Chip Taylor

Money in politics

In his latest Economic Scene column in the New York Times, Hal Varian discusses a study of the effect of poltics on profits:

Every presidential election year, analysts publish lists of stocks they think will increase in value if one party or the other wins.

As the fortunes of the candidates ebb and flow, the stocks of such politically sensitive companies should respond in a predictable way: industries that are expected to do well if President Bush wins should increase in value when his likelihood of winning goes up, and industries that would probably prosper under John Kerry should increase when sentiment swings in his favor.

This platform capitalization theory was recently examined by the Brown University economist Brian G. Knight in a National Bureau of Economic Research working paper, "Are Policy Platforms Capitalized Into Equity Prices?"

Knight's research found just such an effect.

The platform capitalization theory presumed that the day-to-day changes in Mr. Bush's and Mr. Gore's chance of winning would be reflected in the stock market value of the companies expected to prosper under the two administrations.

Indeed, that was exactly what Mr. Knight found. According to his estimates, Gore-favored companies were worth 6 percent less in a Bush administration, while Bush-favored companies were worth 3 percent more, adding up to a 9 percent difference. According to Mr. Knight, "Bush's victory over Gore transferred over $100 billion in market capitalization from the 29 Gore-favored firms to the 41 Bush-favored firms."

So, Varian points out, we shouldn't be surprised that companies want to contribute to campaigns -- there's a lot a stake.

Perhaps it is unpleasant to some to be reminded of how important a role money plays in politics. Yet how could it be otherwise? With billions of dollars in the balance, people will try to find ways to protect or enhance their assets. Over all, being able to hedge political risk on the stock market has to be a good thing. From a shareholder's viewpoint, political risk is like any other risk that might affect portfolio values, and being able to lay off some of that risk in the market is advantageous.

Corporate spending to influence platforms or outcomes is another matter. That it will happen is inevitable; the challenge is to keep it under control. In politics, money may talk, but it shouldn't shout.

I'm not sure why spending to influence platforms or outcomes is "another matter" apart from spending to influence elections.

At any rate, I think that what passes for campaign finance "reform" -- with its focus on restriction of speech and spending by certain parties, rather than disclosure of who is spending and how much -- is creating a system where more money whispers in private, so that we can't be sure who is even talking.