Corporatism in Everything or: How to Have Government Work for You without Resorting to Bribery

BK Drinkwater has a couple of excellent posts on established businesses using the force of government to muscle out competitors ( I also like them because they both have my name in them, to paraphrase the man himself). Here’s another interesting example from the story of unlicensed contractor stings I blogged about at Fr33Agents the other day.

It turns out that the guy posing as a customer in order to arrest the unlicensed electrician is himself a state-licensed electrician. That is, a member of the state-protected cartel is helping the police with their job. This subsidy of law-enforcement is similar to Hall and Deardorff’s theory of lobbying as legislative subsidy. When special interests find it difficult to have extra sway over policy through outright bribery, they can provide services to already sympathetic legislators in order to make them more effective. Legislators supported by lobbyists providing research and pre-written speeches will be more able to pursue the legislative goals. Cops supported by unusually public-spirited electricians will be more effective in enforcing cartels.

The CEO and the Senator

Scott Adams has a degree in Economics. Judging by the comic below, he must have studied some Public Choice.

In relatively well-functioning western democracies, politicians accepting outright bribes take a significant political risk. The final two panels illustrate two ways special interests can rent-seek without the need for a brown paper bag full of money.

Special hiring favours like the one suggested in the second panel are one way of making bribes less transparent. Unfortunately, this will usually be more costly than a pure transfer. The Senator’s dimwitted wife might get the equivalent of one brown paper bag of money, but the rigmarole of hiring her as a consultant will add additional costs to the transaction. Opaque bribes are inefficient, and, from a utilitarian point of view, are worse than transparent bribes.

If we ignore the “thief” and focus on the “lazy,” the third panel illustrates the concept of lobbying as legislative subsidy. Let’s say the preferences of the CEO and the Senator are aligned, thereby making bribes unnecessary. The CEO might be a producer and the Senator an ideologically-motivated protectionist. For every bootlegger, there’s bound to be some baptist. The CEO can use his resources to increase the effectiveness of the friendly Senator by offering help drafting legislation and performing other duties which make passage of favourable bills more likely. This will make legislation serving special interests more likely to be passed. At the end of the day, the effect will be similar to bribery, though this will only work with policies which already have some degree of public support.

Dogbert is a very capable rent-seeker. He’ll go far in business, especially in the current environment.

Yandle on Tobacco Regulation

Bruce Yandle, author of the wonderful paper “Bootleggers and Baptists: The Education of a Regulatory Economist,” applies the logic of that paper to FDA regulation of tobacco in the latest issue of The Freeman:

No, there is no evidence to suggest that tobacco has until now been “an industry that has gone basically unregulated.” But there is ample evidence that tobacco regulation has served the interests of the industry and the politicians that broker favors to the industry. Meanwhile, consumers of tobacco products, who are generally a lower-income population, have been denied the benefits of competitively determined product information; they also have unwittingly become major sources of revenue for state politicians, who generally provide more benefits to higher-income than lower-income consumers.

One can only speculate about what might have happened had the FTC not outlawed health-effects advertising and had the industry not become one of the more regulated industries in America.

Read the whole thing.

Bootleggers and Baptists: Normatively Ambiguous

I think the Bootleggers and Baptists theory of regulation is incredibly helpful in explaining policy choice. I also think the normative view we should take of organizations putting forward public interest arguments to advance their financial interests is far from straightforward.

Often, the arguments are very bad (as in the classic bootleggers and baptists story). At other times, the arguments are very good. While we should be suspicious of arguments put forward by anyone with a vested interest, we should not reject them out of hand. Lobbying efforts by concentrated interests will often improve policy, since they are the ones with the strongest incentive to defend their right to do business. Federated Farmers’ support for free trade is about the best example I can think of, especially when compared to the protectionism of American and European farmers.

