Naked Economics: Chapter 8 The Power of Organized Interests Real Life Economics November 12, 2010

Transcription

1 Naked Economics: Chapter 8 The Power of Organized Interests Real Life Economics November 12, 2010

2 If we know so much about public policy, then why is everything so messed up? Economists often propose policies that will benefit everyone, yet they run into a political brick wall For example: international trade; economists believe it to be crucial to the development of poor and wealthy countries alike. Yet, there are violent anti-globalization riots and ferocious political battles concerning free trade agreements

3 Meanwhile, pork-barrel legislation sails through Congress; small projects that do nothing to promote national interests For example, the subsidy for Mohair farmers; in 1955, it was set up to ensure the armed forces would get enough wool, but in 1960, they switched to synthetic fibers. (eliminated, yet was brought back in 2008) Why? For the Mohair farmers, the subsidy was very, very important; for the rest of us, it works out to be pennies, so we don t care

4 Many groups are lined up for such subsidies, tax breaks, or trade protection Every budget is a Christmas tree upon which every politician adds an ornament For example, former Congressman Rostakowski was able to get federal funds for a parking lot for a local museum

5 ETHANOL $7.1B of foregone tax revenues sponsor the use of ethanol, supposedly for its environmental benefits and reducing dependency on foreign markets BUT, ethanol has little effect on the environment, nor the dependency on foreign oil May make some air pollution worse! Replaces only a small fraction of gas consumption, yet contributes substantially to environmental degradation by encouraging the use of fertilizers and pesticides

6 The ethanol subsidy works wonders in political campaigns IOWA is an important state in American political elections, so all candidates support the subsidy (except John McCain, but he lost ) Meanwhile, farmers are only 2-3% of the population, and fewer are corn farmers Why do they have such power?

7 Theory of political behavior: When it comes to interest groups, it pays to be small Gary Becker found small, well-organized groups are most successful in the political process; the costs of whatever favors they are able to receive are spread over a large, unorganized segment of the population The Ethanol subsidy was spread over 98% of the largely uninterested population

8 What would happen if the right-handed people (90%) proposed that the lefthanded people have to pay each of them 100$. The left-handed people would have to pay $900, thus would have serious reason to organize and protest. Politicians would do well to side with the left-handed people

9 Looking at international politics, countries with small percentages of population as farmers subsidize them considerably Countries with large populations of farmers have them subsidize the urban dwellers with cheap food! In politics, the tail can wag the dog

10 In a $14T economy, each of the subsidies seem small and insignificant; the ethanol subsidy, the federal funds for the museum parking lot, trade protection for sugar producers, tax breaks for pharmaceutical companies, price supports for dairy farmers Add them up, they are significant! Many little inefficiencies

11 Firms and industries benefit from regulation; it helps them or hobbles their competitors For example, teacher certification seems reasonable improves teaching quality However, most requirements do not have to be met by existing teachers! Only new teachers need to jump through the hoops, and this does not benefit the students More nonsense: private teachers wanting to switch to public school also must fulfill the stringent requirements; university professors too

12 Furthermore, there is no correlation between certification and performance In Las Vegas, new legislation required small class sizes, so they hired many new teachers A study was done on the results of the new and old teachers, both certified and uncertified, and concluded: 1. Good teachers matter 2. Certification doesn t matter The barriers to entry only benefited existing teachers

13 In Illinois, barbers/manicurists need licenses, but electricians don t! Faulty electrical work could kill, barbers/manicurists could cause bad hair and ugly fingernails! For interest groups, the best indicator of whether a license is required is the size and budget of their professional organization, NOT the danger malpractice may impose on the public Groups seek to get themselves licensed

14 Chicago group of economists are opposed to big government; skeptical The broader the government, the more room for special interest groups to carve themselves deals

15 Tyranny of the Status Quo Small groups can stop what they don t want Joseph Schumpeter coined the term creative destruction ; capitalism is incessantly destroying old structures and creating new ones Good for the world, but firms/industries of the old structure will do everything to stop it Groups under siege from competition seek trade protection, government bailouts, favorable tax considerations, limitations of competing technology When facing layoffs or bankruptcy, their pleas are compelling

16 Problem: no benefits from the new structure politicians protect old structures declining method, skills, and technology They protect weak, outdated technology, thus slowing the economy s progress From a compassionate point of view, maybe we should help those harmed by progress transition training, job training For example, NAFTA provided compensation to those who lost their jobs due to expanded trade with Mexico States are using money from lawsuits against tobacco companies to compensate tobacco farmers

17 Crucial distinction: 1. Using political process as a safety net for those harmed by creative destruction 2. Using political process to stop creative destruction For example, the Pony Express was no longer viable with the invention of the telegraph. Retrain Pony Express riders as telegraph operators? Or ban the telegraph?

18 Sometimes potential benefits are huge, yet spread across a large population, while the costs are concentrated For example, International Trade benefits many with lower consumer prices Rubin quote; reduction of tariffs can be translated into huge tax cuts But, you aren t going to fly somewhere to march in favor of the WTO Those affected negatively have political motivation

19 Unions sent 30k to Seattle to protest globalization; concerned about wages and working conditions in the developing world NONSENSE!! They are concerned about losing American jobs and closing factories The Luddites English textile workers who destroyed machinery in protest of low wages and unemployment caused by mechanization

20 Consider China: more technologically advanced than the West at the beginning of the 15 th century, superior science, farming, engineering, veterinary science, casting iron in 200BCE (1500 years before Europe) Yet, the Industrial Revolution happened in Europe. Why? Chinese leaders favored stability rather than progress blocking social change Banned long-sea-venture trade choking off trade and economic development, discovery, and accompanying social change

21 President can seek fast-track authority in issues of free trade Congress gives an up-down vote and can add no revisions; this avoids congressman protecting special interest sectors WTO is an organization of fast-track: demands its members to open markets, eliminate subsidies, phase out tariffs; that s the price of membership Countries then gain access to all markets of existing members

22 Wheelan was president of his townhouse association and slowed down development of transit system We are special interest groups professions, ethnic groups, demographic groups, neighborhoods, industries, regions of a country Utilitarianism, or attempting to create the most utility for the most people, creates small, angry groups that will pelt your car with tomatoes

23 He ran for a Senate seat In the forum, a journalist asked about earmarks ways to get money for specific projects All candidates initially were adamantly opposed to the idea But, what about the Children s Memorial Hospital funding? Oh, well, that s different Everyone despises earmarks except their own.

24 What about campaign finance reform? The democratic process will always favor small, organized groups at the expense of large, diffuse groups. It s how MUCH you care that counts A quote from a Democratic senator: Should I say something that gets applause? Or should I say the truth that gets me boos? This is why our growing knowledge of public policy is not translated into a more perfect world.