Authors: Adam Smith
As for future reforms, what might we predict on this same basis? Two come to mind. First, like AT&T, the U.S. Postal Service has stuck to an obsolete technology. With electronic transmission of messages, arguments about natural monopoly status have lost any credibility they may have once had and, for that reason among others, the statutes barring competition in the delivery of first class mail are under increasing fire. Energy regulation is another likely candidate for reform. Technical change and rapidly shifting relative prices have placed enormous pressures on existing regulatory structures, so that producers and consumers are now seeking greater flexibility than the present “public utility” status of much of the industry will allow. For example, the need for appropriate incentives to increase the amount of natural gas delivered to the market is widely recognized, and alternative systems for pricing and arranging the distribution of electricity are being explored. (Here, at least, we may have found one beneficial aftereffect of OPEC and its works.)
Changes in the Supply of Regulation
. The supply side of regulation, like the demand side, helps determine the quantity of regulation produced in political-economic markets. Among the variables here are the bureaucracy and the electoral and legislative process.
•
Bureaucratic incentives and structure
. If lawyers and economists can improve their expected lifetime earnings by filing enforcement actions against specific industries, for example, those actions will tend to be filed. More broadly, how agencies are organized (whether they are independent commissions or headed by a single administrator), what voting rules are applied in making decisions, to what extent the agency specializes in an industry or product, and whether there is competition from other agencies for jurisdiction are traditionally thought to affect the supply of regulation.
•
Congressional oversight
. The legislative component of the supply side is closely related to demand, since elected officials also represent special interests who seek regulatory benefits. But, even so, the competition among legislators, their voting rules, and their committee organization are supply characteristics.
Assuming that demand is held constant, to what extent will changes in these supply-side characteristics affect the quantity or quality of regulations produced? For example, will a reduction in the number of commissioners (as is happening now at the FCC), or a shift in the party mix of agency oversight committees, cause regulation to change?
Empirical research suggests strongly that the supply side matters. For example, Barry Weingast and Mark Moran report that, contrary to some opinions, the FTC’s regulatory behavior mirrors the conservative-liberal makeup of the agency’s key congressional committees: in other words, the agency is hardly ever “out of control” (
Regulation
, May/June 1982). Roger Faith, Donald R. Leavens, and Robert Tollison find that the FTC has been less likely to take actions against firms headquartered in the districts of congressmen who sit on the FTC’s congressional committees than against firms not so favorably situated (
Journal of Law and Economics
, October 1982). My recent research on the FTC suggests that the agency’s behavior is influenced not only by shifts in the chairmanship from a Democrat to Republican and vice versa, but also by shifts in how the chairman is chosen (in 1950 the method was changed from rotation to presidential designation).
Putting all this together, we may say that there are strong possibilities for regulatory reform when the institutions involved are changing for other reasons anyway. Such changes would help explain the flurry of deregulation initiatives at the FCC, especially those dealing with broadcasting, as well as the shift away from industry-wide rulemaking and structural antitrust investigations at the FTC. Moreover, the cautious attitude now shown by the Justice Department and the FTC when considering price discrimination, resale price maintenance, and vertical combinations, along with the probing economic analysis applied in such investigations, reflect new learning in law and economics and changes in the structure of the two agencies. Indeed, the significant overall reduction in new regulatory initiatives across the entire federal government reflects a coordinated effort that draws on each of the items mentioned.
Other Agents of Change
So far I have hardly mentioned yet another interest group: those who gain special satisfaction from participating in the regulatory process in ways that will improve economic efficiency. While some might conclude that students of the process can only observe, record, and analyze, I have a more sanguine view: simply put, people and their ideas do make a difference.
Some individuals, for example, make a difference by continuing to raise questions about grand principles—overall social efficiency, the appropriate role of government, economic freedom, the virtues of the price system. The more articulate and informed of these point out the compromises being made by the rest of us. Of equal importance are those whose goal is to understand how the regulatory process works, what interests are driving it, and how its outcome might be predicted. These are the academic researchers, the public policy analysts, the economists with private firms and in government, who struggle to bring about marginal adjustments. Their task is the creative application of economic logic. At yet a third level, there is active participation in decisionmaking itself. When I observed the effect of an Alfred Kahn at the CAB, a Darius Gaskins at the ICC, and a James Miller at the FTC—to say nothing of the less visible but nonetheless significant work performed by scores of others in the arena where decisions are made—I must believe they make a difference, a very great difference.
Finally, one should not expect to see sudden and widespread transformation in regulation. Like all market processes, the market for regulation is relatively stable, the result of thousands of transactions and years of institutional development. Yet, also like other markets, the forces of supply and demand do change, and the agents for change can and do have a marginal but significant impact on political demand and regulatory supply. Bootleggers and Baptists may have been agitating for a century or more, but the saloon is still with us—and usually on Sundays, too.
*
Reprinted from
Regulation: AEI Journal on Government and Society
, May/June 1983, pp. 12–16.
Preface
1
. A copy of the 1983 publication is in the appendix.
Chapter 1
1
. We note that the resulting Sunday drinking cartel may be profitless for the bootleggers unless some way exists to restrict the entry of new bootleggers. Selective law enforcement may accomplish this. Alternatively, bootlegger wars over territory may arise, as happened during Prohibition, and as drug cartels war among themselves today.
2
. Accordingly, we denote this group of people as a category with a capital
B
(i.e., Bootleggers). Any specific reference to actual bootleggers engaged in selling illegal booze is denoted with a lowercase
b
.
3
. The most exhaustive estimates of regulation’s effects on productivity for the entire economy were done in the late 1970s and early 1980s. These identified highly significant reductions in productivity growth in association with the growth and character of regulation. On this see Denison 1979; Christainsen and Haveman 1981; and for a survey, Christainsen and Haveman 1984.
