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Privatization and the Law and Economics of Political Advocacy:

As I noted in a recent post, I'm delighted to be publishing my article, Privatization and the Law and Economics of Political Advocacy, with the Stanford Law Review. (Those of you who want to read something more technical can check out my economics paper on the subject, Privatization, Free-Riding, and Industry-Expanding Lobbying.) This will be the first of a series of blog posts summarizing the paper. Comments are welcome, as the paper won't be published until next year.

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Over 90 years ago, opponents of World War I alleged that "munitions manufacturers frighten the popular mind with the fear of imaginary external enemies and inflame it with murderous patriotism." According to Stefan Zweig, the war began only when "newspapers in the pay of the arms manufacturers began to whip up sentiment against Serbia." After the war, that accusation morphed into the charge that arms makers were self-interestedly obstructing peace efforts. Today, an opponent of U.S. military policy characterizes defense contractor CACI International Inc, whose chairman speaks publicly of the "heinous[ness]," "fanatical horror," and "barbarism" of terrorism, as "one of the most unabashed corporate backers of Bush's foreign policy and a key supporter of the military campaigns in Iraq and Afghanistan." Critics also charge that private military interests affect what weapons systems we rely on and what alliances we enter into, and that, in some countries, those interests may even take over the government.

This theme—that private contractors use their influence to advocate not just privatization but also, insidiously, changes in substantive policy—sweeps more broadly than just defense contractors. The following list gives a sense of the generality of the accusation; the last few items illustrate that the critique comes from "the right" as well as from "the left."

In this Article, I examine this "political influence" challenge to privatization using the case study of private prisons. I conclude that, in the prison context, there is at present no reason to credit the argument. At worst, the political influence argument is exactly backwards, by which I mean that privatization will in fact decrease prison providers' pro-incarceration influence; at best, the argument is dubious, by which I mean that whether it is true or false depends on facts that proponents of the argument have not developed.

Colin (mail):
the argument is dubious, by which I mean that whether it is true or false depends on facts that proponents of the argument have not developed.

Do you mean the facts are undeveloped in this specific instance, or in claims of undue political influence of privatized industries generally? If the former, are there any instances in which you have been persuaded that privatized industries do have undue political influence, or believe that it is likely?
4.3.2007 12:28pm
Sasha Volokh (mail) (www):
As it happens, my one case study that I know something about is prisons. My paper suggests how you might do it for other industries -- identify the players, try to figure out what their goals are, etc. -- but that requires in-depth knowledge of these other areas. So I mean the naked form of the argument doesn't provide the factual basis; in the case of prisons, the factual basis is absent; but it's entirely possible that the argument is true, and that folks who make the argument support it properly, in other cases.
4.3.2007 12:30pm
Spitzer:
Sasha, for historical background, you may find it interesting that the Tories used to accuse the Whigs of fomenting foreign adventures (esp. land wars on the continent) to advance the commercial interests of the Whigs' core constituency (financiers and bankers) in the late 17th-18th centuries. The Tories, not widely popular in the financial sector, traditionally preferred the so-called "blue water" strategy of defending the archipelago with the Royal Navy and allowing the continent to go to hell on its own.
4.3.2007 12:38pm
Zathras (mail):
This is a very interesting article. However, it seems that the first concrete situation talked about (munition makers in WWI) might make people overgeneralize about the results. Rather than being an argument against privatization, some people might see give a superficial look at the paper and think that the paper shows that government contractors do not have influence over substantive decisions, which is not what the paper argues.
4.3.2007 12:47pm
mrshl (www):
It seems like there would be weak forms and strong forms of the argument you critique. For example, a weak form in the defense contracting industry might suggest industry has to some extent captured the DOD and their interests are closely aligned when it comes to seeking increases in military spending. A strong form might suggest that defense contractors actively lobby in favor of new fronts and conflicts.

The second might be dubious. The first seems kind of obvious.
4.3.2007 12:51pm
Richard Aubrey (mail):
A government office, department, or individual paid to deal with a social problem is hosed if the problem goes away. The individual gets promoted if the problem gets worse and new hires are needed.
I don't see the difference between private and government self-interest in making too much of an issue.
4.3.2007 12:58pm
Cityduck (mail):

At worst, the political influence argument is exactly backwards, by which I mean that privatization will in fact decrease prison providers' pro-incarceration influence


I eagerly await your exposition on this point. Just reading that sentence causes me to have a host of questions, foremost among them whether private prison providers are paid by the inmate or a flat rate per prison. If it is the former case, then they would have an incentive to lobby for incarceration measures like three strikes and would want to promote prison overcrowding as that would increase their net profit. If it the later case, then shouldn't you be focusing on prison building to test their political influence instead of pro-incarceration policies?

