Free Bootleggers & Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics by Adam Smith Page B

who contaminate the environment are not charged in accordance with the damage they do. . . . Public policies must be designed to reduce the discharge of wastes in ways and amounts that more nearly reflect the full cost of environmental contamination” ( Economic Report of the President 1966, 119–20). Without acknowledging the possibilities for enhancing common law and other private action-based remedies, Mr. Johnson’s economists took a cue from Professor Pigou. Their rhetoric expands the domain of public interest from antitrust regulation and consumer protection to dealing with external costs imposed by firms on their neighbors.
    By 1978, the ever-ballooning domain of public interest had led to such extensive regulation that President Jimmy Carter’s Economic Report of the President (1978) began to address regulatory reform. Still, the report indicates the need for government intervention as a means of limiting the unfettered private pursuit of profit: “In a mixed market economy like that of the United States, government regulations of the marketplace sometimes play a vital role in meeting social goals, curbing abuses, or mitigating the hardships that would flow from the unconstrained play of economic forces” ( Economic Report of the President 1978, 206). Even as late as 1978, the Economic Report of the President did not recognize what historians and political scientists had known for decades: that the regulatory process can be captured by the regulated.
    Capturing the Regulator
    The second theory of regulation, called capture theory, builds on the public interest theory but recognizes that even politicians and regulators dedicated to serving the broad public interest face a fundamental information problem: they have no handbook that defines “the public interest.” What the dedicated legislator and regulator do have is an ample supply of private- and public-sector advisers eager to offer their own ideas—not to mention the lobbyists.
    It is important to recognize that lobbyists do more than curry favor and plead for pork: they also often provide a high level of valuable technical expertise. That can make them important adjuncts to the politician’s office given the breadth and complexity of the myriad issues a modern government is expected to address. If fact, some lobbyists are so helpful that they get called on to assist in defining the public interest! Thus a thorny problem for elected officials becomes a golden opportunity for the lobbyist, a nascent Bootlegger. Increasingly dependent on the representatives of the very firms they are expected to regulate, politicians are effectively captured.
    It is perfectly logical that a president’s report would not discuss this element of political action. Admitting that politicians can be captured would seem to suggest that public servants are not up to doing their jobs. But in the real world, even the most dedicated public servant must obtain detailed information about prospective law and regulations somewhere. Generally speaking, those with the most information are the parties who will be directly affected by regulatory action—and they are typically only too happy to share it, along with their recommendations on the best course of action.
    The reason is simple: with the stroke of a pen, a politician can cause vast wealth to be transferred from taxpayers to the providers of all this valuable information. Capture theory helps explain how eastern high-sulfur coal interests influenced key members of Congress when the 1977 Clean Air Act Amendments were being developed. These amendments required the use of “scrubbers” to remove sulfur oxides from smokestacks. Massive machines that used as much as 10 percent of the power generated to operate, scrubbers were mandated even though cleaner low-sulfur western coal could have accomplished the same thing without scrubbers.
    The cost of the rule was spread over an enormous number of electricity users; most consumers never