Chapter 2
1
. Part of the material in this chapter is drawn from Morriss, Yandle, and Dorchak (2009). We express appreciation to Yale University Press for permission to use this material.
2
. Gary S. Becker (1983) makes the fundamental theoretical point that the political process is competitive in the sense that actions taken, no matter how costly, are still accomplished at the lowest possible cost, given the associated constitutional rules and political costs. We consider Bootleggers and Baptists to be a component of Becker’s politically competitive process. But we also note that Mancur Olson (1982) described the limits of interest group action, which might have been taken competitively through time, as causing a kind of hardening of economic arteries such that innovation and economic growth become stifled. Somewhere between Becker’s one regulation at a time competition and Olson’s locked-down economy, Bootleggers and Baptists work at the margin to gain another increment of rent.
3
. On this point, Pigou laments in a footnote that, “In Germany the town-planning schemes of most cities render anti-social action of this kind impossible; but in America individual site-owners appear to be entirely free, and in England to be largely free, to do what they will with their land.” Pigou’s view that the freedom of site owners is the source of “anti-social action,” may offer some insight into his mindset regarding external effects (see Pigou [1932] 2009, 186).
4
. Pigou later recognized that private interest lobbying would stand in the way of effectively applying his public interest theory. However, even though Pigou may have recognized this, his modern-day disciples disregard his warning and regularly promote the basic idea that government has a heavy public interest role to play (Yandle 2010b).
5
. We note that the “as is” or warranty sticker seen on used cars today, a low-cost solution to the congressional effort, is the result of the Used Car Rule.
Chapter 3
1
. Or as President George W. Bush’s equally appropriate malapropism explained, “Fool me once shame on you . . . but you’re not gonna fool me again!”
2
. We thank David Rose for alerting us to this angle of our theory.
Chapter 4
1
. Family Smoking Prevention and Tobacco Control and Federal Retirement Reform, Pub. L. No. 111-31, 123 Stat. 1776 (2009),
http://www.gpo.gov/fdsys/pkg/PLAW-111publ31/pdf/PLAW-111publ31.pdf
.
2
. Pure Food and Drug Act of 1906, Pub. L. No. 59-384, 34 Stat. 768, 768–72 (1906) (repealed 1938).
3
. Federal Cigarette Labeling and Advertising Act, 15 U.S.C. §§ 1331–1340.
4
. Public Health Cigarette Smoking Act of 1969, Pub. L. No. 91-222, 84 Stat. 87 (1970).
5
. Coyne Beahm, Inc. v. FDA, 966 F.Supp. 1374, 1388 (M.D.N.C. 1997),
rev’d
Brown and Williamson Tobacco Corp. v. FDA, 153 F.3d 155 (4th Cir. 1998),
aff’d
FDA v. Brown and Williamson, 529 U.S. 120, 160–61 (2000).
6
. Universal Tobacco Settlement Act, S. 1415, 105th Congress (1998); Kelder (1998, 5–6). Senate Majority Leader Trent Lott, brother-in-law of attorney Richard Scruggs, had asked Sen. John McCain in early 1998 to craft in the Commerce Committee a bill that embodied the tobacco settlement. “The committee consulted Wall Street analysts who calculated Congress could extract that much without any of the tobacco companies going bankrupt” (Bierbauer 1998). See also O’Brien (2000).
7
.
http://humboldtmedicalcannabis.com/cannabis/humboldt_growers_association/
.
Chapter 5
1
. Sections of this chapter are reprinted with permission from the publisher of
The Independent Review: A Journal of Political Economy
(Summer 1999, Volume 4, no. 1, pp. 19–40). © 1999, The Independent Institute, 100 Swan Way, Oakland, CA 94621-1428 USA; mailto:[email protected];
www.independent.org
.
2
. This is a loaded sentence. Volumes have been written that describe environmentalism as a religious movement. Robert H. Nelson (2010) leads this scholarly interpretation.
3
. See Teamsters, General Executive Board Resolution on the Kyoto Protocol (January 2001), available at
http://www.ujae.org/NewsRes/Teamster%20resolution%20on%20Kyoto%20Protocol.pdf
, and AFL-CIO Executive Council, The Kyoto Protocol (January 30, 1998), available at
http://perc.org/sites/default/files/Yandle.Buck.Harvard.pdf
.
4
. This idea, discussed formally at Toronto in June 1988 and considered by Congress in 1989 in a proposed bill, the Global Warming Prevention Act, was fundamental to pre-Kyoto commitments reached in 1992, when representatives of 160 nations attended the Rio de Janeiro Conference on Environment and Development (Manne and Richels 1991, 88).
5
. Anecdotes in this section are drawn from Yandle and Buck (2002).
Chapter 6
1
. Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, 122 Stat. 3765 (2008),
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ343.110.pdf
.
2
. The terms of this appropriation were as follows. TARP would purchase senior preferred shares, which qualify as Tier 1 capital, ranking senior to common stock. These shares would yield 5 percent per annum for the first five years and reset to 9 percent thereafter. In addition, the Treasury would “receive warrants to purchase common stock with an aggregate market price equal to 15 percent of the senior preferred investment. The exercise price on the warrants will be the market price of the participating institution’s common stock at the time of issuance, calculated on a 20-trading day trailing average” (Treasury Department 2008a, 4).
3
. One possible exception was the Federal Deposit Insurance Corporation’s increasing of its deposit coverage insurance from $100,000 to $250,000 (see FDIC 2008).
4
. The represented banks were Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Merrill Lynch & Co., Bank of New York Mellon Corp., State Street Corp., Morgan Stanley, and Wells Fargo & Co.
5
. This comes from documents that reveal a list of talking points at the October 13 meeting. The points of relevance are (a) We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed, and (b) If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.