Summer School 3: How government decides what to spend our money on

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Speaker 5 Welcome back, class, to Planet Money Summer School, the only economics degree you can get just by listening. No tuition, no textbooks, no frustrating group projects.
Am I right?

Speaker 5 I'm Robert Smith, and this season we are tackling power and money, the profound ways that the government influences business and the economy. This is class number three, you are what you pay for.

Speaker 5 Last week we talked taxes, how the government raises money. This week we get to decide what to spend it on.
Woo! Government shopping spree.

Speaker 5 But reality check, although it seems like the government can spend an endless amount of money, it cannot do all the things it wants to do.

Speaker 5 So the big question in this week's lesson is, how do we decide? Why does the government spend so much money on some things and not other things? And honestly, is there any limit?

Speaker 5 The United States is at, let me check here, more than $36 trillion in debt. Is that too much? Kind of feels like too much.

Speaker 5 Every week we have a couple of case studies and a guest professor to teach us the big lessons. Welcome today to Aviva Aaron Dine, Director of the Hamilton Project at the Brookings Institution.

Speaker 5 What exactly does the Hamilton Project do? It's not based on the musical, right?

Speaker 7 It's not based on the musical, though it's funny. It gets its name from sort of the same rehabilitation of Hamilton that is embodied in the musical.

Speaker 5 I guess it is hard to make a rhyme based on the Hamilton Project, but of course, I'm going to try. It makes multimodal proposals on quality fiscal policies.

Speaker 5 Yeah, not ready for Broadway. Moving on.

Speaker 5 For our purposes here at Summer School, we should say that Aviva has in the past been inside the very government we are going to talk about at the Treasury Department and at the Office of Management and Budget.

Speaker 5 So Aviva, you have been there for the taxing, you have been there for the spending, and the cloud hanging over all those discussions must be the national debt.

Speaker 5 Now, of course, like as an individual, I have to pay my debts eventually.

Speaker 5 Why doesn't the government ever balance its budget?

Speaker 7 So government is different fundamentally because it has a tax base. And there are, in fact, some very good reasons that a government might not balance its budget every year.

Speaker 5 Yeah, I mean,

Speaker 5 we might be at war. That often sends up the deficits.
The country could be in recession where it makes sense to spend a ton of money to perk up the economy and help people.

Speaker 5 But there's not always an emergency reason, right?

Speaker 7 Yeah, even outside a recession, it can make sense for the government to borrow to invest.

Speaker 7 The concern, and I would say we do have this concern now, particularly as we look out 10, 20 years, the concern is when your debt is growing too rapidly relative to your economy.

Speaker 7 And that's what projections would say is going to happen in this country going forward if we don't do something that changes our fiscal trajectory.

Speaker 5 So to put it in terms of my own life, if the money I owe to the bank is growing faster than the money I make, my salary, then I'm getting deeper and deeper into this hole.

Speaker 5 And for governments, they're already in a hole and they might want to stop digging at some point.

Speaker 7 And the reason for that is that the size of your debt and the growth rate of your debt relative to your economy is sort of telling you what would you need to do if you abruptly needed to reduce your debt.

Speaker 7 Is that a manageable proposition where you have lots of policies you could plausibly pursue to do that? Or is it an unmanageable proposition?

Speaker 5 Okay, so you seem to be saying

Speaker 5 if there's some huge thing the government has to spend money on, like a crisis, or perhaps the financial system starts to worry about lending the government money, we could always theoretically increase taxes as a country to stabilize the debt.

Speaker 5 But it makes a difference if you have to theoretically increase taxes by 3%, which may be manageable, or if you have to increase taxes by 10%,

Speaker 5 which is definitely going to get you in trouble. Like a 3% tax hike is easier to sell.

Speaker 7 And, you know, we're a big country. We're a wealthy country, we absolutely have policy tools with which we could do that.

Speaker 7 But the more the debt grows as a share of the economy and the more it's rapidly it's growing, the harder it is to make that stabilization.

Speaker 5 So on today's show, we are going to peer inside the budget and see what we can do to slow this roll a bit.

Speaker 5 It's easy to rant about big government, but what if everything inside the budget is actually there for a good reason? Then how do you make the hard choices?

Speaker 5 Get your calculator out for After the Break.

