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Economic Power and Political Influence: The Impact of Industry Structure on Public Policy

  • Lester M. Salamon (a1) and John J. Siegfried (a2)
Abstract

Political scientists have devoted considerable attention to the ways in which economic power can be translated into political influence. Yet there has been little empirical research capable of confirming or denying general hypotheses about the political implications of various aspects of economic structure. This article seeks to begin filling this gap by first identifying five aspects of economic structure likely to affect an industry's political influence (firm size, industry size, market concentration, profitability, arid geographic dispersion) and then testing these aspects by analyzing how well they account for variations among industries in their success at securing public policies of benefit to them, especially in two policy arenas: federal corporate income taxes and state excise taxes. What emerges most clearly from this analysis is an empirical confirmation of the popular hypothesis linking firm size to political influence with respect to both federal corporate tax policy and state excise tax policy. Beyond that, we find reasonably strong negative relationships between political influence and market concentration, profitability, and industry size – the latter lending interesting support to Mancur Olson's argument about the political disabilities of large groups. In the process, the article suggests a potentially fruitful new way to get beyond the case study approach in studying the impact of economic power on political influence, and thus a way to bring to bear more powerful methodological tools on this central issue of modern democracy.

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1 This point is argued convincingly in: Kariel, Henry, The Decline of American Pluralism (Stanford: Stanford University Press, 1961); McConnell, Grant, Private Power and American Democracy (New York: Alfred A. Knopf, 1966); Lowi, Theodore, The End of Liberalism (New York: W. W. Norton and Company, Inc., 1969); Dahl, Robert A., “Business and Politics: A Critical Appraisal of Political Science,” in Dahl, Robert A., Haire, Mason, and Lazarsfeld, Paul F., Social Science Research on Business: Product and Potential (New York: Columbia University Press, 1959), pp. 3, 44; Dahl, Robert A., After the Revolution (New Haven, Conn.: Yale University Press, 1970); Epstein, Edwin M., The Corporation in American Politics (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1969).

2 Wilson, Woodrow, The New Freedom (New York: Doubleday, 1913), p. 57. See, for example: Mills, C. Wright, The Power Elite (New York: Oxford University Press, 1956); Domhoff, G. William, Who Rules America? (Englewood Cliffs, N.J.: Prentice-Hall, 1967); Hunter, Floyd, Community Power Structure (Chapel Hill: University of North Carolina Press, 1953); Lynd, Robert S. and Lynd, Helen M., Middletown in Transition (New York: Harcourt, Brace, Jovanovich, 1937); Mintz, Morton and Cohen, Jerry, America, Inc. (New York: The Dial Press, 1971); Stern, Philip M., The Great Treasury Raid (New York: Random House, 1967); Green, Mark, The Closed Enterprise System, Ralph Nader's Study Report on Antitrust Enforcement (New York: Grossman Publishers, 1972); Harris, Fred R., “The Politics of Corporate Power,” in Corporate Power in America, ed. Nader, Ralph and Green, Mark J. (New York: Grossman Publishers, 1973), pp. 2544; Theodore Lowi, The End of Liberalism.

3 See, for example: Dahl, Robert A., Who Governs? (New Haven: Yale University Press, 1961); Wolfinger, Raymond, The Politics of Progress (Englewood Cliffs, N.J.: Prentice-Hall, 1974); Truman, David B., The Governmental Process: Political Interests and Public Opinion, Second Edition (New York: Alfred A. Knopf, 1971). Bauer, Raymond, Poole, Ithiel de Sola, and Dexter, Lewis, American Business and Public Policy (New York: Atherton Press, 1963).

