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visit MIT OpenCourseWare at ocw.mit.edu. RICHARD SCHMALENSEE: OK. Today, we're going to
talk about public policy. It'll be a little US-centric. We're going to walk
through Madison, talk about interest
group liberalism, other political
processes, and then begin the discussion of that
clean coal/dirty air trading filth case, with
mostly background and a couple of questions. So I want to review from
way back in February. This is almost the
same slide, not quite. We talked about differences
between market processes and political processes. I will remind you
that governments tend to have, need to have,
a near monopoly of force. And if they're stable, they
tend to have legitimacy. That is to say there tends to be
a general acceptance that it's OK that they make
laws and rules, that the processes are OK,
that people are OK generally. Obviously, not everybody
agrees, and there are people in various
parts of this country who think the US government
should be overthrown. But by and large, Syria
is an interesting example. The government has a
near monopoly of force, clearly has very
little legitimacy. And whether it's a near monopoly
of force or not quite enough, we will see. We will see. Somalia, nobody has either. So the differences between
political processes and market processes-- in
market processes, we think about individuals
pursuing self-interest. In the political
sphere, individuals are actors and so are groups. And self-interest is not the
only thing that people pursue. They pursue their view of
what's good for everybody else. An awful lot of
government actions are what's good for you, not
just what's good for the actor. Collective choice-- choice made
for all of us, public goods, things that affect all of
us, and in market processes, we think about
individuals' preferences. What do I want? In political
processes, you really have to think about ideologies. Ideologies are views of the
proper function of society, the proper organization of
society, what's good for you or what's good for all
of us, but certainly what's good for you. That doesn't arise
in the market. It does arise in
politics inevitably. When you're making
decisions that affect the whole
community, you have to have some notion of
what those decisions should look like, how they should
be made, and so forth. So ideology always matters. Market processes, we think
mostly about competition. But competition is
not the only process in the political sphere. Certainly as we
go into elections, we will think about influence. As you watch people
lining up behind Romney, you think about
cooperation as a key part of the political process. And as you see people
lining up behind Romney, who don't much like Romney, you
see the influence of loyalty. All those processes matter--
influence, cooperation, and loyalty matter in
the political sphere. In politics, power
is a goal for most of the actors, a goal
in and of itself-- the ability to get other
people to act in my interest or in the public interest,
not in their interest. And finally, I remind you
that there is no there is no perfect system. We talked briefly about
this voting paradox back in February-- that it's quite possible. Just to remind you
what it looks like, we have three individuals,
individual one, two, and three. Three alternatives-- individual
one prefers A to B to C, individual two-- let me be sure I
get this right-- individual two
prefers C to A to B, and individual three prefers
B to C to A. So if we vote, two people prefer A
to B, so A beats B. Two people prefer
B to C, B beats C, and two people prefer
C to A, So C beats A. So voting with those preferences
cannot produce consistent decisions. There's no sense in asking what
the optimal decision is here. If I can control the agenda, I
can determine the outcome, just the order of voting. If I want if I want A to win, I
will first vote B against C. B will win. I'll then vote A
against B. A will win. And you can see if you
can choose the order, you can choose the outcome. So the political system is more
complicated in many dimensions than the economic system. And this last point
basically says the notion that there is an optimal
design for government-- this is something
basically Ken Arrow got a Nobel Prize for proving
in a very, very general way in 1950 in one of the shortest
doctoral dissertations in economics-- the notion that there is an
optimal design for government is a dream. There isn't. This says without a
dictator, you can't even get a consistent system. And that's a very
general result. So questions about any
of this before we go? We talked about all
of this stuff earlier. I'm just trying to get you in
a political frame of mind here. Then let's go to Madison. So Madison is writing
in the context of designing a government. It's easy to forget this. Having just read this very
long biography of Hamilton, I will do a little
history lesson. When the country started,
if you think about it, when they sat down to figure
out how the government ought to be organized, there
weren't any obvious models. There weren't any
republics of any size. Venice had sort of had one,
but there weren't any republics of any size currently. England had a king, and they
didn't want to do a king. So how do you run a
government without a king? Well, you could look back to
Rome, you could look to Athens. They lasted a while. They fell. The Roman Republic became
a dictatorship, basically, and Athens fell for
a variety of reasons, and really was a
democracy, which they didn't think they wanted. They wanted a republic. How would you do a republic? So it is quite
extraordinary if you read what they wrote at the time. It was, like, well, we can
look at what the Romans did. But if you look at the
details of the Roman setup, it was very strange. And you wouldn't want to-- people held office for
a year and the nobility were the office holders. You wouldn't want to do that. So what would you do? The first thing they did
during the Revolution, they set up the Articles
of Confederation. And that really was
a deal between 13 independent colonies,
each one a sovereign state in its own eyes. And the Articles
of Confederation didn't have any
executive branch. They had Congress. Didn't set up any
courts, and the Congress didn't have the
power to raise money. So the Congress had the
power to borrow money. And Congress could ask the
states to please send in money. And that had mixed results. So at the end of the
Revolution, there was a lot of national debt. We debt financed the
Revolution, because the states by and large-- states also borrowed a lot. So there was a lot of
debt floating around, but you couldn't tax. We tried to run a government
that way for a while, but that didn't make any sense. So they sat down and they
drafted the Constitution. You will notice that's 10
years later, more or less. So they tried it for a
while during and after the Revolution, and then
they wrote the Constitution that we now have,
which everybody sort of treats as, yes, of course. That's what you would do. At the time it was
enormously controversial. It was not clear it
would be ratified. There was intense opposition,
particularly in New York, also in Virginia, the
two leading colonies, very organized opposition. The Governor of New
York opposed it. They did not want a
centralized power, which is what the Constitution did. It took power to the
central government. So we think of the
Federalist Papers as sort of reflections, idle
commentary, people with time on their hands talking
about what we intended when we wrote the Constitution. These were political documents. Madison was, all these
guys, were arguing here are reasons to ratify. Please ratify. So this was an explicitly
political document at a somewhat different level