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Speaker 5 Planet Money Summer School back in session and doing math on the radio, which is always fun. Pay attention, everyone.

Speaker 5 We are going to go over everything our government spends money on in exactly 10 minutes. This is from an episode we did back in 2017.
Professor Aviva Aaron Dine,

Speaker 5 what should the students listen for in this episode?

Speaker 7 I think the question is, what are all these programs doing? What do these policies and programs accomplish?

Speaker 5 This episode was hosted by Jacob Goldstein and Stacey Vannick-Smith. And even though it was made eight years ago, the percentages of the government budget are roughly the same.

Speaker 5 One thing to mention, though, when we talk in this episode about President Trump and the Republicans trying to make budget cuts in things like Medicaid, we are referring to his first term and not the current moves in his second term to make those cuts.

Speaker 5 The more things change.

Speaker 10 Okay, here's how it's going to work. We're going to put 10 minutes on the clock and we're going to cover the entire federal budget.

Speaker 11 Every second of that 10 minutes will will be worth $6.4 billion.

Speaker 10 So the small programs, they're going to go super fast.

Speaker 12 Big programs, nothing but time.

Speaker 10 And we're going to bring in a bunch of people from Planet Money to help us out. So the first piece in our show today, Robert Smith, is going to talk about Medicare and Medicaid.

Speaker 10 That is 29% of the federal budget. So they will get 29% of our 10 minutes.

Speaker 5 Start the clock now. You know how there's always this debate about whether the federal government should have a responsibility to pay for health care? Well, I've got news for you.

Speaker 14 It already does.

Speaker 5 The federal government pays for the health care of 120 million Americans. People over the age of 65, families with low income, people with long-term disabilities.

Speaker 5 They're all covered by Medicare and Medicaid. Medicaid and Medicare.
Although I always mix them up. Everyone does.

Speaker 15 I had some embarrassing errors when I was a new health policy reporter where I would mistake these in stories and lots of people would send me angry emails.

Speaker 5 This is Sarah Cliff, a writer for Vox.com.

Speaker 16 She co-hosts the Weeds podcast.

Speaker 15 I heard a terrible way to remember it.

Speaker 11 Oh, I want to hear it.

Speaker 15 Ages ago, someone told me, you care for the old and aid the sick? Or no, aid the poor. That's what it is.

Speaker 11 See, it's a it's a terrible one. Okay, I have a better one.

Speaker 5 Silver hair, Medicare. Underpaid, Medicaid.
If we live long enough, we all get Medicare. But even if you don't consider yourself poor, you might also find yourself on Medicaid.

Speaker 15 It actually finances a lot of long-term nursing home stays.

Speaker 15 So a lot of middle upper class Americans eventually do end up on Medicaid when they need that kind of coverage and they've kind of whittled away their savings.

Speaker 5 And there you have it. Hey, Stacey, how much time do I have left?

Speaker 11 You've got about a minute and a half.

Speaker 5 Minute and a half.

Speaker 10 Yeah, you got it. This is the big, this is the biggest part of the budget.
You got some time.

Speaker 11 Okay, let's go get some coffee.

Speaker 11 Let's go.

Speaker 11 We got time.

Speaker 16 We have some time.

Speaker 5 And I got to explain one more thing about Medicaid.

Speaker 11 Okay, so we've all heard about Obamacare.

Speaker 5 We've all heard about how in Congress right now the Republicans are undoing Obamacare. But what the fight is really about is the future of these programs we're talking about, the future of Medicaid.

Speaker 11 Underpaid.

Speaker 9 Underpaid.

Speaker 5 Do you want, should I get your cup?

Speaker 11 A black coffee, please.

Speaker 5 One of the big ways that Barack Obama got people insured was to expand Medicaid. Medicaid costs are shared between the federal government and the states.
States run the programs.

Speaker 5 And Obama essentially said, we are going to give you more federal money, a larger share of our budget, if you just cover more people.

Speaker 5 And so this part of the budget pie I'm talking my way through, this got larger.

Speaker 5 So when the Republicans are thinking, God, how do we undo Obamacare, what they thought is, let's put some caps on the growth of Medicaid.

Speaker 5 And what that means in sort of real world terms is that if the Republican plan passes, 15 million fewer people covered by Medicaid.

