Login or signup
36

Picking A Pac
 

Political action committees are "an investment that pays off." Here are some ways to measure your return.
Advertisement

What the mutual fund does for small investors, the political action committee promises to do for the average voter. Consider the advantages of a mutual fund. It saves you the trouble of following the performance of dozens of individual stocks; the fund manager does that for you. You don't have to worry about diversification; buying into a fund automatically spreads your investment over a number of stocks. And you're no longer just one small investor; as a mutual fund shareholder you're part of a group with clout. You get the lowest commission rates and the best market prices; and corporate management worries about whether you are happy with the earnings performance.

A political action committee (PAC) works about the same way. As an individual, you have one congressman and two senators. Let's say you contribute $100 to each. What is $100 to them, when they spend a quarter of a million or often more than half a million dollars getting elected? A $100 drop in the bucket doesn't buy you any clout. Nor do you have any diversity. Even if he or she did listen to you, one congressman out of 435, unless he is Tip O'Neill, doesn't carry much weight. He might not even get elected, and then what would your $100 contribution be worth?

Yes, a PAC is definitely the way to go. To begin with, consider its clout. About 10 years ago, the Federal Trade Commission proposed new regulations on the sale of used cars.Now, a lot more people buy used cars than sell them as dealers, so you would think that Congress, being sensitive to which side represented the most votes, would have sustained the FTC's regulations. But, in fact, it overruled the FTC this year. Might that have something to do with the fact that used-car buyers as a group don't have a PAC but used-car salesmen do? The National Automobile Dealers Association's PAC invested $1,035,276 in scores of congressional candidates during the last election campaign.

Even at that level the auto dealers were only the fourth highest investor in congressional candidates. The National Association of Real Estate Boards ($1.54 million), auto workers ($1.42 million), and American Medical Association ($1.35 million) all out-contributed the car salesmen. One editorial writer suggests, with a hint of disapproval, that these contributions may have influenced Congress to propose subsidies for the housing industry, to bail out Chrysler, and to discourage the FTC from meddling with the medical profession.

Like mutual funds in the 1960s, PACs have been the growth industry of the '70s. In their current form, PACs didn't even exist until 1972. By the 1979-80 political campaign season there were 2,155 of them -- 46% more than in 1977-78 -- contributing $55.2 million to congressional candidates, 57% more than in the earlier election. Of all the money given to congressional candidates in the last election, PACs contributed more than 22%.

By now you are probably wondering how to get in on this growth, how to pick a PAC. Again, like mutual funds, PACs come with different investment objectives. Just a little sophistication will help you invest your political dollar wisely.

Your trade association probably has a PAC. (If it doesn't, maybe it should.) Some of the trade association PACs are big; remember, the auto dealers and Realtors each placed more than $1 million in the 1979-80 political market. But there are dozens of smaller ones, too: wholesalers, retail druggists, soft-drink bottlers. There is not much choice here, though, since there is usually only one PAC per industry. So the question with trade association PACs is not which one to invest in but whether to invest at all.

There are four general-purpose, small business PACs to choose from (see box).But picking is a problem because you can't judge a PAC the way you judge mutual funds, by their five-year compounded growth rates or their dividends. You'll need some different measures. Here are a few, using actual numbers from the National Federation of Independent Business's PAC.

First, to measure a PAC's approach to risk, there is the Status Quo Ratio (SQR). It tells whether the PAC prefers to play safe and support incumbent members of Congress, or whether it wants to risk upsetting the status quo by putting its dollars into the challengers.

SQR = (No. of incumbents supported) - (No. of challengers supported) / (No. of races with both incumbent and challenger running)

The Status Quo Ratio will range from +1 (risk averse, supported all incumbents) to -1 (risky, supported all challengers). An SQR of 0 indicates an even split between incumbents and challengers.

The NFIB, for example, invested in 153 incumbents and 43 challengers in the 1980 House races. So its SQR for the House is:

SQR[H] = 153-43 / 196 = +0.561

For the Senate it is:

SQR[S] = 6-12 / 18 = -0.333

The NFIB was more prone to take risks in the Senate races than in the House races, and, as the next ratio shows, its risk-taking paid off.

The Winning Ratio (WR) measures not just the proportion of the PAC's picks that won, but the proportion of money the PAC put on winners and losers.

WR = ($invested in winners) - ($invested in losers) / Total $invested

Like the SQR, the Winning Ratio will range from +1 (all the cash to winners) to -1 (all the cash to losers).

For the NFIB, the WRs look like this:

WR[HOUSE] = $129,915-$31,249 / $129,915+$31,249 = 0.612

WR[SENATE] = $44,029-$10,020 / $44,029+$10,020 = 0.629

Finally, there is the Cost:Vote Ratio (CVR). It is a little more complicated, but it gives some idea of how efficient the PAC is in picking not just winners, but winners that subsequently voted right.

CVR = Total $invested / (No. of winners)X(their vote average)

The NFIB's PAC invested $161,164 in House races in 1980; 188 of their candidates won. In 1981, those congressmen supported the NFIB position on 77.65% of the votes taken. So, the NFIB's CVR is:

CVR[H] = $161,164 / (188)X(0.7765) = $1,104/congressman

The CVR of the NFIB's PAC in the Senate is higher (less efficient), even though it picked a higher proportion of winners and the winners voted closer to the NFIB position. The higher CVR results from the PAC's having invested more in each of its Senate candidates.

CVR[S] = $56,058 / (16)X(.8975) = $3,904/senator

As Rep. Andy Ireland (D-Fla.) wrote not long ago, "In business, you should expect to get what you pay for, and to some extent, the same is true in politics." The problem, as Ireland sees it, is that not enough small businesspeople are willing to pay for good government. So, he points out, "when the tough decisions are made [in Congress] between small business and other powerful groups like organized labor, consumerists, big business, or big government, rarely does small business win... Organized special interests don't contribute to congressional candidates for the fun of it; they do so to get things done. It is a lesson that small business has yet to learn."

Justin Dart, chairman of Dart Industries and a leading chef in Ronald Reagan's kitchen cabinet, says "Talking to politicians is fine, but with a little money they hear you better." Dart himself invested $1,000 in the NFIB's PAC in 1980.

No doubt, as the PAC industry grows and competition for investors' funds becomes more intense, these and other PAC performance measures will be refined and standardized. It might be useful, for example, to know a PAC's Equity Share (ES) in individual members of Congress. (ES is the ratio of the PAC's investment in a candidate to the total amount spent by the candidate in his last election.) The NFIB's PAC bought a 0.43% ES in Rep. Jim Jones (D-Okla.), but its current ES in rep. Cleve Benedict (R-W.Va.) is more than twice as high at 1.08%. Yet not all congressional properties are the same. A smaller share of Jones, who is the influential chairman of the House Budget Committee, may be worth quite a bit more than a larger share of Benedict, a freshman in the minority party.

Occasionally a cynic complains that PACs are not healthy for our democratic government. Ann McBride, a vice-president of Common Cause, a citizens' lobbying group, recently said she thinks "it's a terrible thing [that PACs] are viewed as an investment that pays off."

Bullfeathers!

Any businessperson knows you can't buck the market. If politicians want to sell and the public wants to buy, there is not much you can do to stop the trade.

Last updated: Aug 1, 1982




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Comment and share features
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: