Value for Money: How Important Is Lobbying to Industry?

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1 January October 2014 Follow on head on Master page A : How Important Is Lobbying to Industry? By Will McKitterick, Maksim Soshkin and Lucas Isakowitz The amount that industries contribute to lobbying does not always reflect how dependent industries are on lobbying dollars Some of the highest contributors to raw lobbying dollars have low intensity rankings Over the past five years, business interests contributed more than $16.1 billion toward lobbying the US federal government. With major issues such as financial and healthcare reform and the battle over the budget consuming Washington, it is no surprise that representatives of some of the largest sectors in the economy, such as finance, energy and healthcare, have poured billions of dollars into protecting their interests. But how do industries lobbying efforts compare with their overall contribution to the economy? And how important is lobbying to these industries? Using a ratio comparing individual industries share of total business lobbying in the United States with their share of total value added to the economy, IBISWorld has crafted a measure for calculating an industry s lobbying intensity. This metric goes beyond just measuring raw spending on lobbying; lobbying intensity ranks industries by how great a role lobbying plays in their business. Industries that exhibit high lobbying intensity are typically those that are most impacted by changes in government spending and federal regulation. Conversely, industries that exhibit low lobbying intensity have relatively less at stake regarding government action. Lobbying Intensity Sample of Industries by Lobbying Intensity Ratio Defense Pharmaceuticals/Health Products Tobacco Railroads Sea Transport Power Generation Health Services/HMOs Telecommunications Services Oil & Gas Commercial Banks Hospitals/Nursing Homes Special Trade Contractors SOURCE: IBISWORLD AND THE CENTER FOR RESPONSIVE POLITICS Findings IBISWorld found that the industries that contribute most to lobbying are not necessarily those that depend most on lobbying. Some of the highest contributors to raw lobbying dollars, such as the Insurance industry, have low lobbying intensity rankings because they have less info@ibisworld.com

2 October to gain from lobbying when compared with the Defense or Pharmaceutical and Health Products industries. Therefore, the value of lobbying dollars varies by industry. Also, industries that are grouped together by their level of lobbying intensity often share several notable characteristics, such as their level of concentration, dependence on public money and federal regulation. Moreover, there are a finite number of issues that lobbying dollars can chase. As a result, it appears as though the largest industries do not have to match their heft in the economy with a similar share of lobbying dollars. See the Map of Industries by Lobbying Intensity chart for an analysis of the most intensive and least intensive industries in this study. High Intensity: The Big Three High-intensity industries are classified as those with a lobbying share that is at least four times greater than their share of total value added to the economy. IBISWorld has identified only three industries that meet this criteria: Defense, Pharmaceuticals and Health Products, and Tobacco. As mentioned previously, industries that are highly intensive tend to share several characteristics. In this case, each industry has high regulatory exposure, dependence on government spending and market share concentration. Compared with the rest of the economy, these three industries are disproportionately subject to government oversight and rules, which dictate and impact the scope, performance, product range and day-to-day operation of industry players. All three industries are dominated by a relatively small number of major companies, which makes it easier for them to align, coordinate and express their interests through lobbying. Furthermore, the Defense and Pharmaceuticals and Health Products industries have great interest in government spending policies, whether it is for contracts or market support.

