Bootleggers & Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics (12 page)

Separation of church and state and the rise of heterogeneous religious preferences— including no religion at all—changed all this, especially in the American experience. Fascinated by America and its promise, Alexis de Tocqueville ([1848] 1990) wrote extensively in the 1840s about the importance of religion in America as well as on the relationship between religion and politics. As he saw the situation, high participation in religious life was crucial to the success of American democracy. Indeed, he claimed that freedom of choice in an appropriate institutional setting would lead the human mind to “regulate the temporal and spiritual institutions in a uniform manner, and man will endeavor . . . , to harmonize earth and heaven” (Tocqueville [1848] 1990, 300). He described the form of Christianity brought to the New World as a “democratic and republican religion.”

At the time he was writing, Tocqueville ([1848] 1990, 304) noted that “in the United States, religion exercises but little influence on the laws and on the details of public opinion; but it directs the customs of the community, and, by regulating domestic life, it regulates the states.” If religion regulates the state, albeit only partially, then politicians must show respect for the regulatory mechanism and signal their understanding of its power when molding laws and regulation. Within the American landscape, successful politicians must bridge the religious/political/market divide when explaining their actions and in doing so acknowledge, if only by the content of their rhetoric, the critical importance of ethical norms in preserving order.

Ethical behavior can lower the costs of transaction in an ever-evolving political and economic order. This gives rise to the possibility of increased cooperation and economic growth by way of uncoordinated but vigorous support of ethical behavior, rather than constant monitoring to punish shirkers and cheaters. Of course, it must be the right kind of ethical behavior, which includes truth telling, promise keeping, hard work, and thrift. These habits of the heart can be encouraged by political rhetoric that extols the beneficial moral behavior. But there is another darker possibility.

What Happens If the Bootleggers Start Leading the Baptists?

This carefully constructed order can be perverted when the wrong kind of ethics enters the picture. If the state itself is viewed as the proper source of education, housing finance, risk mitigation, consumer protection, environmental protection, care and sustenance for the helpless, and even recreational activities for inner-city young people, then religious and civic groups will focus their energies on influencing the body politic to expand its redistributive activities. We have increasingly seen this result over the 20th century.

This was most evident in the early 1970s when the United States experienced a kind of civic religious awakening. Environmentalism emerged as a powerful social force that reflected characteristics common to conventional religions. Environmental leaders and politicians harmonized and called for a new ethic, a new morality that accorded almost divine status to the natural environment. Similar appeals were raised for federal regulation of food and auto safety, workplaces, and consumer products. As the machinery of government accelerated, a host of new rules and regulations emerged in an effort to change human behavior for the better, at least as seen through the eyes of the environmental leaders. But real-world policies don’t spring fully formed from moral intentions or even from the will of the voters—neither of which can be counted on to derail the lobbying locomotive.

How Polling May Mislead and Voting Can Make Things Worse

Recall that voters are rationally ignorant. They may not know much about the inner workings of policy, but they’re not suckers either. Telling voters that a special interest group just wants its share of government largess simply won’t do. Representatives have to appeal to our other-regarding sympathies. So to gain voter trust, special interest groups have to apply sympathetic cover. Otherwise, the public’s other-regarding tendencies will fail to emerge and may even spur voters to oppose the efforts of the organization. The problem, however, is that the sympathies engendered by this Baptist cover do not provide a reliable constraint against Bootlegger gaming of the policy process. In fact, they usually encourage it.

Let’s suppose that voters will reward what they perceive as other-regarding behavior and punish pure self-interest. The question then becomes what political activity is truly other regarding and what is motivated more by special interests. It is not enough, after all, that people act in a public-spirited manner: their well-intentioned decisions must also be well informed if political outcomes are to be beneficial. But polling data overwhelmingly show that the public is largely ignorant of political outcomes—and as a result often inadvertently facilitate the seemingly “irrational” behavior so often found in politics (Caplan 2001, 2008).