Speaker 5 So if we were going to do this show again in 10 years, there might be slightly less time for government health care, perhaps.

Speaker 11 No coffee break?

Speaker 5 Maybe time for a short coffee break.

Speaker 11 You gonna drink that, by the way?

Speaker 4 No.

Speaker 11 Transportation, 2% of the budget.

Speaker 17 Kenny Malone. We asked former Secretary Rayla Hood to write us a haiku.
He declined, so I made one for him using words from his old speeches.

Speaker 11 A highway crumbles.

Speaker 17 Neath our wheels, one big pothole.

Speaker 11 It spreads across the roads.

Speaker 17 Thank you all very much. Thank you very much.

Speaker 10 Next up, Social Security. It accounts for 24% of federal spending.
Jacob, take it away.

Speaker 11 Social Security is really big because almost everybody gets it. In particular, almost every American over the age of 66, including billionaires.

Speaker 11 You know, if Warren Buffett wants Social Security, he can get it. I called up Ted Marmor to ask about this.
He's an emeritus professor at Yale, expert on Social Security.

Speaker 11 Why does Warren Buffett get Social Security checks?

Speaker 18 That's a classic dumbbell under

Speaker 18 formulation. Okay.

Speaker 11 Marmer says billionaires getting Social Security is not a bug, it's a feature.

Speaker 11 When Social Security was created back in the 30s, some Democrats did want to create a version of the program where the money just went to poor people.

Speaker 11 But President Roosevelt was like, no, a program like that just won't survive politically. What we need is something that almost all working people are eligible for.

Speaker 11 And he said, we should fund it with a special tax that almost all working people pay. That way people will say I paid into Social Security, I deserve Social Security when I retire.

Speaker 11 And I will vote out of office any politician who tries to take it away from me.

Speaker 18 His terms in which he expressed it was, God damn it,

Speaker 18 I'm going to be sure to have a program that no damn Congress is going to mess with because people are going to feel

Speaker 18 entitled.

Speaker 11 But I do think this leads to a lot of confusion. You know, people seem to think, oh, I contributed to Social Security.
They're holding on to my money in a special box. This is not how it works.

Speaker 11 My money is paying for retired people right now, and I'm crossing my fingers that in 30 years, when I'm retired, there will be 40-year-olds who are paying me.

Speaker 14 Jacob. Yes.

Speaker 18 I'll bet you any money, and I want you to pay me off by putting it in my grave.

Speaker 11 Okay.

Speaker 18 The probability that you will receive Social Security benefits for retirement is so high that you should be declared irrational for believing so.

Speaker 11 Really?

Speaker 11 Why are you so confident?

Speaker 18 Why am I so confident? Because I understand the political economy of the United States.

Speaker 11 Because Roosevelt was right.

Speaker 4 Correct.

Speaker 11 Because almost everybody pays in and gets paid out, including billionaires, Marmer says Social Security is politically bulletproof.

Speaker 10 Social services and education, 3%.

Speaker 10 And for this segment, we wanted to get someone who is currently a beneficiary of public education, aka Jacobs Kidd.

Speaker 19 Most Most funding in this area comes from state and local governments.

Speaker 9 The federal government's biggest education.

Speaker 19 The federal government's biggest education line item is grants for low-income college students.

Speaker 11 National defense is 15% of federal spending.

Speaker 13 Stacey.

Speaker 10 We spend $1.5 billion every day on defense. And this is famously one of the most controversial parts of the budget.

Speaker 10 I mean, Democrats often come in and they want to cut defense spending, then Republicans come in and they want to raise defense spending.

Speaker 10 But somehow, in spite of all of this, if you look back over the last 20 years, the share of the budget devoted to defense has not really changed that much.

Speaker 10 And actually, that is pretty much true for most of the federal budget. It stays pretty steady.
And I was totally shocked by this. So I talked to this guy, Bill Valdez, about it.

Speaker 10 He worked for the Energy Department for more than 20 years. He wrote a lot of budgets.
And he told me his theory of what's going on here.

Speaker 14 You know, the real thing that keeps the budget stable is that there are all these special interest groups.

