Bootleggers & Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics (25 page)

The Dodd-Frank Act furthermore established a whole new set of Bootlegger/Baptist relationships. Though touted as a crackdown on Wall Street, the act reflected a shift into calmer waters for all involved. Witness, for example, recent measures to reduce interchange fees, which are collected by credit card companies from providers of merchant customer credit card services. The Durbin Amendment to the Dodd-Frank Act caps the maximum fee that can be charged, which lowers costs for merchants and (ostensibly) credit card users but deprives banks and other credit card issuers of revenue. But as Zywicki (2010) explains: “Interchange partially compensates the cardholder’s bank for the cost and risk of offering payment cards to consumers. This includes clearing costs, billing and collection, fraud recovery, customer service, credit losses, and the resolution of any disputes that might arise from the transaction.” Revenues from these fees are accordingly used as a means to extend credit.

The legitimacy of these fees has, rather unsurprisingly, been challenged by merchants, who must pay about 2 percent of each transaction that uses a credit card. Enter the Baptist in this little drama: the Merchants Payments Coalition. Here’s how they describe themselves:

The Merchants Payments Coalition . . . is a group of retailers, supermarkets, drug stores, convenience stores, fuel stations, on-line merchants and other businesses who are fighting against unfair credit card fees and fighting for a more competitive and transparent card system that works better for consumers and merchants alike.” (Unfair Credit Card Fees.com 2012)

These businesses—though obviously profit-seeking enterprises with a vested interest in the regulation—covertly pose as Baptists by providing a moral argument for capping interchange fees. Of course, the immediate result of such a measure would be to reduce the credit flow to those who are most risky and accordingly most likely in need of credit.

That foreseeable side effect means there’s another, less obvious Bootlegger lurking in the wings: lenders willing to take on risky consumers who stand to gain from the squeeze in credit—such as payday loan companies, pawn shops, loan sharks, and various underground lenders—will soon see their businesses grow as companies unable to escape regulation cede their clientele to these less reputable businesses. As Zywicki (2011) puts it:

Regulators cannot wish away the need of low-income consumers for credit: If your car’s transmission blows, you need $2,000 for repairs to get to work, whether or not you have it saved in the bank (and most low-income Americans don’t). If you can’t get a credit card, you’re going to have to get that money from a payday lender, pawn shop or loan shark.

After TARP, regulators may not wish to wish it away but instead embrace a measure that allows for greater levels of pork.

Another part of the Dodd-Frank statute buttresses this alliance between consumer advocacy groups and businesses that gain from encroaching regulation: the provision establishing the Consumer Financial Protection Bureau, an agency set up to regulate consumer financial products. Organized by Harvard University law professor (now senator) Elizabeth Warren, a long-standing “consumer advocate” and lightning rod for anti-business sentiment, the agency resides within the domain of the Federal Reserve Board but operates independently. It has far-reaching authority to regulate consumer financial products (Solomon 2011). Recognizing that Professor Warren could not gain Senate confirmation, President Obama nominated former Ohio attorney general Richard Cordray to be the director of the CFPB (HuffPost Politics 2011).

The inception of this bureau showcases the lessons lawmakers learned from TARP. Baptists quickly ventured into the playing field, with popular consumer groups such as the Consumer Federation of America voicing support for the new agency. Where TARP was unable to acquire suitable Baptist cover for its activities, the CFPB starts from a position of political popularity before transferring pork to special interests. Indeed, the CFPB constitutes a far more durable pork barrel mechanism than TARP.

As a final example, Dodd-Frank established a new oversight council to monitor systemic risk in the financial system. This has led to the unusual spectacle of firms going before various public administrators to explain how unimportant they are. These firms are attempting to avoid being designated as “systemically important,” which would trigger greater regulation, diminishing their profits. Some firms are even unloading assets to avoid the designation (Dash and Creswell 2011). Such odd behavior—though perfectly reasonable from a Bootlegger/Baptist perspective—emerges because of the incentives in the system. Firms that were previously looking for pork are now attempting to escape pork-extraction measures. Still other firms, particularly small financial services firms, welcomed such regulation, being assured that they would not be designated systemically important.

