Authors: Adam Smith
In 1995, a new interest group emerged, dedicated to expanding government efforts to help Americans purchase homes: the NHS, which we mentioned in our last section as an example of a Baptist group created by Bootleggers. The 56 NHS members included the American Bankers Association, the Appraisal Institute, Fannie Mae, the Federal Home Loan Bank System, Freddie Mac, the Mortgage Bankers Association of America, the Mortgage Insurance Companies of America, the National Association of Home Builders, the National Association of Real Estate Brokers, the National Foundation of Consumer Credit, the National Urban League, and the U.S. Department of Housing and Urban Development (HUD) (Affordable Mortgage Depression 2010).
As should be evident, the alliance contained an impressive list of dominant private-sector and public-sector Bootleggers. The NHS coalition was not a winning one, however, because it had no true Baptists. But this oversight was addressed as quickly as one could say “homeownership.” Led by sitting presidents, the housing coalition was soon supported by an array of public interest groups who followed a decades-old, if not centuries-old, tradition of promoting American homeownership.
With strong private-sector support, President William J. Clinton called on Freddie Mac and Fannie Mae to reduce their lending standards and greatly expand mortgage lending for families, even if the families lacked the funds for a down payment or the income to support homeownership on normal terms. In announcing the new strategy, President Clinton (1995) invoked a national commitment to the American Dream:
One of the great successes of the United States in this century has been the partnership forged by the National Government and the private sector to steadily expand the dream of home ownership to all Americans. In 1934, President Roosevelt created the Federal Housing Administration and made home ownership available to millions of Americans who couldn’t afford it before that.
Mr. Clinton then noted how prospects for achieving the dream had dimmed and pledged to brighten the light of government-assisted homeownership in America. The Baptist foundation for expanding home construction and ownership was easily laid and implemented.
After taking office in 2001, President George W. Bush blessed the idea that every American should have a home, whether or not the dream could be paid for, by signing the 2003 American Dream Downpayment Act. The new legislation provided up to $10,000 in direct government down-payment funding for low-income Americans (HUD 2003). Full of good cheer, the president, like his Democratic predecessor, offered a Baptist-flavored comment: “Today we are taking action to bring many thousands of Americans closer to the great goal of owning a home. . . . These funds will help American families achieve their goals, strengthen our communities, and our entire nation” (HUD 2003).
Alas, it was not to be. In 2008, as the subprime mortgage collapse loomed, CBS News reported:
For decades, Fannie and Freddie fulfilled the American dream. . . . Consumers took out loans from banks, which in turn sell those loans to Fannie or Freddie. Then the mortgage giants repackaged those loans and sold them to investors, guaranteeing the mortgages would be repaid.
As home ownership grew universal, Fannie and Freddie prospered. Their CEOs, Daniel Mudd and Roger Syron together earned around $30 million dollars in 2007. (CBS/AP 2009)
A few months before the Fannie/Freddie takeover, a
Washington Post
story described the situation this way:
Today, 3 million to 4 million families are expected to lose their homes to foreclosure because they cannot afford their high-interest subprime loans. Lower-income and minority home buyers—those who were supposed to benefit from HUD’s actions—are falling into default at a rate at least three times that of other borrowers. (Leonnig 2008)
The picture was not pretty. The article explained that even as regulators warned that “subprime lenders were saddling borrowers with mortgages they could not afford, the U.S. Department of Housing and Urban Development (HUD) helped fuel more of that risky lending” (Leonnig 2008).
HUD, Fannie, and Freddie were key players in the 56-member strong NHS group that included mortgage lenders, real estate developers and agents, bond-rating agencies, and the politicians who could speak glowingly about helping low-income people achieve the American dream (Yandle 2010a). By 2011, the bailout total for Fannie and Freddie was $259 billion (D. Wagner 2011). The presence of Fannie and Freddie, two government-sponsored enterprises, in a national-scale, presidentially coordinated Bootlegger/Baptist coalition is this story’s distinguishing feature. The two housing finance agencies were the twin treads of a homeownership juggernaut driven by a supercharged engine. There was just no stopping the housing finance cartel from pumping out below-par debt until world markets finally said “enough.”
