What Reason Is There to Be Pessimistic About the United States?: DeLong FAQ

Weekend Reading: Daniel Davies: Why a Speech from Barack Obama is Worth $400,000

Weekend Reading: Daniel Davies: Why a speech from Barack Obama is worth $400,000: "What do you get when you pay $400,000 to Barack Obama for a speech?... https://www.ft.com/content/35802190-2c06-11e7-bc4b-5528796fe35c

...Or if you recruit George Osborne, former UK chancellor, to a four-days-a-month advisory role at a salary of £650,000 a year? In a former job at an investment bank, I occasionally produced write-ups of meetings at which “global advisers” and “senior fellows” mingled with the corporate finance crowd, and often speculated on why we were spending so much money on the retired political upperworld when it could otherwise have gone into the bonus pool.

Pure and simple influence-buying is a lot rarer than people on the outside might think. These days, anyone in a position to do regulatory favours for a big bank is going to have conflict-of-interest policies all over the place. In any case, lobbying is the job of lobbyists, best done in dark corners and private offices, not by paying for a public speech in an auditorium.

After observing these gatherings at length, in the days when I used to get half of my calorie intake from conference room sandwiches, I concluded this could not be the explanation—the expenditure is just not in proportion to any realistic guess at the influence bought, especially when you compare it with the salary of a proper 24/7 lobbyist. Instead, the old joke is true. Politics really is showbusiness for ugly people.

If you pay serious money for a speech from someone who has succeeded at the top level of politics, the one thing you are going to get is a really good speech. A “global adviser” of the highest calibre is going to give you some interesting advice. Not as much or as useful advice as you would get by spending the same money on specialists, of course. But the fact that there is genuinely relevant business content there means that you can market the event to clients in a way that would be much more difficult for a day at the races, or front-row tickets to a pop concert.

Considered as a form of entertainment, I can testify that rubbing shoulders with the great and powerful is pretty good fun if someone else is paying. They are interesting people; a small amount of grovelling can pay a huge return in name-dropping anecdotes that can be used at dinner parties for years.

Banking and corporate finance are relationship businesses, and political household names are marketing gold. They attract the kind of people who are otherwise very difficult to get hold of: they make the clients feel important, and burnish the image of the banker who organised the event as someone who is at ease in the corridors of power. You need to secure only one advisory role on a big deal to justify years and years of paying for former world leaders to decorate your corporate social life.

The fundamental insight here is that the reason that we can be sure that these payments are not purely transactional is that nothing in investment banking is purely transactional. Across fields from advisory to research to capital markets, bankers are used to working on spec, building relationships and trust, and eventually getting paid at the time of a big transaction. This is not a transparent pricing model, and for that reason it is generally hated by regulators. It is, however, a very elegant emergent solution to a serious problem of information economics—the fact that it is impossible to tell whether a piece of content or advice is worth paying for without consuming it. The relationship model lets clients “try before they buy”, at the expense of breaking the connection between any particular piece of service and any particular piece of revenue.

So payments to former politicians for speeches and access shouldn’t be seen as straightforward purchases of services; they are one of the ways in which bankers invest in an overall ecosystem that they think benefits them. This is a fairly uniquely bankerish way to do business, and there is certainly a legitimate question of whether it benefits society as a whole. But it’s not a quid pro quo. You don’t pay $400,000 a speech because you want to hire President Obama — you pay it because you want to be the kind of guy who can hire President Obama.