Bootleggers & Baptists. Bruce Yandle
losses that spring from the resulting output restrictions.2
Declining lobbying costs on the demand side reinforce falling costs on the politician-supply side because enormous fixed costs are associated with forming trade associations, opening Washington offices, and keeping lobbyists on retainer. Once the office doors are open, the average cost of chasing bundles of pork gets smaller and smaller (Murphy, Schleifer, and Vichny 2003). In contrast, running a business or operating a factory tends to be an increasing or constant cost endeavor.
Business firms then have a choice. Will they seek gains at the margin through lobbying or by putting more scarce capital into producing products and services? Once the lobbying machinery is built, the calculus will be biased in favor of the former. Indeed, fledgling Bootleggers may even be spared the trouble of building their own machinery by channeling resources through Baptist groups that have already built the necessary infrastructure. We thus get fewer bread factories but more lobbying lawyers and economists doing benefit-cost analysis. Bootlegger/Baptist interaction helps grease the rails that lead to increased regulation and an expanded public sector.
But All That Glitters Isn’t Gold
As we saw in chapter 1, regulation takes the edge off GDP growth. Fortunately, the Bootlegger’s search for pork has limits. We must remember that the political process is competitive. Lots of Bootleggers would love to bend the politician’s ear, but only a few can be successful. Chasing politicians and sharing views with them—lobbying—is costly business. As Tullock teaches us, even the most successful Bootleggers may end up with little in the way of additional net cash flow once the costs of currying favor are tallied. Even the winners of the pork race may discover that their barbecue cookout on the National Mall doesn’t serve up the prime cuts they’d hoped for.
It may seem counterintuitive, or at least ironic, that those who pursue government favors can find themselves suffering from a kind of buyer’s remorse, but this phenomenon has long been recognized in public choice scholarship. In another insightful article, Gordon Tullock dubbed this apparent paradox the “transitional gains trap” (Tullock 1975). His story describes a multistage process in which special interest groups first gain a profitable advantage but then must keep spending to hold their favored position. With profits seemingly assured, owners and managers of politically favored enterprises tend to spend more on fancier digs for themselves and share some of the wealth with their employees. As operating costs head skyward, producers of substitute goods—including novel types of goods that may fall outside the bounds of the monopolizing regulation—cheerfully expand to serve price-sensitive consumers. The market enjoyed temporarily by the favored interest groups contracts, profits fall, and the federal rules that protected the interest group—now with higher built-in costs—become handcuffs that won’t let go.
Tullock uses the example of the U.S. Postal Service to illustrate the point. By maintaining its status as a monopolist in the delivery of first-class mail, the Postal Service garnered plush revenues for decades. With this income came generous pay and fringe benefits for postal workers. Prospective employees flocked to obtain the cushy positions on offer, and with more bright people looking to sign on, hiring standards rose—as did wages, benefits, and of course, postal rates. Costs then were locked in at a permanently higher level. The attendant higher prices attracted more efficient competitors who took advantage of technological change and new forms of communication. With the advent of e-mail and online billing services, the Postal Service discovered that its legal monopoly no longer guaranteed it a captive audience. Captured by an old technology and a labor force spawned by it, the Postal Service held on to its disappearing first-class mail delivery system while caught in a transitional trap.
The essence of Tullock’s lesson is that a regulatory advantage is not necessarily a goose that perpetually lays golden eggs or, indeed, any eggs at all. Successful government favor seekers enjoy only temporary gains that are soon eaten away as windfall profits translate into locked-in costs. If earnings should then be driven to competitive levels—whether by technological innovation, changing consumer preferences, or a shift in the political winds—the organization will find itself desperate to meet its inflated costs, as we’ve seen in the case of the Postal Service. Having been reared in a regulatory hot house, the “lucky” Bootlegger discovers it cannot sustain itself with mere competitive returns.
We find a similar dynamic at work in the surface and air transportation sectors. In both cases, regulation purposefully set up monopoly arrangements, to the benefit of owners and workers. As the regulated industries prospered, their competitiveness languished. Substitute services emerged, often based on new technologies. Some who had favored more regulation called for reform, until eventually, the regulatory structures came crashing down. The ICC, which had regulated trucking and rail transportation for decades, was eliminated in 1995. Trucking was deregulated; rail passenger transportation was nationalized. The Civil Aeronautics Board, which regulated airline pricing and service, was dissolved in 1984. Even the U.S. Postal Commission loosened its grip on the sale of stamps beyond the confines of post offices, cut hours of service, and allowed competitors such as FedEx to place receiving boxes on Post Office property. Deregulation is not complete, but the days of golden eggs for these industries are over.
To sum up, Bootlegger/Baptist theory rests on several key public choice insights. First, each of us tends to be naive about a vast number of subjects but intensely informed about matters that have an immediate and direct bearing on our own well-being. As a result, large benefits can be provided to well-informed special interest groups (Bootleggers) through government transfers without the majority of the population being aware that anything is going on—or having much incentive to find out.
Second, smaller Bootlegger groups have lower organizing costs than larger groups, and average gains per member are higher for smaller coalitions, given a fixed payoff. Startup costs are associated with organizing a lobbying effort. Once that initial investment is made, however, a lobbying group will be ready to go for the pork when another political opportunity surfaces.
As politicians redistribute pork to Bootleggers, the number of organized groups expands. At the upper limit, a rational Bootlegger will be prepared to spend the expected value of a political prize in pursuit of that prize. Once obtained, political restraints on competition or other benefits can improve profits for a time. But higher profits tend to feed higher costs in Bootlegger organizations.
The costly political machinery that provides all this must be maintained. Meanwhile producers of substitute goods and services are attracted by Bootlegger profits. With costs rising and profits falling, Bootleggers find themselves caught in a regulatory trap. The process has limits. Redistribution cannot continue indefinitely without killing the goose that laid the golden eggs or chasing off the pigs that provide the pork.
Four Explanations for “Why So Much Regulation?”
Having laid a public choice foundation, we now consider several accounts of why regulation flourishes and how the Bootlegger/Baptist theory explains the workings of the regulatory world. We review four theories of regulation and trace their appearance in successive editions of the Economic Report of the President spanning 1965 through 2010. We examine which theories White House officials used to explain their regulatory policies and when the various theories seemed to be important. Though the goal of theory is to describe political action, how politicians and the public understand regulation can also have an enormous impact on how political outcomes unfold. That underlies our interest in discovering when the essence of Bootlegger/Baptist theory shows up in the reports.
Serving Everyman (and Everywoman)
The first and oldest theory of regulation—so old it has no clear inventor—is the public interest theory. This theory holds that when they take office, politicians and their appointees also take on a new life, putting aside their personal interests to serve the common good. Once ensconced in Washington, representatives lie awake at night trying to find better ways to provide broadly appreciated public benefits, their thoughts unsullied by any narrower interests.
Whether the problem to be addressed is pollution, unhealthy working conditions, or teenage smoking, a public interest legislator seeks to achieve as much improvement as possible given