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The Privileged Position Of Business?
1. The Privileged Position Of Business: An Evaluative Essay
By
Todd Julie
For
Professor Rodney Haddow
POL224
T.A. Gabriel Arsenault
Mar.13, 2012
2. “Charles Lindblom argues that business’s ‘privileged position’ means that it has a
powerful impact on governments even without using interest groups to press home its
arguments. The story about banking and financial regulation in the US very much reflects
this ‘structural’ kind of influence. The financial sector does not use well-financed interest
groups to push home its preferences in Washington. In spite of how much weak financial
regulation contributed to the economic crisis of 2008, however, financial interests have
blocked any meaningful steps towards greater regulation of that sector in the US.”
3. The above statement rests on the major premise that (1) government advancement of big
business interests is structurally embedded within the decision making process. The
argument also rests on the assumptions that (2) business did not significantly lobby in
advance of the new financial government legislation . . . And (3) that it is in the interest
of business to minimize new regulations. Taking all this for granted, it is asserted that (4)
the government privileged business interests in the crafting of its post-crises legislation,
without a signifigant lobbying effort by the business community. This paper will argue
that while Lindblom’s assessment of structural business power is convincing, despite
being problematic in certain ways, the above statement is deeply flawed. Other scholars
have argued that business influence is more in the key of a negotiation, with business’s
voice at the table waxing and waning with the times. This view is lent support by the fact
that big business did lobby extensively in the post-crisis period. Further while the
business community in general fights against new regulations, there do exist divisions
within that community. These divisions present opportunities that, while small, may
allow governments to escape the “structural” influence of business, in the face of strong
public opposition to that sector. In fact the degree to which government privileged
business in the crafting of post-crisis legislation is highly debatable.
What are the structural mechanisms that Lindblom asserts work in business's favour?
Between his book Politics and Markets and the proscribed article, he mentions three main
factors. The first is what he terms an "automatic punishing recoil"1. What this means is
that without any conscious plot on the part of dissatisfied business leaders, their
disapproval registers in the form of scaled back business initiatives and smaller job
1
Lindblom, C., “The Market As Prison.” in The Journal Of Politics, Vol. 44 (1982): 325
4. creation. This manifest disapproval acts as punishment of a consequently less prosperous
electorate that will then hold politicians accountable for reduced economic prospects.
The threat alone of electoral retribution is usually enough to persuade politicians of the
rightness of the business perspective. In May 2011, the New York Times did report poll
results showing Americans more downbeat than anytime since President Obama had
taken office, in the face of bad economic times2.
But is it a given that the electorate will hold politicians responsible? Another recent
article illustrates that with the President trying to portray Republicans as the “defenders
of a small elite”3 and Republicans trying to highlight Obama’s supposedly “failed
stewardship of the economy”4, there is more than one explanation available to voters for
an ailing economy. Bernhagen & Brauninger point to findings (Mitchell, 1997, pp. 41-
59; Smith, 2000, pp. 167-96) that in certain instances, the business community fails to get
its way. These mixed results lead Bernhagen & Brauninger to put forward a "signal
theory"5 where legislation is negotiated by both sides according to competing cost-benefit
calculations done by both sides. The electoral impetus for government officials to be
seen as fulfilling their ideological pledges acts as a counterweight to Lindblom's
"automatic punishment recoil" (they don't use the specific term)6. There has been a
strong public outcry against business in the wake of the economic crisis, prompting the
2
Harwood, J. “Organizing Now, Democrats Expect Tough Bid in 2012” New York Times, May 2, 2011:
A18. http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/864180234?accountid=14771
3
Sulzberger, A. “Obama Sounds A Populist Call On G.O.P. Turf” New York Times, Dec.7, 2011: A1.
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/908705228?accountid=14771
4
Ibid.
