Estimated running time: Chapter 9 is entitled Business in Politics. It talks about the long-standing relationship between business and elected governments. Let s explore this topic. 1
Concerns about the likelihood that business will have a greater influence on the workings of government than ordinary people are not new, as evidenced by this quote from Adam Smith in 1776. READ SLIDE, then say Some people call Adam Smith the Father of capitalism. In his book, The Wealth of Nations, he sang the praises of capitalism, and argued that, for the most part, the pursuit of profit by business owners through markets would produce very GOOD social welfare outcomes for almost all members of society. If HE S worried about allowing businesses to wield political influence, then I AM TOO! 2
Exiting U.S. President Dwight D. Eisenhower warned particularly that DEFENSE CONTRACTORS, such as Lockheed, General Dynamics, and others; were, in his view, likely to have an inappropriate amount of influence over the spending decisions of the U.S. government unless the citizenry remained EXTREMELY VIGILANT of this possibility, and he coined the expression Military-Industrial Complex to make his point. In his farewell speech to America, a few days before he left office, he said this: READ SLIDE. 3
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With the political power of Southern Agriculture decimated by the Civil War and its aftermath, Northern industry s influence over politics in Washington grew even stronger during the period 1865-1890. It was common knowledge that legislators did what powerful corporate leaders in their state told them to do; because if they didn t, they couldn t get re-elected. West Virginia & Kentucky were known as coal states because it was believed that their legislators did what the coal mining companies told them to do. New York, California, Illinois, and other Midwestern states were known as railroad states because it was believed that their legislators did what the railroads told them to do. Montana was known as a copper state because the copper mining companies controlled things. Ohio, Texas and Pennsylvania were known as oil states because it was believed that their legislators did what the oil companies told them to do. This led to political cartoons like this one by Joseph Keppler, first published in 1889. This is the floor of the U.S. Senate. The small men in front are the elected Senators. The giant men in back that look like big money bags represent the dominant firms in each industry. The peoples entrance to the Senate is marked closed. The sign at the back of the room says this is a senate of the monopolists by the monopolists for the monopolists. The age of this cartoon shows that people have been concerned in America about business and especially LARGE companies having excessive influence over government for at least 120 years. 6
Ulysses S. Grant, who had been an important General in the Civil War, was elected to the Presidency in 1869 and spent two terms there. But his Presidency was terribly scandal-ridden. This was a low point in American politics. There were many scandals involving Grant s cabinet during this time. I have listed only the two most famous ones. During his first term, the most-famous scandal was the Whiskey Ring scandal, which had two parts. In the first part, over 3 million dollars in taxes were stolen from the federal government with the aid of high government officials. In the second part, Secretary of War William W. Belknap was discovered to have taken bribes in exchange for the granting of licenses from the federal government to sell liquor to Indian tribes at government trading posts. During Grant s second term, the most famous scandal was the Credit Mobilier scandal, in which it was discovered that the Credit Mobilier Company had given members of Congress shares of its stock to avoid an investigation of its fraudulent railroad construction work. 7
It is no accident that it was shortly after Ulysses S. Grant s presidency that the Populist movement got started. This was a movement primarily of farmers, who complained that 1) With falling crop prices, banks were foreclosing on their farms 2) Railroads had monopolies on their routes and were charging exorbitant rates to ship crops, worsening their economic pain, and 3) The recently revealed corruption in Grant s administration proves that the games of business and politics are both rigged are not being played fairly. To remedy these problems, the Populist movement sought government OWNERSHIP of the railroads, among other things. In the end, they got less than they had asked for, but they did get some changes. They got government REGULATION of the railroads with the establishment of the Interstate Commerce Commission in 1887. 8
