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Revolving Doors Matter – James Kwak- The Baseline Scenario

This is a syndicated repost published with the permission of The Baseline Scenario. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

By James Kwak

It is common fare for people like me to point disapprovingly to the revolving door between business and government, which ensures that every Treasury Department is well stocked with representatives of Goldman Sachs. In 13 Bankers, the revolving door was one of the three major channels through which the financial sector influenced government policy, alongside campaign contributions and the ideology of finance. The counterargument comes in various forms: people like Robert Rubin and Henry Paulson are dedicated civil servants who wouldn’t favor their firms or their industries, the government needs people with appropriate industry experience, etc.

It is certainly possible that industry experts provide valuable skills and experience to the government. But that value comes with a cost; put another way, it’s not just the public good that benefits. Using data on Defense Department appointments, Simon Luechinger and Christoph Moser (paper; Vox summary) measured the impact of political appointments on the stock market valuation of appointees’ former firms; they also measured the impact on firms’ stock market valuations of hiring a former government official. In both cases, the stock market reacted positively to new turns of the revolving door. Here’s the chart for political appointments:

Luechinger and Moser survey the existing literature on the value of political connections in the first part of their paper. To summarize, this is the kind of thing that you expect to find in developing countries and countries with weak institutions—not in the United States, the paragon of democracy and the greatness we never weren’t.

This research touches on one of the most important questions of our time: whether, in our age of extreme and increasing inequality, public policy has become the private preserve of the rich and the well-connected. In Why Nations Fail, Daron Acemoglu and James Robinson described the importance of inclusive political institutions for economic development. Although the United States became rich and powerful in large part because of our inclusive institutions, it is possible for an elite to shut down those institutions in order to further their economic interests, as occurred in late-medieval Venice. (For a summary, see my review of the book in Democracy.)

The disproportionate influence of economic elites on political decision-making is a hallmark of emerging market crises; its importance in the United States during the financial crisis was a central theme of “The Quiet Coup” and 13 Bankers. Luechinger and Moser provide a little more evidence that we are a bit more like Indonesia of Suharto than we might care to admit.

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