5
Bernhagen, P. and Brauninger, T. “Structural Power And Public Policy: A Signaling Model Of Business
Lobbying In Democratic Capitalism” in Political Studies Vol. 53 (2005): 43
6
Ibid., 48
5. Obama administration’s attempt to position the President as “defender of the middle
class”7. Echoing this suggestion of legislative cost balancing is a further suggestion by
Helleiner & Pagliari that, in light of the crisis, more "cyclical theories of private influence
in which booms encourage deregulation, followed by crises and re-regulation"8 may have
to be developed. The suggestion is that business influence is more contingent on the
continuing goodwill of legislators and the public at large than prior literature on the topic
would indicate.
The second mechanism, of which Lindblom takes especial note, in his book Politics and
Markets, is "constitutional rules - especially the law of private property” which “specifies
that, although governments can forbid certain kinds of activity, they cannot command
business to perform. They must induce rather than command"9. This principle does seem
to have been at work during the financial crisis. Phillip Swagel, a treasury assistant
secretary during the crisis, later wrote of the generous share price paid by the government
to invest in failing banks "the government had to offer attractive terms because it could
not force the banks to agree to any investment"10. He went on to say that many of the
policy prescriptions put forward by "academic economists"11 would run into legal
constraints and further, "A lesson for academics is that anytime they use the verb "force"
(as in "The policy should be to force banks to do X or Y"), the next sentence should set
7
Dewan, S. and Gebeloff, R. “One Percent, Many Variations” New York Times, Jan. 15, 2012: A1.
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/915983265?accountid=14771
8
Helleiner, E. and Pagliari, S. “The End Of An Era In International Financial Regulation? A Postcrisis
Research Agenda” in International Organization 65, Winter (2011): 180
9
Lindblom, C. Politics And Markets (New York, NY: Basic Books Inc, 1977), 173
10
Johnson, S. and Kwak, J. 13 Bankers: The Wall Street Takeover And The Next Financial Meltdown (New
York, NY: Pantheon Books, 2010), 155
11
Swagel, P. “The Financial Crisis: An Inside View” in Brookings Papers On Economic Activity Vol. 2009
(Spring 2009): 2
6. forth the section of the U.S. legal code that allows that course of action"12. The Dodd-
Frank legislation has indeed run into legal challenges, stemming from a 1996 law that
"requires the S.E.C. to promote ‘efficiency, competition and capital formation’. The law
enabled the financial industry to build lawsuits around the economic costs of a rule,
regardless of its merits"13. Margaret E. Tahyar, a partner at the law firm Davis Polk
explains the banking industry’s approach to the Dodd-Frank legislation package: "There
is no reasonable constitutional or statutory challenge on the whole - only on the bits and
pieces."14. What Ms. Tahyar is describing is the familiar 'death by a thousand cuts'
approach. The appeals court has tossed out three financial regulations in the last six
years.
The third structural mechanism, according to Lindblom, is corporate law, specifically
limited liability. A recent article in The New York Times discussing the willingness of
private versus public companies to indemnify executives against potential lawsuits
illustrates Lindblom's point perfectly. In the case of a public company, where
shareholders pay the cost, executives are indemnified to a great extent against any
potential legal repercussions resulting from their actions. The article cites two examples:
"Bank of America, in its acquisition of Countrywide, agreed to indemnify . . . for any
claim brought without regard to whether he had acted in bad faith. JPMorgan Chase
agreed to a similar provision for . . . executives and directors in the Bear Stearns deal.
12
Ibid., 3
13
Protess, B., “Court Ruling Offers Path To Challenge Dodd-Frank” New York Times, Aug. 18, 2011:B1.
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/884106659?accountid=14771
14
Ibid.
7. This is a startlingly broad indemnification, which the courts have upheld."15. Apparently
executives at private equity firms don't fare as well. This is what allowed individuals in
the banking industry to walk away from the crisis they created with relative ease, leaving
government officials to clean up the mess. Limited liability greatly strengthens big
finance's hand in negotiating any possible regulation of their industry with government
officials. Johnson & Kwak recount how, "In the end the government had more to lose
from major bank failures than did the bankers"16. They describe how bank heads were
able to "take a large chunk of the economy hostage" and "dictate the terms of their
rescue", secure in the knowledge that they "had already made their money" 17.