The seventeenth amendment to the U.S. constitution changed the system by which U.S. senators were elected. Previously, U.S. Senators had been chosen by state legislators. Only members of the House of Representatives were elected by popular vote. The seventeenth amendment changed that, making Senators elected by popular vote as well. Corporations fought this amendment, but their motives were not pure. Simply stated, they LIKED the extra influence they had over U.S. Senators that the old system afforded them. There was ample evidence that the old system was causing political corruption. For example, in 1884 representatives of Standard Oil called members of the Ohio legislature into a back room where $65,000 in bribes was handed out to obtain the election of Henry B. Payne to the U.S. Senate. One witness saw canvas bags and coin bags and cases for greenbacks littered and scattered around the room and on the table and on the floor with something green sticking out. $65,000 was a lot of money back in those days. People were shocked when they learned about this, and that s why the seventeenth amendment was passed. 9
The great political reforms of the progressive era were reactions to corruption in a political system dominated by business. While business power was more often checked after the turn of the century, it remained preeminent. 10
Warren G. Harding s presidency was so beset by scandals that Congress was considering impeaching him when he died of a stroke in 1923. The worst scandal involved Secretary of the Interior Albert B. Fall, who accepted bribes from oil company executives in exchange for the right to pump oil from government reserves in Teapot Dome, Wyoming. 11
The next big turning point in the relationship between Business and Government in the United States was called The New Deal. The new deal was formulated in response to the Great Depression. The Great Depression lasted from approximately 1929 1935. During the Great Depression: The official unemployment rate reached 25%, but the real figure was probably much higher, people many people gave up looking for work after a little while, and the official unemployment figures only include people who have actively looked for work in the past six weeks. Many conservative business executives argued publicly that the depression would correct itself without government action. President Herbert Hoover accepted their arguments. He kept telling Americans that prosperity was just around the corner. Americans responded by making the song which corner? popular in 1932. 12
President Hoover s attitude and the attitude of the leading businessmen who advised no action by government to correct the situation irritated a lot of Americans. They concluded that the rich just didn t care about their suffering. Americans confidence in their business leaders morality fell to a new low. People were ready for a change. They elected President Franklin D. Roosevelt in 1932 on a platform of change. 13
After the election of President Roosevelt, corporations fought his efforts to regulate banking and industry, strengthen labor unions, and enact social security. They called him Stalin Delano Roosevelt and said his policies were bringing America a giant step closer to communism. They started a whispering campaign totally false that he had been declared insane by his doctor. They were fighting dirty! Leaders of DuPont, General Motors, Standard Oil, U.S. Steel, J.C. Penney, Heinz, and other major firms formed the anti-roosevelt American Liberty League. Roosevelt was hurt by all the hate directed toward him for his New Deal programs, which seem moderate by today s standards. He once stated that through his New Deal programs, he had saved capitalism despite the vigorous efforts of the capitalists themselves to PREVENT him from doing so! After the Great Depression, Americans would believe for at least 50 years that government should be used to correct the flaws of capitalism and control the economy so that prosperity would no longer depend solely on unbridled market forces. 14
During the late 1960s, new citizen action groups arose to champion the rights of consumers, the environment, taxpayers, and people of color. These groups had success in pushing new regulation through Congress. Business was unaccustomed to defeat. They began to invest more in countering this new political power of citizen groups. They did this by spending more on lobbyists and more on political campaign contributions. Once they had succeeded in counteracting citizen power, they continued their level of effort, flexing the newfound muscle to influence the probusiness legislation of the 1980s and 1990s. 15
Business and politics intersect in two separate activities. In the electoral process, candidates attempt to get elected, and they collect campaign contributions so they can run expensive TV ads and convince voters to vote for them. Corporations have not been able to give money DIRECTLY to candidates political campaigns since 1907, but there are many INDIRECT ways that they help politicians raise this money. Lobbying is defined as advocating a position to government. Because corporations are treated as INDIVIDUALS under the law, they are afforded similar rights to call or write their Congressmen that flesh-and-blood people are given. Corporations exercise these rights in a variety of ways, as we shall see. Law and etiquette both require that the two activities shown on this slide be kept separate, but most people suspect that the separation between these two activities is not nearly as complete as appearances would indicate. Political etiquette requires that lobbyists and elected officials not discuss legislation and campaign contributions in the same meeting, in order to avoid the appearance of one being given in exchange for influence over the other. But just because you don t discuss them in the same meeting, does that mean that there is NO relationship between the two? I highly doubt it, and so do most people. What is unknown is the exact DEGREE to which campaign contributions given by business during the ELECTORAL process influences politicians OPENNESS to pro-business ideas on the LOBBYING side. Let s take a closer look at this important issue. 16
