GOP strategist and fundraiser Karl Rove, U.S. Chamber of Commerce head Tom Donahue and Federal Reserve Chairman Ben Bernanke are all in the same economic boat. Whether they realize it or not, they are limited by the fundamental economic phenomena of “diminishing marginal returns” in similar ways.
Strictly defined, this refers to a situation faced by any producer. In most production situations, if you add successive units of some input such as water or fertilizer, labor or machinery to the production process, you increase output, at least for a while.
But the marginal increase, the change in total output that results from a specific change in the quantity of the input, tends to decrease as one adds more of the input.
For example, if you are growing corn and go from zero to 10 pounds per acre of nitrogen fertilizer, you may increase your yield by 30 bushels. Adding a second 10 pounds may add 26 bushels. Going from 20 pounds of nitrogen to 30 may add 23 bushels, and so on. For quite a while, additional fertilizer means additional corn. But the extra corn for each additional pound of fertilizer drops and eventually will hit zero as some other factor such as water, sunlight or weed control becomes the ruling constraint.
You can come up with similar examples of water on tomato plants, workers in a car factory or whatever.
And the 2012 election demonstrated that it applies equally to campaign contributions, particularly those funneled through “super PACs” or other third-party organizations.
That is where Rove and Donahue come in. Rove has a reputation as a political wizard, but this year his American Crossroads and affiliated organizations raised and distributed some $380 million only to see its favored presidential candidate and all but one of its favored Senate candidates defeated. Donors, some of whom gave as much as $50 million, reportedly are disgruntled with Rove.
Ditto for Donahue, who in his 15 years at the chamber has pretty much turned it into a fundraising arm of the GOP. It spent at least $32 million and saw 13 of the 15 Senate candidates it supported defeated. Again, there are widespread reports that several major member corporations are re-evaluating whether money funneled through the chamber is a negative rather than a positive factor in furthering their political interests.
Shell-shocked voters in states like Ohio can attest to the fact that a PAC can pour millions into TV commercials.
But the additional votes per additional million dollars spent falls off rapidly. Diminishing returns once again rears its ugly head.
At some point, additional spending may actually reduce votes for the candidate supported. This is due to the phenomenon of “negative externalities.” Especially if ads are strident, further saturating the media with them eventually turns off some people who might otherwise have voted in your favor.
The problem with super-PAC ads often is that they blur “brand identity.” Big donors have particular axes to grind, but they are so isolated from the general populace that they don’t understand their pet peeve may not matter to most people. Clumsy ads harping on peripheral issues may thus detract from, rather than enhance, the image that the candidate’s own organization is carefully trying to create.
This may explain why Rove and Donahue are seen by some Republicans as the gang that cannot shoot straight.
But what about Ben Bernanke?
Politics aside, increasing the money supply may boost a recessionary economy, but it also faces diminishing returns and can have negative externalities.
Pouring additional reserves into the banking system in 2008-09 avoided a 1929-33 style meltdown. Further money creation in 2010 and 2011 probably raised output and employment above where they would have been without it.
However, buying an additional $40 billion in bonds per month under Bernanke’s QE3 initiative may be adding little, if any, to economic growth. If it undermines household and business confidence, its effects may be negative.
And there are negative externalities. All that money sloshing around the economy is the primary reason for a rapidly growing farmland price bubble that will be messy when it pops, as it inevitably will.
In the price of farmland, there is a dual effect. Low interest rates drive up the market value of a capital asset, as economist David Ricardo demonstrated 190 years ago.
But near-zero investment returns elsewhere draws investors into buying real estate who never would have looked at it otherwise. And once the bubble starts to inflate, it takes on a life of its own. Outsiders look at the paper capital gains enjoyed by those who bought land just a year or two ago and compare those gains with what they might get from stocks or bonds.
They decide to get in on the fun themselves, not appreciating the likelihood that they are suckers buying into a bubble at or near the high.
Another external cost of prolonged low interest rates is that people such as retirees, who are living off their savings, take a hit either to current spending or remaining net worth.
That is true for me as someone who just got his first Social Security check. We managed to more than preserve the capital in our retirement accounts from 2007 to the present, but our current earnings on that capital are minuscule.
Bernanke probably would respond that it is better to be getting low returns on assets in an economy that is growing even slowly than to be scrambling for survival in a free-falling one like 1933. I think he is right.
Finally, both the Fed and the super-PAC operators can defend themselves with the argument that “it would have been even worse without our efforts,” although it is hard to see how the GOP could have done much worse in terms of the presidential and Senate elections.
This defense is essentially unanswerable, just as it is when applied to the Obama stimulus program.
One set of economists with a mathematical model based on a certain set of assumptions runs the numbers and proclaims Fed policy a success. Another set, with different assumptions and a different model, finds the opposite. The same is probably true for political scientists who look at PAC spending.
There is no way to objectively “prove” any of these conclusions, however much these scholars try to drape themselves with the mantle of science.