Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't (8 page)

The potential loss of profits stemming from the loss of a good reputation helps keep businesses honest. This holds true so long as a business is concerned with its future profits. But if a reputable firm has some low-quality merchandise and is going out of business, it may decide to try to sell off these products for the same price as its high-quality versions; the firm is no longer worried that it will lose its reputation or its ability to charge the high-quality premium because it has no future anyway.
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This is where the incentives for firms to act honestly differ from those of politicians. Analysts usually assume that politicians have a similar motivation for honest behavior as companies do; politicians won’t get re-elected if they break their promises, just like companies will lose sales if they cheat their customers. But there is a key difference between the incentives for firms and for people: firms can, at least theoretically, last forever, while people can’t. Firms—unless they are about to shut down—will always face the potential loss of sales stemming from dishonest
behavior. But politicians don’t always have the incentive of re-election because eventually they will leave office one way or another.

This is called the “Last Period Problem,” and it indicates a weakness in the conventional wisdom that politicians are kept honest only due to their desire for re-election. If a politician only keeps his promises in order to get re-elected, why would he keep them after he decides to retire? Suppose a politician announces during a campaign that his next term will be his last. Why would voters elect him to a final term in which he will no longer have the threat of re-election to keep him honest? The answer is: they wouldn’t. And if he has no prospect for re-election to his last term, why would the politician keep his promises in his second-to-the-last term? The Last Period Problem thus unravels the supposition that a politician only governs with an eye to re-election.
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It may seem that three circumstances could resolve this predicament. Firstly, perhaps a politician could avoid the Last Period Problem by refusing to announce publicly that a forthcoming term will be his last (although this would not apply to the presidency, many governorships, and other public offices that are term-limited, or to House and Senate candidates who adopt voluntary term limit pledges). Secondly, a politician may hope to maintain his reputation throughout his last term in hopes of winning election to some other government position after his retirement, or securing employment as a lobbyist for some group that he “took care of” while in office. Finally, a politician may want to keep his reputation intact in order to pass it on to his children and assist their political careers.

To test these possibilities, I conducted a study of congressmen who retired in 1978. Nearly 40 percent of this group neither went into government service after retirement, nor went to work as a lobbyist, nor had children who went into politics, government, or lobbying.
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Surprisingly, the retiring congressmen who did not have these incentives kept their election promises just as frequently as the retiring congressmen
who had one or more of them.
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Clearly, there is some other incentive at work that’s keeping politicians honest.

The prospect of passing on a political reputation to others deserves a brief digression here. Might a politician stay honest in his last term in order to transfer his good reputation to other politicians? Popular former presidents, governors, senators, and congressmen frequently pop up at campaign rallies and political conventions to endorse current candidates. But a closer look reveals that politicians are not able to transfer their reputations wholesale to others. When Rudolph Giuliani endorsed Michael Bloomberg as his successor for New York City mayor, it was surely helpful, but it wasn’t the same thing as having Giuliani run for another term. The same rule applies to Ronald Reagan’s recommendation of George H. W. Bush and Bill Clinton’s endorsement of Al Gore. People can’t simply transfer their own reputation to others whenever it’s convenient to do so.

This reflects another difference between businesses and politicians; firms can sell their reputations, but individuals can’t. If some company buys out Campbell Soup, consumers won’t feel the need to get to know the new Campbell owners before they decide whether to continue buying the soup. Customers will still pay for the product as long as the price and recipe remain unchanged and it continues to carry the Campbell name. It’s the reputation a firm cultivates for its product—not a firm’s personnel—that guarantees a product’s quality. Retiring politicians cannot pass on their reputations in the same way.

There is, however, one instance in which politicians can bestow their reputation on someone else—they can pass it on to their own family members, especially their children and grandchildren. A successful politician’s children begin their own political careers with an advantage; until they develop their own political record, they are generally associated with their parent’s political reputation. Politicians ranging from former vice president Al Gore to President George W. Bush have
used their forebears’ political reputation as a launching point for their own political careers.

Because a politician’s reputation can’t be transferred outside his family, a politician’s child who doesn’t go into politics simply loses the benefits of this reputation. It’s not like inheriting a family business, where a son or daughter could sell it off and use the proceeds toward some other line of business. Since going into politics is the only way a politician’s child can exploit his parent’s political reputation, it should come as no surprise that politicians’ children follow their parent’s careers at higher rates than most other professions: about 30 percent of politician’s children follow their parent’s profession, second only to the children of farmers.
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By contrast, about 15 percent of sons of fathers from all self-employed licensed occupations follow that path themselves.
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We have already seen, however, that the prospect of passing on a good political reputation to one’s children does not make a retiring politician more honest than others. Neither does the threat of re-election nor the hopes of securing a good job after retirement from politics. So what does keep politicians honest?

To answer this question, let’s first analyze some professions that enjoy near-total job security. For example, with lifetime appointments, Supreme Court justices are removed from any equivalent of re-election pressures. If we look at the current justices with over ten years’ experience on the court, nearly all of them rule in an ideologically consistent fashion—Justices Breyer, Stevens, Souter, and Ginsberg are reliable liberal votes, while conservatives extol the dependability of Scalia and Thomas. Only Kennedy is considered a swing justice.

