What Economic Sleuths Can Tell Us About Our Corrupt Politics

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Michael Berman uses a magnifying glass to find dividend yielding stocks as he looks over one of his investment journals in his home in Cranberry, Pa. Friday, Oct. 24, 2008. (AP Photo/Keith Srakocic)

“Forensic economists,” the sleuths of the “dismal profession,” have devised ingenious ways of analyzing big chunks of data to ferret out corruption — both the kinds of corruption that land people in jail and the kinds that help land others in Congress.

“Over the last decade or so, economists have become a lot more creative in figuring out where corruption is taking place, or firms are cheating,” explains Edward Miguel, a scholar at UC Berkeley. “There’s a lot more data publicly available than there used to be, and the basic idea is to try to assemble as much data as you can, and then look for patterns that are inconsistent with each other, but are consistent with someone cheating.”

A good example: Raymond Fisman of Columbia Business School (who co-authored Economic Gangsters: Corruption, Violence, and the Poverty of Nations with Miguel), wanted to quantify how much stuff was being smuggled from Hong Kong to mainland China. He figured out that because there are import duties on goods coming into China but no taxes on exports from Hong Kong, people had little incentive not to report what they were shipping out. When he looked at the difference between the export data from Hong Kong and the import data from China, he determined that the higher the import tariff on a given good, the more of it seemed to have “vanished” in transit.

University of Chicago economist Steven Levitt, author of Freakonomics, and Columbia University sociologist Sudhir Venkatesh, combined surveys of street-level prostitutes in Chicago with police reports to determine that “a prostitute is more likely to have sex with a police officer than to get officially arrested by one.” According to the authors, three percent of Chicago street prostitutes’ sex acts are “freebies” offered to cops in order to avoid arrest.

When it comes to legal corruption – the influence of big money in politics – a popular approach is to study stock prices. Researchers look at how a lawmaker’s changing fortunes affect the share prices of companies or industry groups to which he or she is linked. “What people have documented is that there is value to making campaign contributions, there is value to lobbying,” Mara Faccio, a professor of finance at Purdue University, tells Moyers & Company. “So, whenever a political tie vanishes, the value of a company is affected quite drastically.”

Faccio’s research uses a narrow definition of politically connected firms, only including those with at least one current officeholder on their boards of directors. Congressional rules make that situation a rarity (our legislators tend to get those cushy board positions after they leave office). But other researchers have looked at how companies connected to legislators through lobbying or campaign contributions fared when those lawmakers’ situations changed.

In one of the first of these studies, Brian Roberts looked at how the markets reacted to the sudden death of Senator Henry “Scoop” Jackson in 1983 ($$). Jackson, the senior senator from Washington, had been a huge presence in the upper chamber, having served for three decades at the time of his death.  A notoriously hawkish Democrat, Jackson chaired the Armed Services Committee. When he died, Sam Nunn (D-GA), took his gavel. Roberts found that the share prices of companies with ties to Jackson tanked at the news, while firms that had close relationships with Nunn saw significant gains.

Edward Miguel says that these findings have been replicated again and again. He described a study of the market before and after Vermont Senator Jim Jeffords left the Republican Party in 2001, handing control of the Senate to the Dems. “In the days after Jim Jeffords’ announcement,” says Miguel, “firms that had given heavily to Republicans in the previous election cycle lost value on the New York Stock Exchange,” while share prices for companies that had given to Democrats spiked.

A similar study conducted by three researchers at the University of North Carolina found that the stock value of companies with former Republican lawmakers on their boards increased by an average of three percent when the Supreme Court handed the 2000 election to George W. Bush, while companies with former Democratic politicians on their boards dropped by the same amount.

Mara Faccio found that the value of a political connection isn’t the same in every country.  In those with high levels of corruption, cozying up to a politician gives a company significantly more benefit than it does in countries with strict rules governing conflicts of interest.  In the U.K., for example, when Rolls-Royce Chairman John Moore was appointed to the House of Lords, it didn’t budge the company’s stock price. But in Italy it’s a very different story. 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 matter of hours.

“Unfortunately,” says Miguel, “the United States is more like Italy. We’re sort of kidding ourselves if we think that because we’re the U.S., we’re immune to these problems. We just haven’t paid enough attention to these issues, and business is very powerful in this country.”

