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(FORTUNE Magazine) - Yes, the Jack Abramoff scandal is a cancer eating away at the heart of Washington, fresh proof of the Beltway's culture of corruption, etc., etc. But for business, this tawdry episode is a reminder of something that gets too little notice: A company's return on lobbying and campaign contributions--let's call it return on political investment, or ROPI--is astronomically higher than any real investment it can make. These remarkable returns, not any inherent venality, explain why the pseudo-reforms likely to come in Abramoff's wake will do nothing to stop the meltdowns from recurring.
Consider the puny dimensions (in dollar, not legal, terms) of today's villainy. Congressmen have been rushing to return the roughly $200,000 in campaign contributions Abramoff has made since 1999; that's some $35,000 a year, spread over a lot of officials. Even when you toss in the $5 million in other people's cash Abramoff helped direct to pols and their causes, it's just $830,000 a year, again divvied among dozens of open palms. Yes, there were some primo golf trips, but except for Abramoff himself, who bilked Indian tribes to the tune of many millions, the cash going to politicians was small beer. But such pittances can buy results, from tax favors to protection against competition.
Wealthy individuals have always understood one aspect of this game. Limits on contributions (say, $4,000 per couple in presidential campaigns) explain why many rich folks give to all comers; it's a low-cost way to retain access and "friendship," a prudent hedging strategy. Much less appreciated is how the return on lobbying investments can be truly enormous.
Recall that, when it comes to ordinary investment decisions, companies calculate their cost of capital--currently averaging around 12%--and pursue the most attractive projects exceeding that "hurdle rate." In lobbying, a 12% ROPI is often surpassed every two hours. Mortgage giant Fannie Mae, for example, spends $9 million or so a year lobbying to preserve measures that lower its financing costs; depending on whom you believe, this subsidy is worth $20 billion and perhaps far more. The trial lawyers' association finds that for a mere $5 million in lobbying a year it can keep tort reform at bay--along with those pesky caps on damages that would cost the plaintiffs bar hundreds of millions.
But the Pentagon may offer the most measurable examples. Lockheed Martin has spent $55 million lobbying since 1999, during which time it has won roughly $90 billion in defense contracts. ROPI: 163,536% (no, that is not a typo. And yes, it assumes lobbying is the only reason things happen in D.C., so let's stipulate that product quality matters, but that without a political "salesforce" you can't close the deal). By contrast, Boeing's lobbying investment looks downright shoddy, with $57 million over the same period producing about $81 billion in contracts, for an ROPI of just 142,000%. (Can't you hear the irate CEO? "Dammit, Carruthers, if you can't get our political returns up past 150,000%, I'll find someone who can!") Throw in campaign contributions and other minor adjustments, and the figures may come down a tad, but we're still talking a whole lot more than 12%. Seen this way, Abramoff is a kind of perverse reformer whose real crime was raising the price of political influence to market rates.
Every lobbyist in D.C. knows influence is wildly underpriced, but none before Abramoff had the chutzpah (normally associated with Third World officials) to extract some of that value. Those Indian tribes could fork over $20 million to Abramoff and his cronies and still make out like bandits, because extending their casino franchises and skirting taxes were worth far more. In other words, their ROPI was still fabulous--just not as fabulous as is customary in Washington. Who knows? If Abramoff had billed for those millions honestly and not via kickbacks and other felonies, we might have flushed into the open the absurd heights of today's ROPI. Then we might be debating true reforms, not the gimmicks Congress will cook up (bye-bye, golf junkets!) to inoculate members on the campaign trail.
While companies understandably view today's outsized ROPI as an opportunity, it's corrosive in a democracy. Take the estate tax, which a handful of wealthy families have been working to scrap. They invest a few million, and if that works, the nation's top heirs get $30 billion to $40 billion a year (and rising) in perpetuity, for a world-beating ROPI of close to infinity.
The adage that counsels "when something seems too good to be true, it usually is" simply doesn't apply to political investments. Jack Abramoff shows us there's something wrong about that.