than many political documents we see today, but it's
important to recognize this was in the heat of combat. This was something you
dash off over a weekend and then get to the next one. This was not written at
leisure in the study. So that's Madison. And what's the problem he's
addressing in Federalist 10? Max. AUDIENCE: Faction. RICHARD SCHMALENSEE:
Faction, what's faction? AUDIENCE: [INAUDIBLE]
people get together for a common goal [INAUDIBLE]. RICHARD SCHMALENSEE: So
it's not just a common goal, it's get what they want,
which is not a good thing. He defines "faction," as
you said, they get together. They're united and actuated
by a common impulse-- I think that should
be "or passion." That's my typo, or
maybe it's "passion of." In any case, the key
is this last part-- "adverse to the rights
of other citizens or the permanent and aggregate
interests of the community." At the end of the thing in one
of his illustrative remarks, he talks about a
"rage for paper money or for any other improper or
wicked project," dot, dot, dot. So that's the kind of
thing he has in mind, that a faction might actually
advocate what we carry around in our pockets every day,
which when he was writing was viewed as evil. Let's look at--
that's the problem. How, in a representative
republic or a democracy, where you want the will of
the people to drive decisions, how do you guard
against a set of people who want to do
things that basically trample on the rights of others
or would harm the community? How do you fix that? That's kind of an
interesting design problem. So let's walk through it. First, could you
eliminate factions? What do you say about that or
what do you think about that? Could you avoid
groups of people who want to do things that would
trample on the rights of others or be adverse to the long-term
interests of the community? Could you eliminate it? I can't call on you again,
because you've actually read the thing. I can tell. Anybody else? Kirsten. AUDIENCE: [INAUDIBLE]
to eliminate the cause, you'd have to either
eliminate the people's liberty to choose or eliminate
their capability to think. That would be against-- RICHARD SCHMALENSEE: Well,
apart from universal free beer, I'm not sure how you eliminate
their ability to think. He points in another
direction, though, doesn't he? He says, first you can
eliminate their liberty, but then suppose
they were all alike. Suppose everybody were the same. If you could do that, you
wouldn't have this problem. AUDIENCE: OK, not likely,
given that everybody can think for themselves,
and [INAUDIBLE] people reason through things. RICHARD SCHMALENSEE: People
come with different conclusions. He also points to something
else that leads to differences. You're right. He says, you can't
eliminate liberty because that's the whole
point of the exercise. You can't eliminate
differences because people will have different opinions. He points to a
particular, and something we see these days, a
particularly important source of differences of view. Casey. AUDIENCE: Was it property? RICHARD SCHMALENSEE:
It was property, yeah. He says just the way life
goes, people accumulate. Some are rich, some are
poor, some have a lot, some have a little. That divides their interests. Rich people and poor people
have different interests. They're going to
have different views. So you can't keep
them from expressing their different views. That would be to
eliminate liberty. That would be unwise. And it would be
impractical, he says. Of course, the
Communist argument was, no, no, no, we should
eliminate differences in property. That will take care of it. He calls that
"impractical," which is pretty good diagnosis
in advance of Marx. So if you're going
to have factions, how do you deal with,
let's say, a small one? Is that a problem? Is that a problem you
have to worry about? We don't have tot have read
Madison to think about this. Suppose you're voting. Is a minority faction a problem? Say why. AUDIENCE: As long as they
accept the [INAUDIBLE] outcomes. RICHARD SCHMALENSEE:
As long as you're staying within the rules of the
game, a minority faction loses. They lose the vote. OK, that ought to
take care of that. Now he says, suppose you
have a pure democracy. You have a small
number of people gathered in a room,
or a small village, and it's one person, one vote. Can you ever
eliminate the problem of a majority faction,
which is clearly now the problem to deal with? You have the problem
of a majority that wants to trample
on the rights of others. Can you make that unlikely,
or rule it out, or rule out its effects when
you're small enough to have a pure democracy-- no representation,
just everybody votes? Charlotte, you keep
waving your hand. I keep thinking you're raising,
but you're not raising it, are you? AUDIENCE: I mean, no, you
can't eliminate it [INAUDIBLE] democracy-- RICHARD SCHMALENSEE: Exactly. AUDIENCE: Because
that's how it is, unless you change the
way they're thinking, which [INAUDIBLE] can't do. But if more people want it one
way, then they're going to win. RICHARD SCHMALENSEE:
They're going to win. And majority factions can happen
because you can do influence. You can do various other things. So his answer is, no, you can't. So he says, OK, and then
he makes an argument that what you really
want is a large republic. That's the way to deal with the
problem of majority factions. Why? He gives two basic reasons,
one of which I think is wrong. Jessica. AUDIENCE: One of the
things is because he gives some sense of equal
power, so the bigger party that can decide where
that faction is going. RICHARD SCHMALENSEE:
Well, I don't know what you mean by "equal power." He says if it's large,
there'll be diversity. But push that a little more. What do you mean by-- AUDIENCE: A greater-- the
people ruling no matter how [INAUDIBLE] will be
able to somewhat-- it's sort of to the
[? knowledge ?] in a way, to have one of the final says. And then it's not
a pure democracy. RICHARD SCHMALENSEE: Well,
he has in mind a republic or a representative democracy. He has in mind a
situation where people are elected from
around the country, and those people are the
ultimate decision makers. So where they're elected,
you could imagine a majority faction, maybe. But Kirsten, you wanted to-- AUDIENCE: You made
the assumption that elected officials
would represent the public good, [INAUDIBLE]
particularly necessary. And he-- RICHARD SCHMALENSEE: He kind
of hints at that direction, but he points someplace else. He does sort of say that. And then he does
say, at some point, that you can't count on it. He says, "It is vain to say
that enlightened statesmen will be able to adjust these
clashing interests. Enlightened statesmen will
not always be at the helm." So he points in that
direction and then backs off. Somebody else? Julian, what do you think? Forget Madison,
what might solve it? AUDIENCE: [INAUDIBLE]. RICHARD SCHMALENSEE:
Yeah, but he's not there. He's not there. Yeah. AUDIENCE: You can
induce compromise by having representatives
be responsible for being accountable to lots of people
or by having enough people that, on any given issue, they
might fall into a faction, but you start compromising
because different sets of you will be in different
[INAUDIBLE] issues. RICHARD SCHMALENSEE:
That's a process issue, and maybe you can make
sure that kind of process is followed,
although if you look at how the Constitution
works in the US, you don't necessarily
see that happening. But he has in mind a
structural difference that-- think back to what
the country looked like when he was writing. No electronic media. Weeks, months to
communicate north to south, east to west, lousy roads. Most rapid, most
efficient communication would be by sail, by the