3 October Definitions: Lobbying intensity: A ratio between an industry s percentage share of total federal lobbying in the United States and an industry s share of total value added in the economy. (% of total lobbying / % of industry value added) High lobbying intensity: Industries with a ratio of 4.0 or greater. Moderate lobbying intensity: Industries with a ratio of greater than 1.0 but less than 4.0. Low lobbying intensity: Industries with a ratio of 1.0 or below. Industry value added (IVA): The market value of goods and services produced by the industry minus the cost of goods and services used in production. IVA is also described as the industry s contribution to GDP, or profit plus wages and depreciation. Defense No industry is as lobbying intensive as Defense. Over the past five years, its share of lobbying was 8.7 times greater than its share of the economy, indicating that defense contractors are most likely to benefit from lobbying, compared with other industries. The primary reason is that most US defense companies derive the majority of their revenue from US military and homeland security contracts. For instance, in 2013, the top-lobbying defense and aerospace businesses generated 56.1% of their revenue from US government contracts, with some receiving a much as 90.0%. This direct dependence on government spending makes it vital for these contractors to constantly influence policymakers budget allocations. In fact, over the past five years, IBISWorld analysis reveals that despite the industry reducing its lobbying spending, its intensity has steadily climbed as contractors fight to keep contracts amid declining US defense funding and sales. Aside from dependence of direct government contracts, defense companies are also highly regulated, with stringent restrictions regarding whom they can sell to and how they conduct business. To a large degree, arms exports are a reflection of US foreign policy and can be linked to the government s policy and relationships with foreign states. For instance, many foreign arms deals are made at a government-to-government level. Simultaneously, rules, such as International Traffic in Arms Regulations article, dictate which defense equipment can be exported, with the Department of State having to provide approval. Moreover, major international arms sales have to be reviewed by Congress, which may then block or modify the sales. As a result, industry operators often have to lobby the government to push through export sales, which are becoming increasingly important amid waning domestic demand. Because so much of the industry s performance, means of operation and even existence are directly impacted by the government, contractors in the Defense industry value lobbying to a greater extent than any other industry. Pharmaceutical and Health Products The Pharmaceutical and Health Products industry is a close second in its lobbying intensity level. Over the past five years, its share of lobbying was 8.6 times greater than its share of IVA. While contributing only 1.0% of value added to the US economy, this industry is by far the largest lobbying spender, accounting for 8.3% of total industry lobbying in the United States over the past five years. In comparison, the Hospitals and Nursing Homes industry spent half as much on lobbying, despite contributing more than seven times as much value to the economy. The primary reason that the Pharmaceuticals and Health Products industry lobbies so heavily is that federal regulation regarding healthcare, trade, drug pricing practices and approval, medical device taxes and patent exclusivity significantly affects industry revenue. For instance, pharmaceutical companies in the United States benefit greatly from their ability to set drug prices unlike in many other developed nations. Moreover, through its Medicaid and Medicare programs, the government is the single largest spender on drugs. The Congressional Budget Office estimates that Medicare spending on medication will total $76.0 billion in 2015, accounting for over 36.0% of pharmaceutical manufacturing revenue. These examples demonstrate the massive return pharmaceutical companies earn from spending on the Hill, indicating just how much bang they get for their lobbying buck. Tobacco Tobacco is the third-most lobbying intensive industry in the country. Mired

4 October Sources Number of Special Interests Vying to Influence Health Reform Legislation Swelled As Debate Dragged On, Center for Responsive Politics The Medicare Prescription Drug Benefit Fact Sheet. The Medicare Prescription Drug Benefit Fact Sheet, The Henry J. Kaiser Family Foundation kff.org by a litany of regulations aimed at combating the negative health effects associated with smoking, tobacco interests spend millions each year in Washington, DC, to defend their livelihood. Still, as a share of total lobbying, tobacco companies spend much less than many comparable industries; tobacco interests account for only 0.8% of total lobbying over the five-year period. This is in comparison with the Oil and Gas industry which makes up 5.1% of lobbying dollars over the same period. Nevertheless, the Tobacco industry exhibits the thirdhighest lobbying intensity ratio (5.9), making it almost four times more lobbying intensive than the Oil and Gas industry. This is due largely to the paltry amount of economic activity the Tobacco industry generates: IBISWorld estimates tobacco companies account for only 0.1% of value added to the US economy. Despite their small economic footprint, top tobacco lobbyers spend considerable amounts each year to fight new FDA regulations aimed at curtailing the ability of cigarette companies to develop and market their products. They also fight legislators frequent efforts to raise excise taxes on cigarettes, an increasingly popular means for generating tax revenue. Somewhat surprisingly, the industry s share of overall lobbying has decreased over the past five years, even as its lobbying intensity has maintained. This is due to the fact that the Tobacco industry faces an existential crisis, as mounting regulation and falling smoker rates threaten the viability of this declining industry. Low Intensity: Size Matters Low intensity industries are those whose share of lobbying is either equal to or less than their share of the economy. Unlike the handful of industries that are highly intensive, low intensity industries are numerous and diverse. Generally, lobbying does not play a large role in these industries business. For instance, the Recreation and Live Entertainment (e.g. amusement parks) industry has an extremely low intensity ratio, due to the limited role federal government policy plays in its operations. However, just because an industry has low intensity does not mean that it spends less on lobbying or that political influence is not important to them. The Securities and Investment industry is one of the largest spenders on lobbying in the country, accounting for 3.5% of total industry lobbying over the past five years. However, it remains low intensity because of its massive value added contribution to the economy. To this point, some of the industries that fall into this intensity category are among the largest and most fragmented in the nation. Finance Industries in the finance sector (i.e. banks, insurance and real estate companies) are among the top spenders on lobbying in the country. Over the past five years, of the 20 largest industry spenders on lobbying, a quarter belong to this sector, accounting for 16.5% of the total lobby spending in the country. Financial, insurance and real estate companies are highly regulated and in light of the financial crises, have received large-scale assistance and bailouts from the federal government. Moreover, in recent years financial regulation has intensified, as exemplified by the Dodd Frank Wall Street Reform and Consumer Protection Act. However, because industries in this sector are so large, not a single one contributes to a greater share of total lobbying than it does towards the economy, putting them all in the low lobbying intensity range. Despite all the regulation and government assistance, compared with companies in industries such as Defense, operators in this sector are not as reliant on political influence

