaciously against the Corporate Right on issues ranging from oversight of the "security contractors" that have run amok in Iraq to stronger environmental standards.
There will no doubt be plenty of analysis about what the hugely significant change in leadership on the committee will portend for the next president's agenda. Energy and Commerce plays a key role in crafting a huge variety of legislation -- from consumer protection, food and drug safety and public health and environmental policies to the supply and delivery of energy and international trade.
But that's not the only interesting aspect to this story. Consider this opening to a piece on the Washington Post's website -- it reveals much about American governance:
Most people wouldn't give that headline a second thought. Why wouldn't auto stocks take a hit soon after the industry "had lost a loyal friend" on a key regulatory committee?
It's business as usual, of course, but it's also evidence of a corrupt government. That's according to forensic economists -- the CSIs of the "dismal science."
Corruption is difficult to measure. Organizations like Transparency International rank countries according to people's -- especially business-people's -- perceptions of government corruption. But perceptions can be a tricky thing -- people doing business in a country can have all sorts of motivations for under- or over-reporting the degree of corruption they encounter. And critics have claimed that the rankings are highly politicized, with business-friendly countries getting a pass even if their customs inspectors and highway cops shake down everyone passing before them.
But, as Raymond Fishman and Edward Miguel, two professors who penned the book Corruption, Violence, and the Poverty of Nations, wrote recently in Foreign Policy ($$), forensic economists are pursuing a more methodologically sound way of rooting out government corruption: watching how the ups and downs in the careers of government officials impact the stock prices of firms to which they're connected in one way or another.
Fishman and Miguel laid out the rationale behind the approach:
Whether through hefty campaign contributions or cushy jobs for former politicians, corporations are constantly accused of trying to profit through political ties. (Just think Halliburton or Russia's Gazprom). But what's the real value of these companies' connections? If you ask politicians or investors, you're likely to hear a lot of denials. To get the truth, we could ask insiders to put some money where their mouths are, making them bet some of their own cash on whether particular companies are making back-alley deals with politicians to increase their profits. In this political betting pool, raw financial self-interest would lead bettors in the know to reveal their true beliefs about corruption.
That betting pool is, of course, the stock markets. The scholars wrote: "If connections buy tax breaks, valuable licenses, and advantages in bidding for government contracts, then strengthening political ties should boost profits. These higher profits translate directly into higher stock prices, and conversely, removing those ties should send profits -- and stock prices -- tumbling."
Purdue University economist Mara Faccio studied those ties in every country that had a functional stock market. Not surprisingly, Faccio found strong connections between business and government across the board, but she also noted that the value of those connections in terms of stock prices varied greatly.
In the United Kingdom, for example, stock prices don't move at all when a firm's political ties wax or wane. When Rolls-Royce Chairman John Moore was appointed to the House of Lords, it didn't touch Rolls-Royce's stock price. But in Italy the picture's quite different. When Fiat chief Giovanni Agnelli was appointed to the Italian Senate, Fiat's stock soared by 3.4 percent, adding millions of dollars in value to the company in a single day.
Now consider that headline once more -- "Waxman Gains House Energy Committee, Auto Stocks Drop." It says that we're a lot closer to Italy's infamous level of public corruption than we are to that of our British cousins.
One could argue that the Big Three's tanking share prices are simply a product of a representative from California knocking a local Michigan pol out of a key committee chairmanship. But in order for that argument to hold water, one would have to further claim that Dingell's five decades spent fiercely opposing beefed up emissions and fuel efficiency standards served not only the short-term interests of the Big Three's bottom lines, but also the long-term interests of the rest of his constituents. That's a tough argument to make, especially at this moment in time.
It's also the case that Congress didn't give the Big Three the $25 billion in "bridge loans" they'd begged for, which no doubt hurt their share prices as well. But, as Fishman and Miguel noted, the pattern is well-established:
Numerous studies have found that the economic fortunes of well-connected U.S. companies mirror the political fortunes of their connections. When U.S. Sen. Jim Jeffords defected from the Republican Party and handed Senate Democrats a slim majority in 2001, Democratically connected companies benefited in the immediate aftermath. Similarly, the stock value of companies with former Republican lawmakers on their boards increased an average of 4 percent when the Supreme Court handed the 2000 election to George W. Bush, while companies with former Democratic politicians on their boards declined.
The take-away from all this is that while there's reason to celebrate progressives like Waxman increasing their influence at the beginning of the Obama era, we also need to keep in mind that the system in which they operate is rotten, and that there's still a lot of work to be done in order to bring responsible governance in the public interest to Washington. No matter who occupies 1600 Pennsylvania Avenue, there’s still an enormous amount of centralized power in DC, and Congress still has an incumbency protection racket and seniority system that allows industries to keep a loyal foot soldier like Dingell in a place of power for decades (in 1955, Dingell took the seat his father had held until his death).
What's more, we shouldn't dismiss public corruption as just so much "business as usual" when it's right there, staring us in the face.