ocean or on riverboats. Boston to Philadelphia
would be, say, to go to the
Constitutional Convention, would be measured not in hours
but in days, or maybe weeks, depending. You had very
different interests. You had people
trading on the coasts. You had people farming inland. You had heavily slave-dependent
societies in the South. You had some slavery in
the North, but not as much. And he basically argued that
that might be enough to do it. How could that work? That might be enough
to solve the problem. I mean, he doesn't
say that explicitly, but that's the world
in which he's writing. OK, Chad, you want
to take a shot? Don't want to take a shot. Andrew, you want to take a shot? Go ahead. AUDIENCE: OK, so I'm
just thinking this way and that's probably
confused [INAUDIBLE].. And I think it's if we
have bigger majority, it will be smaller
relative to the other one, meaning if the
republic is bigger, then the majority will not
be as big as [INAUDIBLE].. RICHARD SCHMALENSEE:
That's close to it. He argues if it's big, you're
likely to have local factions. That'll happen. You could have a majority of
the people in South Carolina want slavery forever
in the Constitution or not in the Constitution. They want some law
strongly favoring slavery, but that's South Carolina. And if there's
enough diversity, you could have local factions,
but not national factions. This is his basic argument. He has two arguments. One is he says if there are
larger districts, if you have a large republic,
then everybody's going to be elected by more people. And you'll probably get
better candidates that way. And he says, let me get this-- "The proportion
of fit characters be not less in the large
than in the small republic, the former will present
a greater option and consequently, a greater
probability of a fit choice." And he says also, "As
each representative will be chosen by a greater
number of citizens in the large than in the small
republic, it will be more difficult for
unworthy candidates to practice, with success, the
vicious arts by which elections are too often carried." He was not thinking of
attack ads on television, however, which are more
easily done in large than in small districts. So I'm not persuaded by that. His second argument, though, is
the one we were inching toward, is extend the sphere. Make it larger. Make it more diverse. You make it less likely that a
majority of the whole country will coalesce around a
particular bad idea, a majority of the whole. Or if, in fact, a lot
of people think that, just because the place
is spread out-- again, no electronic communications--
the place is spread out. They won't be able
to find each other. It'll be harder for them to
discover their own strength and act in unison. So he argues we can deal
with this, basically, by you have a large republic. You have a lot of
parties and interests-- and I'm going to spend time
on parties and interests. You make it less likely that
among all that diverse regional and industrial and
whatever interest, you will get a majority of
the whole country pointed in an unpleasant direction. You'll get competing,
diverse interests. He also is relying
on the fact that it will be hard to organize
if they're all spread out. I'm going to come
back to that, too. I don't think it's as
true now as it was then, but there's still truth to it. You see, this one I
think is a little odd. I once remember-- you've
never heard of Alan Simpson unless you really
follow politics closely and you've heard of the
Simpson-Bowles Deficit Reduction Panel. Alan Simpson was about 6 foot
5, one of the funniest men in Washington. And he was a Senator from
Wyoming, a Republican Senator from Wyoming, who had
a whole set of opinions on a whole set of issues
that were not particularly orthodox Republican positions. And I remember
somebody telling me that Wyoming's a small state. He can actually sit down and
explain himself to people. In California, you have to
communicate by television in 30-second spots. Simpson can go around and talk. So it's not clear to me you get
better candidates and better positions in large districts. But that's the solution. And in this solution, you get
a model of politics, sort of. The model of politics
is a great variety of parties and
interests competing, making it impossible or unlikely
that a big, single group will form and trample on the
rights of the minority, or be able to get
something stupid passed-- something really stupid passed. Make some sense? Yeah. AUDIENCE: --argue that
the same process kind of makes it harder to get anything
passed, get anything done. RICHARD SCHMALENSEE:
Well, the US Constitution is distinctive internationally
in how many obstacles it puts in front of
getting anything done. There was this great
fear of mob rule. There was this great fear. They'd had a king, so you
don't want the president to be too powerful. So you put a House. You put a Senate. And you're afraid that the House
may be governed by mob rule because it turns
over every two years. So you have the
Senate that's supposed to be deliberative, and more
aristocratic, and slower. And then, although they
hadn't really thought of it, they got it pretty quickly-- you have the Supreme
Court that has the ability to say this violates
the Constitution. It isn't in the Constitution
that the Supreme Court can do that, but the Supreme
Court asserted it could, and it did, and has. So the US system-- it's actually hard to explain
to people outside the US that we do not have a
government in the sense that they have a government. In a parliamentary
system, the coalition that controls parliament
names the prime minister. If the government of which
the prime minister is the head introduces a major law
or introduces a budget and it doesn't pass,
the government falls. You have another election. So when the prime
minister says we're going to ratify this treaty,
he either ratifies the treaty or he's gone. We have nothing like that. We don't have a government
that can make promises. Most countries do. So you're right. We set it up so we
don't have a king. We don't have the House of
Representatives in charge. To a first approximation, we
don't have anybody in charge. Now, in the 18th century, this
was considered a good thing. It still has its merits. It means it's hard
to act in haste. One of the critiques of
parliamentary systems is they can go from a
set of left-wing policies to a set of right-wing
policies with one election. We move more slowly,
for better or for worse. But you're right--
the whole Constitution is designed to prevent action
to a first approximation. OK, Madison's model, then,
is one of competing interest groups. Factions are inevitable,
but if they're weak, if they're small and
weak, they don't dominate. And it's interesting--
if you go from Madison, and I must say I'm sure you all
find [? Loewy ?] easy to read. I find him almost
incomprehensible, but this is a standard text. He argues-- this is written
in the '60s, but I think it's still implicitly true-- that competition
among interest groups has been both an accepted
description of US politics, and politics in
some other settings, and implicitly, an ideal. If you go to Washington
and look in the phone book, look in buildings on K
Street, you will see-- I spoke yesterday
to an interest group composed of large industrial
users of electricity. I was preceded by a spokesperson
for the American Public Power Association, which represents
municipal and cooperative power consumers. We were sharing quarters with
the American Forest Products Association, which
represents timber harvesters. You can go up and
down the street and there's the
Department of Agriculture, set up as an interest
group, basically, to represent the farm
community, and on, and on. So the argument [? Loewy ?]
