class: center, middle, inverse, title-slide # 3.3 — Special Interest Groups ## ECON 410 • Public Economics • Spring 2022 ### Ryan Safner<br> Assistant Professor of Economics <br> <a href="mailto:safner@hood.edu"><i class="fa fa-paper-plane fa-fw"></i>safner@hood.edu</a> <br> <a href="https://github.com/ryansafner/publicS22"><i class="fa fa-github fa-fw"></i>ryansafner/publicS22</a><br> <a href="https://publicS22.classes.ryansafner.com"> <i class="fa fa-globe fa-fw"></i>publicS22.classes.ryansafner.com</a><br> --- # Major Players in a Liberal Democracy .pull-left[ .smaller[ - .hi[Voters] express preferences through elections - .hi[Special interest groups] provide additional information and advocacy for lawmaking - .hi[Politicians] create laws reflecting voter and interest group preferences - .hi[Bureaucrats] implement laws according to goals set by politicians - .hi[Judges] interpret laws to settle individual disputes ] ] .pull-right[ .center[  ] ] --- # *Special Interest Groups* in a Liberal Democracy .pull-left[ - .hi[Special interest groups]: any group of individuals that value a common cause - SIGs as economic agents: 1. **Choose:** .hi-purple[ < candidate/policy to support >] 2. **In order to maximize:** .hi-green[< utility >] 3. **Subject to:** .hi-red[< budget >] ] .pull-right[ .center[  ] ] --- # Only Some Interest Groups are Like This .center[ <iframe width="980" height="550" src="https://www.youtube.com/embed/GXvNOZezo-Q" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe> ] --- # Interest Group Pluralism .pull-left[ - Enormous variety of interest groups: business industries, environmental groups, religious groups, taxpayers, government agencies, etc. - .hi[Pluralism]: a wide distribution of many groups with different viewpoints on any given issue (or priorities across issues) ] .pull-right[ .center[  ] ] --- # Interest Group Pluralism .pull-left[ - Democracy as a grand bargain between varying interest groups on issues - Role of politicians as leaders to mediate these groups ] .pull-right[ .center[  ] ] --- # The Logic of Collective Action .pull-left[ - But power and influence is not evenly distributed across interest groups - Olsonian logic: **Smaller** and more **homogenous** groups face **lower** collective action costs of organizing than **larger** and more **heterogeneous** groups - Smaller groups to whom benefit (cost) of a policy is more concentrated can outmobilize larger groups where benefit (cost) is more dispersed ] .pull-right[ .center[  ] ] --- # The Logic of Collective Action .pull-left[ - Policies in representative democracies tend to feature .hi[concentrated benefits and dispersed costs] ] .pull-right[ .center[  ] ] --- # An Example .pull-left[ .center[  ] ] .pull-right[ .smallest[ "In fiscal year (FY) 2013, Americans consumed 12 million tons of refined sugar, with the average price for raw sugar 6 cents per pound higher than the average world price. That means, based on 24 billion pounds of refined sugar use at a 6-cents-per-pound U.S. premium, Americans paid an unnecessary $1.4 billion extra for sugar. That is equivalent to more than $310,000 per sugar farm in the United States" Source: [Heritage Foundation](http://www.heritage.org/research/reports/2014/06/us-trade-policy-gouges-american-sugar-consumers) ] ] --- # An Example .pull-left[ .center[  ] ] -- .pull-right[ .center[  ] ] --- # An Example .pull-left[ .center[  ] ] .pull-right[ .smallest[ "Washington, D.C., doesn't have many farms, or farmers. Yet thousands of residents in and around the nation's capital receive millions of dollars every year in federal farm subsidies...lawyers, lobbyists and at least one psychologist collected nearly $342,000 in taxpayer farm subsidies between 2008 and 2011...[also] Gerald Cassidy, the founder of one of Washington's most powerful lobbying firms, Cassidy & Associates; Charlie Stenholm, a former congressman; and Chuck Grassley, a Republican senator from Iowa; [and former] Secretary of Agriculture Tom Vilsack..." ] .source[Source: [Washington Examiner](http://www.washingtonexaminer.com/millions-in-farm-subsidies-flow-freely-to-dc-residents-who-dont-actually-farm/article/2542174)] ] --- # An Example .pull-left[ - And yet, each individual pays maybe $1-2 a year in higher prices for sugar - Difficult to mobilize voters to petition to end the sugar subsidy to save $1 - Sugar producers stand to lose a billion dollars - Sugar PACs that contribute thousands to key lawmakers ] .pull-right[ .center[  ] ] --- class: inverse, center, middle # Interest Groups as