These measures and the larger policy goals of the Dodd-Frank Reform Act represent a transition from the politically dysfunctional TARP mechanism to a viable means of providing some needed cover for Bootleggers. Though far more palatable to the voting public, the shift in mechanisms brings together an insidious coalition of Bootleggers and Baptists that will ensure pork barrel politics flourish in the world of finance for some time to come.

Final Thoughts

This chapter presented a case study where Bootleggers were caught out in the cold without Baptist support. Stung by the ensuing backlash, public officials sought to constrain the pork barrel mechanism they had created, TARP, so that only disbursements they favored would be made. Unfortunately for both officials and firms connected to TARP, this was not to be. The payment of bonuses, seen as unbelievably excessive by the public, exposed a greater supply of pork than voters—and in turn their representatives—were willing to support.

The results of this arrangement proved disastrous for firms caught in the public spotlight. Not only were they subject to public outcry, but lawmakers soon turned on their would-be beneficiaries by engaging in sweeping interference in their business practices. Lawmakers sought to taint the supply of pork with taxes on bonuses, unexpected compensation oversight, and a premature recoupment tax.

The consequence of this fallout was an early exit for larger companies and the end of TARP’s viability as a pork barrel mechanism. Large firms especially were caught in a situation where they could no longer gain the pork they had originally been promised. This proved too much for these firms, and they took great strides to exit a “sticky” TARP mechanism. As the situation deteriorated for leading Bootleggers, requests for subsequent disbursements slowed to a trickle, with only truly desperate—and usually small—firms continuing the search for pork.

The broader lesson from TARP is that transactions within the political marketplace risk disastrous consequences for all involved when no Baptist cover is forthcoming for the deal—even when the purely economic rationale for it seems overwhelming. What initially appeared to be a bona fide bailout soon became an entanglement mechanism that transferred wealth away from company executives. Although the market participants may not have anticipated these outcomes, they are easily reconciled within our theory. When a docile electorate becomes energized by transfers that lack a moral—rather than purely pragmatic or economic—justification, pork generation ceases to occur, causing unexpected negative consequences for firms bellying up to the barbecue counter.

7. Obamacare: Too Big to Plan (or Stop!)

Introduction: Can Planners Even Plan?

We have saved the biggest and most extreme Bootlegger/Baptist tale for last. How else can one describe the passage of a health care bill that restructured an industry representing 17 percent of the economy, yet was opposed in court by 26 state attorneys general and regarded as a “bad thing” by 50 percent of Americans (Saad 2010)?

Whether one supports the policy or not, Obamacare’s success showcases how a runaway piece of legislation comes to fruition through rampant Bootlegger/Baptist interaction, leaving some of its original constituents behind. Its passage illustrates a basic lesson of government planning—one widely understood in principle but rarely recognized in practice: there are limits to what government planners can plan, especially when Bootleggers and Baptists are at play. Recognition of these limits makes for better policy. The cavalier attitude taken by congressional leaders in 2009, when the original health care plan was passed, revealed a broad disregard for these limits. As this story shows, what is too big to plan can quickly become too big to stop.

In this chapter, we focus on Bootlegger/Baptist elements in the health care reform process. Obamacare provides a classic example of our coordinated mode of Bootlegger/Baptist interaction that focuses on top-down leadership: interest group coalition building, spearheaded by a president, that enables the formation of a national cartel. But the story is much more complex than this. The episode also contains elements of other cooperative modes where some Bootleggers directly and openly support Baptists to bring about a desired end—while other Bootleggers, who find themselves out in the cold, secretly subsidize their opponents. Ours is a chaotic story, indeed.