Speaker 10 Hundreds of lobbyists battling for government funds, hammering out deals with different states and different politicians. Bill says the budget status quo is really this hard-earned equilibrium.

Speaker 10 And he thinks this is a good thing, ultimately. It creates stability.
So we actually have lobbyists to thank for our stable budget?

Speaker 11 Yeah,

Speaker 14 in many respects, yeah.

Speaker 7 It's like a little shout-out to the lobbyists.

Speaker 11 Well, they get so little love.

Speaker 20 I feel like that's okay, right?

Speaker 10 Don't you think that maybe the budget should be their Valentine?

Speaker 10 President Trump has proposed increasing defense spending by cutting other parts of the budget. Bill says he will have to get through the lobbyists first.

Speaker 5 Next up, income security.

Speaker 11 13% of the budget. Here is Noelle King.

Speaker 21 Yes, income security. So think of this as programs for poor people.

Speaker 21 It includes a bunch of different things like the earned income tax credit, housing assistance, unemployment, foster care is a small part of it.

Speaker 21 I'm going to talk about food stamps, which are officially known as SNAP. for two reasons.
Number one, food stamps are a really big program. Usage spiked during the recession.

Speaker 21 If you look at graphs, it's basically like a straight line going up. And it has stayed pretty high.
More than 40 million people are getting food stamps right now.

Speaker 21 And I think there is a lot of confusion over who gets them. So let's clear that up.
Two out of every three people on food stamps are kids, the elderly, or they are disabled.

Speaker 21 Of the rest, it's roughly split between people who are working but making very low wages, low enough to qualify for food stamps, and people who are not working but should be working soon.

Speaker 21 Because SNAP comes with work requirements. For the most part, if you are able-bodied and you don't have a job, you get cut off from food stamps after a couple of months.

Speaker 11 There you go.

Speaker 10 Interest on the national debt, 6% of the budget.

Speaker 8 And you can look at this in two ways.

Speaker 11 One, interest rates are really low right now, so the government was able to borrow money, spend it on goods and services for Americans. Great.

Speaker 10 But you could also say this whole chunk of the budget is just the interest on all the money we owe. And what we get in return for all this money is nothing.

Speaker 12 Four more seconds.

Speaker 10 This is feeling awkward.

Speaker 11 Veterans Affairs, 5%.

Speaker 16 Sally Helm, go.

Speaker 20 Yes, they provide things like health care and disability benefits for vets.

Speaker 20 President Trump wants to boost funding for the VA, but is proposing some cuts, including one for disabled vets once they're old enough to get Social Security.

Speaker 20 President Eisenhower tried to do something kind of like this in the 50s. He was a five-star general, so maybe he thought he could get away with it, but he got totally shut down by Congress.

Speaker 20 We'll see how Trump does.

Speaker 10 International Affairs, 1%. Nick Fountain, go.

Speaker 13 Yeah, this goes to operating U.S. embassies and consulates throughout the world, providing military assistance to allies, aiding developing nations.

Speaker 11 Everything else makes up about 3% of the budget. Let's bring it home.

Speaker 10 Justice, that's FBI, DEA, prisons, homeland security.

Speaker 11 Natural resources and environment.

Speaker 10 Science, space, and technology.

Speaker 11 General government, that's like mowing the White House lawn and paying congressional salaries.

Speaker 10 Community and regional development.

Speaker 11 Agriculture. Energy.
Gone. Woo! We did it.

Speaker 10 So we made it through the whole budget in 10 minutes.

Speaker 10 And I have to say, the thing that strikes me about the budget is that half of it, more than half of it, is just made up by three programs: Medicare, Medicaid, and Social Security.

Speaker 11 And then in the rest, overwhelmingly, the biggest chunk is defense.

Speaker 11 And so there is this old line that I still love, which is the federal government is basically a big insurance company backed by a large standing army.

Speaker 5 Jacob Goldstein and Stacey Vannix Smith from 2017. And the percentages you heard there are still roughly the same with a couple of notable exceptions.

Speaker 5 If we were doing the show again today, Nick Fountain would barely have time to speak. If the current plans hold, the budget for international aid and embassies will be cut to far less than 1%.

Speaker 5 And the interest on the national debt. The debt is now bigger.
The interest rates are now higher. The interest on the national debt is now double what it was, 13% of the budget, twice as much time.