makes is that we've moved. And I think though
he was writing in the '60s that isn't bad. That has become both an
accepted description. Think about how
politics are described in the press, not presidential
politics, but any kind of legislative decision. The environmental community,
the Black community, women-- we describe the political
process in terms of groups, often-- the Cuban community in
Atlanta, blah, blah, blah. I mean, we do a lot
of group description. And it's almost--
here's the next step-- it's viewed as a good thing. And the question is,
is it a good thing? First of all, is it an accurate
description of politics? And I'll come back to that--
sometimes yes, sometimes no. But first, [? Loewy ?] has
a nice, little statement about if politics looked like
that, could it be a good thing? And he argues you'd sort
of need three pieces. First, you'd need
clearly defined groups. Large consumers of electricity
is a pretty clearly defined group, but you can see it blurs. But certainly cooperative
and municipal utilities that buy electricity--
that's a well-defined group. The Forest Products
Association probably is. And then there's this-- I think of it mathematically
as [? spanning-- ?] the notion is that the
organized groups pretty much cover the universe. Pretty much every
interest that matters is represented well
by an organized group, so that everybody's covered. Everybody has a group, or not
everybody, every interest. So you may be represented
by several groups, depending on what you're
thinking about at the moment. And then if you believe that
as a statement of ideology, as a statement about how
the world should work, that the role of
government is basically to balance and reconcile, to
do deals among various groups. You ensure access so all
groups can participate. And this is his language-- "You ratify the
agreements and adjustments worked out among them." So again, you hear
legislative deals in Congress. And we'll talk about
at length the time after next in this case where
people explicitly say, look, these guys won in Congress. And so our job is to
make sure they get it. They get the fruits
of their victory. So do those makes sense as
descriptions of the world as you know it? Does that make sense as a
description of a good world? Catherine. AUDIENCE: So I agree that
having organized [INAUDIBLE] but the problem that he talked
about business interests, like generally the
interest group, but there was money [INAUDIBLE]
given that Representatives in the Senate and House,
they want to get re-elected. And so the group that
has the most money can have a larger [INAUDIBLE]. RICHARD SCHMALENSEE: So you're
pointing-- and I think I would, too-- you're pointing sort of to the
second of those assumptions, particularly the "adequately
represent" part of it. So what you're saying is not
all groups are created equal. I think that's fair. Are all possible
interests represented by organized groups? AUDIENCE: No, but I think
that a group has a view, and if New York was [INAUDIBLE]
large enough to influence, then I think [INAUDIBLE]. RICHARD SCHMALENSEE: Who
represents the interests of mobile phone users? Is there an organized group? Or buyers of milk-- we have a federal
milk price support program that's designed to
raise the price of whole milk. The dairy farmers are an
effectively organized group. People who give milk to
their kids, not so much. So I would point to both parts. I agree with you. I agree with you on the second-- not all groups
are created equal, so you don't necessarily get the
kind of balance you might like. But I'm not sure
they fill up most of the sectors of our lives. And what's
interesting-- yesterday was a good day for anecdotes. So the speaker from the
Public Power Association said she was very
happy to be addressing these large industrial
consumers because, she said, your group and my group
are the only ones that represent consumers of
electricity, which probably makes sense. Small businesses aren't
represented in Washington as consumers of electricity. There is a National Federation
of independent Businesses, but it's got a lot of issues. Nobody's representing me as
a consumer of electricity, as far as I can tell. So when we were talking
particularly about the FERC, when there is a proceeding,
a regulatory proceeding at the FERC, a notice goes out. You don't see it. I don't see it. They see it. That's their job. They're in Washington. And they respond to it. And with some luck, they respond
as consumers of electricity, but they're consumers
of electricity with particular interests. They don't necessarily
represent me. AUDIENCE: [INAUDIBLE]. RICHARD SCHMALENSEE:
Yeah, but look at all the residential
users of electricity. That's a lot of volume. Hard to organize,
though, hard to organize. So that's one kicker. Anybody else? I picked on Catherine enough. Charlotte. AUDIENCE: I just had a question. So one of the things you were
listing earlier about things that Madison was
considering factions, like slavery or
trade, those are all things that I think of as having
to go with a political party, whereas the things you're
talking about now as factions are things that I wouldn't
think about having to do with a political party. So I guess how is
Madison relating factions to political parties or
what was the situation then? RICHARD SCHMALENSEE:
They actually hoped, a number
of them early on, that you wouldn't have parties,
which was really pretty-- [INTERPOSING VOICES] AUDIENCE: There'd been
a loyalist person that [? hadn't ?] developed
another one yet [INAUDIBLE].. RICHARD SCHMALENSEE:
No, I mean, Washington had sufficient
charisma that until you began to coalesce opposition to
Washington, and in particular to Hamilton-- Hamilton had a particular agenda
for the central government, which is to strengthen it. And Jefferson, and soon
Madison, opposed that strongly. But-- AUDIENCE: [INAUDIBLE] also
some sort faction [INAUDIBLE]?? RICHARD SCHMALENSEE:
It's interesting. And that was a fear,
that if you manage to get a large
parity as faction, you could have exactly
the problem that Madison thought of, which is one reason
why they didn't like parties. Traditionally, American
political parties have been pretty big tents. They've represented a lot
of different interests that didn't see eye
to eye on all issues. In the European tradition,
parties tended to be narrower. So you'll have the
Labor Party in Britain, which is was a left
party, but traditionally really was aligned with
the labor movement, as the Democratic
Party was and is, but much more tightly
than the Democratic Party. So I think it depends on
the nature of the party. And in some
