Authors: Adam Smith
Our book has two parts. The first part focuses on theory while providing numerous applications. Chapter 1 describes federal regulation’s explosive growth during the 1970s and 1980s, when the theory was germinating, and presents an array of Bootlegger and Baptist stories stretching from Magna Carta to President Barack Obama’s 2012 efforts to coordinate U.S. energy producers. We organize these stories into four modes of Bootlegger/Baptist interaction, which we use throughout the book. The chapter also provides evidence of regulation’s effects on U.S. gross domestic product (GDP) growth.
Chapter 2 connects the theory to the discipline of public choice economics with a focus on the Bootlegger side of the story. Here we examine a stream of economic thought that has emerged to explain regulatory activities. We build this account by reviewing discussions of regulation that have appeared in the
Economic Report of the President
over 45 years. Doing so enables us to illustrate how the ideas of academic scribblers shape the mental models of presidents and their senior staff as they attempt to explain and communicate their actions. Chapter 3 speaks to the question: Why Baptists? Why do politicians find offering moral justifications necessary for actions they seek to take when serving their constituents? Why not an economic or patriotic justification? This chapter reaches into philosophy, experimental economics, and evolutionary psychology to answer the question and concludes that politicians must always offer a “Baptist” justification for their actions if they hope to survive in the political realm.
The book’s second part is a collection of specialized case studies, each illustrating an important facet of Bootlegger/Baptist theory. Chapter 4 begins, naturally enough, with the struggles over sinful substances that gave our theory its name. Here we describe regulatory episodes involving alcoholic beverages, tobacco products, and marijuana. In each case, Bootlegger/Baptist theory explains how certain rules arose in the first place and how they disappear when a Bootlegger/Baptist coalition breaks down. The alcohol regulation story is about the industry’s successful cartelization by government, acting at the behest of moral lobbyists. Similarly, the tobacco story explains how anti-smoking crusaders successfully obtained regulation that actually strengthened the tobacco industry’s profits. And as strange as it may seem, the marijuana story is about efforts to legalize pot openly opposed by the illegal growers themselves, with an unwitting assist from moralists committed to the view that everyone must not get stoned. This chapter exposes how Bootleggers undermine and manipulate even the most seemingly pure social causes, all while appearing to be at odds with the Baptists who—typically, though not always—are rallying against them.
Chapter 5 applies the theory to one of its most fertile fields—environmental regulation. We focus on the debate over global climate change, beginning with the 1997 Kyoto Protocol and then describing frustrated attempts by various interest groups to establish stricter U.S. regulation of greenhouse gas emissions. The story we tell is about Bootleggers who seize upon such regulations as a way to gain markets and grow profits, joined by environmental Baptists who lobby for emission reductions. Ours is a story of coalitions that form and split, of Bootleggers who openly join Baptist efforts, and ultimately of failed efforts to “do something” about carbon emissions. We show how the ultimate results of noble-minded efforts to effect change in the public interest prove to be neither noble nor in the public interest, but instead a product of Bootlegger manipulation.
The financial collapse of 2008 and the organization of the Troubled Asset Relief Program (TARP) are the subject of chapter 6. TARP’s injection of federal funds into banking and other institutions was devised during some of the darkest days of the financial crisis, when White House officials were operating in uncharted territory. With all the constitutional barbed wire cut and pushed to the side, cabinet members acted to form cartels involving the nation’s largest financial institutions. Our theory is used to explain the rise and fall of TARP support and to show how banks, initially eager to be on TARP’s receiving end, became even more anxious to escape its clutches. This chapter in particular shows how Bootlegger activity without Baptist support is a dangerous business and detrimental to all parties involved.
Chapter 7 addresses the most significant Bootlegger/Baptist story of our time: the rise of Obamacare. The passage and implementation of health care reform simultaneously provided health care access to a larger share of the population, cartelized a major part of the U.S. economy, and guaranteed an expanded health care market for the insurance industry, all while disappointing many of the very parties involved with its construction. This chapter offers insights into how the interaction between the relevant Bootleggers and Baptists wound up producing a bill that many wanted but few are now willing to claim as their own, because of its failure to address health care costs.