Most people would have little difficulty explaining why the individual justices consistently vote either liberal or conservative—it’s because they really believe in their political philosophy. When a president nominates justices, he looks for a judge who will provide a reliable vote for his political orientation. He analyzes potential nominees’ career voting records and looks for other signs of an intrinsic commitment to shared
ideals. Judges may be able to hide or misrepresent their true philosophy in hopes of getting a Supreme Court nomination, but it is difficult to do this over a long period of time. Supreme Court nominees will usually have years of consistent rulings that testify to their reliability. If a president nominates someone without a clear record, he risks getting burned. This was the case with George H. W. Bush’s 1990 nomination of David Souter, a judge with little experience on the Appeals Court who, after his appointment, became one of the Supreme Court’s most liberal justices.
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The tenure process among university professors works in a similar way. Once a professor gets tenure, he has near-absolute job security. So why would a professor continue to work hard once he gets tenure? The answer is that tenured professors usually have an intrinsic interest in teaching and research. A candidate for tenure who doesn’t really enjoy working may try to work just hard enough to get tenure in hopes of having a minimal workload thereafter. But the period leading up to the tenure decision, which typically lasts around five to seven years, acts as a probationary period in which professors can pick up on subtle signs that a candidate may not genuinely value his teaching and research. Does a candidate spend his summers doing research or vacationing? Does he like to talk about his academic interests or about television? Ultimately, over time, candidates who value work will distinguish themselves from those who do not, and it is these professors who tend to get tenure.
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This same process helps to explain why professors are overwhelmingly liberal. Because tenure is for life, professors are reluctant to offer it to conservative candidates whose politics may then annoy them for decades. The probationary period leading up to the tenure decision gives professors a chance to observe not only a candidate’s work habits, but also his political inclinations. Perhaps a candidate can hide his true politics for a time, but can he do this for five to seven years? Candidates who show conservative leanings in their research, social discussions, or
lifestyle choices can thereby be weeded out. The end result: studies show that 96 percent of registered voters among liberal arts professors in top-rated schools such as Harvard and Cornell are Democratic or Green Party members,
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while 86 percent are Democrats at large state schools like the University of Texas and Penn State.
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Thus the tenure process tends to result in the promotion of professors who are
both
liberal
and
hard-working.

The point here is that it might be easy to fake dedication to a certain political philosophy or to a good work ethic, but people who genuinely believe in these things, especially over a long time, will appear more convincing. Evaluators can typically distinguish between the two groups, and they will usually pick the latter to become Supreme Court justices or tenured professors. Justices offer consistent rulings after receiving lifetime appointments for the same reason that professors remain hard-working and liberal even after getting tenure—because both groups reached their positions as the result of a sorting process that eliminates insincere or uncommitted candidates.
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Politicians go through this same vetting process. A politician may be able to fake an allegiance to a set of principles. He may parrot the “right” slogans and even vote the “right” way in order to get re-elected. But voters, like presidents and faculty members, can distinguish between sincere and insincere politicians, especially over a long period of time. And they reward the sincere ones with their votes.
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Contrary to popular belief, politicians who get elected and re-elected tend to be the ones who show that they really believe in the positions they espouse.

Politicians from Kansas really do think that farmers are the backbone of America. Those from Detroit really do want to help the car industry. This is why politicians keep their promises even during their final terms—they don’t promise to support certain positions merely in order to win re-election, but rather because they genuinely believe in those positions.

People often point to political campaign financing as a prime example of the corrupt nature of the U.S. political system. Big corporations, wealthy individuals, and powerful political action committees (PACs) allegedly buy influence from politicians, who then focus on pleasing their big donors at the expense of the little guy. This outlook presupposes that when someone donates to a politician, he is hoping to affect the politician’s votes in his favor—in effect, he’s looking to “buy” the politician’s votes.

Labor unions, business groups, lawyers, doctors, and a galaxy of special interest groups all regularly donate money to politicians. But the surprise here is that these contributions, in fact, do not significantly alter how individual politicians vote. What’s more, donors do not expect them to do so.

The main evidence for the view of political donations as an exercise in vote-buying is that politicians tend to vote in line with the wishes of their donors. Very few people would deny this is true. But an analysis of donation and voting patterns reveals that donors support politicians for the same reason voters do: politicians intrinsically value policies, and donors give to candidates who share their values. Vote-buying is not occurring because individual politicians are not altering their votes based on donations.

Analyzing this dilemma is a bit tricky: how can we figure out whether donors are giving money to candidates because they want to affect the politicians’ votes or because they agree with the politicians’ values and positions?

One way to approach this dilemma is to take another look at retiring politicians. When politicians decide not to run for re-election, they no longer have to worry about adhering to donors’ wishes in order to secure contributions for future elections. If donors are bribing politicians to vote differently than they otherwise would have voted, politicians should shift
at least somewhat away from the voting interests of their donors when they no longer have to worry about losing these donations. But if donors support politicians based upon the politicians’ genuine beliefs, there should be little change in politicians’ voting patterns once they decide to retire.

Economist Steve Bronars and I examined the voting records of the 731 congressmen who held office for at least two terms between 1975 and 1990. We found that congressmen do continue their previous voting patterns after they announce their intention to retire, even when accounting for other explanations such as whether they will secure other jobs after their retirement from politics. Although retiring politicians only receive 15 percent of the amount of PAC contributions that they enjoyed in the preceding term, their voting pattern remains virtually identical; on average they only alter their position on one out of every 450 votes.
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