parliamentary systems, you have very little
parties that are focused on particular issues. Think about the ultra-orthodox
parties in Israel, for instance, or some
of the far left parties in European politics. Our parties have traditionally
not been easily identified with particular factions. And there isn't a-- well, I'm going to
talk about this, but most of the interest groups
we see in the US try very hard not to be identified with
one party or another. Because you don't want
to-- if you could possibly be friends with everybody,
you can survive. Pro-choice, pro-life, they have
not been able to do that trick. There's a Republican side
and a Democratic side, and there they are. But most-- the Forest Products
Association, I am sure, contributes to people
from both parties. The large consumers of
electricity, I'm sure, contribute to people,
et cetera, et cetera. So good question, though. Anything else? OK, so I guess I'm
inclined to agree with, I think with Catherine,
that this probably doesn't work as well as one might like. I don't know whether
it's an ideal, whether it would work as an ideal or not. It's not a bad story. But the notion that pretty much
all interests are represented and they're well represented,
and that government is about-- modulo the role of parties--
is about refereeing agreements and adjustments among
interest groups, is not a bad
description sometimes-- sometimes. Once again, sometimes. But I'm not sure it's an ideal. OK, let me move on. A little bit about interest
group competition-- first, if you think
about interest groups, their ability to
organize is really key. Those large consumers
of electricity-- there are about 40 of them-- they're the big
industrial buyers. They sit in a room. Small consumers of electricity--
there are many of us. We also have
different interests. We're in different
parts of the country-- hard to organize. The more important an issue is-- that should be higher
dollar "stake," not "stage." I'm looking at that and
saying that makes no sense-- "stake." Electricity is 2% of the
average family budget. You're not going to
get families to rally around electricity rate reform. It's just not important enough. It's a big deal to the big guys. They'll send people
to Washington. And there are a small number
of them, so they organize. So a classic example is debates
about airline deregulation back in the '70s. The airlines were
well organized, were very important in Congress. Most did not want
to be deregulated, thank you very much. Travelers did not have
an interest group. There is an Airline
Passengers Association. I have no idea
who belongs to it, but not a particularly
important group. Nonetheless, they
were deregulated, something we may come back to. But the shorthand in politics
is a concentrated interest, an interest that affects
a small number of people and has a big
stake for each one, tends to be a potent interest. So back to are all interest
groups created equal? Well, no. Some groups don't organize. Back to regulating
electric utilities-- the utility cares
an enormous amount about the outcome of regulation. Those of us who buy
care a little bit. There are a lot of us. We don't have that
much influence, except from time to time. So a key factor is how easy
is it to organize in terms of interest group competition. Money-- money is interesting. The simple assumption
is that you buy votes with campaign contributions,
and some of that does happen. But if you look at the
pattern of spending, people contribute to
politicians of both sides. If you become chairman of
a congressional committee, you will get campaign
contributions from anybody your
committee touches. Usually, what you want to
do is you want to make sure your friends win. It's harder to make somebody
make a 180-degree turn, or even a 90-degree turn
on an issue than it is to elect somebody who
already agrees with you. So an awful lot of what
goes on is electing friends and getting access. Getting access-- if you've given
a lot of money to somebody, they will return
your phone call. But it's amazing--
people who have no challenge, no
effective opposition, will get campaign contributions
from people who disagree with them on issues,
just because I want to be able to get in the door. I want you to think well of me. If I think you can be beaten
by somebody who I like better, I will pay a lot for them. But it's pretty
hard to buy votes with campaign contributions. The other thing-- and this
all merits discussion-- the other thing that
has to be mentioned is the Citizens United decision,
which is this recent Supreme Court decision that
said corporations are people and limits on
spending are limits on speech. So you saw it in the primary. You didn't see it
here particularly, but other people saw it. There's really no
limit on what can be spent to support a candidate
by wealthy individuals, mainly, more than corporations. We talked about corporate
political action. But that may change
things dramatically. And it goes back to
Catherine's point about money. If you're free to
speak with your $5, and I'm free to speak
with my $50 million, we have different impact. So can I get my friends elected? Well, yeah, probably. Can I buy votes with it? Buying votes is hard. Getting friends
elected is easier. So we're going to
see more of that. We're going to see a lot of-- this will be a very ugly Fall. That's all I have to say. Comments on any of this before
I go to the last one, last point here? Reactions, thoughts? Jacob, you look disturbed. David is disturbed. David. AUDIENCE: Don't [INAUDIBLE]
speak with their money, and you determine what
you care about more. So I buy electricity. It's only 2% of what I have,
so I don't care about that that much, but maybe I care
more about milk or something. So how do I choose? How do I vote what
percentage of my care I want to send each group? [INAUDIBLE] RICHARD SCHMALENSEE: I
mean, you as an individual or you as a really rich person? AUDIENCE: Rich people are
individuals, too, right? RICHARD SCHMALENSEE:
Yes, yes, yes, yes. Which are you imagining yourself
to be, you or a Warren Buffett? Because the answer differs. AUDIENCE: OK, yeah,
for someone who maybe doesn't have a lot of money. RICHARD SCHMALENSEE:
Somebody who doesn't have a lot of
money, you basically belong to an organization. You care about gun rights, you
belong to the National Rifle Association. You care about
abortion, you contribute to the National Abortion Rights
Act, whatever the thing is, or Planned Parenthood. You can contribute
to organizations or you can contribute
to candidates. If you're Warren Buffett, you