Speaker 5 Ouch indeed. Let's bring back in our professor, Aviva Aaron Dine from the Brookings Institution.
As we listened to those 10 minutes of the budget, I kept thinking, why?

Speaker 5 Why does the government do these things and not other things? What's the big way to think about this?

Speaker 7 So I think you can put most of the things government does into one of two buckets.

Speaker 7 One is addressing a market failure, a case where there's something that prevents the private market from functioning well. And the other is redistributing income.

Speaker 7 So addressing a case where the private market is not giving us the distribution of resources that we as a society want.

Speaker 5 Why don't we start with market failure? What do you mean by market failure?

Speaker 7 Yeah. So this is a case where, right, there are lots of cases where markets work pretty well.

Speaker 7 If you want to buy a pair of shoes, A market economy is going to do a pretty good job of offering you a range of shoes to buy of different kinds, lots of different characteristics.

Speaker 7 They're going to be priced pretty close to what it costs to make them. It's going to work great.

Speaker 5 This is why we don't have government shoes.

Speaker 7 Right. And anyone who suggests we should have government shoes, right, you'd have some questions.
There are other things that the market is definitely not going to provide.

Speaker 7 So classic example, national defense. It's what economists call a true, a sort of pretty pure public good.

Speaker 7 We usually define this in technical terms as non-rivalrous, which means that the fact that you and I both get protection from the U.S.

Speaker 7 national defense apparatus doesn't really increase the cost of providing national defense.

Speaker 7 And non-exclusive, which means you can't really say to anyone living here, we're going to carve you out of our national defense protection because you didn't pay for it, right?

Speaker 7 So the market is just never going to provide something like that. And then there are lots of things that aren't pure public goods, but they have some characteristics and qualities of public goods.

Speaker 7 So this is a lot of things that the federal government does, like education, scientific research, infrastructure, national parks. In theory, could you imagine those being privately provided?

Speaker 7 Sure, but I think most people have a pretty strong instinct that there are reasons that those are treated as public goods, that we want to provide those on a common basis.

Speaker 5 So that is one reason why government would spend money for a market failure. The other one, you said, was redistribution.
Which parts of the budget are redistribution and why are we doing it?

Speaker 7 Sure.

Speaker 7 So a good example of a part of the budget that is principally redistribution is the Supplemental Nutrition Assistance Program, or SNAP, or what used to be called Food Stamps, that provides food assistance to people who have low incomes, whether elderly people who have low incomes, kids who have low incomes, people of working age who just lost their jobs and have low income.

Speaker 7 And that's a pretty pure case of

Speaker 7 In a market economy, if you just left the market outcome alone, many of those people would really struggle to put food on the table.

Speaker 7 And in fact, we have evidence that when you cut SNAP, people have more trouble affording food. When you increase SNAP,

Speaker 7 fewer people struggle to get food. And we've decided that that's a valuable thing to do.

Speaker 7 It's not addressing a market failure per se, but it's addressing a failure of the market to achieve the distributional outcome, in this case, lower poverty, lower rates of people who can't feed themselves, than we want.

Speaker 5 So that is the theory of how government budgets should be decided. Coming up after the break, we look at the messy reality.

Speaker 5 I don't want to spoil it, but let's just say that maybe, maybe the politicians who decide how to spend our money have some personal interests of their own.

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Speaker 5 Okay, class. In our next case study, we peer behind the curtain of the U.S.
Congress and find out that there are forces at work that might keep them from doing the most fiscally responsible thing.

Speaker 5 One reality is that senators and representatives want to keep their jobs and get reelected. And that takes donations.
Listen now to Illinois Senator Dick Durbin.

Speaker 22 I think most Americans would be shocked, not surprised, but shocked, if they knew how much time a United States Senator spends raising money.

Speaker 22 And how much time we spend talking about raising money and thinking about raising money and planning to raise money.

Speaker 5 In 2012, Planet Money and This American Life collaborated on a series of stories about how money and lobbyists influence politics.

Speaker 5 Alex Bloomberg and Andrea Seabrook began by tracking down a list of dozens of fundraisers that happen in Washington, D.C. every single week.