How do businesses let their elected representatives in Congress know which direction they would like them to vote on particular bills currently pending in Congress. The answer is through lobbying activities. First of all, there are three main ways a business can communicate their positions on political issues, such as bills currently pending before Congress, to their elected representatives: through self-representation, by hiring third parties to REPRESENT their interests, and by joining and funding the activities of BUSINESS INTEREST GROUPS. More than 700 corporations have staffs of government relations experts in Washington. These Washington offices are set up mainly by big companies. This is called self-representation or direct representation. Every person in these offices is a fulltime, salaried employee of the corporation. They just happened to be stationed in Washington, D.C., and their fulltime job is to let government officials know how their employer recommends they vote on particular issues, and why. Studies indicate that about 75% of all LARGE firms in the U.S. hire private lobbying firms to represent their interests to elected officials. Many large firms communicate their positions to elected officials using a COMBINATION of self-representation and private lobbyists. Private lobbyists are usually partners or highly-paid employees of lobbying FIRMS in Washington. Many of them have backgrounds as lawyers. Many of them are also former government officials. 17
The business interest groups are the third channel through which businesses seek to lobby government. Medium size and small firms usually participate in politics ONLY through THIS channel. The lobbying activities of these organizations are funded by the annual membership dues paid by their member companies. Business interest groups can be divided into two main types: Peak associations and Trade associations. The peak associations represent many different companies and industries. Examples include The U.S. Chamber of Commerce The National Association of Manufacturers The National Federation of Independent Businesses, and The Business Roundtable Of these, perhaps the MOST influential is the Business Roundtable is composed of the CEOs of the 200 largest U.S. corporations. Membership is by invitation only. They personally attend the meetings of the group and act as its lobbyists to carry their message directly to Washington. What makes these PEAK ASSOCIATIONS rather than TRADE ASSOCIATIONS is that they sit at the PEAK or the TOP of a large, disparate group of businesses. TRADE ASSOCIATIONS, in contrast, draw their entire membership from the firms 18
of a SINGLE INDUSTRY. Thus, the INTERESTS of the companies who have joined trade associations tend to be more HOMOGENOUS. This is one of the most important reasons they are more INFLUENTIAL IN POLITICS than the PEAK ASSOCIATIONS. You may think that all businesses have the same interests, but they definitely don t see it that way. The same piece of legislation that would HELP an oil drilling company might HURT fisherman in the fishing industry, and so on. The peak associations have a lot of trouble getting ALL their members really excited about the same issues. TRADE ASSOCIATIONS don t have that problem. There are only a handful of important business peak associations, but the number of industry trade associations is staggering. There are more than 6,000! They attempt to remain below the public s radar and influence politics through direct contact with legislators and their staffs. The peak associations, by contrast, tend to make their positions on political issues publicly known, doing most of their lobbying through the news media and in full view of the public. 18
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The Tillman Act was the first major piece of U.S. legislation designed to curb the influence of corporations on politics in America. It was passed in 1907. It is a federal statute that means a federal law passed by Congress. The presidential election of 1900 was between William McKinley and William Jennings Bryan. Mark Hanna, a close friend of McKinley's, Chairman of the Republican National Committee, and chief fund raiser for McKinley s reelection campaign, had devised a system of quotas for contributions from large corporations. Most of McKinley's six to seven million dollars in campaign funds came because Hanna levied regular assessments on the major corporations. He called them and pressured them to give. When the public learned about this, they were ready for a change. President Theodore Roosevelt campaigned for President in 1904 on a platform of change in which he promised to break the link between corporate contributions and