4 Harris, Fred, “The Politics of Corporate Power,” in Nader, and Green, , Corporate Power in America, p. 39.

5 Scott, Andrew M. and Hunt, Margaret A., Congress and Lobbies (Chapel Hill, N.C.: University of North Carolina Press, 1960), p. 6. Similar criticisms can be found in: Latham, Earl, “The Body Politic of the Corporation,” in The Corporation in Modern Society, ed. Mason, E. S. (New York: Atheneum, 1966); Cohen, Bernard, The Influence of Non-Governmental Groups on Foreign Policy Making (Boston: World Peace Foundation, 1939), pp. 218236; Lowi, Theodore J., “American Business, Public Policy, Case Studies and Political Theory,” World Politics, 16 (07, 1964), 677715; and Eldersveld, Samuel J., “American Interest Groups: A Survey of Research and Some Implications for Theory and Method,” in Interest Groups on Four Continents, ed. Ehrmann, Henry (Pittsburgh: University of Pittsburgh Press, 1960).

6 Each of these three approaches seeks to assess the relationship between economic power and political influence. The “reputational approach,” which proceeds by collecting votes on community influentials from a panel of experts, has been criticized for focusing on presumed rather than actual power, and for beginning with a self-fulfilling prophecy in positing the existence of a power structure at the outset. The “positional approach,” which focuses on the backgrounds and characteristics of the persons who hold the positions purported to be the mtjst powerful in the society, has been faulted for confusing formal authority with, the actual exercise of power. And the “decision-making approach,” which concentrates on the actors involved in the making of important decisions, has been called into question for its case specific nature and its neglect of those dimensions of power involved in keeping subjects off the agenda of political decision making altogether.

For classic examples of these three approaches, see, respectively: Hunter, Floyd, Community Power Structure: A Study of Decision Makers (Chapel Hill, N.C.: University of North Carolina Press, 1953); Mills, C. Wright, The Power Elite (New York: Oxford University Press, 1956); Domhoff, G. William, Who Rules America? (Englewood Cliffs, N.J.: Prentice-Hall, 1967); and Dahl, Robert, Who Governs? (New Haven: Yale University Press, 1961).

For a discussion of these approaches, see: Dahl, Robert, “A Critique of the Ruling Elite Model,” The American Political Science Review, 52 (06, 1958), 463469; Wolfinger, Raymond, “Reputation and Reality in the Study of Community Power,” American Sociological Review, 25 (10, 1960), 636644; Polsby, Nelson, Community Power and Political Theory (New Haven: Yale University Press, 1963); Bachrach, Peter and Baratz, Morton, “The Two Faces of Power,” American Political Science Review, 56 (12, 1962), 947952; Wolfinger, Raymond, “Nondecisions and the Study of Local Politics,” American Political Science Review, 65 (12, 1971), 10631080; Merelman, Richard, “On the Neo-Elitist Critique of Community Power,” American Political Science Review, 62 (06, 1968), 451460.

7 Dye, Thomas R., Politics, Economics, and the Public: Policy Outcomes in the American States (Chicago: Rand McNally, 1966); Dawson, Richard and Robinson, James A., “Inter-Party Competition, Economic Variables, and Welfare Policies in the American States,” Journal of Politics, 25 (05, 1963), 265289; Cnudde, Charles F. and McCrone, Donald J., “Party Competition and Welfare Policies in the American States,” American Political Science Review, 63 (09, 1969), 959966; Sharkansky, Ira and Hofferbert, Richard, “Dimensions of State Policy,” in Politics in the American States: A Comparative Analysis, Second Edition, ed. Jacob, Herbert and Vines, Kenneth N. (Boston: Little, Brown and Company, 1971). Sharkansky and Hofferbert have been most comprehensive in their treatment of economic variables, examining no fewer than 15 separate variables. Though they include items as diverse as value added by manufacturing and the number of telephones per 1,000 population, however, they do not include variables measuring the structure of different industries that would make it possible to test hypotheses about the impact industry structure (e.g., firm size, market concentration) has on political influence. Yet these are the hypotheses most often generated by students of the economic aspects of political power.

8 Olson, Mancur, The Logic of Collective Action. Public Goods and the Theory of Groups (Cambridge Mass.: Harvard University Press, 1965), p. 35.

9 Dye, Thomas R. and Zeigler, Harmon, The Irony of Democracy (Belmont, Calif.: Wadsworth Publishing Co., Inc., 1970), p. 149.

