Concentrated benefits and dispersed costs

Michael Giberson

Recently I went looking for a source for the idea that special interest lobbying succeeds due to the logic of concentrated benefits and dispersed costs.

Frequently in economics and especially among public choice analysts the concept is attributed to Mancur Olson and sometimes specifically to The Logic of Collective Action. For example, in a post by J.C. Bradbury, A Lesson in Concentrated Benefits and Dispersed Costs, “ he states “Mancur Olson was right” in reference to a news story that compares the $4 million lobbying campaign a football team put together seeking taxpayer spending for a football stadium to a mere $20,000 that opponents of the spending were able to raise. At TechLiberation Jerry Brito writes, “The few who will benefit from the transfer have an easy time organizing to lobby for it, while a group as diverse and dispersed as taxpayers face what Mancur Olson called a collective action problem.” (Links in sources).

The main concern of Olson’s LCA is how special interest groups manage to organize in the first place.  In a sense, this is the flip side of the “concentrated benefits and dispersed costs” problem; Olson in LCA is more about how groups manage to get prospective members to engage in private costs (i.e. pay dues) to pursue group benefits (i.e. lobbying for a policy change). If the prospective member will benefit from the policy change whether or not it joins the lobbying group, then economic logic says the prospective member should not join the group. (Olson’s answer is that most lobbying groups are maintained by the provision of private goods to members and the lobbying capability is, in a sense, a byproduct capacity of the group.)

In an essay “An ‘Austrian’ Perspective on Public Choice,” [ungated version] Pete Boettke and Peter Leeson observe that Ludwig Mises, F.A. Hayek, and Joseph Schumpeter each indicated they grasped the basic policy logic of concentrated benefits and dispersed costs.  For example:

Like public choice theorists, Hayek understood the danger of interest groups in the context of the logic of concentrated benefits and dispersed costs. While these “innumerable interests . . . could show that particular measures would confer immediate and obvious benefits on some, the harm they caused [on others] was much more indirect and difficult to see” (Hayek [Road to Serfdom] 1945, 17-18).

The examples pre-date LCA by 20 years. Boettke and Leeson don’t assert that any of the three invented the idea, only that they exhibited familiarity with the concept. For a clearer source we will need to look elsewhere.

In political science, and particularly in the literature on the politics of trade, the idea is tracked to E. E. Schattschneider’s 1935 book on the Smoot-Hawley Tariff: Politics, Pressures and the Tariff: A Study of Free Private Enterprise in Pressure Politics, as Shown in the 1929-1930 Revision of the Tariff.  (Republished in 1974 under the awful title: Politics and People: The Ordeal of Self-Government. Page numbers below to this edition.) Schattschneider wrote:

Contrary to facile assumptions, economic interests, insofar as their behavior is illustrated in the tariff revision of 1929-1930, are not universally active in promoting their interests in politics. … Apparently, equal stakes do not produce equal pressures. The protective tariff is well established because large areas of adverse interests are too inert and sluggish to find political expression while an overwhelming proportion of the active interests have been given a stake in maintaining the system. (pp. 162-163)

and:

“Although . . . theoretically the interests supporting and opposed to [tariff] legislation . . . are approximately equal, the pressures upon Congress are extremely unbalanced. That is to say, the pressures supporting the tariff are made overwhelming by the fact that the opposition is negligible.” (p. 285-286)

As it turns out, Olson does cite Schattschneider in Logic of Collective Action, but to a later book on lobbying (The Semi-Sovereign People) rather than Politics, Pressures and the Tariff.  Still, Olson does articulate the political logic of concentrated benefits and dispersed costs, if not quite in those words, and his book is probably the earliest work by which most present economists and political scientists have been introduced to the idea.

Perhaps Schattschneider’s 1935 book was not the first to describe this logic of mobilized political interests either, and in any case as the work of Boettke and Leeson suggests, the idea was likely independently arrived at by others as well. Still, if we’re awarding blue ribbons for first place, I’ll tentatively give the award to Schattschneider unless you convince me of an earlier source.

POET, ethanol, independence and the flag

Michael Giberson

Cellulosic ethanol is purportedly the future of biofuels, at least if you listen to ethanol’s supporters.  While the topic of cellulosic ethanol is a subject of some interesting research, digging around the internet for information mostly turns up flag-waving lobbyists seeking more help from the federal government.

