PART II PUBLIC POLITICS AND NONMARKET STRATEGY Pearson Education, Inc. publishing as Prentice Hall

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1 PART II PUBLIC POLITICS AND NONMARKET STRATEGY 6-1

2 Chapter 6 Nonmarket Analysis for Business 6-2

3 Topics Covered Introduction A framework for the analysis of nonmarket action in public politics The nature of political competition Moral determinants of collective action Boeing in a pickle Analysis of Boeing in a pickle 6-3

4 Figure 6-1 Structured Pluralism 6-4

5 Interests and interest groups The term interests has a dual use in nonmarket analysis and strategy formulation. One refers to those individuals, firms, and organizations with a stake in an issue. The other refers to the magnitudes of their stakes. 6-5

6 Nonmarket action The demand for nonmarket action can be characterized in terms of three factors: One is the aggregate benefits to the interests on a side of an issue. The second is the per capita benefits for an individual interest The third is whether there are any other means, such as substitutes, for achieving the benefits by, for example, turning to a different institutional arena. 6-6

7 Nonmarket action and substitutes On some issues, the benefits from nonmarket action can be obtained through other means, referred to as substitutes. The benefits from nonmarket action are lower when there are other means of generating them, and the closer these substitutes come to replicating the benefits, the smaller are the incentives. 6-7

8 Effectiveness of nonmarket action Effectiveness refers to the impact of a given level of nonmarket action on the outcome of an issue. Effectiveness depends on The number of members of an interest group, and Their geographic distribution 6-8

9 Figure 6-2 Natural of Political Competition: Wilson-Lowi Matrix 6-9

10 Boeing in a Pickle Summary of Facts ERTA Act, 1981 ability to sell investment tax credit by loss-making companies Abuses of ERTA by companies involved in foreign sales. Rep. J.J. Pickle s idea was that those exempt from taxes should not receive benefits. Boeing affected by Pickle s move because it was locked in fierce competition with Airbus. 6-10

11 Boeing in a Pickle Summary of Facts (contd.) Boeing U.S. Lessor Foreign Airline (End User) U.S. Foreign Country Tax benefits shared by all 3. Foreign leasing accounted for $570 million in tax benefits, of which $300 million was attributable to Boeing. 6-11

12 Analysis of Boeing in a Pickle The Nonmarket Issue The issue of eliminating the tax benefits on leasing by tax-exempt and foreign entities arose suddenly as a result of the rapid increase in leasing by tax-exempts. The potential loss of tax revenue for the federal government was large. The issue advanced quickly to the legislative stage of its life cycle. The dilemma for Boeing was that its leasing was threatened by the actions of the taxexempts. 6-12

13 Analysis of Boeing in a Pickle Distributive Consequences At the sales rate of ten 747s a year, Boeing s tax benefits at stake were approximately $200 million. Analysis suggests that Boeing is likely to be capturing most, or at least a substantial share, of the tax benefits. If the tax benefits were lost through Pickle s initiative, except for some airlines for which the A300 was a close substitute, Boeing would retain the bulk of its sales by reducing its prices. 6-13

14 Analysis of Boeing in a Pickle Boeing s Nonmarket Agenda and Objectives 1. Defeat of the Pickle bill. 2. An exemption for job-creating leases consistent with the intent of the ERTA. 3. An exemption for job-creating export leases consistent with the intent of the ERTA. 4. An exemption for its own leases 5. Grandfathering of current orders 6. A phaseout of the tax benefits on foreign leasing. 6-14

15 Analysis of Boeing in a Pickle The Nature of the Politics The principal beneficiaries of the Pickle bill are taxpayers and those who would benefit from lower interest rates if the federal budget deficit were reduced. The harm resulting from Pickle s bill is concentrated among tax-exempts, exporters of capital goods that use lease financing, and lessors. 6-15

16 Analysis of Boeing in a Pickle Interests and Demand for Nonmarket Action Boeing accounts for over half the tax benefits associated with foreign leasing Employees, suppliers, shareholders, and local communities that depend upon exporters would benefit from an exemption Lessors also have an incentive to take action The additional tax receipts would contribute to a lower federal budget deficit and hence lower interest rates and increased economic activity 6-16

17 Analysis of Boeing in a Pickle The Supply Side Affected exporters Few in number Geographically concentrated Considerable resources Tax-exempts Numerous Complete coverage of congressional districts Few resources Tax payers Numerous Complete coverage of congressional districts Large resources 6-17

18 Figure 6-3 Distributive Politics Spreadsheet 6-18

19 Analysis of Boeing in a Pickle Institutions and Institutional Officeholders Congress The executive branch White House working group Dept. of Commerce & U.S. Trade Representative (potential supporters) Dept. of Treasury (neutral but not expected to work on Boeing s behalf) 6-19

20 Analysis of Boeing in a Pickle Nonmarket Strategy Formulation 1. Boeing s best strategy was to provide information indicating that export leases created jobs in a manner consistent with ERTA s objectives. 2. Boeing could emphasize its importance in lowering U.S. trade deficit. 3. Boeing could challenge as inflated Treasury s estimates of increased tax revenues 4. Seek help from customers (e.g., Singapore Airlines) to attest to impact of this legislation on orders 5. Point out that it faces unfair competition from Airbus 6. Get help from Washington (state)-based senators. 6-20

21 Analysis of Boeing in a Pickle The Outcome Bill passed as part of the Deficit Reduction Act of Tax benefits eliminated, but current projects grandfathered. Boeing achieved its contingent objectives. 6-21

22 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall