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SEIFFE:  Politics And The Time Value Of Money 

Thursday, March 6, 2008

By Ralf Seiffe

Tony Rezko’s trial for political moneyshines will prove that cash is the lubricant of politics once again.  In another it also spotlights a pillar of economics—the time value of money.  This eternal truth holds that cash on hand is worth more than funds that will materialize later because cash is immediately useful and the future is uncertain.  In politics, the functional equivalent is “early money” because it can be spent right now to build name recognition and sometimes just reporting it can intimidate rivals into staying on the sidelines.  Early money is the most important ingredient in a campaign so politicians work hard to raise it.  But, even underway, campaigns need more money; raising it becomes so important that some pols do not care where it comes from as Rezko and others like him seem to prove.  Politicians accurately perceive that the risk/reward ratio of taking tainted money is not a disincentive.  So, one wonders, what incentives could be created to make politicians more sensitive to the character of their donors? 

If you doubt the time value of political money, consider a group of Democrat women who support candidates advocating permissive abortion laws.  They have created a funding mechanism to help their favorite politicians with something called “Emily’s List”.  There is no “Emily”; the organization’s name is an acronym for “Early Money is Like Yeast”.  These donors recognize that their money creates infrastructure and awareness for beneficiaries which, as time goes on, can be leveraged to yield much greater support from the public at large.  They believe that early participation magnifies the utility of their money.  They are right. 

Less savory characters recognize this phenomenon, too.  Political entrepreneurs are so noxious because they see opportunity to create permanent influence by providing money to politicians early in their careers.  Then, once they make that connection with the up-and-comers--or even experienced politicians--they can create extraordinary and continuing clout in what recent indictments describe as the political equivalent of a perpetual motion machine.  Senator Obama provides just such an example.  He’s reported to have invited Rezko to help him decide whether to purchase his house long after reports of federal investigations should have the senator to dump Rezko. 

On the other side of the equation, politicians have little reason to stop dealing with shady characters is worth the risk, early or late in their careers or campaigns.  Blago, Obama and the Clintons have all been embarrassed by political fixers, oil-for-food ministers, missile entrepreneurs and Buddhist monks.  It’s not just Democrats, either; McCain was once the victim of savings and loan sharks. 

The reason that politicians are willing to accept tainted money is because the penalties are so low if they are caught.  When news that a campaign has taken sleazy money comes out, the usual path of expiation is for the politician to call a news conference, feign mortification and donate the money to some charity which is totally aligned with the politician’s world view.  This is like a catching a bank robber and forgiving him if he donates the proceeds of his crime to a payday loan company.  It does nothing to discourage further bank robberies. 

Returning tainted contributions is as inadequate as the bank robber’s capitalizing a local mortgage broker.  Simply returning the contribution only recognizes the amount of the donation, not its time value.  A dollar-for-dollar refund fails to take into account the time the politician had use of the money which may have launched a political career or been the foundation of a particular campaign.  To the extent the politician used the money to generate other contributions, not requiring a larger penalty is the equivalent of letting them keep the “profits” of their ill-gotten contributions. 

That’s unfair to other candidates who may not know Chinese restaurant owners with a keen interest in politics or who won’t get commissions from neo-robber barons pumping oil in former Soviet republics with unpronounceable names. 

So, here’s my modest proposal.  When a politician gets caught taking money from slumlords or Chinese spies, let’s treat it like the feds would treat crooks who use tainted money to “go legit”.   In these situations, the crooks are required to give up all proceeds that can be traced back to illegal activities, a penalty that recognizes both the crime and the time value of the crime’s proceeds. For politicians, the equivalent penalty should be designed so that it keeps them from taking money from stinkers, in the first place.  Instead of simply returning the contribution, the forfeiture should be based on the proportional amount that the tainted money represented at the time it was received.  From that calculation, the politician should give up that same proportion of all money subsequently collected. 

To illustrate, let’s assume a lowly street organizer or junior senator manages to scrape up $250,000 to run for president.  She’s a great orator and catches the eye of a political operative who packages up money from suspicious activities or from foreign sources.  The fixer contributes this $250,000 providing the candidate with a total war chest of $500,000.  The candidate uses the money to buy a web site that catches fire and raises $50 million. 

It’s then that word comes out that the benefactor is a colonel in the Peoples’ Liberation Army who has ducked a subpoena or the former oil-for-food minister from a country on the U.N.’s skank list.  Under current practice, the horrified candidate would refund $250,000, keeping the $49,750,000 that the fixer’s investment helped produce. 

Under this proposal, we would calculate that the fixer’s contribution had accounted for one-half of the candidate’s war chest at the time it was received.  Subsequent to that contribution, the candidate raised another $50 million so the forfeiture would be half of that amount or $25 million.      

This would tend to help candidates understand that it is important to get the news out early to limit the penalty.  And, if a salacious contributor made a contribution late in the campaign, the proportionality calculation would limit the size of the penalty. 

Of course, all this could be avoided if politicians used the same due diligence they require of the corner bank when they open a junior saver’s account for a 13-year old. 

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.

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