Virginia Association of Economists

March 19, 2015

Randolph Macon College

Ashland, VA
March 19, 2015

Exploring the Entangled Economy

Bootleggers, Baptists & the
Rise of Endogenous
Regulation
(Kudzu)
(Kudzu)

 1983 & Now

Bootleggers &
Baptists
Evolving Theory
Recognition
(Kudzu) 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 serveda bit. (Bruce Yandle. 1983. Bootleggers
and Baptists.)

Baptist churches join liquor stores to fight

supermarket wine March 4, 2009. WATE Knoxville.

"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

"Most of our business comes

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

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

Noble Energy, Anadarko, Encana Support Tightening Colorado

Air Rules
Cathy Proctor, Denver Business Journal, Feb. 13, 2014
Three of Colorados 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 Putins
concern for drinking water purity. As stated on the
Sierra Clubs 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 climateWe need to
move beyond natural gas.

Quote from Robert Zubrin. Putins 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 Fracking

Green Groups Go Red. Team with Putin to Oppose Fracking.

Investors Business Daily
January 27, 2015
http://news.investors.com/ibd-editorials/012715-736562-environmental-groups-take-russian-money-tooppose-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 NAFTAs
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

Dima
Shamoun

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.)
The Propensity to Truck, Barter & Impede Exchange. Economics
Dissertation, George Mason University, 2014.

Evolving Theories of
Regulation
Exogenous
Endogenous

The Federal Regulatory Continuum

THEN
No Intervention

Independent Commissions

Public Utility/Antitrust Government Owned

Continuous Entanglement

NOW

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.

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
Jimmy
overtly political aspects of economic decisions. Representative government is
Carter
quite responsive to claims from individuals, groups, or regions that proposed
gets it!
How arguments
about
policies will benefit them or do them harm Many of the recent
over
that,
Gordon!
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).

Sounds like
1989. Reagan. [M]any firms attempt to use the regulatory
process to
a theory
of
enhance their competitive position. Barriers to entering
an industry
may
a rentincrease with the introduction of new regulations, not
only increasing profits
for regulated firms, but also yielding a less efficientseeking
industry structureOver
society. (especially those
the past 20 years some economists and political scientists
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).

[W]e cannot expect that any public

authority will attain, or will even
wholeheartedly seek, that ideal. Such
authorities are liable alike to
ignorance, to sectional pressure and
to personal corruption by private
interest. A loud-voice part of their
constituents, 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, wellintentioned 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

What about the

Effects?

Patrick
McLaughlin

Shall. Must. May not. Prohibited.

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. Americas 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

Endogenous regulation?
We should call it national capitalism.
N.S.B. Gras, CapitalismConcepts & 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.

Why not just call

it a
Bootlegger/Bapti
st Entangled
Economy?