Short- and long-term growth effects of special interest groups in the U.S. states: A dynamic panel error-correction approach

The perception of special interest groups as a serious threat to economic growth has strengthened over the years; however, the vast empirical literature surrounding this claim has produced mixed and inconclusive results. This study re-examines the issue incorporating a potentially important aspect that has generally been ignored by previous studies, namely, the implicit suggestion by some of the theoretical works that the extent and the intensity of the growth effects of special interest groups may differ significantly over different time frames. Specifically, this study uses dynamic panel error-correction methods (Pesaran, Shin, and Smith (1999)) to properly determine whether these effects, if they exist, occur mostly in the short run or the long run based on data from a panel of 48 U.S. states for the years 1975 – 2004. The joint Hausman-type test selected the preferred model, which controls for human capital achievement, initial income, income inequality, and the tax burden. This model produced results which are in sharp contrast to the simple linearly negative or positive findings reported in much of the literature by indicating that special interest groups have significant non-linearly inverted U-shaped long-run effects on growth, and that it takes time (about 8 years) for the full effects to become evident. The results provide evidence that U.S. states face a threshold point below which special interest groups’ lobbying and rent-seeking activities boost long-run growth performance but above which they have damaging effects on long-run growth effort. This is confirmed by the Lind and Mehlum (2010) u-test which also suggests that the threshold point is reached when the activities and strength of special interest groups (measured by the percentage of each state’s public and private non-agricultural wage and salary employees who are union members, and which varies from 3.8% to 38.7%)) is at the 15.8% level.