For that matter, wouldn't the private prison lobby be more interested in devoting their efforts to lobbying for prison construction, thus increasing their revenue sources, than to lobbying for incarceration? After all, a major argument for prison construction is that there is not enough space to incarcerate the people we want to incarcerate now. If the demand for incarceration is not met by the available prison space, then the proper strategy for private prison contractors is to focus on demanding more prison space not more incarceration. Of course, the effect of more prison space will be more incarceration as pressures to parole decrease.

I am not at all sure your how privatization could decrease pro-incarceration political influence under any theory of political influence. If prisons are publicly run, then the people interested in building new prisons will be the prison contractors and tough on crime lobbies, etc. Opposing them will be proponents of rehabilitation and NIMBY forces, etc. But if prisons are privately run, new actors join the forces lobbying for prisons: The private prison companies. Obviously, the more parties there are who want prisons, the more lobbiests and money they will throw around, and the more political influence they will have. At least that's my common sense take. Money is speech after all. The more money you have in play, the more influence.

I will look forward to seeing if you base your article on an empiracle analysis or on an abstract theoretical approach. Personally, I'd be interested in a case study on the funders of California's pro-incarceration ballot measures over the years. I'd also be interested in an analysis of the amount of contributions by the private prison lobby to legislators and correllations to their votes on prison building. My guess would be that the growth of private prison contracting as an industry and the general surge in prison building tend to support the conclusion that private companies are successfully getting legislators to build more prisons.
4.3.2007 1:08pm
Adeez (mail):
Do private prisons lobby in support of the war on drugs? If I were a gambling man, I'd bet my life. But I'm not, and don't have the facts, so I'd appreciate it if anyone knows for sure.
4.3.2007 1:44pm
Sigivald (mail):
Adeez: Why would they?

By which I mean that the War on Drugs is sufficiently robust that even if they actively wanted it to continue, which is not in evidence, they wouldn't need to lobby in support of it; the mere fear of being painted "soft on drugs" - especially during "The Meth Crisis!" - is sufficient to keep politicians solidly in favor of the War on Drugs as such.
4.3.2007 2:03pm
Ken Arromdee:
Obviously, the more parties there are who want prisons, the more lobbiests and money they will throw around, and the more political influence they will have. At least that's my common sense take.

Common sense so seldom is either.

A lobbyist or other interested party won't throw around an infinite amount of money. They'll only throw in money if they expect the benefits to themselves to exceed the money they're spending.

If you privatize the prisons, you've increased the number of people who benefit from prisons, but they each have a smaller piece of the pie. Since they have a smaller piece of the pie, each dollar spent by them produces fewer benefits to themselves (rather, some of the benefits accrue to others), so they'll stop spending money earlier. It turns out less money will be spent than in the situation where there is just one state owner.
4.3.2007 3:46pm
Rich Rostrom (mail):
How is the alleged practice different from colleges and universities lobbying and propagandizing for more state and Federal aid to students? Do not colleges and universities advocate government policies which encourage college attendance?

One could also mention the role of labor unions in opposing free trade.

There is also the gigantic effort of the NEA to defeat any and all school choice measures.

Spanish-language media companies have opposed measures to end "bilingual" education and just teach kids English.

A few years back, Enron lobbied for U.S. adherence to the Kyoto Accord, because the cap-and-trade mechanism proposed for enforcement would create a market-making opportunity for them.
4.3.2007 4:14pm
Cityduck (mail):

A lobbyist or other interested party won't throw around an infinite amount of money. They'll only throw in money if they expect the benefits to themselves to exceed the money they're spending.


Yep. But different groups of people lobby for the same outcome for different reasons. And the benefits sought by those groups differ. Some groups will lobby for what they perceive as a compelling non-economic benefit (controlling crime), some for a direct contractual benefit (the construction contracts and operations contracts), and some for a chance at an economic benefit (job opportunities). They each have different, independent, calculations of the cost/benefit equation. And some of those lobbyiests are not constrained in their spending by an economic calculus, but by a political one (advocacy groups can spend as much as they can raise on the lobbying and will do so if they think the cause is worth it).


If you privatize the prisons, you've increased the number of people who benefit from prisons, but they each have a smaller piece of the pie.


This is wholly false. All privatizing a prison does is shift a public function (run by an agency which doesn't make campaign contributions or seek to make money) to the private sector (thereby creating a new pie for private exploitation). This means that a new category of potential lobbyiests is introduced into the equation - those representing the private corporations who want the brand new revenue producing pie of the private prisons. The pie isn't shrunk, it is expanded (or more accurately, a new pie is created).


