This essay is part of Ten Key Ideas, an occasional series on fundamental economic concepts.
Mimi and Richard Farina were husband-and-wife folksingers in the '60s. Richard died in a motorcycle accident in the aftermath of a party celebrating Mimi's 21st birthday. A horrible tragedy. At Richard's funeral, Judy Collins sang her signature song, Amazing Grace. It must have been terribly moving. Unfortunately, Mimi's sister wasn't at the funeral, though surely she would have also sung something for such a sad occasion. That sister, Joan Baez, was on a concert tour of Europe at the time. She telegrammed Mimi that she had decided to stay in Europe instead of coming home to comfort her sister. Why? Because that's what Richard would have wanted, Joan explained. By staying on tour, she'd be able to talk about his music. Mimi, interviewed years later, explained that actually, Richard would have preferred for Joan to have a nervous breakdown on hearing of his death and to have been unable to perform.
A more mundane example occurs when a friend calls to tell you about something important in her life but you have too much to do. After a while, you end the call by saying, "I'll let you go." What you really mean is "I have to go," but we try and put it in a more selfless light.
We are a bundle of motives. We are often torn between what is best for ourselves and what is best for others. We are torn between doing the right thing and doing the easy thing or the convenient thing. Sometimes we choose the selfless course of sacrifice. The costs and benefits influence our choices. If Joan Baez had been touring in California instead of Europe, it would have been cheaper to come to the funeral. Maybe she would have decided in that case to attend. When a friend calls us in tears, we're more likely to stay on the phone even when we have other things to do.
But when we choose a selfish course, we rarely confess our true feelings. We find a graceful description to sugarcoat our actions. When the football coach resigns whether because he is failing or because he thinks a better job is available, he often tells the world that he's quitting because he wants to spend more time with his family.
Politicians are just like the rest of us. They find it hard to do the right thing. They claim to have principles, but when their principles clash with what is expedient, they often find a way to justify their self-interest. If they sacrifice what is noble or ideal for personal gain, they are sure to explain that it was all for the children, or the environment or at least for the good of society.
Pigs don't fly. Politicians, being mere mortals like the rest of us, respond to incentives. They're a mixture of selfless and selfish and when the incentives push them to do the wrong thing, albeit the self-interested one, why should we ever be surprised? Why should be fooled by their professions of principle, their claims of devotion to the public interest?
We call politicians our representatives and they often claim to be fighting for us. But when we think about it, we understand that our interests are diverse and that no politician can really fight for all of us. Inevitably, our interests and desires clash and politicians are forced to choose between the general interest and the special interest. Which wins?
The answer depends on the constraints facing the politicians. So politicians in a system with meaningful elections and competition are more likely to pursue policies that please the general public. Dictators have more range to pursue their own self-interest at the expense of the people.
EconLog blogger Bryan Caplan explores these issues in his book The Myth of the Rational Voter: Why Democracies Choose Bad Policies
For better or worse, it is an unavoidable reality that even when politicians are constrained by real or potential competition, they still have wiggle room for pursuing their own self-interest because the level of knowledge among the electorate is imperfect. The electorate can be misinformed. Or rationally ignorant. It's costly for voters to be well-informed. That gives politicians, even in a democracy, the chance to pursue special interests at the expense of the general interest.
This wiggle room for politicians in a democracy leads to some strange outcomes. It allows politicians to do the right thing and the wrong thing at the same time. How is that possible? We shall see below. Even stranger, the imperfect information available to voters can even allow politicians to do the wrong thing and pass it off as the right thing if we're not paying close enough attention.
Bruce Yandle uses bootleggers and Baptists to explain what happens when a good cause collides with special interests.
When the city council bans liquor sales on Sundays, the Baptists rejoice—it's wrong to drink on the Lord's day. The bootleggers, rejoice, too. It increases the demand for their services.
The Baptists give the politicians cover for doing what the bootleggers want. No politician says we should ban liquor sales on Sunday in order to enrich the bootleggers who support his campaign. The politician holds up one hand to heaven and talk about his devotion to morality. With the other hand, he collects campaign contributions (or bribes) from the bootleggers.