Economist Bryan Caplan’s theory of “rational irrationality” encapsulates this result and operates as follows. The first law of demand states that when the price of a good falls, the quantity demanded increases. Caplan simply applies this basic principle to the “good” of political decisionmaking. As the price of making irrational decisions decreases—meaning the cost of making a dumb but symbolically satisfying decision plummets—the quantity demanded of irrationality increases. The lower the cost of making irrational decisions in a particular domain, the more such decisions we should expect to see.

Bootleggers, of course, understand this and react accordingly. Although it is necessary to provide Baptist cover, this cover need not be especially coherent in terms of standing up to intellectual scrutiny. Detailed scrutiny is usually the last thing on the public’s mind. Instead, all that is needed is a credible appeal to sympathy that the public can recognize as being trustworthy.

As we argued previously, human beings do not always behave as simple economic models predict: they will often accept substantial costs to behave morally, and in principle that might include the information costs of learning about the complex effects of legislative proposals. It may also mean that voters are willing to forgo losses on certain public projects simply because “it is the right thing to do.” As we detail further below, massive expenditures are put toward environmental causes every year with little in the way of public complaint. Indeed, voters cheer these efforts for their tough stance on pollution. In a way, voters relish the opportunity to have their “impartial spectator” nourished with no real effort on their part. Nevertheless, the result of these outcomes is to privately reward Bootleggers, who bask in the glow of all this moral sympathy.
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Recall that these moral impulses evolved in small communities to govern individual conduct whose relationship to social outcomes was relatively straightforward. A voter’s “impartial spectator” would surely condemn the choice to remain “rationally ignorant” about the bad social consequences of a policy, but only if the spectator already understands what those consequences really are. Morality cannot help us escape the problem of rational irrationality if the impartial spectator is never awakened. Put another way, voters do not know what they do not know. This can yield disastrous outcomes when our sympathies are engaged on behalf of policies whose consequences are not obvious—especially once the Bootleggers have exerted their influence on the details of implementation.

Thus, the presence of the Bootlegger changes the dynamic. Instead of ethical behavior leading to a superior expansion path that generates higher income and improved human well-being, Bootleggers routinely generate an inferior expansion path with lower income and diminished human well-being. In a world of naive voters, strategic political appeals based on a higher morality may lead to hoodwinking of the worst kind. When Bootlegger/Baptist coalitions form, resources that otherwise might be used for enhanced production and consumption will be dissipated in political struggles that consume more wealth than they produce.

Writing in 1810, American politician and political theorist John C. Calhoun ([1810] 1992) addressed this dynamic as it applied to taxing and spending, but the larger issue he spoke of was political redistribution. He put the problem this way:

It must necessarily follow, that some one portion of the community must pay in taxes more than it receives back in disbursements; while another receives in disbursements more than it pays in taxes. . . . The necessary result, then, of the unequal fiscal action of the government is, to divide the community into two great classes; one consisting of those who, in reality, pay the taxes, and, of course, bear exclusively the burthen of supporting the government; and the other, of those who are the recipients of their proceeds, through disbursements, and who are, in fact, supported by the government; or, in fewer words, to divide it into tax-payers and tax-consumers. (Calhoun, [1810] 1992, np)

Unaware of what today we call public choice theory, Calhoun’s concerns embodied much of what we have discussed. By providing moral sympathy—on the cheap, no less—to voters, special interest groups become armed by others wearing breastplates of righteousness; then even larger transfers can be made from the uninformed body politic to the lurking special interest groups.

The theory of Bootleggers and Baptists thus puts a new spin on an old tune, that of who really benefits from public largess and at whose expense. Although the narratives on this point differ depending on political alliances, Bootlegger/Baptist arrangements clearly point to a common answer; that is, the primary beneficiaries of public choice are economic interests using moral suasion to dilute public coffers. The providers of such a delightful service are essentially everyone else. The Bootlegger/Baptist dynamic accordingly gives new clarity to the recent outrage in 2011–12, which entailed the “99 percent” protesting against the powers that be for supporting the remaining “1 percent” at the expense of everyone else. We turn to this example along with its historical counterparts.

