Tag Archives: Peter Overby

Political espionage and government intervention

“To govern is to choose,” John F. Kennedy famously declared. And when governments intervene in markets, they inevitably choose to favor some business forms over others.

Sometimes this is obvious, as when a local government considers a regulation which conspicuously privileges one type of operator at the expense of another. Sometimes this is less-obvious, as when a licensing regime raises barriers to entry, privileging incumbent firms at the expense of those that might enter the market.

Sometimes the privilege is nearly hidden. Last year, I wrote about laws banning old-fashioned incandescent light bulbs. NPR’s Peter Overby had reported that major light bulb manufacturers actually liked the ban and spent money lobbying to maintain it. Why would a firm possibly want to limit its options? After all, it can make curly-Q light bulbs whether the old kind are legal or not. The answer seems to be that the ban benefited large, established firms because it kept customers from buying the older, cheaper alternative bulbs from rivals who weren’t as good at making the newfangled kind.

The point is that it is nearly impossible to formulate an intervention that treats all firms equally. Even a flat rate tax will fall more heavily on small firms because they lack the compliance resources that the big ones have. It goes without saying that this tendency is even greater when interventions violate generality.

When government policy can make or break a business, you can bet that the business will take an interest in policy. Very large sums of money are at stake when a city council considers a new regulation, when Congress considers requiring customers to buy a certain product, or when the FDA considers approving a new drug. It should come as no surprise, then, that some enterprising folks have set up firms that specialize in reading the tea leaves of government policy. These firms help their clients predict what new rules, regulations, taxes, subsidies, etc. might be coming down the pike. And firms are willing to pay pretty hefty sums for these prognostications, especially when policy is difficult to predict (as, for example, when it turns on the arbitrary beliefs of certain regulators).

Brody Mullins and Susan Pulliam write about just such a firm in a fascinating article in yesterday’s Wall Street Journal.

Naturally, lawmakers take a dim view of this activity. Senator Charles Grassley (R-IA) wants these “political intelligence specialists” to disclose their clients, activities, and fees: “We ought to know who these people are that seek political and economic espionage,” he says.

I have another idea. Rather than regulate the firms that are trying to figure out whom government is going to punish and whom it is going to privilege, why not eliminate discriminatory government policy? Why not limit government intervention in the market? And why not ensure that policy turns on predictable rules rather than arbitrary decisions?

If government cannot privilege some and punish others, then insider information will be worth next to nothing. If government interventions are limited, then firms will not live or die at the whim of politicians and regulators. And if policy is predictable and rational, share prices will reflect policy expectations, and there will be no way to profit from insider information.

If to govern is to choose some business forms over others, then sometimes the best option is not to govern and to let people choose for themselves.

Why Would Light Bulb Manufacturers Want to Be Regulated?

Image courtesy of "posterize"

NPR’s Peter Overby had an interesting (pre-holiday) story on recently-passed legislation to save the incandescent light bulb. In Robert Siegel’s intro he tells us:

Last weekend, Congress passed a trillion-dollar budget bill. Among its provisions, plenty of things not related to spending. One of these so-called riders is aimed at saving the hundred-watt incandescent light bulb. But as NPR’s Peter Overby tells us, the move by Republicans is more about politics than light bulbs.

Here is Overby:

Old-fashioned incandescent bulbs waste a lot of energy. So under federal law, they’re being slowly phased out. And the first to go, starting on New Year’s Day, is that old reliable of home lighting: the 100-watt bulb. But what looked like energy efficiency when President George W. Bush signed to law four years ago now looks like oppressive big government to many conservatives.

So the conservatives made sure that the spending bill had a rider which says the Energy Department cannot spend money to enforce the phase out of the 100-watt bulb. Here is where things get interesting. Overby went and talked to industry representatives and found that few if any actually wanted to repeal the ban:

But from the perspective of the lighting industry, this rider is several years too late to make a difference, and they don’t want Congress changing things now….

companies long ago started changing their product lines from traditional incandescents to halogens, compact fluorescents and LEDs.

The National Electrical Manufacturers Association’s Joseph Higbee tells Overby:

Delaying enforcement undermines those investments and creates regulatory uncertainty.

So far, so interesting. The companies being regulated actually want the regulation and getting rid of it would create uncertainty. So, “the move by Republicans is more about politics than light bulbs.”

But is this really the whole story? I think it would be natural to ask just a few more questions. If the ban were lifted, nothing would keep the companies from making the newfangled bulbs anyway, right? So why in the world would a firm favor legislation that limits its options? Why would it expend scarce resources lobbying Congress to keep the ban? Overby says that they “spent months giving show-and-tell demonstrations to lawmakers.” That must have taken up a fair amount of company time. But why do it?

My guess is that it has less to do with the firms wanting to limit their own options and more to do with them wanting to limit the options of would-be competitors who haven’t made investments in the newer technologies. They must worry that there is still a market for the older bulbs and they’d prefer that other firms be forbidden from serving that market.

Economists will recognize this as a simple story of regulatory capture. As Barry Mitnick put it in his classic study, The Political Economy of Regulation:

Much relatively recent research has argued that regulation was often sought by industries for their own protection, rather than being imposed in some ‘public interest.’ Although the distinction is not always made clear in this recent literature, we may add that regulation which is not directly sought at the outset is generally ‘captured’ later on so it behaves with consistency to the industry’s major interests, or at least has been observed to behave in this manner.

When I used to teach capture theory to my students, I’d often encounter incredulity. It sounds like formalized conspiracy theory. Are we
really supposed to believe that all regulations come about because industries have somehow greased the palms of politicians? Well, no. Sometimes it’s that obvious. But often, it is subtler.

As the light bulb story illustrates, some regulations come about because some politician has some well-meaning belief that the regulation will improve lives. But once the regulation is on the books, it tends to favor incumbent firms. So even if it proves to be inefficient, the incumbent firms are willing to exert a great deal of pressure to keep it there lest the market be opened up to others with different business models.

For a helpful and enlightening compendium of observations about capture, see this post by my colleague, Adam Thierer. It is interesting to note that progressive thinkers have often been the first to uncover these stories.