Authors: Adam Smith
Capture theory also explains how the railroads won the day when Congress empowered the ICC to regulate motor carriers in 1935 (Felton and Anderson 1989). This occurred after carriers began cutting prices for carrying freight, in spite of organized opposition from agricultural and other shipper interests. The rail interests were successful in forcing ICC controls on truckers.
If all this sounds a little too simple, that’s because it is. After all, regulatory tradeoffs are made: political decisions create winners and losers. Thus, the question is not just whether a politician will be captured but which particular Bootlegger will do the capturing. Suppose a legislator is considering an array of proposals to set tighter limits on the nitrogen oxide emissions from diesel engines. Which of the several standards being considered serves the public interest? Is the burden of achieving cleaner emissions best placed on the producers of diesel fuel, on engine manufacturers, or on some combination of the two? Is a simple, uniform rule preferable to a more nuanced one that is sensitive to human exposure and differences between urban and rural operations?
Agents of Bootlegger engine and fuel manufacturers are only too glad to join the discussion—indeed, they better be at the table. Baptists from environmental groups, organized religion, and regulatory agencies are on hand to assist the legislator’s search for a public interest solution as well. Some will even arrive with draft legislation already prepared to guide the politician.
The politician’s search for the public interest is confused by the fact that many lobbyists will claim to be serving the public interest, even though disagreement exists as to which nitrogen oxide standard is most desirable and how best to achieve it. But time is precious, and the politician has to make a decision. Persuaded by some of the lobbyists’ arguments, the legislator takes a position that turns out to be advantageous to certain Bootleggers.
Suppose the politician opts to place the burden of reducing emissions on fuel manufacturers. Perhaps without realizing it, the politician has been captured by the engine manufacturers, one of several competing Bootleggers, while still believing that he or she is serving the public interest. In specific instances, the belief may even be accurate! The point is that whichever choice the politician makes, he or she will necessarily rely on information and analysis provided by parties with powerful vested interests in the outcome.
Stigler’s Special Interest Groups
So how does one predict which Bootlegger group will prevail in regulatory struggles? Our third theory was developed by Nobel laureate George Stigler and is called the special interest theory of regulation. Stigler suggests that if we wish to predict which of several parties will prevail in a valuable political struggle, we should imagine that the specific content of proposed legislation is simply auctioned off to the highest bidder.
By focusing on which parties have the most to lose (or gain) in the struggle, we can begin to understand outcomes. Of course, this is just a first step in the process. To participate in the auction, the agents doing the bidding must know the consensus position of the group they represent. Organizing an interest group is costly, and the more numerous and diverse the players, the greater the cost. Once organized, the group must reach consensus on a preferred policy outcome, which may itself be costly, requiring research, analysis, and internal deliberation.
With Stigler in mind, let’s reexamine the Clean Air Act scrubber case. Suppose the case had simply involved pitting western against eastern coal producers. The eastern producers were located in relatively populous states, had been organized and working the halls of Congress for decades, and had more members of Congress to confront and more support from other interest groups who wanted to keep local economies humming. The producers were not strictly homogeneous. Some produced metallurgical-grade coal, and some were diversified across industries, but a small number of large producers dominated the industry. When speaking to politicians, the voice of the United Mine Workers came through loud and clear.
Now consider the western producers. They were comparatively younger firms with nonunionized workers and were located in remote corners of less populous states. They operated in towns that had yet to flourish, so these towns had not yet given rise to the school districts, Main Street merchants, and others who might later have lobbied for western coal. Although the bulk of the market for western coal was in the east, most consumers and voters were rationally ignorant about where their coal came from. Pushed to pick which region mattered most, concentrated eastern interests with a lot to lose outweighed scattered western interests that had yet to enjoy the fruits of an expanded market for their coal. Using this scorecard, a prediction that eastern interests would carry the day should have been easy to make.
What about the conflict between truckers and rail interests, which led to the truckers being brought into the regulatory web? First, far fewer railroad companies existed than trucking firms at the time. The large rail companies had been organized and politically active for decades. Furthermore, railroad companies owned vast amounts of land in many states. These fixed assets meant railroad companies were all but certain to be around a long time, were in a position to extend significant favors, and had a long-term interest in political decisions affecting the value of their land spread over many states. By contrast, thousands of small, local trucking firms had few employees in the average firm. The truckers, being new to the game, faced high upfront organizing costs. They lacked both deep roots in important political territories and experience in working Washington. The transaction costs of organizing and securing beneficial regulation were lower for railroads than for trucking interests. Unsurprisingly, the railroads won the day.
Now, let’s return to our survey of the president’s annual economic reports. By 1981, President Jimmy Carter’s
Economic Report of the President
finally recognized the importance of special interest groups. So much new regulation had been placed on the books that steps were being taken to systematically review and control the flow of new rules. Although the report understandably makes no mention of regulatory theories, ample evidence indicates that the capture and interest group models were understood. Consider the following:
As government involvement in the economy has grown, so have the overtly political aspects of economic decisions. Representative government is quite responsive to claims from individuals, groups, or regions that proposed policies will benefit them or do them harm. Since all interventions, no matter how small, have the effect of harming some and benefiting others, there has been growing pressure to “manage” these gains and losses to produce “fairness” rather than economic efficiency. Many of the recent arguments over deregulation, for example, have tended to focus less on the benefits of deregulated markets than on the economic losses of the persons or industries that have been protected in the past by Federal economic regulation. (
Economic Report of the President
1981, 89)
Eight years later, and following a change in the party in power, we find recognition of special interest demand for regulation—and even the possibilities of Bootlegger/Baptist alliances—in President Ronald Reagan’s
Economic Report of the President
(1989). Along with this came discussion of government failure. Ideas developed by economists in the 1960s, 1970s, and early 1980s had made their way into mainstream discussion of regulation. In a discussion of rationales and motivations for regulation, the report indicates the following:
Until recently many economists viewed market failure as a sufficient rationale for government intervention. Because it is now widely recognized that government intervention is not without its pitfalls, however, market failure is seen as a necessary, but not sufficient, condition of government intervention.