politics. Roosevelt lobbied hard for the passage of the Tillman Act, and he got it. The Tillman Act is still the law today. Because of it, a U.S. corporation cannot give one penny directly to the re-election campaigns of any federal official. Most states have enacted similar laws covering state elections. After 1907 the spirit of the Tillman Act was quickly and continuously violated. Forbidden from giving directly, companies found clever, indirect ways to put their dollars to work in campaigns. They lent money to candidates and later forgave the loans. They paid lavish sums for postage-stamp-sized ads in political party booklets. They assigned employees to work fulltime on political campaigns at no charge to the candidates, and they provided free services to candidates for office 20
such as rental cars and air travel. Since the Tillman Act did not limit individual contributions, wealthy donors stepped in. These fat cats, who included corporate executives, legally gave unlimited sums to the re-election campaigns of political candidates. The hope and the expectation I am sure was that the political official, once elected, would give special access to the executive and his high level employees whenever they sought an audience with that political official. 20
But no new laws to limit the personal campaign contributions of wealthy businessmen were passed until 1974, and it took a one-two punch of first, a campaign disclosure law, then a law actually LIMITING the campaign contributions of individuals for this to happen. Here s what happened: After Richard M. Nixon s election to the Presidency in 1968, somebody uncovered the fact that billionaire W. Clement Stone had given $2.2M to the Nixon campaign through a maze of committees. At the time, this was not illegal, but it was a staggering sum, and once again, people began saying that something needed to be done to reduce the greater influence of the rich and powerful on federal politics. By 1971, Congress HAD done something about it. They had passed the Federal Election Campaign Act of 1971. This did NOT place any caps on contributions, but it required full disclosure of all contributions both by the donor and the political candidate. When the data for the 1972 President elections began to roll in, people saw how much money the rich were giving, and how little money everybody else was giving, and continued to discuss vigorously whether further action by Congress was necessary. Then, in 1974, the Watergate investigations revealed that 21 corporations had violated the Tillman Act by making direct contributions totaling $842,000 to the Nixon campaign in 1972. People were ready for a change, so Congress passed a 21
set of major amendments to the Federal Election Campaign Act in 1974. The Amendments were a bigger deal than the original 1971 FECA Act! 21
The 1974 FECA Amendments had two main parts: limits on campaign EXPENDITURES that were defined on a per CANDIDATE, per election basis, and limits on campaign CONTRIBUTIONS that were defined on a PER DONOR per election basis. This was the biggest thing to hit the regulation of political elections since the 1907 Tillman Act. The limits on campaign expenditures were struck down as unconstitutional in a 1976 U.S. Supreme Court case called Buckley v. Valeo. Basically, the U.S. Supreme court declared in that case that campaign spending is a form of speech, and as such, is protected by the First Amendment to the U.S. Constitution. Now, speech can be regulated, but there needs to be a compelling government interest in such regulation and the people who pass the law regulating or limiting that speech have to be able to convince the Supreme Court that #1, the proposed limitation on speech is likely to significantly contribute to the achievement of the goal that the government is trying to achieve, #2 that there is no other way to achieve that goal that doesn t limit speech, and #3 that the goal itself is a valid, appropriate, and important goal for government to be pursuing. Basically, the majority in the Supreme Court said that having free and fair elections is a valid goal, but they didn t see how limiting campaign expenditures was necessary to achieve that goal, so they struck it down. But this still left the limits on CONTRIBUTIONS. Now, those limits have been amended at least twice since 1974: once in 1979 and again in 2002 by the Bipartisan Campaign Reform Act or BRCA, and they have also been indexed to inflation, but here s how they currently stand (ADVANCE SLIDE). 22
This is figure 9.5 from page 300 of your book. Let me walk you through. Corporations are prohibited from contributing to the election or re-election committees of federal political candidates from their own funds. This is actually from the Tillman Act of 1907. This has been the law since 1907 in the United States and is still the law today. Corporations can give up to $10,000 per STATE political party committee per election where permitted by state law. Corporations USED to be able to give unlimited amounts to both state AND FEDERAL political party committees, but this was changed in 2002 by the Bipartisan Campaign Reform Act. Corporations can still set up a political action committee within their company, and use this vehicle to gather contributions from EMPLOYEES, including high-ranking managerial employees, which can then be given to candidates according to the limits described at the bottom of this slide next to the Political Action Committees box. I ll come back to political action committees and independent expenditures in a little while. Corporations can also give unlimited amounts of money to private, nonprofit advocacy groups called 501c and 527 organizations. This is another way that soft money finds its way into election campaigns. I will come back to 501c s and 527s in a minute also. But first let s focus in on that $2,500 per election figure listed as the first line in the section relating to contributions from Individuals. 23
