In today’s Finshots, we explain why the potential sale of TikTok in the US has evoked discussions around an economic concept known as a Revolving Door.
The Story
The US is done with TikTok!
Lawmakers have passed a bill asking its Chinese parent ByteDance to either sell off the short-form video app to another party or face a ban in one of its biggest markets.
And the reason for the proposal is simple — security concerns.
Everyone fears that China’s government secretly controls many of the country's companies. So it can force them to share sensitive information of users from around the globe — such as location information. Also, the other worry is that China will use TikTok to spread disinformation campaigns. Maybe even interfere in the voting process during the elections.
Quite concerning, no?
But that’s not the most interesting bit.
I mean, India banned TikTok after similar concerns. Europe is mulling over a similar clampdown. So the idea of banning TikTok is not new.
What’s interesting is who wants to ‘buy’ TikTok in the US — Steve Mnuchin!
Now you may not have heard of Mnuchin before. But he was the Treasury Secretary during the Trump government. And in 2020, he had vociferously advocated for a ban on TikTok.
Okay, wait…a government official who wanted to ban TikTok now wants to buy it?
Sure, TikTok makes a lot of business sense. It's worth billions of dollars. And if someone who's in a position of power in the government forced ByteDance's hand just for the purpose of trying to get a stake in it for himself, that's a problem. But here, on the face of it, there’s nothing wrong. It doesn’t reek of a ‘conflict of interest’ since Mnuchin’s not in government anymore. He’s a private citizen and he’s free to do his own thing. It has also been a while since he relinquished his government role post and he's back running a prive equity fund anyway. So TikTok does fit into that business interest.
But you could wonder if maybe he was harbouring intentions of getting into bed with TikTok even as he was fighting to ban them. And that could be a problem. As Bloomberg’s Matt Levine pointed out, it raises questions about revolving-door incentives.
What’s that, you ask?
Think of this as a situation in which folks in the upper echelons of government regulation leave to take up roles in the private industry. They might work in the Tax department for years and suddenly be courted by accounting firms for some inside knowledge of audit procedures. They might be a Defence official one day and suddenly jump to working in the drone manufacturing industry.
Or even vice versa. They might work for years in the private sector and then decide that their true calling is to regulate the company that had employed them.
That’s the revolving door analogy where folks revolve around government roles and private-sector gigs.
Now on the face of it, you might think that a government official who’s looking for a lucrative position in the private sector might go easy on these companies. Only then will the companies even be amenable to hiring the official, no? So the official has an incentive to play nice.
But that’s not what actually seems to happen. Rather, these government officials don’t try to curry favour with their potential employers. They go hard on them and tighten the screws. They make life difficult for the private sector.
As Levine puts it,
If you develop a reputation in government for being Tough On Industry X, that makes it more likely that some firm in Industry X will want to hire you:
1. Toughness, generally, is a business virtue; they will be impressed by your work ethic and creativity.
2. If they can offer you a nice pay package to quit the government and go work for them, then that removes you as a tough antagonist.
3. If you work for them, your arguments will carry more weight with other government officials, because they will remember you as a tough regulator of Industry X.
To sum up, be mean to Big Tech, and you might end up with an even more remunerative role.
In fact, the Federal Reserve Bank of New York has a paper analysing the revolving door phenomenon. They analysed the movement of 35,000 employees spread across 25 years. And they found that government officials working in regulation are more prone to be poached by the private sector banks when the rules are stricter. They call it the ‘regulatory schooling hypothesis’.
So maybe it works the same way in the tech world too.
We don’t know if that’s what Mnuchin always had in his mind but these sorts of things happen often. For instance, Nick Clegg’s official title at Meta (Facebook’s parent) is ‘President, Global Affairs.’
But guess what he did for a couple of decades before that role?
He worked in government. Yup, he was the Deputy Prime Minister of the UK and served in the European Parliament too. In fact, he’s even called into question how companies like Facebook have avoided paying taxes.
Yet, he’s the same guy who’s the PR (public relations) man for the tech giant now!
And that feeds in with point number three of Levine’s theory, no?
The folks in government would probably pay more attention to what Clegg says because they know he wasn’t enamoured by big tech anyway. Meta might have been betting on that.
And as we said earlier, it’s all quite common.
But just because it’s common doesn’t make this right. Remember, quite often these are government officials whose job it is to protect the public welfare. And by moving into a private sector role that’s so evidently a consequence of the position they held in government, it poses ethical questions.
So, the only question that remains is — should such revolving doors be shut forever?
Well, we don’t know the answer to that. Sure, it seems like a good idea but some people argue that if you shut the doors to private service, you’ll never find people with specialized skill sets who’re interested in government and policy work. Also, you’ll probably hear the argument that if regulators are likely to be stricter with companies they intend to work with, isn’t that a good thing?
What do you think?
Until then…
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