Economists sometimes refer to situations where government intervention results in a less efficient policy as “government failure.” (
Economic Report of the President
1989, 191)
The discussion continues with direct references to special interest demand and the possibilities of Bootlegger/Baptist explanations for regulation:
Many firms attempt to use the regulatory process to enhance their competitive position. Barriers to entering an industry may increase with the introduction of new regulations, not only increasing profits for regulated firms, but also yielding a less efficient industry structure. The existence of incentives for firms and individuals to manipulate the political process means that regulatory programs may not be implemented so as to promote economic efficiency; nor is such efficiency necessarily an important criterion for politicians designing such programs.
Over the past 20 years some economists and political scientists (especially those of the “public choice” school) have attempted to understand what motivates different approaches to regulation. A key insight from this research is that much regulation can be explained by an interest in redistributing wealth from the general public or taxpayers to special interest groups. . . . For example, the legislation requiring scrubbers on power plants appears to have been motivated as much by the self-interests of environmentalists and high-sulfur coal miners as by a desire to promote cleaner air. (
Economic Report of the President
1989, 191–92)
There we have it. Environmentalists and coal miners, two very dissimilar interest groups that share one common interest: a requirement for technology-based standards in pursuit of cleaner air, even though clean coal could accomplish the environmental goal.
The very next year’s economic report for President George H.W. Bush acknowledges the influence of successful lobbying efforts on the regulatory fine print (
Economic Report of the President
1990). After all, it is not environmental protection per se that brings Bootleggers and Baptists to the table, but rather specific kinds of environmental regulation. The report tells us that “firms routinely seek to keep their existing products and facilities under the current regulatory regime when more stringent regulations are implemented for new products and facilities” (
Economic Report of the President
1990, 188). Emission reductions can be obtained by setting clear performance standards—backed by high penalties—without specifying how air quality improvements are to be achieved. Alternatively, emission fees or taxes can be imposed; these can be raised or lowered to obtain the desired reductions. Finally, tradable permits can be put into play, with the total number of permits establishing a maximum emission level.
The Bootlegger/Baptist theory predicts that legislators will steer away from these three alternatives in favor of technology-based standards that set stricter rules for new sources of pollution than for existing sources. Environmentalists often seem to put more trust in technology than in economic incentives, and polluters prefer “polluter profits” that can accrue when output is restricted across an industry by technology-based barriers to entry (Buchanan and Tullock 1975).
Mr. Bush’s 1992 economic report discussed the scrubbers required for electric power plants and then explained why they were required:
One reason that command-and-control regulations remain in place is that the decision to introduce regulatory reform or to deregulate an industry affects the distribution of wealth among consumers and regulated companies.
The outcome of the regulatory process may be determined by the strength of interest groups rather than by an assessment of whether a proposed regulatory action maximizes net benefits to society.
A regulated company that produces inefficiently, for example, knows that competition will force the company either to go out of business or to invest in a more efficient production process. Such a company is highly likely to resist regulatory reform. (
Economic Report of the President
1992, 163 [emphasis in original])
In 1993, President Bush’s report echoed the notion, familiar from previous reports, that markets can fail to account fully for the costs of pollution or to adequately inform consumers of risks associated with products they may buy. Having acknowledged market failure, the report continued:
There are costs associated with regulation, however. Attempts at regulation must be tempered by the understanding that the rules may be as imperfect as the market they are trying to improve; that is, governments as well as markets may fail.
(
Economic Report of the President
1993, 170 [emphasis in original])
From 1993 to 2010, discussion of regulation in the
Economic Report of the President
emphasized efficiency concerns and focused primarily on finding ways to improve the regulatory process.
In a sense, all the reports carry an implicit assumption that government is ultimately capable of getting it right—but increasingly tempered by an awareness of how easy it is to go wrong. For example, President George W. Bush’s 2002 discussion is dedicated almost totally to institutional design, which is to say, making regulations inherently more efficient and marketlike. In addressing the need for regulatory reform, Mr. Bush’s 2003 report indicates that “although some demands for regulation reflect a desire to improve the efficiency of intrinsically imperfect markets, other demands for regulation seek to change market outcomes, for reasons that range from the compassionate to the opportunistic” (
Economic Report of the President
2003, 135).
In our earlier discussion, we mentioned the fleeting nature of advantages gained by the lucky and hard-working Bootleggers. In some cases, recall, this is a function of changing technology, but in others, it is the result of policy changes that strip away legal protections that firms had come to rely on—leaving them ill adapted to a more competitive market. Can these sheep somehow escape being sheared just when their wool is beginning to flourish?
Generally speaking, avoiding such haircuts requires legislation and regulation with a long half-life. When Congress passes major statutes that require regulatory action, there are typically preset dates when those actions must be taken and when the legislation must be reauthorized. These dates set predictable limits to the political gains from a successful lobbying effort. They also allow canny members of Congress to get entrepreneurial when seeking campaign contributions—which brings us to our fourth theory.