can set up a political action committee-- he doesn't do this-- put a
few tens of millions of in it, look around the country
for candidates you like, and spend for them. You can't give it to them. You can spend for them. You can hire people
to write attack ads against their opponents and put
a lot of money in television, or you can also find
interest groups. AUDIENCE: My question is
if I care a lot about-- I have a [INAUDIBLE] because
I buy electricity [INAUDIBLE],, but maybe I really care
about guns or something. So what would the
ideal system be in which I can have interest
in all these different groups, but the ones that I care about
more get more of my support. RICHARD SCHMALENSEE: Well,
if there are organizations-- I mean, the National
Rifle Association is politically active. So if you care
about guns, that's a place you can send money. They'll spend it for you. If you're old you, the
American Association of Retired Persons-- I mean, there are
plenty of pockets. AUDIENCE: The things
that I care a lot about I can give more money
to than other things. So that works-- [INTERPOSING VOICES] RICHARD SCHMALENSEE: Sort of. AUDIENCE: --money
But then my voice is smaller because I
have less money in total. So someone who maybe doesn't
care as much about this can give a little money, too,
but still larger than my voice. So money seems like the most
efficient system that I can think of that allows people to
contribute to things they care about a lot, and have
their voices heard there, whereas things they
don't care about, but they're part
of, they don't-- RICHARD SCHMALENSEE:
The issue that disturbs people is sort of twofold. One of the things
that's happened in this country over
the last 30 years, maybe goes back
a little farther, is increasing inequality
of income and wealth. I think it's very hard to
point a policy finger at what's done that, and it's
very complicated to figure out what's
done it, but it has happened one way or another. And so the thing
that upsets people is the difference in the
size of Warren Buffett's voice and your voice. If it's one person,
one vote, we don't all have equal impact on the
process with contributions. In fact, they differ by several
multiple orders of magnitude. That's the upset. I have no problem with-- and
the campaign finance laws were supposed to deal with that. The idea was A,
corporations can't make political
contributions, and B, there's a limit on how much
an individual can spend. That was intended
to equalize voice. You can still give to
various organizations as much as you want, but in
terms of the electoral process, there were limits. Those laws are no
longer relevant because of Citizens United. I mean, that's the issue. I mean, I've got no problem
with people spending money. I'm not profoundly upset
at the current system, but the huge difference
in the ability of somebody like this casino owner
who gave $15 million to the Newt Gingrich campaign-- that's one guy carrying
a presidential campaign. Wow. That no longer sounds
like Athenian democracy. Yeah. AUDIENCE: Two points-- one,
couldn't a voucher system solve this problem? Like something proposed
by Lawrence Lessig. RICHARD SCHMALENSEE: Say what
you mean by a "voucher system." AUDIENCE: So what
Lawrence Lessig says is that each individual
has $50 tax credit, and that money goes towards
funding a candidate. And there's no other outside-- [INTERPOSING VOICES] RICHARD SCHMALENSEE: Yeah, it's
the "no other outside money" that violates the
Constitution, almost certainly. So let me move
forward a little bit. AUDIENCE: [INAUDIBLE]
second part. RICHARD SCHMALENSEE:
Yeah, please. AUDIENCE: Wouldn't
pure capitalism solve this problem
because the governments aren't involved then. And if you're buying milk,
it's the consumer [INAUDIBLE] supply. RICHARD SCHMALENSEE:
Oh, you're saying that you should limit
the scope of government so you can limit the
mischief it can do. AUDIENCE: In theory. RICHARD SCHMALENSEE: Sure. Why are we trying to
raise the price of milk, for heaven's sakes? Because dairy farmers
are a very effective organized group and have been. Why do we raise
the price of sugar? Because if we didn't have
barriers to trade in sugar, we would undoubtedly
buy Cuban sugar, and we don't wish
to buy Cuban sugar. Oh, and by the way,
they're sugar producers. Anyway, lobbying-- let me
urge you read the short piece by [? Kline ?] and
[? Steller. ?] It's not on the syllabus because
it came out this spring. It's a very nice description
consistent with all my experience of
how lobbying works. Effective lobbyists don't
walk in with bags of money to buy votes. Effective lobbyists
make friends. They get in to talk. They provide information. The information is, of course,
slanted, but it's your friend. It's a very
interesting description of what the guy calls
a "gift economy," where basically you're doing favors. You have a complicated
piece of legislation. I'll discuss it with you when
we play golf next Saturday. We're good friends. How did I get hired
as a lobbyist? Because I'm friends
with these people. That's how I got
hired as a lobbyist, so they'll play golf with me,
so I can tell them this stuff. Yeah, maybe I give
them some tickets, but I'm not going to buy
their votes with money for a whole set of reasons. First of all, you go to jail
for that if you're caught. And second of all,
most people in Congress don't think of
themselves as crooks. They think of themselves as
trying to do the right thing. So the process of lobbying
is very, very nicely described in that article. And again, it's
because I've seen it, it's consistent with
everything I've seen. You become an effective lobby
not because you have more money to swing around, but
because you can hire people who have connections. You can get information
prepared that's useful, and you have the ability to
affect campaign contributions. That does matter. But it's a very
different process. It's a process of influence,
not a process of bribery. So I urge you to read that. It's short. So quickly, [? Loewy ?] makes
the point interest group competition is one
kind of politics. It really is inside baseball. But if you look at various
kinds of political action and various kinds of
governmental action, it doesn't all fit. This is a set of possibilities. This is impact on
the Federal Reserve. Well, is that interest groups? Antitrust policy-- is
that interest groups? Reapportionment-- well,
that's more complicated. Tariffs-- tariff policy
is winners and losers. Milk price supports is
aiding constituents. Regulation-- can you
make products safety regulation interest groups? Not too easily. So the [? Loewy ?]
point, and you can read the text around this
to interpret this diagram, is that that doesn't always
describe politics well. I'm going to come back to that
when we talk about regulation. There's also other models. Now, this is the piece by Whitt. And Whitt is a Marxist, so Whitt
is very big on class dialectic. And if you can make sense out
of that, you're one up on me. But I think the middle column,
the split between the two columns is interesting. If you think about
politics in China or if you think about
traditional politics in Latin American
countries, where they would talk
about the oligarchy, you would think about
this middle column. You would think about
politics by the elite. Read descriptions of
politics in Haiti, et cetera. There are a number of situations
in which it makes sense to think about. And if you read
older descriptions in Boston of the
vault, which is what all the business
and civic leaders would get together in the
vault of the Bank of Boston, you sort of have a politics that
doesn't look so much like this. This is really a
[? Loewy ?] description over here, a very nice
[? Loewy ?] description of how it ought to work. But in fact, there are
situations in which in essence, there is a relatively
small elite that controls the government. They may control the
government for exploitation. They may control the
government for who knows what, but it's a club. It's a small club. And there are situations
that look like that. The US doesn't look like that
so much because our politics are less well organized. Latin countries always
used to look like that. They're less so now. But again, listen to
[? Evita ?] and hear them talk about the oligarchy. So there are a
number of settings in which it makes sense to
think about the politics as elite control, not
interest group competition. You might think about that. There are also situations
that don't fit any of these, and I'll talk about
some of those. What I want to do
now is begin the lead into the discussion of
clean air as an example where a number of these and
some other things surface. So I realize that
to do that case, you have to have a little
background on the structure of federal regulation. And let me do that now. Please try to stay awake. The way the US system works,
typically, is laws are vague. Laws say things like,
"EPA must set a standard to protect human health," or
"the public utility commission shall ensure that electricity
prices are just, reasonable, and not unduly discriminatory." Very commonly, this is a
very standard-- sometimes that's handed to a
cabinet department-- the Department of Agriculture,
the Department of Interior, whatever. Sometimes, it's
handed to an agency. We're talking here
mostly about agencies. They come in two forms-- they're either
independent or they're part of the executive branch. If they're part of
the executive branch, like EPA, the President
appoints the head. The President can fire the head. If they're independent,
the President will be able to appoint the
head but not remove them, except to show cause. You can fire the head of EPA
because he or she ticked you off. To fire the head of FERC,
you have to show cause. That can be challenged
in court, and so forth. So they are independent. They were invented around in
the teens of the last century. The idea was to
make them-- well, there were some
earlier examples, but it was really pushed then. The idea was these
will be expert bodies immune to politics. The Federal Trade Commission
is one such like that it. It has its own building. It gets its money from Congress. It doesn't report
to the President. The President appoints people
with the consent of Congress, can't fire them. Often, they have
to be bipartisan-- two Republicans, two
Democrats, something like that. They could be captured. They could be captured by
the regulated interests. It's argued that FERC is
captured by the utilities. I don't think that's true,
but you can make the case. And the idea of
putting EPA, which is a later creation,
in the executive branch was to make it responsive to
politics, make it responsible. It affects the
kind of oversight. Rules passed by EPA,
rules proposed by EPA, are reviewed by the Office
of Information and Regulatory Analysis in the Office
of Management and Budget. They can be called
in on the carpet. They can be fired. All kinds of things
could happen. The Federal Communications
Commission, or the FERC, or state public
utility commissions, are not reviewed in that
fashion by the President, or the President's
people, or the governor, or the governor's people. But all decisions by
regulatory agencies can be reviewed in the courts. So here's the architecture. The law says it's got to
be just and reasonable. It's got to protect,
blah, blah, blah. In some cases, the
President or the governor can review it,
more commonly not. It gets reviewed by the courts
under the Administrative Procedures Act of 1946,
or related state acts. The court can reject
an action that's arbitrary and capricious,
an abuse of discretion, or not otherwise in
accordance with the law. So the law says you have
to protect human health. The agency has no
evidence on health. The court will say, that's
arbitrary and capricious, and throw it out. Or you didn't take into
account public comment. So here is where organized
interest groups matter. So the agency is going
to make a decision. It has to take
comments, usually. And the American Public
Power Association will file comments
on everything. e which is this
electricity consumers organization, will file
comments on everything that has to do with electricity. You and I won't. As will every utility in
the land, and who knows, General Electric. Organized interest groups
will file comments. And the courts
will reject a rule that doesn't take adequate
account of public comment. So if somebody proves that a
chemical is cancer causing, and EPA says, no,
it'll be thrown out. You've got to consider
the evidence that's submitted in the process. That's the regulatory process,
particularly as it relates to environmental regulation-- fairly vague laws, not
always, not on all terms, but usually fairly
vague, hands it off, delegates to the agency. Sometimes, in the case of EPA,
reviewed by the White House, sometimes not. Always reviewable by
the courts, always a requirement to take
into account comments. You might ask, who would
work in a regulatory agency? And we'll talk
about that briefly. But is that process
reasonably straightforward? Yeah. AUDIENCE: Would it
take into account who's making the comments? RICHARD SCHMALENSEE: No. You take into account
the evidence provided. So if the large
electricity consumers, say, we think that rates
too high, well, there's nothing to take into account. If they say, here's a study that
shows that 10% of our members will be driven bankrupt
by these prices, and the study is not junk,
they have to consider that. So they're not obliged, in