Speaker 6 The money changes hands in very specific places all over D.C. There are townhouses whose sole function is to be rented out as venues for this.

Speaker 6 Dozens of restaurants do a booming business catering small parties in private rooms.

Speaker 16 And there's one thing driving all this activity, a gnawing, relentless, voracious need for cash. To understand that need, consider Walt Minnick.

Speaker 6 Minnick is a conservative Democrat who represented a Republican-leaning district in Idaho. He was first elected in 2008, and after he won, he took just five days off from fundraising.

Speaker 6 Then, two months before he was sworn in as a congressman, he was back raising money for the next election, two years away.

Speaker 23 I needed to raise $10,000 to $15,000 a day, and you only do it by elbow grease.

Speaker 16 Let's stop and dwell on that statement for a second, shall we, Andrea? $10 to $15,000 a day.

Speaker 16 The typical cost of a congressional race is about a million dollars, although if you're challenging an incumbent, you need more.

Speaker 16 Minnick's goal was even more than that, $2.5 million, because he was in such a competitive district.

Speaker 23 I would spend two or three hours a day as a congressman

Speaker 23 trying to raise money.

Speaker 6 That's typical for a member of of Congress, and most of those hours are spent across the street from the Capitol in special offices set up by the parties specifically for this purpose.

Speaker 16 Special offices because federal law prohibits lawmakers from making fundraising calls from their own congressional offices.

Speaker 16 Neither party is eager to let reporters into these call centers, but we got a couple Democrats to describe what it's like in there. This is Oregon Congressman Peter DeFazio.

Speaker 12 If you walked in there, you would say, boy, this is about the worst-looking, most abusive call center situation I've seen in my life. These people don't have any workspace.

Speaker 12 The other person is virtually touching them, just like counters on the wall with telephones and people eight inches away from you talking on the telephone.

Speaker 22 We sit at these desks with stacks of names in front of us and short bios and histories of giving.

Speaker 22 This is Senator Dick Durbin, who says that on the Senate side, they'll have these things called power hours several times a week, where a bunch of senators will go into the call center and make these calls to people who are our faithful friends and ask them to give money or have a fundraiser.

Speaker 22 And then, if we're fortunate enough, we end up attending those fundraisers that we beg people to do for us. I mean, that is part of the conversation.

Speaker 2 And this goes on and on and on.

Speaker 16 Where do the names come from? How do you decide who to call?

Speaker 22 The names come from a history of giving. And many of them, it's hard for most listeners to believe, really aren't looking for much.
They want their team to win, in this case the Democratic team.

Speaker 22 They don't ask for special favors, but there are exceptions.

Speaker 22 There are some who won't waste any time to tell you what they think is the most important issue in Washington as they talk about their donation.

Speaker 22 I mean, it is part of the reality of the life that I live.

Speaker 16 Now, there is an easier way to relieve some of that pressure and raise money faster, a way that doesn't involve tapping out your friends.

Speaker 16 Just go to the people who already have big stacks of money set aside to give to politicians.

Speaker 7 Lobbyists.

Speaker 6 A lobbyist can throw you a fundraiser, a lunch at Johnny's Half-Shell, or a cocktail reception at Bullfeathers.

Speaker 6 And so every week, lawmakers and their staffs work the phones trying to find lobbyists to organize these events. Jimmy Williams used to get those calls.

Speaker 6 He was a lobbyist for the real estate industry for many years.

Speaker 17 A lot of them would call and say, hey, you know, can you host an event for me? And you never want to say no.

Speaker 17 Actually, no, you always want to say no. In fact, you always want to say no.

Speaker 17 But you can look on your phone with these caller IDs and you would be like, really?

Speaker 8 I'm not taking that call.

Speaker 16 Oh, so you would dodge calls for phone calls.

Speaker 11 Oh, yeah.

Speaker 17 Every lobbyist does it. Are you kidding? You spend most of your time dodging phone calls.

Speaker 4 Oh, yeah.

Speaker 16 This was one of the most surprising things I learned about this whole process. The way most of us generally think about it is absolutely backwards.

Speaker 16 We imagine the lobbyists stalking the halls of Congress, trying to influence members with cash. But more often than not, it's the reverse.

Speaker 16 The member is stalking the lobbyist, saying, hey, can I have some of that money?