In a recent news release, ethanol producer POET Energy announced that the director of it’s Project LIBERTY would be giving a project status update on the planned cellulosic ethanol plant at a pair of Iowa-based events. (Project LIBERTY has its own website which talks a lot about energy dependence and independence and includes a lot of stars and stripes, red-white-and-blue imagery.)

The news release included a link to “a documentary about POET’s pilot cellulosic ethanol plant“, which I thought might be interesting.  As it turns out it was interesting, though more for what it revealed about the reliability of its content than for what it said about ethanol.

About one-third of the way through the POET video, in the context of discussing criticism of ethanol policies and specifically when discussing the effect of grain ethanol on food prices, it said, “Many claimed the diversion of corn to make fuel drove up food costs, a myth later disproved by independent economists.”

As the narrator read the bolded phrase, the video flashed an image that looked like a newspaper column.  It went by so fast the first time I couldn’t read more than the first few words of the headline: “Big Food’s Smear Campaign….”

Curious who these independent economists were, I stopped the video and scrolled back to the image (at about the 3:41 minute mark).  The full headline said, “Big Food’s Smear Campaign Exposed by New Group of Ethanol Producers.”  The subhead said, “Growth Energy formed to promote clean, green, high-tech, homegrown biofuels.”  Turns out the column was just a Growth Energy news release.

Growth Energy also has a website, which sports more flag-waving imagery, and describes the group in more detail.  Is this group the source of the purported “independent economists”?  The Washington, D.C., based group was, as advertised, formed and funded by the subsidized ethanol industry.  I don’t think “independent” means what POET thinks it means.

For a little more insight into how ethanol is grown in Washington, D.C., and perhaps insight into the current administration’s commitment to science-based public policy, read Timothy Carney’s column in the Washington Examiner: “Obama EPA’s ‘science’ pleases powerful ethanol lobby.”

Growth Energy has a video, too.  It begins with a flag, fades to a baseball stadium, and soon enough the Statue of Liberty.  If I would have stuck with it a little longer I’m sure I would have got a picture of apple pie, Mom, and probably a boy scout or ten marching in a Fourth of July parade somewhere in America’s heartland.  But I had had enough.

Flag-waving by lobbyists in pursuit of government-granted privileges always turns my stomach.

The wind industry loves to fret

Michael Giberson

“Still, the wind-power industry loves to fret,” writes Keith Johnson at the WSJ‘s Environmental Capital blog, “Now, the worry is about a slowdown in manufacturing which could put thousands of ‘green jobs’ at risk—unless Congress offers even more support to the wind industry in the form of tougher renewable-energy standards.”

Of course “fretting” is an industry lobbyist’s job.

You might think it is the job of the wind energy trade association to help create a healthy wind power industry.  It is, to a point, but if the industry were too healthy, it wouldn’t be so worried about the loss of federal policy support (and then the industry wouldn’t need to spend quite so much on lobbying the federal government).

Auctions as tools to limit government discretion

Michael Giberson

Auctions, especially auctions of government property, are not a tool of the rich…  As principles of market design become more thoroughly articulated and widely understood, the sphere of governmental discretion will shrink. More and more, politicians will be forced to play by the rules.

That’s David Warsh writing on the relationship between the economics of auctions and government. His main point is that when government property (anything from radio spectrum licenses to surplus office furniture) is sold by auction rather than disposed of in other ways, the tendency is for rules to limit discretion. Lobbying and personal relationships become less important, and cash deposited into government accounts becomes more important.

It might be objected that the current lobbying frenzy occasioned by the Waxman-Markey carbon emission cap-and-trade bill is a counter example. For example, from the New York Times:

Cap and trade, by contrast, is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts. That is precisely what is taking place now in the House Energy and Commerce Committee….

Yes, a lot of lobbying is going on. Regulation of carbon emissions will occasion a substantial increase in the influence of the government over the economy, and the consequences of that potential regulation provide significant motivation for firms to invest in lobbying.

But observe carefully, this isn’t a case in which auction tools enhance the granting of political favors. Instead it is an example of how, if you want an advantage in an auction system, your best bet is to get your advantage placed in the rules in writing up front. No CEO is saying to his board, “Don’t worry, I went to school with the guy at the EPA (or DOE or wherever) who will be in charge of the auction; he owes me a few favors, he’ll take care of us.” Instead, they are lobbying like crazy.

When the rules are in place (and the subsequent narrower lobbying over the implementing regulations, and the subsequent lawsuits roll through the courts), the ability of wealth to buy political favors will be constrained.