Globalization of Campaign Funding: The Problem of Private Money In Politics

By Adam Weinberg

Globalization and Political Campaigns
Does globalization necessitate a rethinking of the way we finance elections?

Debates over campaign finance reform have been framed around dueling needs to prevent political corruption while protecting first amendment rights. Proponents argue that financing elections through private money leads to corruption, because politicians are beholden to their donors and not to their constituents. Contrarily, opponents argue that money equals speech. Any infringement on the right to spend money articulating a political preference is a direct violation of the first amendment. What has ensued is a very important debate about the point at which money stops being speech and starts becoming a form of power used to drown out the voice of others.

Globalization shifts the debate. In the global economy, the question is not the point at which money stops being speech and starts becoming power. The question is whose money, and thus whose speech, should influence American elections? American law is governed by a clear principle that foreign governments, political parties, corporations, and individuals should not directly or indirectly influence any election. This principle is even extended to domestic subsidiaries of foreign corporations, who are allowed to only give contributions that come from domestic profits. Hence, there was an outcry of illegitimacy in the 1996 election’s with a Chinese businessman offered a contribution to the Clinton campaign, through the vehicle of nuns at a Buddhist temple. The administration was penalized, and the contribution returned. This is an important principle that goes to the heart of national sovereignty.

Yet, the globalization of corporate structures makes it virtually impossible to prevent foreign nationals from participating in U.S. elections, as long as private money is the financing mechanism for political campaigns. Take the case of Enron, an energy corporation that gave $2.5 million in the 2000 elections, making it the largest energy campaign contributor, and the 36th top corporate contributor.

Globalization And The New Style Investments In American Elections
Why did Enron invest so heavily in the 2000 election? What might it have hoped to gain? And how does this relate to its global investments and profits?

Enron’s campaign contributions were aimed at reducing and/or shaping any political discussion around energy policy. Campaign contributions are a form of business investment. Enron anticipated returns on their investment. By electing George Bush, there was the potential for the rejection of the Kyoto Accord, removal of CO2 caps for power plants, and proposed incentives for drilling in Alaska and other sensitive ecological systems. Each of these actions would appear to represent high returns on this modest investment.

•Rejecting the Kyoto Accord would permit Enron to expand its markets for energy and energy services in the US. In addition, if the US rejection weakened the international agreements around the Kyoto Accord, this would also expand Enron’s markets abroad.
•Removal of CO2 caps in US power plants would likewise expand Enron’s US market, and increase profits. The only environmental note in Enron’s 2000 annual report was one documenting the costs of air pollution as a drain on profits.
•Incentives for further drilling would offer new profit arenas for Enron subsidiaries, including its on-line transaction system for bidding on and moving energy supplies across and within national borders.

Enron would not be disappointed. In a scant half-year in office, President Bush has:

•promoted withdrawal from negotiating commitments to the Kyoto Agreement to reduce global warming gases,
•eliminated Clinton controls over carbon dioxide emissions from power plants, oincreased energy production,
•increased oil drilling, refining, and transportation;
•increased exploration of new nuclear power plants;
•decreased exploration of renewable energy sources; and
•increased deregulation of power industries.

These policy decisions are likely to translate into substantial profits for Enron. For example, Enron believes it has positioned itself to be the prime energy supplier in deregulating energy markets, since its breadth of services and subsidiaries, and its global reach of supplies and transportation options has prepositioned it better than competitors. In addition, part of the services it sells are risk-underwriting for power systems, facing uncertain deregulatory outcomes. Moreover, with its direct online marketing system, Enron can react faster in any geographic locale to bid on new opportunities for energy (and material) supply. And Enron has built both contractual and investment linkages to a variety of energy suppliers.

Under U.S. law, there might or might not be a problem with Enron giving money to the Bush campaign, to influence policy in favorable ways. At this point, we are stuck in a serious debate over the tension between preventing political corruption and preserving first amendment rights. Yet, the globalization of organizational structures changes the debate.

Enron has become a global firm that transcends any real national affiliation. In the past three years, foreign revenues have increased from 7% to 23% of their total revenues in the last three years ($22,898,000,000 up from 6,013,000,000 in 1998).

Let us consider the full implications of this change. On a pro-rata basis, the majority of campaign funding by Enron could consist entirely of earnings outside of the US. Whether this global revenue is actually used for this purpose is indeterminable, and also largely immaterial for our purposes. If foreign revenues are not directly used for campaign financing and other political investments, then these revenues fill in the voids created by Enron’s use of domestic earnings, and permit expansion of campaign funding.