Speaker 6 And it's hard to say no, Jimmy says, especially to a congressman whose work and votes he cared about. So he'd say yes, and then he'd have to round up a bunch of guests.

Speaker 17 So I call up my buddies down on K-Street from my buddy over at the credit unions or my buddy over at the insurance company or my buddy over wherever at the home builders.

Speaker 17 And I say, hey, dude, I'm going to do this event for this guy. And he sits on the House Financial Services Committee.
And do you guys have any money for this person? Is he in your budget?

Speaker 17 And the answer was usually, yeah, yeah, I got money for that guy. And so, all right, so cool.
So we'll come up with a date and then we have this fundraiser.

Speaker 17 And it's a breakfast or it's a lunch or it's a dinner or a cocktail reception. And everyone comes and they bring their checks or they mail their checks in.
And then you have it.

Speaker 6 We're talking thousands of dollars that the congressman will make in just an hour.

Speaker 16 And this brings us to the big question. What does the money buy? What are corporations and special interests getting in return for the billions of dollars they spend lobbying each year?

Speaker 6 There tend to be two views on this. If you're cynical, you think money buys votes.
Pure and simple. Washington is owned.
Money drives everything.

Speaker 16 But lobbyists and politicians will sometimes tell you the opposite. Money has no effect.
After all, they say there's always two sides, and both are giving.

Speaker 16 Exporters versus importers, bankers versus realtors, businesses versus unions. The money cancels itself out.

Speaker 6 When we asked Congressman Barney Frank about this, he said both of those positions are caricatures.

Speaker 24 People say, oh, it doesn't have any effect on me.

Speaker 24 Look, if that were the case, we would be the only human beings in the history of the world who on a regular basis took significant amounts of money from perfect strangers and made sure that it had no effect on our behavior.

Speaker 24 That is not human nature.

Speaker 6 On the other hand, he says there are things that influence a politician besides money.

Speaker 24 If the voters have a position,

Speaker 24 The votes will kick money's rear end anytime.

Speaker 6 But the fact is, most legislation your district doesn't care about. The stuff that makes the news is a tiny fraction of what Congress actually does.

Speaker 6 They're deep in the weeds of tax law and business code and replacing the and in subsection B of Title I with an or, things most voters have no opinions on.

Speaker 6 The only people who do care or who even understand what that small print means are the lobbyists and the industries and interests they represent.

Speaker 16 Consider the American Jobs Creation Act of 2004. This was a piece of legislation that lots of multinational corporations spent a lot of time lobbying for because it got them a huge one-time tax break.

Speaker 16 Some of their profits, the profits they made overseas, would be taxed at just 5%

Speaker 16 instead of the normal rate of 35%, a massive windfall.

Speaker 6 This law caught the attention of a tax professor at the University of Kansas, Raquel Alexander.

Speaker 6 She thought it might help her understand a pretty difficult question she and her colleagues had been considering.

Speaker 25 We know that people lobby for a reason, but we haven't really been able to quantify what's the return on their lobbying investment.

Speaker 6 With the American Jobs Creation Act, Alexander and her colleagues finally got something that could help them add up the lobbying costs and benefits.

Speaker 16 They simply compared the amount that companies spent lobbying with the amount they saved on their taxes, came up with a figure, a figure they called the return on investment for lobbying.

Speaker 16 Now, for some perspective, money in a regular old savings account, you'd be lucky to get a 1% return on your investment.

Speaker 16 On the other end of the spectrum, Bernie Madoff advertised annual returns of just over 10%.

Speaker 16 If you want to come up with a big, impressive-sounding lie, a 10% return on investment is what you say. The return on investment to lobbying, in the case of Alexander's study,

Speaker 25 22,000%.

Speaker 25 So for every dollar on average that these firms spent on tax lobbying, they received $220 in tax benefits from this repatriation provision.

Speaker 16 Were you expecting it to be that big?

Speaker 25 I was not.

Speaker 25 I was not expecting it to be that big at all. I thought I needed to go back and check my math again.

Speaker 16 So after the fifth or sixth time checking, you were like, oh, this is the number.

Speaker 4 After the 20th time of checking.