Since they have a smaller piece of the pie, each dollar spent by them produces fewer benefits to themselves (rather, some of the benefits accrue to others), so they'll stop spending money earlier.


Again this is false. First, the pie isn't smaller. Second, you are analyzing the term "benefit" only in terms of a profit/loss calculation not in terms of issue advocacy and speech. Anti-crime issue advocacy groups exist to lobby, that is what they raise money for, their contributions are limited by their ability to raise money, not by a profit/loss calculation. Issue groups don't fall into your economic analysis. You need to do a political analysis.


It turns out less money will be spent than in the situation where there is just one state owner.


That is empiracle research I'd like to see. Still, I'd like to know what these companies real incentive is: To lobby for prison building or to lobby for more incarceration. Given the prison crowding problem, I tend to think that lobbying for incarceration has probably slackened for reasons that have nothing to do with your economic analysis.
4.3.2007 4:46pm
Sasha Volokh (mail) (www):
Cityduck: "empirical"
4.3.2007 5:34pm
Cityduck (mail):
The principal is my pal.

If you're going to correct my spelling, at least provide me with a spell checker! Or a clerk! As an anonymous blogger my motto is: Type fast, shoot from the hip and run from the grammar police.

I'm much more interested in seeing you correct my lousy grasp of economics. I'm open to being educated.
4.3.2007 6:03pm
Sasha Volokh (mail) (www):
Cityduck: Just to anticipate, my view is similar to Ken Arromdee's which you disagreed with above. But my story will be trickling out over the next few days; or, if you're impatient, you can read the paper from the link I gave. (That paper is in plain English, but I've also linked a technical paper above, if you prefer.)
4.3.2007 6:16pm
Joshua:
If I were a gambling man, I'd bet my life.

Speaking of gambling, another example that might have made Sasha's list would be any manner of legalized gambling outlets, who frequently tag-team with gambling opponents to lobby against allowing any would-be competition, such as from, say, online casinos and poker rooms.
4.3.2007 8:07pm
Joshua:
I should have clarified: "...any manner of legalized gambling outlets, most of which are either directly state-run or otherwise in some sort of partnership with a state government..."
4.3.2007 8:10pm
Riskable (mail) (www):
I'm confused: Is the argument that private industries don't lobby the government to benefit their own special interests or that such lobbying is ineffective?

I think Heinlein's stance on matters such as these is rather conservative and truthful...

"It is a truism that almost any sect, cult, or religion will legislate its creed into law if it acquires the political power to do so, and will follow it by suppressing opposition, subverting all education to seize early the minds of the young, and by killing, locking up, or driving underground all heretics."

If I were to translate this quote to be more digestible in the setting of the current political climate in the U.S. it would be:

It is a truism that almost any business or industry cartel will legislate more profit into law if it acquires the lobbying power to do so, and will follow it by attempting to keep influence over the politicians that passed it, attacking those against it, and attempting to improve upon the previous legislation with even more profitable laws.

-Riskable
http://riskable.com
"In the heart of great injustice lies a popular belief and a sacred text backing it up."
4.4.2007 2:11pm
Ken Arromdee:
The desire of the business or industry cartel to legislate more income for themselves is more than balanced by the lesser desire of the government agency that used to perform the same work to do so.
4.4.2007 2:25pm
Riskable (mail) (www):
Ken Arromdee wrote, "The desire of the business or industry cartel to legislate more income for themselves is more than balanced by the lesser desire of the government agency that used to perform the same work to do so."

Assuming, of course, that the lesser desires of deprecated government agencies are as influential as lobbyists and campaign contributions. I think it is safe to assume this is not the case.

Also, legislating more profit for a special interest does not necessarily indicate the displacement of government services. Heck, it doesn't even have to be a bad thing. It is only a bad thing when its societal impact is negative. Or rather; when the change in law benefits a special interest at the expense of the people.

We kicked out the British and formed this country because King George III (a special interest) was taxing Americans (legislating more profit) to fund an unpopular war which did not benefit Americans in any way (negative impact). Current politicians would do well to remember this.

-Riskable
http://riskable.com
"One is not burned by belief. One is burned by believers."
4.4.2007 3:59pm
Rich Rostrom (mail):
Riskable: Actually, Britain wanted to tax the colonies for a popular and successful war that had aleady been won and was very much to the colonies' benefit. By taking Canada from France, Britain greatly reduced threat of Indian attacks against frontier settlers. What offended the colonists was that the taxes were imposed without their consent.
4.6.2007 1:58am