Bootleggers & Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics (3 page)

The Bootlegger/Baptist Dynamic

The Bootlegger/Baptist theory provides a useful device for explaining crucial features of enduring social regulations that affect consumers and producers worldwide. The theory describes how special interest groups acquire gains through the political process, and why these two types of interest groups become more prevalent and vocal. Politicians are agents who serve the competing goals and objectives of special interest groups as well as the broader unorganized public. Bootlegger/Baptist theory tells a story of how public interest justification greases the rails for purely private pursuits.

Gifted politicians who seek to serve their constituencies can do more for economic interest groups if their actions can be clothed in public interest garb (Simmons, Yonk, and Thomas 2011). Politicians will rarely explain an effort to improve the profits of an economic interest group by saying, “I was just trying to help a good firm make more money.” The Bootlegger/Baptist theory explains how the cost of organizing demand for political action can be reduced while at the same time easing the politician’s burden when it comes time to justify those actions. When Bootleggers and Baptists unite, activity in the market for regulation flourishes.

We should hardly be surprised by private pursuit of regulatory benefits. None other than the patron saint of economics, Adam Smith, warned about efforts by early industrialists to seek political favors through laws and regulations. As Smith wrote in his magnum opus,
The Wealth of Nations
([1776] 1827, 107):

The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.

Writing in 1776, Adam Smith had apparently not encountered situations where businesspersons were joined by clergy and others who wrapped the political enterprise in an attractive moral cloak, thereby improving the chances that politicians would respond favorably to their high-sounding petitions.

The government “pork” Bootleggers seek—with the witting or unwitting assistance of Baptists—can take myriad forms. The most straightforward example of Bootlegger/Baptist activity occurs when some private interest seeks a direct benefit from government—such as a subsidy, contract, or special tax break—on the premise that some higher moral aim or public interest will thereby be served. In these cases, nominal rivals within a sector of the economy may find themselves united in covert support of measures that benefit all, even if they subsequently find themselves at odds over the division of the loot.

Often, however, firms can profit as handsomely by hindering their market rivals as they could by seeking direct payouts from public coffers—and without the public scrutiny that typically attends such transfers. The simplest form of this situation is seen when regulatory measures are used to sock it to competitors (Salop and Sheffman 1983).

The noncooperative strategy of raising rivals’ costs is hardly a novelty of the Internet era: a prime example appeared some eight centuries before the South Carolina Amazon episode, when London weavers exploited a stricture contained in the Magna Carta to gain an advantage over foreign competition (Yandle 1984). As the historian W. F. Swindler (1965, 311) explains, chapter 25 of the “Great Charter” established uniform measures of ale, grain, cloth, and other goods to facilitate trade—a classic case of consumer protection at a time when buyers, ill-equipped for comparative shopping, dealt with traveling merchants who moved from market to market, and “traders and merchants found it practically impossible to conform to the standards that were different in each locality.”

Such imposed uniformity may have made sense on its own terms given the potential uncertainty of dealing with traveling peddlers, but enforcement of the standard was not uniform. As William McKechnie (1914) documents, the London weavers paid a bribe to local enforcement agents to avoid having the standard enforced on themselves but demanded that it be scrupulously applied to traveling merchants who came to London markets. Differential enforcement thus entered the picture, allowing the best organized merchants to raise rivals’ costs, and— unsurprisingly given the state of communications at the time—traveling merchants from assorted far-flung locales had little chance of being as well organized as the London weavers (Thompson 1948, 100–121). In short, the “uniform” standard meant to protect consumers became a barrier to entry for disfavored sellers.

Such regulatory gamesmanship may also take subtler forms, as when looming government action prompts an industry to rally in support of stricter regulation—perhaps to avoid an even more costly outcome—ultimately forming a government-assisted regulatory cartel. Almost invariably, regulation generates differential effects across member firms in the cartel. In other words, when noncooperative strategies are at play, there are winners and losers.

The interaction between Bootleggers and Baptists in pursuit of these aims can itself take a variety of forms. Starting again with the simplest case, Bootlegger firms may covertly advance Baptist arguments, as when film studios advocate for more stringent copyright protection by invoking either the moral claims of artists to remuneration or the promise of increased creativity and innovation spurred by greater rewards to creators. Strictly speaking, these are not Bootlegger/Baptist scenarios at all, but rather cases of Bootleggers covertly posing as Baptists. Such cases, however, often signal the first phase of an evolving political process that yields more complex forms of cooperation. Moreover, considering some of the drawbacks of this one-man-band approach helps illuminate why we so often find a division of labor between Bootleggers and Baptists, with members of each group doing what they do best: the Baptists making the moral argument and the Bootleggers providing financial support for cooperating politicians.