Yandle discusses his theory of regulation in this podcast.
You'll also find additional readings on the theory there.
Yandle points out that virtually every well-intentioned regulation has a bunch of bootleggers along for the ride—special interests who profit from the idealism of the activists and altruists.
If that's all there was to Yandle's theory, you'd say that politics makes for strange bedfellows. But it's actually much more depressing than that. What often happens is that the public asks for regulation but inevitably doesn't pay much attention to how that regulation gets structured. Why would we? We have lives to lead. We're simply too busy. Not so with the bootleggers. They have an enormous stake in the way the legislation is structured. The devil is in the details. And a lot of the time, politicians give bootleggers the details that serve the bootleggers rather than the public interest.
In the 1970s, sulfur dioxide released by the smokestacks of American midwestern utility companies created acid rain in the American northeast. A clamor arose to clean up the air—environmentalists and everyday citizens demanded legislation. That should have been relatively easy. We know how to get less of something—make it more costly. So the cheapest solution to the sulfur dioxide problem would have been to tax smokestack emissions. That would give utilities the incentive to find the cheapest way to reduce emissions. Over time, better and better technologies would be developed as a way to reduce the burden of the tax.
But Congress didn't impose a tax. Congress imposed a technology. The 1977 amendments to the Clean Air Act required every utility to put a scrubber on its smokestacks. These were incredibly expensive—about $100 million each. They made the air cleaner. They also made the makers of smokestacks richer. The makers of scrubbers were the bootleggers. They joined environmental groups in lobbying for the legislation. That's not so bad. Maybe scrubbers were the best technology and even if a tax had been put in place, the scrubber makers would have profited.
The role of dirty coal in setting the legislative agenda is found in Clean Coal, Dirty Air or How the Clean Air Act Became a Multibillion-Dollar Bail-Out for High-Sulfur Coal Producers, by Bruce Ackerman and William Hassler. The use of mandated technology by the EPA (sometimes called command-and-control) rather than a more decentralized approach that lets innovation emerge from the bottom-up, is a common regulatory approach to environmental problems. See Robert Crandall's "Pollution Controls" in the Concise Encyclopedia of Economics.
But the real bootleggers were the West Virginia coal companies. If a tax had been used to reduce sulfur dioxide emission, there would have been an incentive to clean up the air. One way to clean up the air is to use technology like a scrubber. A second way is to burn cleaner coal. Cleaner coal (low in sulfur) comes from out West. Dirty coal (high in sulfur) comes from West Virginia. Senator Byrd is from West Virginia. He made sure that scrubbers were mandated. For the environment of course. For cleaner air, of course. For the children, no doubt. But also for his friends in the coal business. We got cleaner air, but we achieved it at a much higher price than was necessary.
In the worst cases of the bootlegger and Baptist alliance, the good intentions don't just get sidetracked or achieved at a higher cost by the bootleggers—they get thwarted.
The attorneys general in a number of states threatened the tobacco companies with legal action on the grounds that tobacco companies were imposing costs on state budgets by getting people sick. Eventually, the tobacco companies settled, a complex legal structure called the master settlement. The master settlement, applauded by anti-tobacco activists and everyday citizens concerned about their taxes and the health of their fellow citizens, imposed large tax increases on tobacco companies to fund children's health programs. It was a proud day all around. Who could be against such a result? Oh, a few people griped that the whole process was unconstitutional and reduced freedom. But look at the benefits, the defenders would answer—Big Tobacco punished, smoking discouraged, and more health for the children.
Jeremy Bulow's analysis of the tobacco settlement can be found in the Milken Institute Review. He calls the settlement "byzantine." I think he's being kind. But the complexity of the settlement is a common way to obscure income redistribution and inefficiencies that would otherwise be politically embarrassing. I have never met an economist (let alone an educated citizen) who understands and can explain how the price of milk is set in the United States. To call dairy regulations "byzantine" is to insult an ancient people.