I would like to give you two perspectives on why the individual contribution limit of $2,500 per candidate per election does not work to make U.S. federal elections as democratic as we would wish them to be: why individual contribution limits don t work in THEORY, and why they don t work in PRACTICE. As we just saw, under current law, individuals can give no more than $2,500 per election to each candidate running for office in a federal election. As of 2010, it takes an estimated $1.4 million, on average, to win a seat in the U.S. House of Representatives. If you collect the maximum $2,500 from each person, you will only need 560 people to contribute to your re-election campaign to raise enough money. 560 people! That s nothing! That s only 0.2% of the constituents in a typical-sized Congressional district! 24
As of 2010, it takes an estimated $9 million to win a seat in the U.S. Senate. If you collect the maximum $2,500 from each person, you will only need 3,600 people to contribute to raise the amount of money you need. That may sound like a decent number, it it s only.06% of the population of the average state! 25
But when we add the numbers for PACs in it gets even worse, because individuals are also allowed to give to Political Action Committees. In fact, they re the only ones that CAN give to Political Action Committees. Corporations aren t allowed to give money to PACs at all, even the ones they start and run. They re allowed to pay the OPERATING expenses of their own PAC, but not to give money directly to the PAC. And the $5,000 per year limit you see here for individuals giving to PACs is PER PAC! Individuals can give up to $70,800 per election cycle to all PACs combined! You will find this figure in the explanation in parentheses three bullets down from the $5,000 per year to political action committees bullet. And the PACs can EACH give up to $5,000 to a candidate. I think you ll begin to see why the number of PACs exploded between 1986 and 2004. It s really a very effective way around the individual expenditure limit of $2,500. It enables an individual to give a lot more than $2,500 to a candidate, because all they have to do is give only to PACs that have pledged to give 100% of the donations received to a limited list of candidates. So PACs really undermine the effectiveness of the $2,500 limit per election per candidate. Notice that individuals, like corporations, can give UNLIMITED amounts of money to so-called 501c and 527 organizations. We ll come back to those after we talk about PACs. I think it s just going to be too much to go through every single bullet point on this slide. Let me skip down to the PACs now. PACs, as we will see on the next slide, are private organizations that have been set up for the purpose of influencing the outcome of elections legally through some 26
combination of campaign contributions and independent expenditures. Each PAC may give no more than $5,000 per election to an individual candidate. But if you want to give them more than $5,000, all you have to do is have someone else set up another PAC to make contributions to the same candidate. Now, federal law DOES say that if two or more PACs are under the control of the same person, they re considered affiliated and must adhere to limits as if they were one. So you DO have to have another person start that second PAC, or you ll get into trouble. 26
PACs have been used by labor unions to collect money from their members and disburse those monies to pro-labor candidates since at least the 1940s. But corporations really didn t have any PACs of their own until 1974, when the FECA Amendments placing limits on individual contributions to political candidates went into effect. Legally, a company becomes a PAC and must report both their receipts and disbursements in detail to the Federal Election Commission if they receive contributions or make expenditures in excess of $1,000 for the purpose of influencing a federal election. PACs are a complex subject, but let s just focus in on the corporate PACs, since we re mostly interested in understanding how BUSINESSES are able to influence politics. 27