10 Neustadt, Richard, Presidential Power, Signet Edition (New York: The New American Library, 1964), p. 42.

11 For an excellent analysis of the diversity and political consequences of federal administrative fragmentation see Seidman, Harold, Politics, Position and Power (New York: Oxford University Press, 1970).

12 Salamon, Lester M. and Wamsley, Gary L., “The Federal Bureaucracy: Responsive to Whom?” in People vs. Government: The Responsiveness of American Institutions, ed. Riselbach, Leroy (Bloomington: Indiana University Press, 1975), pp. 151188.

13 Seidman, , Politics, Position, Power, pp. 37, 40.

14 Ibid., p. 18.

15 On the concept of “policy subsystems,” see Freeman, J. Leiper, The Political Process (New York: Random House, 1965); Fritschler, Lee J., Smoking and Politics (New York: Appleton-Century Crofts, 1969).

16 Quoted in Lee Fritschler, J., Smoking, p. 94.

17 We are indebted here to Epstein, Edwin, The Corporation in American Politics (Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1969), particularly pp. 67–111 for an excellent review of patterns of corporate political involvement.

18 See, for example, Kaysen, Carl, “The Corporation: How Much Power? What Scope?” in The Corporation in Modern Society, ed. Mason, E. S. (Cambridge, Mass.: Harvard University Press, 1959), p. 99; Kaysen asserts: “The market power which large absolute and relative size gives to the giant corporation is the basis not only of economic power but also of considerable political and social power of a broader sort.” According to Senator Fred Harris: “In any area, the size of a big corporation can be translated into political strength.” Harris, , “Politics of Corporate Power,” p. 39. Ronald H. Coase writes that “if policy is to be based on ‘fear of size,’ it is surely desirable to discover what is really feared, whether it results from size, and whether this comes about in all circumstances or only in some” [Congressional Record (June 16, 1969)].

19 Kaysen, “The Corporation.”

20 Edwards, Corwin D., “Conglomerate Bigness as a Source of Power,” Business Concentration and Price Policy (Princeton, N.J.: Princeton University Press, 1955), pp. 331352.

21 National Industrial Conference Board, The Role of Business in Public Affairs, Studies in Public Affairs, No. 2 (New York: National Industrial Conference Board, Inc., 1968), p. 8.

22 Bauer, , Poole, , and Dexter, , American Business and Public Policy, p. 227.

23 Commenting on the relative advantages of having a full-time firm representative in Washington and working through a trade association, Corwin Edwards notes: “While some smaller business interests make a comparable showing through associations set up for the purpose, the experience of a Washington official is that small companies generaUy find out what is happening too late and prepare their case too scantily to be fully effective where their interests conflict with those of large companies.” Edwards, , “Conglomerate Bigness,” p. 347.

24 For an excellent survey of the evidence relating market concentration to profit rates see Weiss, Leonard W., “Quantitative Studies of Industrial Organization,” in Frontiers of Quantitative Economics, ed. Intrilligator, M. D. (Amsterdam: North-Holland Publishing Company, 1971), pp. 362379. Weiss concludes that “practically all observers are now convinced that there is something to the traditional hypothesis…. Almost all of the 32 concentration-profits studies except Stigler's have yielded significant relationships for years of prosperity or recessions, though they have depended on a wide variety of data and methods” (p. 371).

25 See, for example, Bauer, , Poole, , and Dexter, , American Business and Public Policy, pp. 332340; and Truman, David, The Governmental Process, pp. 156187.

26 Bauer, , Poole, , and Dexter, , American Business and Public Policy, p. 266.

27 It has been proposed that firms sometimes do not maximize the attainment of some well-defined objective function, but rather “satisfice.” That is, they seek choices which satisfy at least minimum levels of aspiration with respect to a variety of objectives. For example, management may set a target rate of return on invested capital as its profit objective, and if that target is achieved, it turns to the satisfaction of other nonprofit objectives. See Simon, Herbert, “Theories of Decision Making in Economics and Behavioral Science,” American Economic Review, 49 (06, 1959), 253283; Lanzillotti, Robert F., “Pricing Objectives in Large Companies,” American Economic Review, 48 (12, 1958), 921940; Baumol, William, Business Behavior, Value and Growth, rev. ed. (New York: Harcourt, Brace and World, Inc., 1967); Williamson, Oliver, The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm (Englewood Cliffs, N J.: Prentice-Hall, Inc., 1964).