When separate independent Baptist groups enter the picture, at least initially they may find themselves backing the same cause as Bootleggers through a happy confluence of interests, as in the early stages of the Amazon example. Each group, in effect, pursues its own noncooperative lobbying and advocacy strategy, happily reaping any spillover benefit from the other’s efforts. Independence has its benefits—Baptist groups may seem more credible if they avoid any taint of association with self-seeking Bootleggers—but comes at the cost of whatever efficiencies might be achieved by pooling resources and acting under a unified strategy. In later examples, we will see how togetherness can work.

In other cases—whether by design from the outset or over time as sympathetic interests are recognized in the course of a protracted political struggle—cooperative partnerships emerge as Bootleggers fund Baptists to bolster support for the political outcome both desire. In economic terms, the Baptist groups have comparative advantage in providing public relations efforts supported by less attractive Bootleggers. An extreme form of this mode of interaction is the notorious practice of “astroturfing,” in which corporate interests essentially create from whole cloth an advocacy group designed to seem like a grassroots effort by concerned citizens. Given the tendency of such charades to backfire when exposed, however, the savvy Bootlegger will typically prefer to bankroll an authentic, preexisting Baptist group with a reservoir of public credibility to draw on, even when this strategy requires sacrificing some control.

Finally, as regulation expands and becomes all encompassing across national markets, a still more complex dynamic may emerge. In this fourth type of interaction, presidents or other political actors take the initiative to coordinate a desired mix of national interest groups and regulators to achieve their ultimate political goal by way of a grand regulatory cartel. One could refer to this as the “grand slam” of Bootlegger/Baptist initiatives. When this happens, high-level politicians and Bootleggers profit while Baptists achieve their goals and provide moral cover, making it easier for coordinating regulators to control the industry group. Taken together, these diverse modes of Bootlegger/Baptist interaction yield expanding regulatory activity and rising costs that constrain GDP growth.

The Rising Tide of Social Regulation

A veritable tidal wave of regulation has emerged in the last four decades from the confluence of Bootlegger and Baptist elements. Any investigation of U.S. regulation quickly reveals the explosive growth in federal regulatory activity that began in the early 1970s. An examination of the count of new pages in the
Federal Register
provides the most vivid indication of the rising tide of regulation, although some may argue that levels of regulation need to be considered in terms of the size of the economy being regulated. To account for this argument, we show the count of pages weighted by real GDP in
Figure 1.1
.

The massive change in regulatory activity that occurred in the 1970s should prompt us to question whether an economy can absorb so much regulation in such a short time without significant production losses—and, indeed, whether that economy is still one driven primarily by private risk takers operating in a capitalist system.

When analyzing regulatory activity—like that reflected in the
Federal Register
pages—regulatory scholars divide regulation into two categories: economic and social. Economic regulation, the older of the two types, addresses such things as freight rates, permits to operate, interest rates, and geographic service areas. The economic regulatory agencies included the Interstate Commerce Commission, which regulated surface transportation; the Civil Aeronautics Board, which regulated air travel; the Federal Communications Commission, which regulates radio and television broadcast rights; and the Comptroller of Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Bank Board, which collectively regulated financial institutions. Joining these older economic agencies, the social regulators of the 1970s focused on safety, health, and the environment. These agencies included the U.S. Environmental Protection Agency, the Occupational Safety and Health Administration, the Consumer Product Safety Commission, and the National Highway Traffic Safety Administration.

The new wave of social regulation was fundamentally different from the older economic regulation for transportation, communications, and energy markets. Old-style regulation focused on single industries, yielding a natural constituency of regulated firms that sought to influence outcomes. Social regulation affected all industries. It created no natural constituency of targeted firms that might organize to influence outcomes—at least not easily.

Social regulation also brought something to the table that was lacking in economic regulation. Social regulation was about things that mattered deeply to ordinary people. Interest groups that formed to lobby for safer food, cleaner water, and more humane workplaces possessed a moral fervor that railway freight rules seldom inspire. Voters and interest groups alike became passionate about the new regulation that emerged full bore by the 1970s. New economic models and modes of thinking were needed to explain what was going on. Social regulation became a growth industry, partly because of accommodating Bootlegger/Baptist forces.

When the budgets (in constant dollars) of federal regulatory agencies are considered for the two categories—economic and social—the fast-paced growth of social regulation is astonishing (Dudley and Warren 2011, 5). Total spending on social regulation increased more than 19-fold from 1960 to 2010. By comparison, spending on economic regulation increased less than seven-fold, and total government spending for all federal activities increased just under four-fold across the same 50 years (OMB 2010, 26). Given that government revenues grew less than outlays for most of those years, we can say that regulatory growth was so important that it was funded with deficit dollars. With so much regulation occurring, what was the effect on economic performance?

Throttling GDP Growth

It is now more than 40 years (and 3.5 million
Federal Register
pages) since the surge of regulation that began in 1970. We believe the structure and performance of the U.S. economy has been significantly altered by the rise of what some call “regulatory capitalism,” what others might call crony capitalism, or what we would term Bootlegger/Baptist capitalism. In
Figure 1.2
, we show the annualized rate of per capita real GDP growth over a series of decades, beginning with 1951 and ending with 2010.