But it didn't turn out that way. There was more to the story. But who noticed? How many citizens who cared about smoking actually looked to see how the settlement really worked? It seemed enough to know the broad outlines—tobacco companies punished, children protected. But the bootleggers were very interested in not just the broad outline, but in the details. Yes, tobacco companies were "punished" by high taxes. But they passed the tax on in the form of higher prices to smokers. Yes, higher prices means fewer sales, but profit margins for tobacco companies and tobacco profits actually increased because of the way the settlement was structured. It made it prohibitively costly for generic cigarettes and new entrants to expand their market share. That allowed the tobacco companies to raise prices more than they would normally have been able because their competitors were handicapped.
So the tobacco companies were bootleggers. They actually profited from the settlement. But the real bootleggers were the trial lawyers who helped the attorneys general with the suits that led to the settlement. In return for their efforts, they receive $500 million each year. True, they had to work hard. One lawyer made $92,000 per hour for his work. Per hour. It must have been very demanding work. I'm sure they earned it. It was all for the children. Remember?
When a piece of legislation is called "No Child Left Behind" you know the bootleggers are going to be out in force. Saving the children is so popular with so many people that it opens up tremendous possibilities in the details. One part of No Child Left Behind was called "Reading First" a $1 billion program to help low-income school districts adopt better reading programs. Who's in favor of that? Everybody!
But how would the program actually be implemented? "Quite simply, Reading First focuses on what works, and will support proven methods of early reading instruction," according to the Department of Education.
Sounds wonderful. A reading program for low-income children based on proven methods. It was indeed a political juggernaut. But I wonder if the enthusiastic backers of the program had any idea of how such noble goals would be achieved.
The Washington Post reports:
Department officials and a small group of influential contractors have strong-armed states and local districts into adopting a small group of unproved textbooks and reading programs with almost no peer-reviewed research behind them. The commercial interests behind those textbooks and programs have paid royalties and consulting fees to the key Reading First contractors, who also served as consultants for states seeking grants and chaired the panels approving the grants. Both the architect of Reading First and former education secretary Roderick R. Paige have gone to work for the owner of one of those programs, who is also a top Bush fundraiser.
But it is clear that Reading First has been a terrific boon for the textbook publishing industry, and for the department's favored programs. For example, the company that developed Voyager Passport was valued at about $5 million in a newspaper article before Reading First; founder Randy Best, whose Republican fundraising made him a Bush Pioneer, eventually sold it for $380 million. He then put Lyon and Paige on his payroll.
Pretty depressing, isn't it? But here's a cheerful thought—the glass is really half-full. While the details of legislation in a democracy get twisted by the bootleggers to their own advantage, at least the overall thrust of the legislation is usually in the direction that the general public desires. The diversion of income to special interests is petty cash compared to what dictators are able to channel to their friends in a less representative system without the constraints of elections.
We should be realistic about politicians. George Stigler used to contrast his theory of politics with Ralph Nader's. In Nader's view, all of the ugly aspects of government were caused by the wrong people getting elected. If we could just elect better people, then we'd get better policies. Stigler argued that it didn't matter who the people were—once they got in office, they responded to incentives. They would convince themselves that they were doing the right thing, either because they really thought so or because doing the wrong thing was necessary in order to be able to do the right thing down the line.
Being a Stiglerian in this area, I expect less of my politicians and I am rarely disappointed. Even those politicians we think of as principled, pursue the calculus of the bootleggers and Baptists. Ronald Reagan, an eloquent defender of free trade, imposed "voluntary" quotas on Japanese cars. That is the way the world works.
In the economist's view of politics, ideology and party matter less than the incentives facing politicians. Political parties in a democracy differ more by the words they use to justify their actions rather than by the actions themselves. Republicans talk about economic freedom and the dangers of big government while making government bigger. Democrats talk about their devotion to labor unions and the dangers of free trade but they rarely push for tariffs and quotas.
A final lesson for policy advocates and concerned citizens is to be careful what you wish for. What is best for the general interest is unlikely to survive the sausage factory of the legislative process. What results is imperfect.
So when you hear the politicians talk about how much they care about the people or the children or the environment or health, keep your hand on your wallet and keep a lookout for the bootleggers lurking nearby. They are always there.