Demanders of Regulation --- # The Supply and Demand for Regulation .pull-left[ - Imagine a “market” for regulation (or laws, policy, etc.) — who are the participants? - .hi-blue[Demanders]: voters, interest groups, bureaucracy (?) - .hi-red[Suppliers]: politicians, bureaucracy, interest groups (?) - What determines the regulation we have? ] .pull-right[ .center[  ] ] --- # The Supply and Demand for Regulation .center[  ] .source[Tarko, Vlad and Ryan Safner, 2022, “The Variety of Regulatory Regimes”] --- # Rent-Seeking .pull-left[ .center[  ] ] .pull-right[ - Think of an .hi[economic rent] as a "prize," the payment a person receives for a good above its opportunity cost - Creating rents creates competition for the rents, causing people to invest resources in .hi[rent-seeking] - The cost of the rent is not just the rent itself, but the resources invested in rent-seeking! ] --- # Government Intervention Creates Rents I .pull-left[ .center[  ] ] .pull-right[ - Political authorities intervene in markets in various ways that benefit some groups at the expense of everyone else - subsidies to groups (often producers) - regulation of industries - tariffs, quotas, and special exemptions from these - tax breaks and loopholes - conferring monopoly and other privileges ] --- # Government Intervention Creates Rents I .pull-left[ .center[  ] ] .pull-right[ - These interventions create .hi[economic rents] for their beneficiaries by reducing competition - This is a transfer of wealth from consumers/taxpayers to politically-favored groups - The promise of earning a rent breeds **competition over the rents** (.hi[rent-seeking]) ] --- # Taxis I .pull-left[ .center[  ] ] .pull-right[  ] --- # Taxis II .center[  ] --- # Taxis III .pull-left[ .center[  ] ] .pull-right[ .center[  ] ] --- # Occupational Licensing I .center[  .tiny[ In 1950, 1 in 20 jobs required a license. Today it's 1 in 4. Source: [Obama White House (2015): Occupational Licensing: A Framework for Policymakers](https://obamawhitehouse.archives.gov/sites/default/files/docs/licensing_report_final_nonembargo.pdf) ] ] --- # Occupational Licensing II .center[  .tiny[ Source: [Mercatus Research (March 25, 2014): Occupational Licensing: Bad for Competition, Bad for Low-Income Workers](https://www.mercatus.org/publication/occupational-licensing-bad-competition-bad-low-income-workers) ] ] --- # Occupational Licensing III .center[  ] --- # Occupational Licensing IV .pull-left[ .center[  ] ] .pull-right[ .small[ > "'It is illegal in the state of Utah to do any form of extensions without a valid cosmetology license," the e-mail read. "Please delete your ad, or you will be reported.' >To get a license, Jestina would have to spend more than a year in cosmetology school. Tuition would cost $16,000 dollars or more." Source: [NPR Planet Money](https://www.npr.org/sections/money/2012/06/22/155596305/episode-381-why-its-illegal-to-braid-hair-without-a-license) ] ] --- # Rent-Seeking: Milk .center[  Source: [*New York Times* (Feb 13, 2017)](https://www.nytimes.com/2017/02/13/well/eat/got-almond-milk-dairy-farms-protest-milk-label-on-nondairy-drinks.html) ] --- # Tax Preparation .pull-left[ .center[  ] ] .pull-right[ Source: [*ProPublica* (Mar 20, 2017)](https://www.propublica.org/article/filing-taxes-could-be-free-simple-hr-block-intuit-lobbying-against-it) ] --- # "Consumers for Paper Options" .pull-left[ .center[  ] ] .pull-right[ Source: [Wall Street Journal](https://www.wsj.com/articles/print-is-dead-not-in-mutual-fund-reports-1472064595) ] --- # If You Look at the World Long Enough... .center[  ] --- # The Theory of Economic Regulation .left-column[ .center[  .smallest[ George Stigler 1911-1991 Economics Nobel 1982 ] ] ] .right-column[ - All groups desire to use the State to protect their interests (create rents) - Direct .hi[subsidies] boost profits but can induce **entry** into the industry - dilutes profits/rents - Control of entry reduces competition and increases rents to incumbents - Olsonian problem: More organized industries fare better in controlling politics than less organized .source[Stigler, George J, (1971), "The Theory of Economic Regulation," *Bell Journal of Economics and Management Science* 3:3-21] ] --- # The Theory of Economic Regulation .left-column[ .center[  .smallest[ George Stigler 1911-1991 Economics Nobel 1982 ] ] ] .right-column[ > "[A]s a rule, regulation is acquired by the industry and is designed and operated primarily for its benefits," (p.3). > "[E]very industry or occupation that has enough political power to utilize