fact, they're almost obliged not to take into
account the source, but to focus on the content,
which is sort of sensible. Yeah. Anything else? Yeah, you actually
have to make arguments. OK, so we've been talking
about interest group politics. We're talking about factions. How did that act get passed? Was that interest
group competition? Did interest group
competition give us the Clean Air Act of 1970? And if so list the groups. Clean Air Act of 1970
was a strong assertion of federal power
over the environment. It in effect-- didn't quite,
but in effect-- created EPA. Put in the architecture for
air pollution control, water pollution control-- well, the air
pollution control-- that still governs. Took power from the states. Interest group competition? Brendan. AUDIENCE: [INAUDIBLE]
competition between environmentalists
and those maybe people who were using chemicals
that the Clean Air Act was [INAUDIBLE] against? RICHARD SCHMALENSEE:
Well, environmentalists-- let me push you
a little farther. If you go back to 1960, could
you find environmentalists? AUDIENCE: No. RICHARD SCHMALENSEE:
What happened? I think it was 1970
or close to 1970. There was a big event. AUDIENCE: [INAUDIBLE]. RICHARD SCHMALENSEE: Earth Day. Earth Day. That was when people
started talking not about environmentalists,
but about the environmental movement. You began to hear
the word "movement," just as you start to
hear about the Tea Party movement, the Occupy Movement. You started to hear about
the environmental movement, the civil rights movement. Those aren't really
interest groups. We'll talk Monday
about what they are, but social movements
are a bit distinct from organized interest groups. They're certainly distinct from
organized political parties. Yet every so often, they get
something like that passed. Richard Nixon was not an
avid environmentalist. This was not a Republican
issue, to say the least. There was no industrial
support for the cleanup, maybe a little industrial
support, because the state rules differed and that
was a little problematic, but not much, not noticeable
industrial support. That was a social movement. Who was it was
telling me about all the "No fracking" signs
in New York State, somebody who sits over here? AUDIENCE: [INAUDIBLE]. RICHARD SCHMALENSEE: Yeah,
that's a social movement. That's not an organized
interest group in the sense that the American
Forest Products Association is or the American Public
Power Association. That's a bunch of people who
get very upset about fracking, and who by god make noise. That's what got us
the Clean Air Act. We may need that to do
something about climate change, but we don't have a social
movement in that direction quite yet. But we did have interest
groups after '71. So who were they? Who were the interest groups
affecting SO2 regulation from power plants? And we're going to walk
through the case next week. So please, please do get it. Anybody? Has somebody looked at the case? Who were the groups? Sarah. AUDIENCE: [INAUDIBLE]
coal power plants who [INAUDIBLE] their facilities
and where they get their coal. RICHARD SCHMALENSEE: So you had
utilities with coal-fired power plants. Who else? AUDIENCE: You had utilities
as well, utilities. RICHARD SCHMALENSEE: Utilities,
yeah, with coal-fired power. They owned them. Everybody was vertically
integrated in those days. Utilities with coal-fired
power plants and-- AUDIENCE:
Environmental concerns. RICHARD SCHMALENSEE:
Environmentalists, yeah. They were pretty well
organized by then. AUDIENCE: Coal producers in
the East and in the West. RICHARD SCHMALENSEE: Coal
producers in the East and in the West,
two distinct groups. Eastern and Western
producers, electric utilities, Western states a
little bit on some of the prevention of
significant deterioration, and the environmentalists-- who wasn't represented? Anybody? To go back to [? Loewy, ?]
are there any interests, not interest groups. Are there any interests, David? AUDIENCE: We all buy the
electric power [INAUDIBLE] price [INAUDIBLE]
affects us [INAUDIBLE].. RICHARD SCHMALENSEE:
So consumers weren't represented,
except maybe indirectly by electric utilities who
wanted to keep their costs down. So you're not represented as
a consumer of electric power. Any other interest, Charlotte? AUDIENCE: Maybe the people who
are near the power plants who would be affected by pollution. RICHARD SCHMALENSEE: People
who breathe air, right. Yeah. So the environmental
groups, in a sense, are indirectly
representing that interest. As we'll see, they also
had other interests. So I don't know,
I think those are the main ones that I think of. You had more. Oh, I thought you were-- just waving, OK. OK, how did the act set it up? Who did what? What did EPA have to do? What did the states do? What about new plants? What about old plants? What was the design? Who did what, the
'70 act set up. Casey. AUDIENCE: The EPA set
overarching air pollution limits, and then
each state would have to figure out how they
were going to [INAUDIBLE].. RICHARD SCHMALENSEE:
So the EPA would set air quality standard,
national ambient air quality standards. And then it would, as regards
existing plants and existing facilities, ask the states
for state implementation plans to meet those requirements. Absolutely right. What about new power plants? AUDIENCE: There's a different
set of regulations for them. [INAUDIBLE] RICHARD SCHMALENSEE: Set by-- AUDIENCE: Set by the EPA. RICHARD SCHMALENSEE:
Set by the EPA-- so the EPA didn't set standards
or rules for existing plants. It set air quality standards. Let the states figure
out how to do that. But for new plants, there
were national standards for new plants. What's the basic rationale? Why would you treat new and
old plants so differently? Matthew. AUDIENCE: Because
the existing plants, in order to retrofit them, you
would need expensive equipment. It might not even be worth it. But the new ones, they can
design it so that [INAUDIBLE].. RICHARD SCHMALENSEE: So that's
the basic rationale exactly-- that new plants,
in a sense, you've got a blank sheet of paper. And you can design the
plant to meet this standard. Old plants differ
in so many ways that there's no easy way
to use the same standard across all old plants. It would be easy for some,
impossible for others. Let the states figure it out. That is exactly the
basic rationale. We'll come back to sort
of how that worked. So what we're going to do
in the next two sessions, we're going to talk about
social movements on Monday. And one of the reasons we're
talking about social movements is that that's what got
the '70s act passed. The Civil Rights movement
got civil rights legislation passed-- not an organized party, not
quite an interest group, not the American Forest
Products Association. And then we'll come
back to this case, and we'll talk about how we got
the politics of the standards, the two sets of standards, the
acid rain impasse, emissions trading, other stuff. Thank you.