With that in mind, this press release from the Hospitality Association of New Zealand on alcohol regulation is very interesting. On the one hand, they rightly oppose efforts to reduce the availability of alcohol (in other words, reducing convenience).

The Hospitality Association has told the Justice and Electoral Select Committee considering the Sale and Supply of Liquor and Liquor Enforcement Bill that the Bill, despite talking about reducing harm, would not deliver on that outcome.

Bruce Robertson, the Association’s Chief Executive, said that the underlying assumption throughout the Bill is that by reducing availability of alcohol, consumption will be reduced, so reducing harm.  He said that the reality and the evidence, and indeed New Zealand’s own experience, is contrary to that assumption.

Over the last 20 years the number of liquor outlets has almost trebled and liquor advertising has been permitted on television, yet if anything the per head consumption of alcohol has declined.

Reducing alcohol availability is bad for consumers, and bad for the hospitality industry. Yay for lobbying! Then, a few paragraphs later, they endorse a state-enforced price-fixing arrangement:

[T]he Association believes that alcohol is not a product in which the industry should compete on price, and that by removing the ability to advertise the price of alcohol products the incentive to use alcohol as a loss leader will be removed.

This would be very good for the industry(at least, good for existing players), but very bad for consumers. Boo for lobbying!

I found it amusing to see these two arguments in the same press release.

Bootleggers and Baptists: Climate Change Edition

I’ve been blogging about bootleggers and baptists a bit lately, so I should probably mention this excellent WSJ article on The Climate-Industrial Complex from Bjorn Lomborg.

The partnership among self-interested businesses, grandstanding politicians and alarmist campaigners truly is an unholy alliance. The climate-industrial complex does not promote discussion on how to overcome this challenge in a way that will be best for everybody. We should not be surprised or impressed that those who stand to make a profit are among the loudest calling for politicians to act. Spending a fortune on global carbon regulations will benefit a few, but dearly cost everybody else.

Do read the whole thing. Once again, here’s Bruce Yandle’s wonderful paper.

The Political Economy of Smoking Ban Exemptions

Two interesting items on exemptions to smoking bans have come through my Google Reader recently.

First, Jacob Grier points out that cigar bar exemptions seem pretty elitist, especially when they specifically prohibit cigarette smoking in the cigar bar. I can’t think of a decent reason for allowing cigar smoking but not cigarette smoking in the same establishment. If secondhand tobacco smoke is harmful, surely the source doesn’t really matter. Jacob points out that cigar bars and cigar smokers, generally being more upmarket types, will have more resources to lobby government for exemptions. That’s undoubtedly part of the story, but I suspect there’s also a bit of Bootleggers and Baptists going on here. I’d say cigar smoking is generally more socially acceptable than cigarette smoking, and so the self-interest of cigar smokers and cigar bar operators can be combined with a more compelling moral argument than is the case with cigarettes. This should make their lobbying efforts more successful, which is exactly what we see.

Second, Matt Schonert points to the possible smoking ban in Illinois Michigan, which will likely exempt casinos. The argument from the casinos is that they’ll lose business to Native American casinos in the state which will continue to allow smoking. The exemption, as Matt points out, is a clear example of rent-seeking. My guess is that the casinos have succeeded where restaurants and bars have failed mainly because the casino industry has higher cooperative efficacy, i.e. it is more able to overcome the interfirm collective action problem of lobbying for government favouritism. Compare the casino industry in any given town to the bar industry. There will likely be fewer casinos than bars, and possibly a history of cooperation among casinos in order to share information about cheats, etc. This will allow them to more effectively detect and punish those casinos which freeride on the lobbying efforts of others, encouraging more lobbying effort from all casinos (total lobbying effort being a public good within the industry).

All of the effort casinos and cigar bars exert to avoid smoking bans is, of course, pure loss from a social point of view. If legislators really want to implement a smoking ban with exemptions for those businesses likely to be hit the hardest, a much better way would be to sell exemptions. This way, none of this wasteful rent-seeking or bigoted favouritism would happen.