One might argue that this has always been true. Many American firms have a long history of foreign earnings. Yet, we are witnessing a quantitative leap in the percentage of foreign earnings. Enrons foreign operating revenues have increased over 300% in the last three years. With markets opening in China, India, and elsewhere, this will increase over time.

But this is merely the tip of the global iceberg. The increase in foreign revenues represents a complex set of transnational relationships. These income come from transactions between Enron shareholders, national investors in many foreign subsidiaries or contractors of Enron. Moreover, Enron shareholders are likely to be themselves increasing located outside the US, as Enron stock is traded globally. This suggests that the $2.4M Enron political contribution can serve the following kinds of interests: U.S. shareholders, foreign shareholders of Enron; U.S. shareholders of contractual firms; foreign shareholders of contractual firms; U.S. managers of Enron; foreign managers of Enron subsidiaries; U.S. managers of contractual firms; foreign managers of contractual firms; and foreign and/or U.S. consumers. Enron is currently doing business across North and South America, Europe and Japan with plans to expand. Like many companies, it is going global.

Following is a dramatic example of the complex grasp of Enron, substituting its cross-border and cross-commodity transactions for the “invisible hand” of Adam Smith:

“Cominco Ltd, a zinc producer and an Enron Metals customer in Vancouver, British Columbia, worked with Enron to halt zinc production for six weeks and sell its power into the Northwestern power market, where it was needed. Enron North America protected Cominco by structuring a fixed-price swap to guarantee the sale price of the power, and Enron Metals arranged to supply a portion of the zinc required to fulfill Cominco’s obligations. Cominco’s profit from the deal exceeded the annual profit it makes from producing zinc…” [Enron 2000 Annual Report, 12]

Why is this a problem?
The globalizaton of Enron’s organizational structure allows foreign nationals to influence American elections in direct and indirect ways. Enron often does business abroad through foreign subsidiaries and/or partnerships with foreign companies. Bennett Harrison and others have called this networked forms of production. Firms are linked together through mergers and partnerships into global networks that share information, engage in long term contracts, and work within host countries to create and protect opportunities for other firms within the network. There are important implications. At the very least, foreign nationals are broadly part of the internal decision making apparatus of American firms. Such firms are heavily determining who can afford to run for political office in the United States.

Thus, the energy industry’s early support for President Bush made a substantial difference in his candidacy. It allowed him to run early, and kept others out of the race. The energy industry can no longer be defined as “U.S. energy firms”. The energy industry is a global network of firms with priorities, policies, and decisions being made by managers in an array of countries.

There is a more unsettling scenario. Many of the foreign firms will be companies operated by wealthy families with close ties to foreign governments (and the same family, in some instances). The election of U.S. President is very important to these national governments. Hence, decisions made internally to Enron, about who to support and the strength of that support, will be discussed among top management, which consists of the foreign managers with their ties to foreign governments. If the election is important enough, it is conceivable that a foreign government might underwrite a partnership or sale of a firm to an U.S. corporation as a way to have some influence in domestic policy through campaign contributions and the lobbying doors it opens. It is not a great leap of faith to imagine that the current Chinese government might be placing pressure on Chinese firms, to use their partnerships with American firms to gain access to U.S. politicians making decisions about free trade, human rights, and foreign policy (for example, our shifting stance on Taiwan).

There is another danger. At what point does a firm like Enron cease to be a U.S. firm? The principle of foreign nationals is partially driven by pragmatic politics. People influencing U.S. elections should be doing so based on their belief for what is the best interest of the US. In the future, firms like Enron will acquire more inputs and customers abroad. Hence, they will be mostly concerned about those countries, for which they are dependent for major profits. They are more likely to support politicians and policies that keeps that host countries economy strong.

If 60% if Enron’s employees and revenues are foreign, is it still an American firm? If 80% of its revenues are derived through partnerships with foreign firms? These are difficult questions to answer. They will become more prevalent in the coming years.

Minimizing Corporate Giving
How should the United States respond? One proposal for minimizing the dangers of foreign interference in U.S. elections would be to further regulate corporate giving. We could prevent firms from giving to candidates or to political parties. The logic behind such a proposal rests on a faulty understanding of the difference between hard and soft money contributions.

