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Election cycle advertising, casinos, and trickle down economics

  08/18/12 23:40, by , Categories: Informative

Reddit user Loanhighknight provides an insightful take on the economics of political ads, casinos, and trickle-down theory. It’s a long read, but I think it’s worth it.

Question: If billions of dollars are being spent on this election cycle for advertising, doesn’t that mean that all that money is getting injected into the economy? Shouldn’t that be helping at all?

Your question involves the economics of elections, which is actually not something we know all that much about since it changes election cycle to election cycle. But I’ll take a stab at answering you given what we know about economics generally and you can take it or leave it.

If you get nothing out of this answer but the second half of this sentence you’ll understand the issue rather well: Not all economic activity is equally stimulative. This is an extremely important point, not just in the context of campaign spending, but in ANYTHING involving economic stimulus. A dollar spent on anything, be it ditch-digging or groceries or on a new computer or on a campaign ad will create value in the economy because the guy you paid can now buy something with that dollar, but a dollar spent on Thing A was necessarily not used for Thing B–and not all Things produce the same amount of value. Therefore, there are some things that are better for the economy than others, and it turns out, campaign spending is less good for the economy than the things we would otherwise spend money on.

Okay, so let’s get more specific by starting with the act of donating to a campaign. Let’s say you give the maximum amount to a national campaign: $2500. That money goes to a campaign who will want to use it to advertise in a competitive district–these districts are usually cities and their surrounding suburbs (politically, they tend to be the swingiest districts so they get a lot of attention from campaigns). The campaign needs to spend your money on two things to advertise in these places: 1) they need to create a commercial and 2) they need to buy the air time.

1) When a campaign or PAC (super or otherwise) creates a commercial, it will use a few researchers and writers to get down what they want the commercial to say and look like, and then it’ll hire a firm that will in turn hire a few actors and a director. They are usually able to put a full 30-second commercial together in a day or two, so none of these people are getting paid much. The real cost of making an ad comes from buying the air time.

2) As I said, the campaign knows where they need to advertise. The broadcasters in that area will probably already know that their commercial slots are going to be valuable during the election season, so they will want to jack up their rates to get the most out of the increased volume of commercials (supply–as in, the number of commercial slots–stays constant but the demand increases because two parties of huge, competing advertisers will want to advertise on the same network). So on the surface, this seems like it would generate a lot of revenue for the networks, which seems stimulative, and it is. But there are a few other issues at play that will temper that effect. As I said, the supply remains constant so if campaigns are buying up these slots, that means that other, probably local, companies can’t have them. In short: campaign commercials eclipse commercials for businesses. In addition, by law, networks have to sell their slots to campaigns at the “most preferred rate,” meaning, they need to sell their slots to campaigns as though the campaigns were their best customer. So in order for networks to get the most out of this boost in business, they need to raise rates on everybody–including their usual best customers. This can and will force customers out of the market for ad-time, meaning they can’t reach their customers, meaning they will probably experience lower sales.

And of course, going back to your $2500 donation, that is $2500 you can’t spend on groceries, or fixing your car, or traveling, or eating out, or any of the other things that are generally seen as having very high value returns for the economy as a whole.

Now, all this–paying the makers of the commercials only a little bit and pricing out other ad-makers–would be fine if the products that the advertisements are selling produces more value in the economy than they eclipse. But political ads don’t produce value. All the campaign advertisers get is a vote, which has little to no economic value.

(Sure, you could make the argument that getting someone to vote Republican will pay off if you are in a certain demographic, or that getting someone to vote Democrat will pay off if you are in a certain other demographic, and so in that way the vote produces value, but that value is uncertain and extremely difficult to measure, and if you’re willing to bet on that sort of thing, you probably wouldn’t be worried about the comparative value of elections.)

All this leads me to say this totally unsolicited thing: Yes, campaigns probably cost the nation some money. But it’s probably something the American people are okay burning some money on, even if they do grumble about it every cycle. And finally, all of this election spending will be such a tiny percentage of the trillions of dollars in commerce Americans will do this year that we won’t really experience a difference.

TL;DR: Not all spending is the same. Campaign spending probably does not produce as much value as the spending that otherwise would take place, so it probably depresses the economy a little.

Question: What about the big spenders like the Koch brothers. Billionaires propping up entire superPACs are pumping out much more than the $2500 I could drop on an election. Does all that money have the same irrelevance to the economy of shmoes like me?