Chapter 8 concludes the book by summarizing our key points and exploring a fundamental question: Is there a Bootlegger/Baptist endgame? We close with final thoughts on the theory and its ability to explain at least part of the political economy puzzle.
A Personal Note
We wish to offer deep appreciation to those who provided critical support to us in developing and expanding Bootlegger/Baptist theory and in producing and publishing the book. We acknowledge with deep appreciation the inspiration and guidance provided by regulatory scholar and former Federal Trade Commission chair and OMB director James C. Miller III. We hope that Miller’s noted insistence on clear thinking, tough-minded analysis, and understandable prose are found throughout the book. We also thank Richard Wagner, whose inspiring, eclectic take on the relationship between market and political domains is both pathbreaking, and perhaps accordingly, underappreciated. For similar reasons, we thank Bart Wilson, who continues to push the boundaries, and thereby the veracity, of what experimental economics can teach us. Our universities, Clemson University, George Mason University, and Johnson and Wales University, provided invaluable support as well as inspiration for our scholarly activities.
Although the ideas and papers that have emerged from our academic work have been essential to the book’s development, there would be no book if not for the support of the Searle Freedom Trust and Cato Institute, which respectively funded our enterprise and published the book. In addition to providing funds, Searle president Kim Dennis urged us to the task. Cato executive vice president David Boaz guided the publication process with the able assistance of Cato research fellow Julian Sanchez, who reviewed and commented on the entire manuscript. To Kim, Cato, David, and Julian, we extend our heartfelt appreciation. We are also deeply grateful to colleagues who read and commented on the manuscript. Chief among these is Roger Meiners, who worked through the complete manuscript offering many useful comments for revision along the way. We are indeed grateful to Roger and, as with other readers, we hold him blameless for our final product. Other readers include Dan Foster, David Rose, and Bart Wilson. Comments and criticisms received from these scholars made the book far better and much more readable. Of course, we note that the final product is ours. We alone are responsible for errors of fact or logic that remain in the pages to follow.
We close on a very personal note. The book is the product of a grandfather–grandson effort: Bruce Yandle, the grandfather; Adam Smith, the grandson. We are both economists and students of regulation, public choice, and the market process. Our collaboration has been ably assisted by a person especially important to us, Kathryn Yandle Smith, former newspaper editor and professional writer, who read and commented on the entire manuscript as it was being written, revised, and written again. We have already noted that errors that remain are ours; improved readability and logic of thought are due to Kathryn’s generous effort. She did wonders while navigating the often turbulent waters occupied by her determined father and son.
1. Bootleggers and Baptists: A Winning Coalition
“Baptists question Amazon porn sales, oppose tax break.”
That headline appeared in the Columbia, South Carolina,
State
newspaper (O’Connor 2011) in April 2011, above a story describing a controversy over an Amazon.com distribution center under construction in South Carolina. The facility would employ 1,200 people. Amid high unemployment, the state’s previous governor attracted the company with the promise of a five-year exemption from sales tax on purchases by South Carolina residents. The exemption, which gave Amazon an advantage over conventional retailers, was seen as critical for bringing the center to South Carolina.
Construction of the Amazon fulfillment center was pretty far along when Baptist leaders rallied in opposition to the tax break—and to Amazon’s presence—spurred by moral concerns about unrated videos sold by the website, which they considered to be pornographic. “We obviously have great concern about pornography, wherever it is sold in South Carolina,” said Joe Mack, the director of public policy at the Christian Worldview Center at North Greenville University, a school affiliated with the South Carolina Baptist Convention. “We’d be opposed to anybody who is selling it” (O’Connor 2011). Of course, the location of the distribution center would have no effect on whether residents could buy videos from Amazon, but this fact appeared to make little difference.