5 October About IBISWorld Inc. Recognized as the nation s most trusted independent source of industry and market research, IBISWorld offers a comprehensive database of unique information and analysis on every US industry. With an extensive online portfolio, valued for its depth and scope, the company equips clients with the insight necessary to make better business decisions. Headquartered in Los Angeles, IBISWorld serves a range of business, professional service and government organizations through more than 10 locations worldwide. For more information, visit or call Contact: Media Relations media@ibisworld.com IBISWorld Sales & Subscriptions Phone: for the success of their day-to-day operations. Furthermore, the finance sector is so large, employs so many people and is so vital to the functioning of the economy that it garners political influence through its sheer existence. Health The health sector, excluding those in the Pharmaceutical and Health Products industry, is also a substantial contributor to lobbying. Together, the health sector, which includes Health Professionals, Hospitals and Nursing Homes, Health Services and HMOs and Miscellaneous Health industries, contributed 9.1% of total lobbying dollars over the past five years. These industries were recently affected by the roll-out of the new healthcare overhaul dubbed the Patient Protection and Affordable Care Act (ACA), which constituted a major restructuring of the nation s healthcare apparatus. During the run-up to its introduction, health industries spent lavishly to affect the outcome of the ACA. According to the Center for Responsive Politics, by the time the House and Senate adopted versions of the bill, the number of clients lobbying the government had increased from 398 in the first quarter of 2009 to 1,541 by the end of that year, a nearly 300.0% increase. The gravity of the bill, and its sweeping effect on the nation s healthcare system, guaranteed the involvement of the largest industry players from across the sector. However, IBISWorld s findings indicate that these industries share a relatively low lobbying intensity ratio. This is due to the fact that each of the industries within the sector contribute an enormous amount of value to the overall economy. However, the health sector illustrates a more fundamental point about industries and lobbying: There is a point at which lobbying efforts yield diminishing returns. In other words, there is a limit to the efficacy of lobbying. Large amounts of lobbying can generate substantial returns in terms of protection from competition, government contracts or favorable trade policy. Nevertheless, money can only go so far in swaying the opinions of those in power. Therefore, the health sector s sheer size (representing an estimated 12.2% of total value added to the economy) will inevitably overshadow its political spending, leaving most health industries with surprisingly low levels of lobbying intensity. Footnotes All lobbying data is sourced from the Center for Responsive Politics and was reconciled to match IBISWorld data. Total lobbying spending only includes industry lobbying and excludes lobbying on single issues, ideology, labor, education and other causes. All lobbying intensity levels are based on 2009 to 2014 (latest available) data

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