Apart from Lindblom’s stated three mechanisms, business also exercises a normative
power over government - monopoly over technical financial expertise18. Because finance
officials are apparently the only ones who understand the complexities of the economy,
there tends to be a revolving door between elite finance positions and government
regulatory appointments19. A shared culture makes it extremely difficult for legislators to
think about the national interest as separate from those of the large banks. Pagliari's
findings, that despite a technical shift in the form of financial regulations after the crises,
from private to public, their remains a great deal of continuity between pre and post-crisis
regulations, in terms of their content20, illustrate clearly the character of this normative
15
Davidoff, S. “DEAL PROFESSOR; For Executives Seeking Absolution, A Double Standard” New York
Times, No. 24, 2010: B5.
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/808431949?accountid=14771
16
Johnson & Kwak, 13 Bankers, 184
17
Ibid., 184
18
Ibid., 93-94
19
Ibid., 185
20
Pagliari, S. “Who Governs Finance?: The Shifting Public-Private Divide In The Regulation Of
Derivatives, Rating Agencies And Hedge Funds” in European Law Journal Vol. 18, No. 1, (2012):
8. influence. In 2008, when crafting the initial bank bailout, the Bush administration stated
it would only hire “people with expertise in asset management, accounting and legal
issues” and would “outsource the bulk of the program to 5 to 10 asset management
firms”21. Governments have the authority to make laws but are hesitant to stray from the
line laid down by economists. However this normative power of economists is itself
checked, according to Bernhagen & Brauninger, by a "reputational cost"22 associated with
lying. If financial representatives or lobbyists are seen to provide false information, they
will cease to be trusted by policy makers in the future23.
Despite the manifold evidence of structural influence enjoyed by the financial sector, the
claim that business does not need to lobby government officials is undermined by the fact
that they do lobby, intensively. The financial sector mounted an impressive lobbying
effort in advance of post-crisis legislation. The Los Angeles Times reported that
"Lobbying expenditures jumped 12% from 2008 to $29.8 million last year {2009} among
the eight banks and private equity firms that spent the most to influence legislation"24 and
expected that figure to be even higher in 201025. In 2012, lobbying against the Volker
rule, which would prevent banks from proprietary trading ("placing bets with their own
money"26), has been unprecedented. "I've never seen a rule-making response like this
21
Lander, M. and Andrews, E.L. “Bailout Wins Approval; Democrats Vow Tighter Rules” New York
Times, Oct.4, 2008: A1. http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/433957730?
accountid=14771
22
Bernhagen & Brauninger, “Structural Power And Public Policy: A Signaling Model Of Business
Lobbying In Democratic Capitalism” in Political Studies Vol. 53 (2005): 47
23
Ibid., 47
24
Popper, N. “Wall Street; Banks Hike Lobbying Spending: Spending jumped 12% Last Year Over 2008
As Financial Firms Fought Regulatory Proposals” Los Angeles Times Feb. 16, 2010: B1.
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/422295201?accountid=14771
25
Ibid.
26
Protess, B. & Eavis, P. “At Volker Rule Deadline, A Strong Pushback From Wall St.” New York Times,
Feb. 14, 2012: B4. http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/921284927?
9. before,"27 said Derek M. Bush, a lawyer at Cleary Gottlieb who helped Draft letters to
legislators on behalf of financial interests28. To be fair to Lindblom, he does not, in his
book Politics & Markets, deny the existence of lobbyists, as implied in the initial
statement above.
Despite this intensive lobbying, it is unclear that de-regulation or less regulation is even
in the financial industry's larger interest. The crisis has revealed a diverse set of interests
within the financial community, not all of whom, regard increased regulation negatively.