Another example of government-coordinated coalition building occurred in 2009, when the Obama administration unveiled new fuel-economy and carbon emission standards for the U.S. auto fleet (Yandle 2009). The regulation made clear that the federal government, rather than the states, would set fuel-economy standards. State governments, which were actively pursuing tighter regulations at the time, were to be shoved to the side. Going further, the announcement said the new rules would be based on vehicle characteristics such as weight and size, rather than following a one-size-fits-all approach, as had been proposed previously. This more nuanced approach delivered a valuable differential effect: producers of larger cars were given a significant break relative to their South Korean and Japanese competitors that specialize in producing smaller, more fuel-efficient vehicles.
The group assembled in the White House Rose Garden for the fuel-economy regulation announcement comprised the largest visible collection of Bootleggers and Baptists in recent regulatory history, and this gathering is the distinguishing feature of the story. In a way, the episode marked the beginning of a new age of integrated Bootlegger/Baptist interaction, as the White House recognized explicitly.
As President Obama’s press secretary put it in advance of the occasion, “You will see people that normally are at odds with each other in agreement with each other” (Yandle 2009, 6). In the garden that day were executives from Ford, General Motors, Chrysler, Toyota, BMW, Mercedes, Honda, Nissan, and Mazda. They were joined by United Auto Workers president Ron Gettelfinger and leaders of the League of Conservation Voters, the Natural Resources Defense Council, the Sierra Club, the Environmental Defense Fund, and the Union of Concerned Scientists (Hughes and Chipman 2009). As in other Bootlegger/Baptist episodes, the Baptist component sang the praises of Mr. Obama’s environmental foresight.
The cheerful automakers saw the national rules as an honorable escape from more nettlesome state regulations brewing in California and elsewhere. The Bootleggers—even the Asian producers who were somewhat disadvantaged by the rule—wanted one national rule, not multiple state rules. As GM CEO Fritz Henderson put it, “GM is fully committed to this new approach. GM and the auto industry benefit by having more consistency and certainty to guide our product plans.” Ann Mesnikoff, director of the Green Transportation Campaign at the Sierra Club, said, “The Obama administration is making automobiles go farther on a gallon of gas” (Hughes and Chipman 2010). In 2011, 13 major auto producers signed letters of commitment with the government to meet a fleet fuel-economy standard of 54.5 miles per gallon in 2025, up significantly from the 2012 standard of 24.1 miles per gallon (Zacks Equity Research 2012). The fuel-economy standards also embedded carbon emission limitations.
With the new federal rules in place, the auto industry had accomplished something it could not have achieved without the endorsement of environmentalists. The industry escaped a quiltlike pattern of state regulations, effectively pouring regulatory concrete around a long-term, foundational structure for future regulation. Because the rules set differential standards for cars vs. light trucks, dominant producers of light trucks—namely Chrysler, Ford, and GM—gained a potential advantage over Asian competitors. And domestic producers gained a slight fuel-economy edge over producers for the U.S. import market.
There were winners and losers, but on the whole, the Bootleggers did well. What about the Baptists? With significantly tighter fuel efficiency and carbon emission standards imposed on the entire industry, environmentalists accomplished more than they could have without the support of the auto industry. The new fuel-economy cartel is monitored and managed jointly by the EPA, the Department of Transportation, and the Department of Energy. With so many powerful agencies at the forefront of the process, it is little wonder that the auto industry saw the wisdom of joining the choir rather than trying to fight it.
Subsequent developments in energy markets paved the way for additional Bootlegger/Baptist activity. In 2012, natural gas (obtained in part through the new technologies described earlier) became so plentiful, and gas was flowing at such a pace, that storage locations were exhausted. Energy prices were falling. Electric utilities were switching from coal to gas, and major trucking companies were converting engines from diesel to natural gas. The rapid change in relative prices created disturbances across the oil and coal sectors, and the rapidly falling price of natural gas brought increased uncertainty to that industry’s future prospects.
