In the Nation's Interest

“Bootleggers and Baptists” - How Crony Capitalism Has Captured Regulatory Policy for Centuries

by DIANE LIM August 25, 2015

To widen the market and to narrow the competition, is always the interest of the dealers…The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.—Adam Smith, The Wealth Of Nations (Book I, Chapter XI, Conclusion of the Chapter, p.267, para. 10).

So did Adam Smith caution the readers of his Wealth of Nations, 239 years ago, that policy actions touted by businesses and politicians as being in the “public interest” might actually be positions promoting their own, particular and very special interests.

Fast forward to modern times, and an economist named Bruce Yandle has dubbed this phenomenon the “Bootleggers and Baptists” theory of regulatory policy.  He first introduced the concept in a short paper in Regulation magazine in 1983 and revisited it in 1999.  He recently made a short video on the theory here.  And his latest, more extensive take is in a 2014 book of the same title, coauthored with his economist grandson named, no joke… Adam Smith.  As the two authors explain in the book’s preface:

The [Bootleggers and Baptists] theory takes its name from the classic example of laws requiring liquor stores to close on Sundays, which were supported by both alcohol bootleggers and anti-alcohol Baptists—with both groups willing to spend valuable resources in pursuit of such laws.  The happy bootleggers eliminated competition one day a week, and the devoted Baptists could feel better knowing that demon rum would not be sold openly on their Sabbath day.  Of course, no one will ever see bootleggers carrying signs in front of a state house seeking political support when closing laws are up for reauthorization.  The point of the theory is precisely that they don’t have to: the Baptists lobby state house members for them.  For success to occur, according to the theory, a respectable public-spirited group seeking the same result must wrap a self-interested lobbying effort in a cloak of respectability.  Both members of the politicking coalition are necessary to win.  The Baptists enable accommodating politicians to say the action is the “right” thing to do and have folks believe them.  The bootleggers laugh all the way to the bank—and may occasionally share their gains with helpful politicians.  –Adam Smith and Bruce Yandle, Bootleggers and Baptists [book], 2014 (from page viii of the Preface).

These “Bootleggers” and “Baptists” are pretty strange bedfellows, but the problem for society is not the oddity of these relationships, but rather the disparate and perverse motivations that are thus brought together to shape regulatory policy.  Instead of the partnership allowing policymakers to better account for a broad and diverse set of viewpoints in their making of government regulations as good public policy, this collaboration between Bootlegger- and Baptist-types produces economic outcomes that are, ironically, bad for society and the public interest.  Instead of appropriately correcting or improving situations where the private market on its own would fail to generate an efficient and strong economy, regulatory policies that are tailored to “bootlegger” special interests (but cloaked in public-interest “Baptist” costumes) end up distorting markets further away from what would be best for society as a whole.

The “Bootleggers and Baptists” (let’s abbreviate that to “B&B”) phenomenon is really just another manifestation of what other scholars have called “crony capitalism”—a topic that is part of CED’s “Sustainable Capitalism” project.  Smith and Yandle explain:

…we are convinced that the rising tide of crony capitalism, or what we would call Bootlegger/Baptist capitalism, is drawing some seriously critical attention to capitalism itself.  Capitalism has taken lots of hits recently.  Everything from bailed-out banks and auto companies to subsidized solar product firms that fail spectacularly leaves the public with the feeling that the marketplace is seriously flawed.  Anti-capitalism messages seem ubiquitous.  Yet the proposed remedies for the system’s failings all seem to involve more government regulation, which means more opportunities for Bootleggers and Baptists to line their purses with transferred rather than newly produced wealth.  –Smith and Yandle, 2014 (page x of the Preface).

In their book, Smith and Yandle provide additional modern-day examples of B&B in action, with one chapter covering regulation of “sinful substances”—including (the original) alcoholic beverages, tobacco products, and marijuana—and another discussing the large field of environmental regulation.  In the next two chapters they relate the B&B theory to two more recent and politically-charged public policies:  the Troubled Asset Relief Program (TARP) following the financial crisis of 2008, and the Patient Protection and Affordable Care Act of 2010 (popularly known as “Obamacare”).  In each case the authors identify Baptist-type lobbying that yields Bootlegger-type benefits—“cronyism” in action.

I see the B&B scenario in two more recent examples taken from some of the most innovative parts of our economy:  (i) taxicabs and (ii) internet service providers.  In both cases we can see Bootlegger-type special interests trying to pass off their positions as protecting Baptist-type public interests.

Taxicabs

• Public interest (“Baptist”) claim:  We need to regulate new ride-hailing companies like Uber and Lyft for public safety reasons.  As a New York Times editorial argued, “Consumers have a right to expect proper vetting [background checks on drivers] whether they are hailing a cab or summoning a car from an app on their cell phone.” 
• “Bootleggers” who would benefit from the “Baptist” claim: (i) existing taxi companies who don’t want the competition, and (ii) status-quo state regulators who rely on license and permit (“medallion”) revenue. 

Stories about the new ride-hailing companies suggest there are some true public interests well served by the newcomers’ entry into the industry:  improved access to transportation (in areas where it isn’t profitable for taxis to wait for passengers—read about Oglethorpe University president Lawrence Schall’s experience as an Uber driver), better tailoring of supply to demand (in real time via the app system), and more efficient “peak-load” pricing where fares rise when demand does to ensure cars are available where and when they are most needed/valued.  Traditional taxi companies already subject to regulations naturally find it unfair that companies such as Uber do not have to play by the same rules.  (Dana Rubinstein (in Politico) provides a nice review of taxi history and politics.)  But instead of leveling the playing field by raising regulatory burdens on Uber, governments could take Uber’s success as evidence that their local economies would likely benefit from reducing existing regulatory burdens on the rest of the taxi cab industry.  On the other hand, as Eric Posner cautions (in Slate), the “platform technology” that Uber and Lyft use is one factor that suggests some regulatory attention will be needed, as each company’s own platform (dedicated to purchasing ride services from that company alone) may create monopoly-like pricing opportunities.

Internet Service Providers (ISPs)

• Public interest (“Baptist”) claim:  We want “net neutrality” to provide free or cheap internet access for all, and internet service providers should not price-discriminate across different types of consumers. 
• “Bootleggers” who would benefit from the “Baptist” claim:  application (“app”) developers and other businesses that use internet service as an intermediate input or part of their “supply chain” of services and whose profits would rise if ISP costs were lower. 

Ironically, as Kevin Hassett and Robert Shapiro have recently explained in a paper, the imposition of a single price whereby ISP companies are prohibited from charging higher prices for higher quality services will lower investment, reduce supply, and hence raise average costs charged to consumers.  (I blogged about what seems to be the general public’s misunderstanding of the economics of “net neutrality” earlier this year.)  In the end, even the “bootleggers” in this case would not actually benefit from a pure, unadulterated, fully-implemented and enforced version of “net neutrality” the way they think they would.  But as Roslyn Layton explains, there will be plenty of external legal challenges and internal hand-wringing over the FCC’s new “open Internet” rules before any such rules become a reality.

As part of our Sustainable Capitalism project, CED will be releasing a paper in the coming months on regulatory policy that will highlight the Bootleggers and Baptists phenomenon.  The paper will provide many more examples from other industries, as well as our recommendations on how our nation can best overcome the B&B problem and improve the quality of our regulations so that they help, rather than hinder, the success of our businesses, economy, and society.

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