28 The introduction of a control for profit rate will also probably change the expected direction of the relationship between market concentration and political influence. This is so because the positive political impact attributed to concentration was based largely on the expected higher profits of concentrated industries. With this factor controlled for, the visibility and “wear out your welcome” problems may dominate the relationship. Under these circumstances, we should expect an inverse relationship between market concentration and political influence.

29 Cherington, Paul W. and Gillen, Ralph L., The Business Representative in Washington (Washington, D.C.: The Brookings Institution, 1962), p. 55.

30 Senator Phillip Hart (D-Michigan), Speech to the Lawyers Club in Ann Arbor, Michigan, April 8, 1968, cited in Green, Mark J., The Closed Enterprise System, p. 19. Senator Fred Harris concurs, noting in a recent article that: “A company with plants in ten congressional districts can expect more congressional champions than a company with plants in only five districts.” Harris, Fred, “The Politics of Corporate Power,” p. 39.

31 The IRS classifies all economic activity into “major industry” groups. Within each group are further subdivisions, called “minor industries.” Firms are classified into “minor industries” on the basis of their predominant product. Of the 129 “minor industries” in mining and manufacturing identified by the IRS, fifteen are “not allocable” categories in the major industry groups. The firms in these categories usually do not provide sufficient information to permit the IRS to classify them into a substantive minor industry classification. In general, these industries are small relative to the other “minor industries” in the sample, and the firms in these industries are not likely to have homogeneous political interests. In addition, four other industries were omitted for various reasons that prohibited calculation of their effective average corporation income tax rates, one of the major dependent variables used in the tests below. Accordingly, the correlations reported here relate to 110 of the 129 minor industries identified.

32 See footnote 7 above.

33 In his study of New Haven, for example, Robert Dahl evaluates the influence of economic notables by studying a collection of decisions in four key policy arenas in New Haven over a ten-year span. Since these notables participated infrequently in decisions in almost all of the four policy areas, Dahl concludes that economic power is not translated effectively into political power in New Haven. Similarly, Bauer, Poole, and Dexter, in assessing business influence on U.S. trade policy, scrutinized the degree of business participation in the actual policy-making arenas during consideration of trade legislation. In addition, they carefully analyzed the flow of information within the business community and its trade associations concerning foreign trade matters. On both counts, they concluded that business influence was marginal, despite what many would take to be high economic stakes in the issue. Businessmen generally had little knowledge about trade matters, and their lobby thenorganizations proved incapable of seriously influencing consideration of the policy.

34 Russell, Bertrand, Power: A New Social Analysis (London: Allen & Unwin, 1962), p. 25.

35 For a clear statement of this approach, and of the argument for it, see Bain, Joe S., Industrial Organization (New York: John Wiley and Sons, Inc., 1968), p. 329.

36 Actually, Lowi is inconsistent in characterizing the appropriate category for tax policy, referring to disputes over taxes at one point as classic examples of “distributive politics,” and at another point as classic examples of “redistributive politics.” Our data may provide an empirical basis for deciding which of these views is most accurate, for to the extent that we can explain variations in tax impact in terms of industry economic structure, we will have discredited the view that tax advantages are distributed among industries on something resembling the first-come-first-served basis of a distributive arena. See: Lowi, , “American Business, Public Policy,” pp. 705707.

37 The effective average tax rate is the ratio of actual tax liabilities to estimated “true” accounting net income, which is the industry's reported income plus the amount it was able to exclude from its reported income because of the special provisions in the Internal Revenue Code. For a detailed description of the effective average tax rate see Siegfried, John J., “Effective Average U.S. Corporation Income Tax Rates,” National Tax Journal, 27 (06, 1974), 245259.