Helleiner and Pagliari explain these divisions:
"During the financial crisis, quite sharp divisions emerged among different parts
of the private financial sector, divisions that reduced the sector’s overall
influence. Banks demanded tighter regulation of credit-rating agencies against
these agencies’ wishes. Accountants and banks strongly disagreed with each
other about the need to reform market-to-market accounting. Investors and
exchanges criticized the reluctance of derivatives dealers and brokers to accept
tighter regulation of over-the-counter derivatives. In some cases, these divisions
reflected efforts by individual sectors to shift the blame for the crisis and the
regulatory burden upon other sectors. In other cases, certain parts of the
financial industry recognized material gains they could realize from regulatory
tightening in specific areas. The disagreements also reflected different lessons
learned from the crisis and distinct judgments about the long-term interests of
the financial industry. These developments suggest the need for future
theorizing to disaggregate the industry into its constituent parts and to embrace
more context-specific analyses of financial industry preferences"29
Bernhagen & Brauninger cite a somewhat ambiguous statement by Birnbaum (1984) that
financial interests will generally try to reduce regulatory uncertainty30. Reducing
regulatory uncertainty need not immediately be equated with reducing regulation itself.
accountid=14771
27
Ibid.
28
Ibid.
29
Helleiner & Pagliari, “The End Of An Era In International Financial Regulation? A Postcrisis Research
Agenda” in International Organization 65, Winter (2011): 179
30
Bernhagen & Brauninger, “Structural Power And Public Policy: A Signaling Model Of Business
Lobbying In Democratic Capitalism” in Political Studies Vol. 53 (2005): 46
10. However, they assert that it will lead to business approaching regulation from a generally
conservative viewpoint31. While there may be disagreement among different parts of the
financial sector, the lobbying statistics mentioned above, along with one reform group’s
claim that “of the substantive responses (to the Volker rule) 13 were pro-reform,
compared with 300 from the industry”32, suggest this generally conservative viewpoint is
still a largely held one, despite the financial crisis.
Whether or not the government unduly privileged business interests in the crafting of its
post-crisis legislation is difficult to assess. As discussed above, Wall Street has mounted
a fierce lobbying campaign to influence the legislation process. On the other hand, the
2008 crisis created widespread popular distrust of Wall Street. Popular dissent and
protest have arguably opened a small space for government to escape the ideological
constraints of Wall Street. Here we should bear in mind both Bernhagen & Brauninger's
"reputational cost"33, incurred by politicians who are seen to back away from their
previous ideological stance and Helleiner & Parliari's call for a more cyclical theory of
private influence34. Legislators have passed Dodd-Frank, enacted a consumer protection
agency and are in the process of trying to institute the "Volker rule". However, the merit
of these measures is debatable. Johnson & Kwak criticize Dodd-Frank for not going far
enough and tackling the problem of "too big to fail" financial institutions35. An article in
31
Ibid., 46
32
Eisinger, J. “The Volker Rule, Made Bloated And Weak” New York Times, Feb.23, 2012: B4.
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/922734032?accountid=14771
33
Bernhagen & Brauninger, “Structural Power And Public Policy: A Signaling Model Of Business
Lobbying In Democratic Capitalism” in Political Studies Vol. 53 (2005): 47
34
Helleiner, E. and Pagliari, S. “The End Of An Era In International Financial Regulation? A Postcrisis
Research Agenda” in International Organization 65, Winter (2011): 180
35
Johnson & Kwak, 13 Bankers,191
11. the economist complaining about the length and complexity of Dodd-Frank gave two
reasons for that complexity: hubris (American legislators thinking they can regulate every
imaginable scenario) and lobbying, which the article asserts leads to lengthy bills that
allow those in congress to "slip in clauses that benefit their chums and campaign donors"
and makes it easy for business to find loopholes36. The idea being that the length of
Dodd-Frank is an indicator of lobbyist influence. In light of the Bernhagen and
Brauninger piece37, this leads to the possible paradox that the influence of individual
business interests negatively affects the aggregate desire of business to simplify it's
regulatory environment. If correct, this would lend further support to Helleiner and
Pagliari's call for a more diverse, less monolithic conception of business interests38.
It is hard to argue against the proposition that big finance exerts a structural influence on
government. Constitutional and corporate law tend to facilitate such an influence.
