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How Campaign Contributions and Lobbying Can Lead to Inefficient Economic Policy

How Campaign Contributions and Lobbying Can Lead to Inefficient Economic Policy

The practice of rent-seeking—leveraging campaign contributions and lobbying to influence government policy for private gain—has several negative effects on the U.S. economy.

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The U.S. Supreme Court struck down two campaign finance provisions in the past few years that limited independent political expenditures by corporations and other organizations and placed aggregate limits on individual donations. The Court found that the provisions infringe on the right of free speech and that the aggregate limits do not prevent a narrowly defined version of corruption. Since then, federal courts have begun overturning state lobbying regulations under the logic used by the Supreme Court. While there is considerable disagreement about whether the Court was correct in finding that those campaign finance rules failed to prevent corruption, imposing limits on campaign financing and lobbying may be justified for another reason—promoting productive economic activity.

The primary way that campaign contributions and lobbying may dampen economic growth is via a practice known as rent-seeking—the process of seeking income through special government favors rather than through productive economic activity. When firms and individuals engage in rent-seeking behavior, it has several negative effects on economic growth. Not only do people spend more time and money trying to get a bigger piece of the economic pie for themselves rather than trying to enlarge the pie, but the policies they seek are often wasteful, inefficient, or even harmful. If rent-seeking is a successful strategy for businesses or individuals, it can impose great harm on society by slowing or even stopping economic growth. As Nobel Prize-winning economist Joseph Stiglitz explains, rent-seeking not only wastes tax dollars on unnecessary or inefficient projects—redistributing money from one part of society to the rent-seekers—but it is a “centripetal force” that hollows out the economy because “the rewards of rent seeking become so outsize that more and more energy is directed toward it, at the expense of everything else.”

While it is impossible to quantify the economic harm done by rent-seeking to the American economy, this issue brief reviews the literature and finds that the harm is likely quite significant.

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John Craig

Research Assistant

David Madland

Senior Fellow; Senior Adviser, American Worker Project