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What's a Senate seat worth?
If you discount everything back to today, the net present value of the Senate seat would be ~$6.2 million.
Here are the calculations. One way to dispute the numbers is to adjust for the opportunity cost of the talented labor of the would-be Senator. Still, with finance falling apart, the job market slowing down, and the option of receiving bids from wealthy but non-talented people, I remain surprised that 500K would be viewed as a going offer. The associated fame and power is fun. Clearly the seat was worth more than that to its previous holder, no?
Posted by Tyler Cowen on December 10, 2008 at 01:30 PM in Political Science | Permalink
Comments
Well, even in Illinois, it isn't exactly a perfectly functioning market for Senate seats. There is only one seller (who can't openly advertise that he is selling the product), and only a handful of feasible buyers (the whole deal falls with negative consequences on both sides if the governor can't make a reasonable case that the buyer actually deserves to be a senator).
Hence, it's a thin market for an illicit product where both sides need to maintain the appearance that an actual transaction isn't taking place.
Posted by: Bill H at Dec 10, 2008 1:38:18 PM
Of course you have to adjust for the opportunity cost.
I suspect most Senators make far less, financially, than they would in other professions and likely work pretty hard for their relatively low salaries. A proper accounting would likely show a negative NPV if one looked only at the monetary components of the decision.
They do it because get other benefits (prestige, power, altruism, duty, etc).
Posted by: a student of economics at Dec 10, 2008 1:39:50 PM
Sorry, the calculations are rubbish. Anyone well enough connected to even be invited to offer a proposal will have quite a lot of other options. Sure, they are very hard to quantify, but leaving opportunity costs out altogether throws all the calculation out of whack. Any econ undergrad offering such a calculation would have his knuckles rapped, hard.
And are we talking salary before or after taxes?
Posted by: Gorgasal at Dec 10, 2008 1:40:01 PM
Huh. And here I was assuming that you were going to put this post under your usual "Markets in everything" banner.
Posted by: Michael at Dec 10, 2008 1:45:19 PM
Several things wrong with CFG's estimate:
1.) This ignores the probability of winning reelection, which is not 100%, but probably closer to 78%.
2.) The lifetime pension is not a guaranteed $60,000 per year, but rather the average of the highest three years pay x #years service x 2.5%. You get nothing if you lose reelection after serving out Obama's term, and only $39,000 annually if you win your first full term but lose the second. Fourteen years service (2 remaining years + 2 full terms) would get you about $80,000 annually upon retirement at 62.
3.) Reelection costs money; in a state like Illinois, probably $1 million is a conservative estimate. Now, this is not out-of-pocket, but all the time you have to devote to fundraising might be valued at close to that, especially if your willingness-to-pay to NOT fundraise is particularly high. So this needs to be REMOVED from the benefits in those two election years.
I did similar calculations using these assumptions, but I hadn't thought of including future lobbying earnings when I did them:
http://etedeschi.com/blog/?p=94
Absent lobbying, I got an NPV of $272,000. What's scary is that with a little sensitivity analysis, either 1) Blagojevich's "price" of $500,000 was quite close to the efficient price, or 2) what tips the scales to give a Senate seat a positive NPV is the opportunity for lobbying income after retirement. I don't know which is more disconcerting.
Posted by: Ernie Tedeschi at Dec 10, 2008 1:49:31 PM
"Of course you have to adjust for the opportunity cost."
Surely you also have to adjust for the value of the immense power Senators have (particularlly since they are not bound to the Constitution anymore). Case in point, Pelosi has a place right off of Lake Tahoe that used to have an unpaved road that led to the development. No one would offer homeowner's insurance because of this. Of course all Pelosi had to do was slip something in a spending bill and poof, taxpayers paid for a paved road to one of Pelosi's mansions.
Posted by: Jay at Dec 10, 2008 1:53:31 PM
This person seems to forget in his NPV calculation that there are costs involved. Such as people knowing you willing wanted to be part of Senate, or having to put up with politician all day, I for one dont think the $6.2 million over about 20 year is worth enough for me to consider it...
Posted by: Mickey at Dec 10, 2008 1:58:53 PM
I dunno, some people will spend $28 million of their own money and then not get a Senate seat. $500K may be about right for an average risk-neutral investor, but there are plenty of people who have and who would pay a lot more.
Posted by: mobile at Dec 10, 2008 2:30:41 PM
$6.2 million is the NPV of the total salary (plus retirement benefits) that you'd be paid for 24 years of work, 12 as a Senator plus 12 as a lobbyist. That is equivalent to getting about a $280,000 salary each year for the next 24 years (in 2008 dollars, meaning that raises match inflation). (If raises match the NPV discounting factor, instead of inflation, starting salary is about $260K). Not a great deal for most people with the connections and money to place a bid, unless they want the job for other reasons.
Posted by: Dan at Dec 10, 2008 2:45:41 PM
Doing it well:
The Value of Political Power: Estimating Returns to Office in Post-War British Politics" (Jens Hainmueller and Andy Eggers). September 2008
http://www.people.fas.harvard.edu/~jhainm/research.htm
2nd Article listed
Posted by: at Dec 10, 2008 2:59:47 PM
Getting appointed or running for a senate seat = $500k to many $ millions
Prestige, power, special license plates, good seats in many restaurants, ability to grill all kinds of people at hearings in front of cameras, called "Senator" or "The Honorable" the rest of your life, quoted in papers as a wise person when you spout off the most ignorant remarks, etc., etc. = priceless
Posted by: at Dec 10, 2008 3:16:18 PM
Since the black market for Senate seats is small, it is also not competitive. For example, say I stole a $20 million painting. If I auctioned it openly, then I might get $20 million dollars, but I'll go to jail and be fined every penny that I made as well. Consequently, since I don't care for paintings, I might be willing to sell it for $500,000 if I can find a way to make the transaction quiet.
