The Idea in a Nutshell: All the right incentives are in place to create an effective market and an effective political system. The problem is the overlap between the two – money flowing from successful capitalists and politicians through political donations. If we removed them (political donations), and there are practical ways that can be done, it could fix the root cause of many of the issues we face. That especially applies to Income Inequality.

Starting at the beginning

I studied Economics at University which had a lasting, damaging effect. Just the other day, a good mate from those days sent me an economic analysis of his daughters decision making criteria in deciding which school to go to next. I sent him a game theory explanation of the reasons I choose the seat I do on the ferry. Pretty geeky stuff.

He and I studied a lot of things together at The University Of Hull. We spent a reasonable amount of time during our Economic course on the question of incentives. As everyone knows, profit is the ‘right’ incentive for business to act in rational ways in their ways of going about their jobs.

Getting re-elected is the same thing the same ‘right incentive’ for politicians. Self interest is a decent driver of the right sort of behaviour in politicians in a democracy. The way it’s supposed to work is that politicians make decisions in the interests of the population, and thereby get re-elected.

What appears to happen, in reasonably public forums, is that lobbyists provide political donations, often to both parties so that whichever gets in, they are owed a favour. When the politicans are elected, those who donated sniff around asking for favours – with an expectation they will be granted.

Martin Ford ‘s view

Martin Ford is a guy my father told me to look out for in the Financial times. In this fantastic article he raises the question of the inequality caused by capitalism. He suggests that we cannot continue to assume, that the link we’ve seen for the last eternity, between capitalism and democracy will last. He points out the risk that the current situation (a feature of a world with very unevenly distributed income) could devolve in to a plutocracy or dictatorship. He doesn’t suggest what we could do to combat it.

What’s the problem with political donations ?

The problem with political donations is simple – it creates an overlap of incentives. The system which should work, where politicians represent the people well enough they get re-elected is broken by it.

  • It’s in the interests of smart and rich business men to donate to politicians so they can influence laws in their favour. It is particularly in their interests to lobby for the laws which make them richer. Of those, avoiding tax seems to be the primary consideration.
  • It’s in the interests of the politicians to take the money. They can use it to buy marketing services to get them re-elected.

In my view (and the view of some sensible others) the Income Inequality issue Mr Ford identifies is the “biggest issue of our time.” It’s a problem which is associated with every negative social outcome imaginable.

The problem that this system creates

And there is a direct link between the trend for corporate tax rates to fall and income inequality

Specifically, what’s wrong ?

The rules around political donations are crazy. As the Greens point out, it’s possible to donate $thousands to each politician (nearly $2m in total) without revealing who you are. In addition to that, there are a whole bunch of structures which have been created apparently to avoid the need to disclose the donations that each politician gets.

The free enterprise foundation was a high profile result of this sort of thing. People prohibited from donating – for example property developers simply found a way around the system. They did it through the free enterprise foundation. They paid the foundation which passed the money on to politicians.

This is a well understood issue

A recent Australian court case involved an argument by a donor who was ‘brazen’ about his reasons for providing money in the form of political donations. He said it was to secure power and influence.

Similarly, on the other side of the transaction as reported on Four Corners program which covered the subject. One politician says: ‘I don’t think they donate out of the kindness of their heart.’

How to end it ? Vote Green

There is a very simple way to end what’s happening. Vote for the Green party. They have a policy in place which is trying to bring the truth to light about the corruption caused by ‘toxic’ political donations.

banning

This does seem to be a root cause issue

The reason I think this is important is that it’s fundamental (it’s causing real problems in the real world) and can be acted on easily. If we were to stop politicians taking donations from private sector, their incentive would be correctly aligned. It’s also a really weird thing we just don’t question. Business giving elected officials money is clearly something we should have a laser beam on.

If there is nothing going on, what’s the problem with more transparency ? Why can’t we see who has donated – donated anything at all ? Luckily, incentives for journalists are still in place to report corruption of any sort after it’s happened which is why we hear a lot about this subject in the press at the moment. I love to see the daily announcements that are coming out about Apple having to pay $13bn in Ireland and McDonalds having to pay $500m in back taxes in Europe.

It’s interesting to observe how these systems operate. If politicians don’t voluntarily change their own rules around donations and the subject continues to generate the interest it has in the press recently, things could change of their own accord. If, ultimately, politicians don’t grant the people their rightful governance around donations, it could be the pitch forks come out, they could be forced to.

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