the state will seek to control entry. In addition, the regulatory policy will ofeten be so fashioned as to retard the rate of growth of new firms," (p.5). .source[Stigler, George J, (1971), "The Theory of Economic Regulation," *Bell Journal of Economics and Management Science* 3:3-21] ] --- # Regulatory Capture .pull-left[ .center[  ] ] .pull-right[ - .hi[Regulatory capture]: a regulatory body is "captured" by the very industry it is tasked with regulating - Industry members use agency to further their own interests - Incentives for firms to design regulations to harm competitors - Legislation & regulations written by lobbyists & industry-insiders ] --- # Regulatory Capture .pull-left[ .center[  ] ] -- .pull-right[ .center[  ] ] -- .center[ Source: [Larry Lessig](https://twitter.com/lessig/statuses/149664244357541888) ] --- # The Revolving Door .pull-left[ .center[  ] ] .pull-right[ - One major source of capture is the .hi-purple["revolving door"] between the public and private sector - Legislators & regulators retire from politics to become highly paid consultants and lobbyists for the industry they had previously "regulated" ] --- # Less Sinister Reasons for Regulatory Capture .pull-left[ .center[  ] ] .pull-right[ - A large industrial economy requires complex regulation on very technical issues - Nuclear physics, pharmacobiology, derivatives pricing, etc - Experts in the industry tend to know the most about these fields - Key resource is *information*, not necessarily money or influence ] --- # Less Sinister Reasons for Regulatory Capture .quitesmall[ > “Professional lobbyists are among the most experienced, knowledgeable, and strategic actors one can find in the everyday practice of politics. Nonetheless, their behavioral patterns often appear anomalous when viewed in the light of existing theories...We model lobbying not as exchange (vote buying) or persuasion (informative signaling) but as a form of legislative subsidy — a matching grant of policy information, political intelligence, and legislative labor to the enterprises of strategically selected legislators. The proximate political objective of this strategy is not to change legislators' minds but to assist natural allies in achieving their own, coincident objectives,” (p. 69). > “In sum, lobbyists freely but selectively provide labor, policy information, and political intelligence to likeminded but resource-constrained legislators. Legislators, in turn, should seek policy-relevant services from likeminded lobbyists. The effect is to expand legislators' effort at making progress toward a policy objective that lobbyists and legislators share,” (p.75). ] .source[Hall, Richard and Alan Deardorff, 2006, “Lobbying as Legislative Subsidy,” *American Political Science Review* 100(1): 69-84] --- # Less Sinister Reasons for Regulatory Capture .pull-left[ .center[  ] ] .pull-right[ - Lobbying is an **essential** part of a modern democracy - Provide information about complex issues - Conveys relative **intensity** of preferences of different groups - Democracy as one big extended discussion - The socially-optimal amount of lobbying is not 0! ] --- # Challenges to Good Regulation Thus Far - Olson: collective action/free rider problem is larger for larger groups - Rational ignorance of voters - Caplan: voters are rationally irrational about policy - Tullock-Stigler: it's often in the interests of industries to seek rents -- - Yandle: rent-seeking can be masked by publicly noble intentions --- # Baptists and Bootleggers .left-column[ .center[  .smallest[ Bruce Yandle 1933- ] ] ] .right-column[ > "What do industry and labor want from the regulators? They want protection from competition, from technological change, and from losses that threaten profits and jobs. A carefully constructed regulation can accomplish all kinds of anticompetitive goals of this sort, while giving the citizenry the impression that the only goal is to serve the public interest," (p.13). .source[Yandle, Bruce, 1983, "Bootleggers and Baptists: The Education of a Regulatory Economist," *Regulation*] ] --- # Baptists and Bootleggers .pull-left[ - Regulations are often supported by two categories of groups: - .hi["Baptists"]: group that supports the ostensible public-interest purpose of the regulation - .hi["Bootleggers"]: group that supports the regulation because it generates rents for them - Bootleggers often adopt the language of Baptists ] .pull-right[ .center[  ] ] --- # Baptists and Bootleggers .center[  ] --- # Baptists and Bootleggers? .center[  ]