Although Lindblom's "automatic punishing recoil" is not as singular an influence on
government as it’s made to seem. It can be checked by democratic outrage in extreme
circumstances. Only this can explain the continued lobbying on behalf of financial
institutions. Still, it is debatable whether or not it is in the interest of the financial system
as a whole to block the new regulations. All of this renders the statement quoted at the
outset of this paper deeply problematic. Though I find the sentiment of it much harder to
fault than its substance.
36
The Economist, “Over-regulated America: United States’ Economy,” Feb. 18, 2012:
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/922240698?accountid=14771
37
As mentioned above, the authors describe how business will act to simplify it’s regulatory environment.,
Bernhagen & Brauninger, “Structural Power And Public Policy: A Signaling Model Of Business Lobbying
In Democratic Capitalism” in Political Studies Vol. 53 (2005): 46
38
Helleiner, E. and Pagliari, S. “The End Of An Era In International Financial Regulation? A Postcrisis
Research Agenda” in International Organization 65, Winter (2011): 179
12. Bibliography
Books & Scholarly Articles
1. Lindblom, C., “The Market As Prison.” in The Journal Of Politics, Vol. 44 (1982)
2. Bernhagen, P. and Brauninger, T. “Structural Power And Public Policy: A
Signalling Model Of Business Lobbying In Democratic Capitalism” in Political
Studies Vol. 53 (2005)
13. 3. Helleiner, E. and Pagliari, S. “The End Of An Era In International Financial
Regulation? A Postcrisis Research Agenda” in International Organization 65,
Winter (2011)
4. Lindblom, C. Politics And Markets (New York, NY: Basic Books Inc, 1977)
5. Swagel, P. “The Financial Crisis: An Inside View” in Brookings Papers On
Economic Activity Vol. 2009 (Spring 2009)
6. Johnson, S. and Kwak, J. 13 Bankers: The Wall Street Takeover And The Next
Financial Meltdown (New York, NY: Pantheon Books, 2010)
7. Pagliari, S. “Who Governs Finance?: The Shifting Public-Private Divide In The
Regulation Of Derivatives, Rating Agencies And Hedge Funds” in European Law
Journal Vol. 18, No. 1, (2012)
Newspaper & Magazine Articles
1. Harwood, J. “Organizing Now, Democrats Expect Tough Bid in 2012” New York
Times, May 2, 2011: A18 (http:)
2. Dewan, S. and Gebeloff, R. “One Percent, Many Variations” New York Times,
Jan. 15, 2012: A1 (http)
3. Protess, B. “Court Ruling Offers Path To Challenge Dodd-Frank” New York
Times, Aug. 18, 2011:B1 (http)
4. Davidoff, S. “DEAL PROFESSOR; For Executives Seeking Absolution, A
Double Standard” New York Times, No. 24, 2010: B5 (http)
5. Popper, N. “Wall Street; Banks Hike Lobbying Spending: Spending jumped 12%
Last Year Over 2008 As Financial Firms Fought Regulatory Proposals” Los
Angeles Times Feb. 16, 2010: B1 (http)
6. Protess, B. & Eavis, P. “At Volker Rule Deadline, A Strong Pushback From Wall
St.” New York Times, Feb. 14, 2012: B4 (http)
7. The Economist, “Over-regulated America: United States’ Economy,” Feb. 18,
2012
8. Sulzberger, A. “Obama Sounds A Populist Call On G.O.P. Turf” New York Times,
Dec.7, 2011: A1.
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/908705228
?accountid=14771
14. 9. Eisinger, J. “The Volker Rule, Made Bloated And Weak” New York Times,
Feb.23, 2012: B4.
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/922734032
?accountid=14771
10. Lander, M. and Andrews, E.L. “Bailout Wins Approval; Democrats Vow Tighter
Rules” New York Times, Oct.4, 2008: A1.
http://ezproxy.qa.proquest.com.myaccess.library.utoronto.ca/docview/433957730
?accountid=14771