Speaker 6 In 2010, there was a total of $3.5 billion spent on lobbying. $3.5 billion.
It's hard to imagine that every one of those dollars got a 22,000% return.

Speaker 6 There's certainly companies out there that spend a lot of money and don't get what they want. They've just lost money.

Speaker 16 And it's not to say that the things they're lobbying for are bad public policy. There are lots of people, President Obama included, who think a lower corporate tax rate would benefit the country.

Speaker 6 Barney Frank and lots of others told us straight up: a lot of times the lobbyist knows much more about your subject than you do as a congressman.

Speaker 6 You depend on their expertise, and so you listen to their arguments.

Speaker 16 The problem is, those arguments are accompanied by a large check. The other side of the issue, you don't always hear from them.

Speaker 5 Alex Bloomberg and Andrea Seabrook from Planet Money and This American Life in 2012. Just last year, the amount of money spent on lobbying hit a new record: $4.4 billion.

Speaker 5 Big thanks to This American Life for letting us rerun that piece. If somehow you are just hearing about This American Life for the first time, check it out.

Speaker 5 It's available wherever you listen to podcasts.

Speaker 5 After the break, we'll invite our professor back to talk about an economic principle that explains why special interests often get exactly what they want.

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Speaker 5 We are back with our professor, Aviva Aaron Dine.

Speaker 4 You're back.

Speaker 5 So, in a democracy, we are essentially hiring these politicians to run our country in a responsible way.

Speaker 5 But there are all these pressures on them, right, to bring back more money to their districts and the national interest, of course. And as we hear in the story, to listen to what lobbyists want.

Speaker 5 And so, politicians really have to weigh competing interests over taxation and spending.

Speaker 7 Yeah, I mean, I think another economics concept that comes into play here is the problem of concentrated versus diffuse benefits. And so let's take an example.

Speaker 7 If I were looking for a place to save money in the federal budget, to save a significant amount of money, one of the things I would look at is reforming the way we pay hospitals versus doctors in Medicare.

Speaker 7 We sometimes pay more for the exact same health service if you get it at a hospital than if you get it at a doctor's office.

Speaker 7 It costs us a lot of money, causes all kinds of problems, probably makes care worse.

Speaker 4 But who would want that?

Speaker 2 Right.

Speaker 7 The challenge is whenever anybody suggests changing it, and many people have, you get a lot of pushback from hospitals.

Speaker 7 And they push back quite publicly and they say Congressman so-and-so is proposing to cause your local hospital to close. And a lot of people find that credible.

Speaker 7 Some voters may find that more credible than what their congressperson is telling them. And even more than that, the balance of interests is just very different.

Speaker 7 The hospital cares a ton about this payment reform.

Speaker 7 At best, the average citizen is going to save a little bit of money on their health bill, and they're going to see the national debt go down by a very little bit.

Speaker 7 And so they're just never going to care as much as the local hospital does.

Speaker 7 And I do think there are a bunch of problems in federal budgeting that have this quality you have concentrated interest on one side and diffuse benefits on the other.

Speaker 5 Yikes, the school bell is about to ring. Professor, perhaps we could go over some vocabulary words and concepts so that students can think about it when they hear about Congress debating the budget.

Speaker 5 Does a government program solve a market failure? What's a market failure?

Speaker 7 A case where the private market doesn't function effectively. For example, a case where the private market just won't provide a certain kind of service or good.

Speaker 5 And the government could step in.

Speaker 7 That's right.

Speaker 5 Redistribution.

Speaker 7 When we as a society say that we're not happy with the distribution of resources that results from just letting the market operate, and so we step in to achieve a different distribution of resources.

Speaker 5 When we talked about the problems of trying to balance the budget, we talked about concentrated versus diffuse costs and benefits.

Speaker 7 Yeah, there are a lot of problems in public policy where there's some stakeholders that benefit a lot from a particular policy, and there's a much larger number of stakeholders who would benefit a little bit from changing it.

Speaker 7 And those are circumstances where it's often hard to make changes.

Speaker 5 Aviva Erin Dine from the Hamilton Project, which is part of the Brookings Institution, thank you so much for coming to class today.

Speaker 7 Thank you.

Speaker 5 Man, the time flies when we are in class, but if you're eager to hear more episodes now before everyone else get a head start on studying, well, you can.

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