Depends on the investor, I would think.

The argument that these people are stimulating the economy more than normal because they’re calling up big sums of money from their trove of money that otherwise would be doing nothing is USUALLY false. See, the biggest misconception people on the left have–and I can say this, because I am on the left!–is that billionaires are just sitting on piles of money that aren’t producing anything. In truth, wealthy people rarely stockpile huge sums of wealth–they invest it.

The Koch family possesses an oil fortune, so presumably their fortune is invested in interests compatible with that business (manufacturers, refiners, etc.). And they probably have a large amount of money in securities and such that ultimately make loans for you and me possible. So in the case of the Koch brothers, I would feel comfortable assuming that my original “it’s totally irrelevant” thesis would stand.

But not for everyone. Sheldon Adelson (the guy who continually propped up Gingrich and is now promising to donate $100 million to Romney’s super PAC), unlike the Koch brothers, has a business which actually (at least arguably) pulls money OUT of the economy. He owns a casino business. Therefore, the case could be made that every dollar he doesn’t spend on improving that business helps you and me a little, but, still, ultimately, I don’t think it’d be measurable.

Question: Wait, but doesn’t the money that gets spent at casinos end up recirculating into the economy anyway? The casino pays its workers, buy food and supplies. At the end of the day, how is it different from, say, a movie theater?

Not to get too super-liberal or anything, but there is, I think, a compelling argument that the amount of opportunity and revenue generated by a casino is outpaced by their social impacts–namely that the costs associated with gambling (things like bankruptcies, need for more policing, creation of a bureaucracy to regulate the casinos) are socialized through the nearby community while the profits are privatized and whisked away, out of the community the gamblers live in.

I should have made it more clear that there isn’t a hard-and-fast agreement on either side. Obviously casinos argue that they act as a local stimulus; as somebody who lived fairly close to Atlantic City and saw the complications associated with the casinos, I do not find that argument particularly compelling.

Question: What you wrote above about the wealthy investing most of their money rather than sitting on it sounds like (if broadly applied) kind of a justification for trickle-down economics. I know it isn’t, because you said you’re from the left, so… could you fill in the gaps for me?

Good catch! Yeah, it sounds sort of like it could be advocating trickle-down, doesn’t it?

So I guess it’s worth saying where the left and the trickle-downers agree and then go from there: we all agree that investing in other people is a good thing for the whole economy. The plurality of economists agree with this, regardless of political affiliation. And both sides agree that it’s important to remember that we all give money to other people: if you’re poor, you help others run their businesses by buying their goods; if you’re middle-class, you do what the poor do AND you can save for retirement (which is really putting money in a 401k or a Roth IRA or some other managed savings account where an expert decides where would be a good place to put your money); if you’re wealthy, you do what the poor do AND what the middle-class does AND you also invest directly into businesses to accrue “capital gains” (which is just a fancy term for “my investment got more valuable").

The point where the left diverges from the trickle-downers (or the supply-siders, or the Romneynomics-folk, or whatever they’re calling themselves these days) is where the trickle-downers begin to provide extra incentives (especially tax breaks) to those who invest in others in the “capital gains” way that only the wealthy have the resources to do. We oppose this, not because investment isn’t good for the economy, not because we think rich people are rich enough already, not because we think doing away with it will balance the budget, but because it does not actually make rich people more likely to invest their money. The wealthy were ALWAYS going to do it, because it’s a really sweet way to make more money.

The trickle-downers performed some sort of logical and economic acrobatics to make it seem like investments that produce “capital gains” are inherently different than the other methods of accruing wealth, and therefore should be taxed differently. Economically, it’s just a form of investment that is not intrinsically different than the investment other people do, and this differentiation is totally senseless.

But we, as a nation, do all sorts of economically senseless things–many of which the left love!–so the real metric we should use is “do they make people do more good?” And the answer is unequivocally “no.” The capital gains tax has no measurable impact on investment rates among the wealthy. In fact, in times when the wealthy were POURING money into investment markets, capital gains taxes were very high. Because it does not affect behavior and benefits the rich more than the poor, trickle-down ideology is referred to as “regressive.” And that’s what it is.

TL;DR: Investment helps everyone; trickle-down is regressive. That’s why you can support one and reject the other.

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