Hard money is regulated money. In federal elections, individuals are allowed to give $1000 to a candidate per year in a election ($1000 for a primary, and $1000 for a general election). An individual can also give $5000 to a PAC and to a political party. Individuals are capped at $25,000 a year. Soft money is unregulated money. Individuals can give unlimited amounts of contributions to political parties for “party building activities.” Most often, these funds are used to support candidates in fairly overt ways. Corporations can only give soft money. Hence, it would appear that a ban on soft money would solve the problems that just outlined. This is not true.

Most campaign contributions come from very wealthy individuals, who mostly give as a way to protect and promote their companies and trade associations. In fact, 95% of the money in the 2000 elections came from the wealthiest 1% of Americans. Most corporate donations are made by individuals as hard money contributions. Often this done through a practice known as bundling (one author will admit that his first post-college job partially entailed taking bundles of checks to a bank for a Congressman). To maximized influence, individuals bundle their contributions with others from the firm or sector. Sometimes this is done physically. At a fundraiser, a candidate will be handed a stack of checks, which sends the clear message “These checks come from individuals at X firm who support your candidacy.” Often it is done figuratively. In a recent issue of Newsweek, Michael Isikoff reports that in the last Presidential race, the Republican Party gave its fundraisers tracking codes for donors to write on their checks. An internal memo written by the head of electric power industry’s main lobbying group explained to potential donors why the code was important: “IT DOES ENSURE THAT OUR INDUSTRY IS CREDITED, AND THAT YOUR PROGRESS IS LISTED AMONG THE OTHER BUSINESS/INDUSTRY SECTORS” (capitalization used in the original document).

Banning corporate giving of soft money will do little to stop the influence of foreign nationals in U.S. elections. Bundling will increase. Opponents will argue that hard money is regulated and hence the potential for influence is also regulated. This is also a false premise. An individual can give a candidate up to $1,000 every year, with no more than a total of $25,000 per year. As a family, we can give $4,000 to a candidate per year (me, my wife, and my two kids) and $100,000 per year. For a Congressional cycle my family could give a Representative $8,000 or a political party $200,000. It is not a stretch to argue that a foreign firm could quite explicitly place pressure on U.S. managers of a connected firm to bundle. With 50 or 100 Vice Presidents of various sorts, a firm could heavily influence an election. In fact, there are all sorts of reports of fundraisers of this sort, where a trade association bundles with firms expecting their management team to attend and participate. One political party recently held a fundraiser inside a Washington embassy for a foreign government that needs to influence American elections.

Public Financing As A Reality of Globalization
In the global economy, we will continue to see growing profitability from abroad through the movement of domestic capital. The obverse will also true. Foreign investors may channel their influence through the transfer of profits back to the U.S. holding companies, thereby providing a kind of “domestic” laundering of foreign interests.

It might be time for a more serious and sustained conversation about public financing of elections. A number of states have been experimenting with Clean Money systems. Under Clean Money a candidate has to collect a certain amount of contributory signatures, defined as small donations. The donations are small enough to allow everybody to contribute, yet large enough to demonstrate support: $5 is the typical amount. Once enough signatures are collected, the candidate is given a set amount of money for their campaign. In return, they agree not to take any money from private sources. Early experiments in Maine and Arizona suggest that Clean Money works. More candidates run for office. The pool is more diverse. Likewise, voters seen to prefer clean candidates. Finally, candidates report feeling freed to act as public servants.

Globalization Movements And Clean Money
Recent protests around globalization belie a belief that globalization is not benefiting millions of the worlds poor. The real battle is not over the potential for globalization to create benefits. The battle is over the actual distribution of those benefits, and the actual distribution of costs associated with producing those benefits. Globalization is really an economic opportunity with a political problem. We need stronger democratic mechanisms that can harness and shape the face of globalization, and ensure the distribution of opportunities and gains. Since the United States is largely shaping globalization, it would make sense to start here. We need to make our political system more democratic.

This means that elections must be fair and open. It also means that elected officials need to be responsive to their constituents. In a recent issue of the Harvard Journal of Public Policy, Congressman Harold Ford wrote, “the increasingly exorbitant cost of running for public office allows special interests to exert too much influence over decision making in government, and accordingly, hampers average citizens’ ability to make their own views heard in a meaningful and influential way.” Thus, it seems clear that we will continue to have important and spirited debates over campaign finance reform. As we do so, we should understand and include the problem that the globalization of organizational structure adds to these debates.

The author of this article, Adam Weinberg, is a co-founder of Democracy Matters.

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