The situation was ripe for coordinated Bootlegger/Baptist interaction. On April 13, 2012, President Obama issued an executive order that demonstrated his expertise in extending an altar call to suffering industry leaders (White House 2012a). Following the blueprint for his highly visible fuel-economy cartel, the president appointed a multiagency task force that would coordinate clean production and distribution of natural gas.
Members of the task force included every federal agency that had anything to do with regulating, subsidizing, pricing, and planning energy production and use in the U.S. economy. Key trade associations were sent the draft executive order prior to its becoming final, along with a request for letters of endorsement. When industry groups responded to the invitation, offering glowing support for the president’s foresight, their letters were publicized by the White House (White House 2012b). In effect, President Obama cartelized the government regulatory agencies by way of the task force, then he used this as leverage to cartelize the energy sector. The episode’s truly interesting feature is the formation of a cartel within a cartel.
What does this have to do with Bootlegger/Baptist interaction? The environmental community forms the Baptist component. Highly critical of the new fracking technology that had dramatically increased natural gas production—and even more critical of coal—environmental organizations stood at the forefront of those supporting the president’s effort. The American Petroleum Institute, the American Gas Association, the American Natural Gas Alliance, the American Chemistry Council, Dow Chemical Company, Marcellus Shale Association, and the National Association of Manufacturers each came forward with letters of support. And for understandable reasons. In a world full of federal regulation and price uncertainty, each organization had a lot at stake.
The president artfully circled the wagons. By bringing all the regulators to the table, he reduced infighting and the tendency of each agency to take its own bite from the apple. And by bringing all major energy producers to the table with supporting letters in hand, the president reduced the likelihood that the resulting regulatory cartel would fall apart. The results of this effort remain to be seen, but it seems a safe bet that pork will be divided up across sectors and interest groups, as the combined regulators create industry-wide rules that raise prices and reduce output.
Final Thoughts
This chapter laid out the basic theory of Bootleggers and Baptists, giving examples of four modes of interaction between them, and described the regulatory context from which our model emerged. Our examples have been drawn from as far back as the 13th century up to recent days. The operational content of the theory applies equally in the oldest and most recent episodes.
We have highlighted the extraordinary 1970–80 regulatory period, when the new social regulatory agencies were first emerging, along with thousands of new pages of rules focusing on the environment, safety, and health. The explosion of social regulations set the stage for Bootleggers and Baptists to converge in the regulatory process. The goals of social regulation were, more often than not, the goals of interest groups that included civic and religious organizations along with the newly emerging environmental and consumer groups. In many cases, the regulatory fine print sought by environmental and other public interest groups turned out to be precisely what major firms and industries wanted as well. The resulting rules often brought output restrictions, higher costs for smaller firms than for larger ones, and higher profits for firms well adapted to the new regulatory environment—even while often delivering the goods desired by the Baptists.
As we prepare to turn to the next chapter, which examines where Bootlegger/Baptist theory rests in the broader, evolving body of regulatory theory, we return to the previously mentioned executive order by the Obama administration, which we believe adds new vigor to Bootlegger/Baptist activity.
On January 18, 2011, President Obama issued an Executive Order for Improving Regulation and Regulatory Review, which affirmed the principles of the 1993 order specifying how executive branch agencies would manage development, review, and implementation of regulations (White House 2011). Broadly speaking, Mr. Obama’s order represents the next stage in the evolution of White House regulatory review processes that date back to Richard Nixon.
Mr. Obama’s order directed agencies to identify old regulations for retrospective review to ensure that they were still justifiable and called for more transparency in the regulatory process, so interested parties could more easily learn what is going on as regulations develop. But the order also, for the first time, allowed agencies doing the required benefit-cost analysis to consider effects far beyond the usual economic considerations.