What’s a Senate seat worth?

by on December 10, 2008 at 1:30 pm in Political Science | Permalink

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?

Bill H December 10, 2008 at 1:38 pm

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.

Gorgasal December 10, 2008 at 1:40 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?

Ernie Tedeschi December 10, 2008 at 1:49 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.

Mickey December 10, 2008 at 1:58 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…

Dan December 10, 2008 at 2:45 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.

Anonymous December 10, 2008 at 3:16 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

Bernard Yomtov December 10, 2008 at 4:16 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?

Andrew December 10, 2008 at 5:58 pm

So, THIS is why Hilary took the Sec State job! Deleveraging!

a student of economics December 10, 2008 at 8:03 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.

jarhead December 11, 2008 at 1:34 am

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.

Tony Comstock December 11, 2008 at 9:32 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.

Superheater December 11, 2008 at 2:08 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.

Kyle S December 11, 2008 at 8:12 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.

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