Coordinated cartelization came to fruition when the Patient Protection and Affordable Care Act, popularly known as Obamacare, became law on March 23, 2010.
¹
The event marked the culmination of a yearlong struggle to push through one of President Obama’s marquee agenda items. Mr. Obama was not the first president to push for expanded health care. It has long been one of the most regulated segments of the U.S. economy. Lyndon Johnson successfully pushed Medicare and Medicaid into law in 1965, and George W. Bush added coverage for pharmaceuticals to Medicare. Perhaps the most ambitious previous effort was that of First Couple Bill and Hillary Clinton, who unsuccessfully sought to bring health coverage to the entire U.S. population. In each of these efforts, a vast Baptist choir sang the praises of government-assisted health care. But lurking in the background—and sometimes in the back row of the choir—were pharmaceutical, insurance, and other health care Bootleggers ready to expand sales to the regulated sector.

In this case, the president himself constantly shaped and reshaped the initiative to garner Bootlegger support, even while heaping public scorn on big business elements in the health sector. Instead of expanding subsidies and requiring health care providers nationwide to open their doors to all who need their services or giving indigent citizens access to the Veterans Administration’s hospitals, the president’s plan was based on requiring all uninsured citizens to purchase health insurance or pay a stiff annual penalty.

Thus, the leading Bootlegger—the insurance industry—was identified from the outset, or so it seems. After all, how could any insurance company oppose a plan that would require every citizen to buy an expensive insurance product every year? Surely the insurance firms would be the happiest Bootleggers on the planet. But there is more to the story. Things did not ultimately turn out well for the insurance Bootleggers.

News coverage of Obamacare helps identify the key Baptist themes. In March 2010,
The Economist
came out in support of the president’s project. While acknowledging some of the bill’s flaws, the influential news weekly supported the package for two related reasons: the ethical imperative of universal health care coverage and the law’s potential to lower health care costs (“Pass the Bill” 2010). Both elements made Obamacare an example of doing the right thing. Yet just one week later, without wavering from its Baptist position,
The Economist
lamented: “This newspaper supported the final version of Obamacare, but only because we have long maintained that a country as rich as America should provide decent health coverage to all its citizens. Because the bill does almost nothing to control costs, it was a huge missed opportunity” (“Now What?” 2010).

The abrupt shift in the newspaper’s analysis reflects the difficulty supporters had in reconciling their Baptist vision of universal health coverage with the disappointing outcome actually delivered by the final bill. It is easy to see why many grew frustrated with the final law. As in the examples explored in our “sins” chapter, what the public desires (as proclaimed by Baptists) can quickly get distorted once Bootleggers enter the political process.

So how does such a cumbersome—and ultimately unpopular—initiative become law? A brief exploration of the passage of Obamacare is necessary to address this important question. In doing so, we focus on how Bootleggers and Baptists interacted with the legislative process—and ultimately denied White House planners their dream of achieving a rational political outcome.

We Love the Benefits, but Not the Costs

Placing health care at the forefront of his domestic agenda, President Obama wasted no time in publicizing his vision for reform. In his first State of the Union address, the president claimed “the cost of our health care has weighed down our economy and the conscience of our nation long enough. So let there be no doubt: health care reform cannot wait, it must not wait, and it will not wait another year” (Obama 2009). He followed up with a whirlwind campaign to drum up support for his keystone legislation. Town hall forums and campaign-style appearances were part of a broader effort to convince the American public that health care reform was not just desirable but mandatory for a modern democracy in the 21st century. In an address to Congress he argued, “We are the only democracy—the only advanced democracy, the only wealthy nation—that allows such hardship for millions of its people” (“Obama’s Health Care Address to Congress” 2009).

The president found plenty of Baptists (and even a few early Bootleggers) ready and willing to support his cause. A joint statement in January 2009 from the American Cancer Society, the American Medical Association, Families USA, the Pharmaceutical Research and Manufacturers of America, Regence BlueCross BlueShield, and SEIU declared, “In order to fix the ailing economy, the nation needs health care reform that addresses the related problems of health care costs and people losing health coverage” (“Obama Health Reform Drive Gets Diverse Backing” 2009).