While these Baptists bristled at the prospect of pornography consumption, an unlikely alliance had formed among competing big retailers—including Walmart, Best Buy, and Target—and small Main Street retailers. The common denominator linking these otherwise adversarial firms is a fixed brick-and-mortar storefront, which obligates them to pay sales tax on each purchase. Their common goal: to reduce loss of market share to Amazon, which they claimed was subsidized by favorable tax policy. As William R. Harker, senior vice president at Sears Holdings, said of Amazon’s sales tax edge: “I think it puts all retailers at a disadvantage. What we and other retailers are looking for is for the playing field to be level” (Kopytoff 2011).
These seemingly disparate forces—Baptist leaders; major retailers Walmart, Best Buy, and Target; and small Main Street retailers—worked in tandem to vehemently oppose the tax exemption. As far as we know, the Baptists never met with the retailers to strategize. Nevertheless, the retailers undoubtedly welcomed the implied support of South Carolina’s largest religious denomination in the lobbying battle against Amazon’s special tax treatment. After all, with support from religious authority figures, their battle against Amazon took on a meaning beyond a mere commercial dispute. Alongside arguments about fair competition, the retailers had been empowered to question the very morality of an otherwise routine, profit-motivated attempt to manipulate tax assessment.
The coalition of churchmen, major retailers, and Main Street merchants was initially successful. The South Carolina General Assembly reneged on the previous governor’s promise and voted to deny the Amazon exemption (Adcox 2011). But the story did not end there. After all, the Amazon distribution center was already under construction. Shutdown costs would be sizable. Amazon responded to the makeshift coalition by promising to build a second South Carolina facility that would employ hundreds of additional workers. That offer proved enough to tilt the political scales, and a second Amazon vote was favorable to the online retailer.
We see the Amazon story as a perfect illustration of the Bootlegger/Baptist theory of regulation (Yandle 1983). As noted in the preface, the theory gets its name from two seemingly unrelated groups that both stand to gain from restrictions on the sale of alcoholic beverages. Baptist leaders lobby openly and enthusiastically for regulation of spirits; they prefer a world where less alcohol is consumed. Bootleggers, the illegal sellers of alcoholic beverages, happily support the laws as well; Sunday closings shut down legitimate sellers, thus expanding opportunities for bootleggers to sell their wares.
The resulting laws never restrict the Sunday consumption of alcoholic beverages—no bootlegger worth his salt would support that. Instead, the typical restrictions generate differential effects across sellers. The rules set an output restriction that is monitored by Baptists, enforced by government, and enjoyed by bootleggers.
1
Along the way, some of the resulting bootlegger profits are undoubtedly shared with cooperative politicians.
The Bootlegger/Baptist label is now applied to a wide variety of regulatory episodes where the term “Bootlegger” no longer implies illegal action but rather applies to political action in pursuit of narrow economic gains.
2
Moreover, the term “Baptist” does not necessarily indicate a religious motivation but rather group action driven by an avowed higher moral purpose or desire to serve the public interest. Since emerging in 1983, the theory has been used to illuminate countless examples of “strange bedfellows” who rally behind a shared political aim.
Bootlegger and Baptist interaction is as old as recorded history, but we limit ourselves to tales from the past few centuries in political contexts similar enough to our own that lengthy background exposition can be avoided. Every story we relate is told for a purpose, and each contains specialized content that contributes evidence to a richer theory of political action. Although historic legacy is interesting and may be instructive, it is the growing imprint of Bootlegger/Baptist–abetted regulation that we think deserves attention. Illuminating the dimensions of that imprint is the underlying purpose of this introductory chapter.
The chapter is organized into four parts. First, we introduce the Bootlegger/Baptist dynamic. In this part, we examine the growth of social regulation that has emerged because of Bootlegger/Baptist interaction and the impact of these relationships on economic performance. We explain how Bootlegger forces largely define how the regulation advocated by Baptist interest groups actually comes about in practice. The new set of opportunities afforded by social regulation biases the behavior of corporate leaders away from producing more and better goods and services in favor of regulation-seeking activities that reduce output. Then, we break down examples of social regulation into four modes of Bootlegger and Baptist interaction: (a) covert, (b) noncooperative, (c) cooperative, and (d) coordinated. We use these labels throughout the book to organize our various examples and episodes of Bootlegger/Baptist activity. Finally, we close out the chapter—as we do each chapter—with concluding thoughts.