38 These opposing arguments about the causes of variations in tax policy are nicely summarized by Louis Eisenstein, who characterized the tax policy process as “a continuing struggle among contending interests for the privilege of paying the least.” According to Eisenstein, to view the tax policy process in any other way is just a “pleasing illusion.” Eisenstein, Louis, The Ideologies of Taxation (New York: The Ronald Press Company, 1961), pp. 34. See also Surrey, Stanley S., “The Congress and the Tax Lobbyist: How Special Tax Provisions Get Enacted,” Harvard Law Review, 70 (05, 1957), 11451182.

39 To determine the proper functional form of the hypothesized relationship, we employed the Box-Cox maximum likelihood method, which suggested that a multiplicative (nonlinear) form of our equation was most appropriate. For further discussion of this technique, see Hoel, Paul G., Introduction to Mathematical Statistics (London: John Wiley and Sons, Inc., 1962), pp. 220225. In a multiplicative model, the reported coefficients are interpreted as the percentage change in the dependent variable produced by a one per cent increase in the value of the independent variable.

40 To compute this variable for each “minor industry,” we employed the concentration ratios provided for the Census Bureau's more narrowly defined Standard Industrial Classification of firms. These concentration ratios for the SIC industries were then aggregated, using a weighted average based on employment, to derive the concentration ratios for the “minor industries” which the SIC firms comprise.

41 This index consists of the sum (across states) of the squared share of total industry employment located in each state in 1963. An index of this type is sensitive to both the number of states in which an industry has employees and the distribution of employees among these states. Fewer states or a more unequal distribution will cause the index to rise. Squaring the shares weights the large employment states (and hence the more important states) more heavily in the index.

42 Those firms having less than five million dollars of assets were excluded because many of them showed deficits, and we were not able to remove these effects from the data. Furthermore, firms with less than five million dollars in assets are not representative firms in the petroleum refining industry.

43 For a more detailed discussion of the petroleum industry within the framework developed here, see: Salamon, Lester M. and Siegfried, John J., “The Relationship Between Economic Structure and Political Power: The Energy Industry,” in Competition in the Energy Industry, ed. Duchesneau, Thomas D. (Cambridge, Mass.: Ballinger, 1975).

44 Information provided by Mr. William Haga, representative of major oil company interests in the State of Tennessee. Since 1971 some major oil companies have taken a position of not opposing gasoline taxes which are used for nonhighway purposes if they are dedicated instead to mass transit purposes. Not all companies currently take this position. Since our empirical test is for 1967, however, this change in policy will not affect our hypothesis. Furthermore, we are seeking to discover evidence of general relationships between economic structure and political decision making, and consequently the relevance of our analysis is not diminished by a change in the policy of some oil companies.

45 0n the permeability of state legislatures to special interest pleading, see: Sanford, Terry, Storm over the States (New York: McGraw-Hill Book Company, 1967).

46 The index was computed for crude petroleum using 100 employees as the cutoff size and for petroleum refining using 250 employees as the cutoff size. These sizes were chosen on the basis of data availability and to provide sufficient variation in the explanatory variables constructed from them. 1967 Census of Manufactures data were used.

47 See footnote 7 above.

48 Several alternative explanations for this lack of relationship might also apply. In the first place, the result might reflect relatively less success at influencing policy on motor fuel tax rates because of lower concentration and the associated higher organizational costs of lobbying even though crude producers have a similar desire for lower rates. Furthermore, the data used to measure the share of activity of this sector in each state also included natural gas production. Although natural gas production and crude production are highly correlated across states, the additional variation produced by the inclusion of natural gas production (which does not go toward motor fuels) may be the source of the absence of an effect of this variable on the gasoline excise tax rate.

49 Two recent exceptions to this point, focusing on the trade policy area are: MacPherson, C. P., “Tariff Structures and Political Exchange,” Ph.D. Dissertation, Department of Economics, University of Chicago (12, 1972); and Pincus, J. J., “Pressure Groups and the Pattern of Tariffs,” Journal of Political Economy, 83 (08, 1975), 757778.

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