Virginia Association of EconomistsMarch 19, 2015

Randolph Macon CollegeAshland, VA

March 19, 2015

(Kudzu)

Exploring the Entangled Economy

Bootleggers, Baptists & the Rise of Endogenous

Regulation(Kudzu)

(Kudzu)

• 1983 & Now

• Bootleggers & Baptists

• Evolving Theory

• Recognition

• Effects

What do we mean by Bootleggers & Baptists?

BOOTLEGGERS & BAPTISTS

Unvarnished special interest groups cannot expect politicians to push through legislation that simply raises prices on a few products so that the protected group can get rich at the expense of consumers. There must be a better story! Efforts to obtain special favors must be fortified with public interest stories. Moral issues are offered as the reason for regulating. And the public interest may be served…a bit. (Bruce Yandle. 1983. Bootleggers and Baptists.)

"Most of our business comes from wine sales so the legislation would definitely hurt smaller businesses like this," says Ryan Hollencamp, University Liquor.

"We don't see that alcohol is bringing a lot to the table that's benefiting our culture, but we are seeing a lot of damage," says Dr. Dan Riley, at Calvary Baptist Church

Baptist churches join liquor stores to fight supermarket wine March 4, 2009. WATE Knoxville.

http://www.wate.com/story/9949778/baptist-churches-join-liquor-stores-to-fight-supermarket-wine-salessales

Noble Energy, Anadarko, Encana Support Tightening Colorado Air Rules

Cathy Proctor, Denver Business Journal, Feb. 13, 2014

Three of Colorado’s biggest oil and gas companies and a national environmental group are maintaining their support of new, tighter regulations the state is proposing. The rules are meant to cut pollution from wells pipeline and processing plants and improve air quality across the state.

Colorado adopts tougher air rules for oil, gas industry

Bruce Finley, The Denver Post , Feb. 23, 2014.

Colorado adopted tougher air pollution rules for the oil and gas industry — the first in the nation to cover methane, a gas linked to climate change.State air quality control commissioners voted 8-1 on Sunday to pass the rules with the support of leading operators Anadarko Petroleum, Noble Energy and Encana.

But they did so over the protests of much of the oil and gas industry, including the powerful Colorado Oil and Gas Association and Colorado Petroleum Association trade groups. The Environmental Defense Fund led the creation of rules, which withstood COGA and CPA challenges.

Mr. Putin and Hydraulic Fracturing

Speaking to a 2013 London economic conference, Russian President Vladimir Putin sounded a green alarm about the use of hydraulic fracturing for recovering natural gas: “If you frack, black stuff comes out of the tap.” A host of environmentalists would likely endorse Putin’s concern for drinking water purity. As stated on the Sierra Club’s web site: “Fracking for natural gas damages the land, pollutes water and air, and causes illness in surrounding communities. It is also a major threat to our climate…We need to move beyond natural gas.”

Quote from Robert Zubrin. Putin’s Anti-Fracking Campaign. National Review. May 5, 2014. http://www.nationalreview.com/article/377201/putins-anti-fracking-campaign-robert-zubrin.

Green Groups Go Red, Team With Putin To Fight FrackingGreen Groups Go Red. Team with Putin to Oppose Fracking.Investors Business DailyJanuary 27, 2015

http://news.investors.com/ibd-editorials/012715-736562-environmental-groups-take-russian-money-to-oppose-fracking.htm

[T]he anti-fracking movement has received funding from the fossil fuel industry. But the source of funds isn't a U.S.-based company. The money is from fossil fuel concerns linked to a country that is emerging as an enemy of America.

"A shadowy Bermudan company that has funneled tens of millions of dollars to anti-fracking environmentalist groups in the United States is run by executives with deep ties to Russian oil interests and offshore money laundering schemes involving members of President Vladimir Putin's inner circle," the Free Beacon reported Tuesday. Russia and U.S. environmentalist groups have a common goal: They both want to see fracking shut down in the U.S. Russia wants to stop it because it's hurting that country's oil and gas industry.

The green groups oppose fracking simply because they loathe fossil fuels and the benefits they bring — though, apparently, not enough to stop taking Russian oil money, a fact that calls into question their integrity.

It's a bootleggers-and-Baptists relationship, in which two groups with seemingly opposite interests team together against a mutual foe. The Baptists, who want restrictions on the sale of alcohol, have common ground with the bootleggers, who know that the Baptists' prohibition of legal sales pushes business their way.

And This leads to Bootleggers Subsidizing Baptists

Teamsters fund Sierra Club in 2009 fights NAFTA’s relaxation of trucking rules.

Chesapeake Gas and American Gas Association in 2012 provides $26 million subsidy to Sierra Club beginning in 2007 in an EPA struggle to eliminate coal-fired utilities.

United Arab Emirates funds 2012 Promised Land, an anti-fracking movie developed to build support for regulation limiting use of fracking to obtain natural gas and oil from deep shale deposits.

The Data

Budgetary Costs of Regulatory Agencies, 1960 -2015(2009 Dollars)

Susan Dudley and Melinda Warren. George Washington University, Center for Regulatory Studies, 2015. 2015 Regulators' Budget: Economic Forms of Regulation on the Rise. http://regulatorystudies.columbian.gwu.edu/2015-regulators-budget-economic-forms-regulation-rise

The Rise of the Hybrid CAC Regulation

A regulation with two benefit components

•Private benefits that go to targeted groups. These demand curves are summed horizontally. (major firms, trade associations, industry groups)

•Public good benefits that accrue to all individuals. These demand components are summed vertically. (Environmentalists, health advocates.)