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  • Alpha Wolf

    Or Congressional stock trading….

    “Members of the House of Representatives considerably outperform the stock market in their personal investments, according to a new academic study.

    Four university researchers examined 16,000 common stock transactions made by approximately 300 House representatives from 1985 to 2001, and found what they call “significant positive abnormal returns,” with portfolios based on congressional trades beating the market by about 6 percent annually….

    A study of senators by the same team of researchers five years ago found members of the higher chamber even better at beating the market — outperforming it by about 10 percent, an amount the academics said was “both economically large and statistically significant.”….

    The [House] study found some significant difference based on party membership and seniority, with the Democratic sample beating the market by nearly 9% annually, versus only about 2% annually for the Republican sample.”

    Isn’t that special?


  • Russ Farnsworth

    To stop the corruption, the citizens of this country need to stop fighting each other over the left/right issues that make very little real difference in the grand scheme of things and are nearly impossible to settle. If we instead work together to address the corruption and secrecy, nearly all of us would agree on common sense solutions to fix those problems.

    Below is the link to a forum intended to facilitate that cooperation:

  • Anonymous

    I wish, you wish but nothing will change… We are doomed.

  • Anonymous

    Mr. Moyers;

    Repeatedly I’ve asked you and your ilk (Taibbi, Reich & Maher among others) – to assist us in a troubling matter. All to no avail.

    In part, I presume, it is because there’s a rule written on the mountain somewhere, stating victims such as we should simply surrender to the powers that be. As it is an adage from long ago “To those who can take all that you have, ask how much it is that they desire; and be thankful for what remains”.

    Also (apparently) it is a Rule that a victim should have a doctorate in English, writing sophistication greater than Vonnegut; and a JD. For woe is any victim who hath not such things. The realm of apathy, laxity and deaf ears that shall fall upon you will be manifest.

    Be that as it may, these unwritten rules of oppression upon the slaughtered; I’m simply dumbfounded how obtuse all the banter that be, babbles as it does, speaking of the general state of affairs that all of U.S. (in our own inane way) are fully aware exists.

    Power, money and might make right – and all logic to the contrary is plainly wrong!

    Being that you, Mr. Moyers, and those like you, shun the case specific (at least until it is over and done) and – instead – speak only to the general, we the American working class people, are slaughtered on a continuous basis – unnecessarily.

    For 12 years now (as the the PoliticusUSA.com story denotes http://www.politicususa.com/2012/11/23/meet-man-battling-romney-bains-bankruptcy-fraud-12-years.html ) – we’ve been battling the powers that people.

    Again – all to NO avail – because we are insignificants.

    If you and yours tell the stories appropriate and ask the proper questions – Change Will Come! However, if you continue to sit in your comfort and throw kid glove punches in a pandering manner as you do. One day you too Mr. Moyers, along with your ilk of writers restricted

    will find yourselves to NO avail!

    For, in essence, you and I are already there.


    N’est-ce pas!

  • DavidW

    What you’ve so eloquently described sounds like economic totalitarianism! We have to fight that economically, not politically, to regain the balance to our political democracy. No wonder the public school system is in shambles, it’s a direct effect of limiting the educational capabilities of the people to be able to understand what’s happening and react.

    We need to start thinking about more cooperative enterprise and become our own job creators, co-opting the right’s terminology and build our small locally owned businesses to take market share away from the “royalty.”

    Credit Unions, Food Co-ops, Worker Co-ops and those large Mutual Insurance companies can be the germ on which we can pollinate a new economy. One that can take market share away and get the attention from these Corporate Fascist with a word they understand, competition.

    We can use capital and build out new lines of business, say a news reporting property that is owned by 10,000 people in a town. $200 in equity from each of these 10,000 can be enough to start a paper with real reporters and revenue from ads and subscription can keep it going and reporting the news we need to become better informed citizens and consumer. Imagine that. Their profit would be the continuation of the service and any excess can be returned as discounts on subscriptions or actual cash dividends in a good year.

    More diverse lines of business and the cooperative sector can take market share and reduce the economic power of these corporate overlords. It’s maybe the one option that they aren’t prepared to respond to, yet.