Two things you never want to see made are sausages and legislation.
-Otto von Bismarck
Asymmetric information, rational political ignorance, low voter turnouts, lumpiness in voting for a candidate, and the tendency for parties and politicians to cluster around middle-of-the-road positions are among the reasons government policies only weakly mirror voter preferences. Lobbying and protracted negotiations among elected representatives are among the mechanisms that result in budgets and laws intended to balance the desires of special-interest groups, including those of voters. These mechanisms sometimes provide pressures for policies to more closely conform to voter preferences, but at other times they exacerbate problems inherent in political allocations of resources and incomes.
Economists favor voluntary exchange in most cases because both sides expect to gain.
Legislators commonly trade votes to obtain passage of proposals they favor or to block legislation they oppose, a process known as logrolling.
For example, one legislator might want more funding for education, while another seeks higher agricultural price supports. Trading votes may enable both to get what they want. Logrolling may also be beneficial by allowing legislators to register their intensities of preference. Legislators often trade votes on legislation about which they are reasonably indifferent for votes on matters about which the lawmakers feel strongly. This process can facilitate efficiency by allowing strongly held minority views to overcome weak opposition by the majority.
Economists recognize, however, that some exchanges may not be socially beneficial. An extreme case would be an agreement wherein you trade part of your loot from a bank robbery for my services as a lookout and getaway driver. Society’s problem is that we are not the only people affected by this transaction: our victims’ losses must be considered. Less dramatic but similarly damaging trades can take place through logrolling that results in pork barrel legislation.
Pork barrel legislation uses tax revenues from taxpayers everywhere to fund projects that primarily benefit people in a narrower geographic area.
Many federal projects generate benefits that are largely local. For example, Arizonans make up about 1% of our population and pay about 1% of federal taxes. Even if a canal system to convey water into dry parts of Arizona would cost $2 billion but generate benefits of only $1 billion, constituents would pressure Arizona’s senators and representatives to support federal funds to build it. Arizonans would pay only 1% of the costs while receiving most of the benefits—a good deal for Arizonans, but a crummy deal for other voters.
Most pork barrel legislation is packaged with other pieces of pork and then tied to laws that are national in scope. Presidents cannot selectively veto parts of a law and so must either accept or veto the entire package. This is why some states have passed line-item veto legislation and why there is pressure to do this at the national level.
A line-item veto allows the executive branch (e.g., governors or, if ever enacted nationally, the president) to delete specific items in an appropriations bill before signing it.
Logrolling by lawmakers sympathetic to the goals of special interests is only one mechanism that interest groups use to secure policies they favor.
Majority rule voting tends to slight minority interests, but determined political minorities are often able to impose policies weakly opposed by a majority of voters. For example, opinion polls consistently indicate that most Americans favor some restrictions on private firearms. Yet, for decades, the National Rifle Association blocked national gun control legislation. Why? Typical voters cared relatively little about gun control and were rationally ignorant of most candidates’ positions on this issue. Thus, gun fanciers whose votes and contributions seemed to hinge on this issue alone made many politicians leery of pushing gun control. Voters aroused by publicity about violence on our streets and in our homes finally swayed Congress to enact the Brady Handgun Control Act of 1993. Similarly, people who feel strongly about abortion, prayer in schools, or protecting our steel industry from foreign competition may have disproportionally strong voices in determining certain policies. For example, steel quotas imposed by President Bush in 2002 are estimated to have saved a few thousand jobs in the steel industry—but every job saved is estimated to have cost consumers and investors more than $2,000,000 annually in the form of higher prices for cars, appliances, construction, …
Voting is not the only mechanism special interests use to accomplish their political goals. Money talks and big money talks loudly. Campaign contributions from a well-heeled minority may swing elections, shading some politicians’ positions on certain issues. Alternatively, campaign volunteers can beat the bushes to garner support for specific candidates. Money and bodies also may be devoted to propagandizing for important special interest issues. And then logrolling comes into play when politicians try to pass legislation favored by the interest groups that back them, including pork barrel projects for the folks in their home districts.
As we indicated earlier, one way a democracy can reflect the intensity of preferences is for a minority to exert vigorous pressure to secure policies it favors. Much legislation enacted to benefit interest groups, however, may bear inefficiently high social costs.
People are self-interested and try to manipulate allocative mechanisms to enrich themselves. In competitive markets, this normally entails trying to produce better goods at lower costs. This boosts society’s production and potential consumption. Government can be similarly beneficial by setting rules to correct market failures, but economic legislation and regulation often seem tailored for special-interest groups. One problem with this is that the gains to special-interest groups are often less than the costs to the general public. Indeed, inefficiency in collective decision-making arises primarily because the benefits accrue to small cohesive groups, while the costs are spread across a relatively anonymous, heterogeneous, and poorly informed public.
Rent seeking refers to attempts by interest groups to shape public policy for their own gain.
The interest group’s benefits are usually outweighed by losses to the larger public. Recall that economic rent is any income received in excess of the minimum required to secure the resources that people make available. Figure 2 uses overly restrictive licensing of taxicabs to show why rent-seeking behavior is often economically inefficient and reduces social well-being.
Suppose the taxi market is initially in a competitive equilibrium with perfectly elastic supply of S0 at price P0, and demand at D0. Consumer surplus equals triangle ace, and taxi companies cover all their costs, including normal returns on investment. Major operators could follow a rent-seeking strategy if they thought regulators were hostile to "cut-throat" competition. They might cite horror stories to "prove" that some unwary tourists were gouged by unethical drivers. Suppose taxi licenses were restricted to Q1, and granted only to reputable companies. Cab fares would rise to P1, shrinking consumer surplus to bcd. The loss of consumer surplus equals the trapezoid abde.
Figure 2: Dead-Weight Losses from Rent-Seeking
At first glance, society’s deadweight loss appears to equal triangle fde, with taxi companies reaping economic rent of abdf. Rent seeking, however, also absorbs resources directly, shrinking the gains of taxi firms and increasing the deadweight loss to society. Interest groups seeking favorable policies incur costs and devote resources to mold laws and regulations as long as the expected marginal gains exceed expected marginal costs. Parties on all sides of many issues hire consultants, lawyers, and professional lobbyists; time and money is absorbed by hearings in front of regulatory boards or legislative committees. In some cases, crooked regulators or lawmakers who recognize the potential gains may solicit bribes for favorable policies. None of these costs is incurred productively. The net result of rent-seeking behavior is a continuing social loss for as long as inefficient policies are in place, plus losses equal to the costs incurred by interest groups to secure favorable laws or regulations, or to oppose unfavorable ones.