Dima Shamoun

The Propensity to Truck, Barter & Impede Exchange. Economics

Dissertation, George Mason University, 2014.

Evolving Theories of Regulation

ExogenousEndogenous

No Intervention Independent Commissions Public Utility/Antitrust Government Owned

The Federal Regulatory Continuum

THEN

NOW

Continuous Entanglement

Evolving Literature

From

Stories without Theory & Theory without Stories and Data

To

Theory with Stories and Data.

From

Rich Normative Arguments

To

Refutable Positive Statements.

0

5000

10000

15000

20000

1971-1980 1981-1990 1991-2000 2001-2010

Stigler: 1971 Economic Theory of RegulationGoogle Scholar Citations

Marta Modemska-Miklub and Richard Wagner. 2011. Entangled Political Economy and the Two Faces of Entrepreneurship, J. Pub Fin & Pub Ch. 28: 99-214,.

Recognition??

1966. Johnson. [I]n the case of pollution,… those who contaminate the environment are not charged in accordance with the damage they do... Public policies must be designed to reduce the discharge of wastes in ways and amounts that more nearly reflect the full cost of environmental contamination (119-120).

1978. Carter. In a mixed economy, like that of the United States, government regulations of the marketplace sometimes play a vital role in meeting social goals, curbing abuses or mitigating the hardships that would flow from the unconstrained flow of economic forces (206).

1981. Carter As government involvement in the economy has grown, so have the overtly political aspects of economic decisions. Representative government is quite responsive to claims from individuals, groups, or regions that proposed policies will benefit them or do them harm… Many of the recent arguments over deregulation, for example, have tended to focus less on the benefits of deregulated markets than on the economic losses of the persons or industries that have been protected in the past by Federal economic regulation (89).

How about that, Gordon!

Jimmy Carter gets it!

1989. Reagan. [M]any firms attempt to use the regulatory process to enhance their competitive position. Barriers to entering an industry may increase with the introduction of new regulations, not only increasing profits for regulated firms, but also yielding a less efficient industry structure…Over the past 20 years some economists and political scientists (especially those of the “public choice” school) have attempted to understand what motivates different approaches to regulation. A key insight from this research is that much regulation can be explained by an interest in redistributing wealth from the general public or taxpayers to special interest groups… For example, the legislation requiring scrubbers on power plants appears to have been motivated as much by the self interest of environmentalists and high-sulfur coal miners as by a desire to promote cleaner air (191-192)

2012. Obama. [R]egulations are intended to improve the quality of life by correcting market failures that lead to unsafe living or working environments. Effective regulations put into place rules that correct for significant market failures and thus achieve greater social benefits. “Smart regulations” are those that maximize the net benefits of a regulatory action to society. Benefit-cost analysis attempts to quantify and assign dollar values to the various effects of a regulation, which can be used to determine how it can reach its goal in the most efficient manner (233).

Sounds like a theory of a rent-seeking society.

[W]e cannot expect that any publicauthority will attain, or will evenwholeheartedly seek, that ideal. Suchauthorities are liable alike toignorance, to sectional pressure andto personal corruption by privateinterest. A loud-voice part of theirconstituents, if organized for votes,may easily outweigh the whole.

Pigou, Arthur C. The Economics of Welfare. 1932. Library of Economics and Liberty. Retrieved March 15, 2015 from the World Wide Web: http://www.econlib.org/library/NPDBooks/Pigou/pgEW31.html .

“To evaluate market outcomes, we introduce into our analysis a new, hypothetical character called the benevolent social planner. The benevolent social planner is an all-knowing, all-powerful, well-intentioned dictator., The planner wants to maximize the economic well-being of everyone in society.”

Gregory N. Mankiw. 2012. Principles of Economics. Mason, OH: Southwestern Cengage Learning, 145.

Industry Differentials & Structural Change

Shall. Must. May not. Prohibited. Required.

What about the Effects?

Patrick McLaughlin

Public Utilities (some form of regulated price & rate of return):

Healthcare & Social Services (17,720,090)Banking, Credit Intermediation (2,460,400)Insurance (1,157,490)

Telecommunications (860,060)

Government Enterprises (partial ownership or private/public partnerships)

Auto Manufacturing (169,000)Education (9,500,000)Real Estate & Residential Finance/Construction (614,930)Rail (224,530)

Government Regulatory Satellites (deep agent-client relationship)

Energy (309,230)Pharmaceuticals (267,750)

Total Employment Affected: 41.0 million or 31% of total U.S. nonfarm employment.

Employment data source: Bureau of Labor Statistics, May 2012 National Industrial Specific Occupation Employment & Wages Estimate.

Natalie Scholl, AEI, September 2, 2014. How Regulation Smothers Productivity Growth, in One Chart. http://www.aei.org/publication/how-regulation-smothers-productivity-growth-in-1-chart/print/

Source: Office of Advocacy, U.S. Small Business Administration, from data provided by the U.S. Bureau of the Census, Statistics of U.S. Business.

UNDERGROUND ECONOMY

Richard Cebula and Edgar L. Feige. 2012. America’s Unreported Economy: Measuring the Size, Growth and Determinants of Income Tax Evasion in the U.S., Crime, Law and Social Change. April, 2012: 265-286

We should call it national capitalism.

N.S.B. Gras, Capitalism—Concepts & History, 1939.

No, it should be called political capitalism.

Gabriel Kolko, The Triumph of Conservatism, 1963.

We have crony capitalism.

David Stockman, Moyers & Company, March 7, 2012.

Endogenous regulation?

Why not just call it a Bootlegger/Baptist Entangled Economy?