Protesters and the Rationally Ignorant 99 Percent

Numerous movements have sought to “change the world” yet ended up greasing the rails for Bootleggers waiting in the wings. We trace several historical protests and social change movements, all the way up to the recent 2011–12 Occupy Wall Street movement, which emerged in the wake of the 2007–09 credit market collapse and became famous for slogans naming the disgruntled occupiers, the 99 percent, who were fleeced by the wealthy 1 percenters occupying Wall Street skyscrapers. As is typical of the movements we explore, theirs was an anti-capitalist protest, but it could have been more focused. It could have been an anti-Bootlegger/Baptist protest, an opportunity so often missed by those who misidentify the culprit behind “bad” capitalism outcomes.

In
Grand Pursuit,
Sylvia Nasar’s 2011 book on economic thought, the author describes similar turmoil that arose in the aftermath of the panic of 1893 (Nasar 2011, 153–63). By 1895, some 500 banks had failed, 15,000 firms had given up the ghost, major railroads had gone bankrupt, and unemployment gripped one of every seven workers. There was famine in the land, and popular anger was directed toward familiar targets: bankers, moneymen, and the wealthy owners of the great enterprises of the time. Whereas most of today’s Wall Street protesters are unemployed young people, farmers stood front and center then. The farmers were facing bankruptcy while Wall Street seemed to be rolling in money. Then, as now, the protesters zeroed in on the most immediate target they could find: the banks, rich people, and fat cat corporations. But then, as now, the deeper cause of the problem was far more complex.

These 19th-century protesters were angry and frustrated and somehow felt that Wall Street bankers were the source of the problem. The 99 percent of that day, for the most part, were rationally ignorant about how the international gold standard operated at the time. They did not understand how deflationary swings could force down agricultural commodity and other prices and bankrupt farmers, Main Street merchants, and manufacturers, leading to massive layoffs. All that was clear to them was that somehow, through all this, the Wall Street bankers survived or even flourished.

At the time of the 1893 panic, America was just becoming a regulated national economy. The Act to Regulate Commerce, which formed the Interstate Commerce Commission (ICC), had been passed in 1887, mainly at the urging of a farmers’ movement calling for fair railroad rates. The farmers, who saw higher freight rates when they shipped their goods to larger cities, had wanted short-haul and long-haul freight rates to be equal. But instead of bringing lower rates, the ICC became dominated by former railroad executives and lawyers. The ICC went for equal rates all right: the commission raised rates for everyone. The ICC functioned as a cartel manager that favored railroad survival, not farmer prosperity.

Along another dimension of the economy, the Sherman Antitrust Act had been passed in 1890. The stated purpose of the law was to rein in the power of the trusts and large enterprises that seemed to be controlling major markets nationwide. This satisfied the populists who supported it, but the statute’s first application was against organized labor, not industrial firms.

A partial response to the 19th-century outcry came later when major banking legislation was passed in December 1913, forming the Federal Reserve banking system, a cartelization of national banks that fundamentally changed how U.S. financial institutions would operate, how they would avoid bankruptcy, and how the older risk of deflation would be converted to a new inflationary reality. In short, the 19th-century protest can be seen as a Baptist element in a Bootlegger/Baptist story where leading national bank operators played the Bootlegger role. The protest, far from ending special interest regulation, served to stimulate it.

There is another well-known, highly focused Washington protest: the Bonus Army’s march to Washington in the late spring of 1932 (Shlaes 2007, 127–28). The marchers, some 20,000 strong, were World War I veterans who had been promised a bonus for their service, to be awarded in 1945. As the economy tanked, a movement arose to give the veterans an early payment. With sympathetic support among some members of Congress but staunch opposition from the White House and Treasury Department, these middle-aged and older men, caught in the difficult backwaters of the Great Depression, occupied abandoned government buildings, pitched tents in Washington’s Anacostia Flats, and settled in for the duration. Their leader, an unemployed veteran named Walter Waters, “decided that if bankers could lobby, so could hungry veterans” (Alter 2006, 121).