To start a PAC, a corporation must set up an account for contributions. The corporation may not put ONE PENNY of their own money in that account. Corporate PACs get their funds primarily from contributions by employees, but they are not forbidden from collecting money from other individuals, and a fraction of the contributions they receive ARE from non-employees who have the same or similar political interests as the PACs OFFICERS. The OFFICERS of a corporate PAC MUST be employees of the firm. There are no dollar limits on the overall amounts that PACs may raise and spend, but as we saw from the eye chart two slides ago figure 9.5 from your book on page 300- there ARE limits on the amounts an individual PAC can give to an individual CANDIDATE, an individual NATIONAL PARTY COMMITTEE, and so on. 28
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Let s summarize by looking at how business dollars enter U.S. federal elections. Political Action Committees: Corporate PACs can raise unlimited amounts of hard money that can be contributed to candidates, other political committees, and political parties in amounts specified in Figure 9.5. Some corporate PACs contribute millions of dollars to candidates. They are limited to $5,000 per candidate, but by giving to hundreds of candidates they can give millions of dollars in total per election. Individuals can only give $5,000 per year to each PAC, but by contributing to many ideologically similar PACs up to their limit of $70,800 for all PACs combined, individuals can funnel far more then $2,500 in a given election cycle to the candidates they like. Individual contributions: Individual contributions flow into elections in at least 3 ways. First wealthy corporate executives can contribute hard money directly to individual candidates up to the individual contribution limits shown in Figure 9.5. They are limited to $2,500 per candidate and $46,200 per election cycle to all candidates combined. But it only takes 560 individuals giving the maximum of $2,500 to raise $1.4 million, which is the average amount spent by the winning candidates in the 2010 congressional elections. Second, individuals can funnel additional money to their favorite candidates by making hard money contributions to PACs; and third individuals can contribute unlimited amounts to so-called 501(c) 30
organizations, 527 organizations, and SuperPACs, who use the money on independent expenditures: direct buys of ads and TV time in support of their favorite candidates. Corporate Soft Money: Like individuals, corporations can make unlimited soft-money contributions to 501(c) organizations, 527 organizations, and SuperPACs, who use the money to produce and buy air time for political ads in support of their favorite candidates. Executive bundlers: Bundling occurs when an individual or corporation solicits contributions for a candidate, then bundles them together and passes them on. Each contribution collected must fall within the legal limits outlined in Figure 9.5, but the total size of the bundle can be of any size. If you want to collect and pass on a really big bundle to a candidate, you just have to get hundreds of individuals to each give their maximum $2,500 or something close to it. Bundles of $100,000 or more are now common. There is no limit to how many bundles an individual person or corporation can collect and pass on. Independent expenditures: The Citizens United decision invalidated the long-standing prohibition against corporations paying for ads that expressly advocate the election or defeat of a specific candidate. The Citizens United decision was reached in 2010. The only election we ve had since then is the congressional election of 2010. During that election, independent expenditures by corporations on political ads was not a significant factor. However, the Citizens United decision opens the way for it to BECOME an important factor in the future. So far in the 2012 election, it would appear that most corporations are giving to the new SUPERPACS made legal by a different U.S. Supreme Court decision called SpeechNow.org versus Federal Election Commission, which was decided in July 2010. 30
The history of the efforts to suppress the influence of corporate money in politics in America is reminiscent of water flowing downhill in a stream. It wants to get to its destination. If you dam it up in one place, it finds a way to flow around and get to its destination by another route. After the Tillman Act was enacted in 1907, rich executives stepped in to give money as individual contributions and asked for favors for their corporations in exchange rather than for personal favors. After the 1974 Federal Election Campaign Act amendments were passed, there was an explosion in the number of Political Action Committees sponsored by corporations, and the number of 501(c) and 527 organizations formed to collect soft money contributions to make and run political ads independently from the candidates own campaigns. After the Bipartisan Campaign Reform Act of 2002 was passed banning the use of corporate soft money by 501(c) and 527 organizations to make and run political ads within 60 days of a general election, bundling increased. Then one of the 527 groups who didn t like this provision of the Bipartisan Campaign Reform Act challenged it in court and won. That group was Citizens United, and the Supreme Court decision that struck down that limitation on how soft money collected from corporations could be used was called Citizens United versus Federal Election Commission. You can read all about it on pages 304 to 315 of your textbook. 31