Bootleggers and Baptists: Animal Cruelty Edition [updated]

Unsurprisingly, pig farmers are using recent controversy in New Zealand over sow crates to argue for protection against international competition:

Blame imported pork for keeping sows in cramped stalls, say three Taranaki pig farmers.

The intensive farming practice of keeping breeding sows in stalls has been in the spotlight since TV1’s current affairs programme Sunday showed scenes filmed inside a Levin piggery.

But three of Taranaki’s 25 pig farmers say sow stalls are only one part of a very complex issue.

Taranaki District Pig Committee chairman Ted Gane said it was cheap imported pork, grown using sow stalls, that forced local farmers to use the same system to remain competitive.

“Currently 40 per cent of our meat comes from overseas and I can say that 100 per cent of that would come from sow stalls.” (…)

[Free-range Inglewood pig farmer Helen Foreman] believed without a duty or tax on imported pork, farmers raising pigs indoors would be hard-pressed to afford improvements because there was too much pressure to keep prices down. Free range organic Stratford pig farmer John Earley agreed money was what keeps sows in stalls and pigs in cramped pens.

“It’s all about money and it’s got nothing to do with livestock management. I farm pigs outside and keep six per hectare. That is what it takes if you want to grass feed them. Now you can get a lot of buildings on that much land.”

The paper from Bruce Yandle explaining it all is here.

Update: Matt Nolan and Paul Walker share their thoughts. Update 2: Eric Crampton joins the discussion.

Bootleggers and Baptists

Bruce Yandle’s excellent paper Bootleggers and Baptists: The Education of a Regulatory Economist is required reading for anyone interested in politics. It’s also a fun read.

Indeed, the pages of history are full of episodes best explained by a theory of regulation I call “bootleggers and Baptists.” Bootleggers, you will remember, support Sunday closing laws that shut down all the local bars and liquor stores. Baptists support the same laws and lobby vigorously for them. Both parties gain, while the regulators are content because the law is easy to administer. Of course, this theory is not new. In a democratic society, economic forces will always play through the political mechanism in ways determined by the voting mechanism employed. Politicians need resources in order to get elected. Selected members of the public can gain resources through the political process, and highly organized groups can do that quite handily. The most successful ventures of this sort occur where there is an overarching public concern to be addressed (like the problem of alcohol) whose “solution” allows resources to be distributed from the public purse to particular groups or from one group to another (as from bartenders to bootleggers).

Regulations which blatantly enrich a small interest group at the expense of everybody else would be extremely unpopular with voters, so we tend not to see these sorts of regulation too often. When a policy is in accord with both the narrow economic interest of some group and also has some high-minded moral justification the public sees as somewhat reasonable, the political feasibility of the policy is much greater.

Matt Nolan at The Visible Hand in Economics points to an interesting variation of the bootleggers and baptists logic. The two major supermarket chains here in New Zealand have agreed to stop selling alcohol as a ‘loss leader’, citing public concerns that cheap alcohol leads to abuse. As Matt points out, this is nothing but collusion allowing the supermarkets to increase their profit at the expense of consumers:

How?  Well, it is true that alcohol is being treated as a loss leader.  But its effectiveness as a loss leader depends on the price charged by the other firm.  Under the guise of “the social good” the supermarkets have been able to agree to both increase prices slightly – keeping the relative “loss leader” advantage while making more money off alcohol sales.

It just goes to show – when people start getting the government to pressure firms based on the arbitrary morals they want to force on society, we will end up being taken advantage of by someone.  I want my cheap beer back …

As do I, Matt. As do I.

In this case there hasn’t been any actual regulation enriching the bootleggers and placating the baptists. Rather, the public protestations of the baptists and the threat of further government intervention have allowed the bootleggers to engage in behaviour which would rightly result in a strong consumer backlash were it not hidden behind a thin veil of public interest.