Say he could even get 10 bidders in the black market. 9 will not win, and at least one, if they are angry, might go tell the FBI. Even worse, every bidder knows that every bidder might do that; and every bidder knows that as well. That is to say that a non-winning bidder might go to the FBI is common knowledge. Consequently, almost no one wants to be part of a black market bid, assuming the legal punishment is harsh.
So really, the governor will take what ever offer he can get, and he cannot take offers from two many people. The people making the offers know this, so they offer prices below the NPV.
Posted by: Martin at Dec 10, 2008 4:07:33 PM
What is this calculation? How does 12 years at $318K turn into $4.5 million? Why discount "for 2% inflation at 2.7%?" What discount rate is being used? How do various risks - mortality, failure to get reelected, etc. - figure into the discount rate?
Or is CFG just as full of it with this as with all their calculations?
Posted by: Bernard Yomtov at Dec 10, 2008 4:16:33 PM
I suspect most Senators make far less, financially, than they would in other professions and
likely work pretty hard for their relatively low salaries.
Student of economics. Are you serious? In what other profession can you find so many octogenerians?
Am I too assume that people who are older than dirt (Thurmond, Byrd) and gravely ill (Kennedy, Specter)
are able to function because the job is "hard work"?
Please- these people are the modern aristocrats-there's nothing altruistic about somebody in the
Senate-haven't you heard the joke about the 100 people in America most likely to look in a mirror and
see the next President.
I suggest you pick up P.J. O'Rourke's "Parliament of Whores". Its a bit dated now and there's different
clowns, but its still the same circus.
Posted by: Superheater at Dec 10, 2008 5:17:45 PM
So, THIS is why Hilary took the Sec State job! Deleveraging!
Posted by: Andrew at Dec 10, 2008 5:58:53 PM
Daniel Diermeier et al. have a paper that uses structural estimation to estimate a model. The come up with "non-pecuniary rewards amount to over $200,000 a year for a senator and to either about $35,000 or $20,000 a year for a representative"
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=333001
They are no club for growth, but maybe they know a thing or two.
Posted by: goodnessOfFit at Dec 10, 2008 7:34:48 PM
Superheater:
I think you're too cynical.
I once spent a summer as an intern on Capital hill, and contrary to what you might expect, I came away less disillusioned. The people working in the Senate weren't all like the characters from "West Wing" but overall they seemed to genuinely being trying to do the right thing and they worked pretty hard. Of course, I didn't always agree with all their values -- there was too much diversity of belief for that even to be possible -- but I didn't get the impression that most of them were modern aristocrats, including the Senators who I occasionally glimpsed and once got to play softball with. Maybe I was just lucky in the group that I interacted with but I'm pretty sure most of these guys could have found ways to make a lot more money in fewer hours of work if that's what their goal was. In fact, aren't most Senators already millionaires before their elected?
As for the old and sick guys, yes, I think it is possible to coast if you want to or need to -- no one is checking a time clock -- but the guys I saw liked to work 14 hour days when they could. That said, I agree that the electoral advantages given to incumbents are much too powerful leading to an over-representation of octogenarians.
Posted by: a student of economics at Dec 10, 2008 8:03:24 PM
2.7% discount rate?! That is ridiculously low!
Posted by: Robert Olson at Dec 10, 2008 11:33:31 PM
The calculations do not have any allowance a senator picking up any money on the side in the form of special deals (low rate loans), assorted kick backs, pay offs and bribes. And no good jobs for relatives. I think many congress people and other politicians know how this game is played. Make enough money and such minor factors as discount rates and taxes don't count.
Posted by: jarhead at Dec 11, 2008 1:34:19 AM
We need the governors to be able to sell call options and see what the sitting Senators pay for them. Then we can extract the value placed on the furtherance of their ideology or patronage from the Senator's personal benefit value.
Posted by: Andrew at Dec 11, 2008 5:15:18 AM
Any blogger knows that there's a certain sort of person who values notoriety and a sense of having influence over making money. Some people with these personality traits go into politics.
Posted by: Tony Comstock at Dec 11, 2008 9:32:20 AM
I'm not trying to incenuate any fowl play, but if Blogojavich has any historical dealings with our President-elect, how much is Blogo's silence now worth to Obama?
Posted by: Mr. Winston at Dec 11, 2008 12:50:31 PM
Student of Economics:
I am not cyncical, I'm skeptical. There's a difference. You sound starstruck.
You said they work hard. I'm fortunate to have watched several relatives live
into their 90's (and remain alert and aware). Nonetheless, the infirmities of
old age preclude 14 hour workdays.
Posted by: Superheater at Dec 11, 2008 2:08:06 PM
It's a sign of the cheapening of politics...
Posted by: Ben C at Dec 11, 2008 2:28:42 PM
I guess we know where the $500k number came from now...
DECEMBER 11, 2008, 6:58 P.M. ET
Blagojevich Has $500,000 in Unpaid Legal Bills
By THOMAS M. BURTON, ASHBY JONES and DIONNE SEARCEY
CHICAGO -- The criminal complaint against Illinois Gov. Rod Blagojevich repeatedly refers to his family's financial troubles. Those problems include more than $500,000 in unpaid legal bills, according to people familiar with the matter.
Earlier this year, Mr. Blagojevich, strapped for cash and burdened by a years-long federal investigation into his administration, stopped paying a portion of the millions of dollars in legal fees owed to the law firm Winston & Strawn, according to these people.
Posted by: Kyle S at Dec 11, 2008 8:12:15 PM
