The Ethics and Economics of Choosing Publicly

Release Date
July 20, 2017

Topic

Basic Economics Economics Regulations Sharing Economy
Description

Why do special interests gain so much control over government policy? Public choice economics can explain. To get notifications for all our new videos, click the bell above.

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Daniel Russell: The Ethics and Economics of Choosing Publicly. There are two ways to get ahead in business. One way is to use the market process, bringing consumers something they want at a price they’re happy to pay. The other way to get ahead in business is the political process, by lobbying bureaucrats and lawmakers to grant special favors to your business, or industry. You might get lawmakers to put tariffs on your competitor’s imports. You might lobby for laws or regulations that you can afford to comply with, but which your competitors can’t. You might lobby for licensing laws that make it harder for would-be competitors to start their businesses in the first place. Or you might lobby to receive taxpayer-funded subsidies.
The second way of getting ahead in business, getting ahead by using the political process, is one of the central themes of public choice economics, which tries to understand what it is about the political process that makes it possible for it to be exploited in such a terrible way. Take subsidies as an example, and in particular, agricultural subsides. These are extremely common in the United States, and a lot of people assume that they help everybody. Not only do subsidies protect struggling mom-and-pop farmers, but they also help all consumers by stabilizing the food supply.
But, by and large, neither of those things is true. For one thing, farming is an extremely productive industry today, and the biggest beneficiaries of subsidies are big businesses. For another thing, if subsidies were needed to protect major food staples, we’d expect to see the subsidies going to the beef industry, or to vegetable growers, for instance, rather than to the sugar industry. But in reality, it’s the other way around. Where the subsidies go has nothing to do with consumers, and everything to do with how well those big businesses organize themselves as a special interest group, and how politically well connected that group is.
One of the strangest chapters in the story of U.S. agricultural subsidies is about cotton. The U.S. pays as much as $4 billion a year in subsidies to U.S. cotton farmers, despite an agreement with other countries, like Brazil, not to subsidize cotton. When the U.S. refused to honor that agreement, Brazilian officials hatched a cunning plan. Because the U.S. had violated their trade agreement, Brazil could threaten to put tariffs on imports from the U.S. The plan was really a bet that U.S. producers of cars, and computers, and all sorts of other things, would have so much political influence that they could successfully lobby the government to do whatever it took to protect them against the Brazilian tariffs. And it worked.
But the outcome wasn’t that the U.S. stopped subsidizing American cotton growers. Instead, the U.S. also started subsidizing Brazilian cotton growers. In other words, the U.S. started transferring wealth from U.S. taxpayers to Brazilian farmers for the privilege of continuing to transfer wealth from U.S. taxpayers to U.S. farmers. Stories like these explain why James Buchanan summarized public choice economics as “politics without romance.”
But stories like this also point to a deep paradox. How is it that a process of deciding by majority rule has the regular outcome of creating laws that do economic harm to the majority of consumers and taxpayers? The paradox is a deep one, because it says much more than that sometimes economic policies don’t turn out as planned. The paradox is that economic policies chosen under majority rule often turn out exactly as planned, to benefit some special interest at the expense of everybody else. Evidently there must be some distinctive features of public choice, as opposed to other forms of choosing, that account for the fact that policies chosen publicly so often harm the public. The goal of public choice economics is to understand exactly what those features are that make public choice work in its own strange way.