In arguably his best known work, The Theory of Economic Regulation, George Stigler discusses how interest groups and other policy figures will use the regulatory and ruling powers of government to shape laws and regulations in ways that are beneficial to them. In the first sentence Stigler proclaims, “The state-the machinery and power of the state-is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries.” This is a truth that is widely observed today, especially with regard to analyzing the effects of domestic industries involvement with foreign countries. The consequences of globalization have positive and negative impacts on a variety of domestic industries. This is why for an industry, the political power to influence regulatory decisions is becoming more important and increasingly necessary.
Industry regulation hurts or helps different industries, usually at the same time. For example, Donald Trump’s “major border tax” of 35% is intended to reduce manufactured products imported from Mexico. This protective tariff for imported goods increases the price of imported goods by 20%, which will induce consumers to buy domestically where prices are relatively cheaper. Mexican manufacturing firms adversely affected by this border tax will raise product prices to cover cost increases that result from adhering to the regulation. Depending on the elasticity of demand associated with a good or service a particular industry predominantly provides, higher prices may induce consumers to switch to close substitutes. This is an example of a regulatory policy that benefits domestic firms in the manufacturing industry, because it is speculated that this will increase demand for domestically manufactured products. Consequently, this same border tax will hurt some domestic U.S. firms in the manufacturing industry that have outsourced all production of manufactured goods overseas, like Nike.
Why are specific industries regulated by the federal government?
According to Stigler, “regulation is instituted primarily for the protection and benefit of the public at large or some large subclass of the public.” The terms “protection and benefit” can be defined as the measure of physical health, financial independence, or feeling of personal safety in a social environment. Another explanation offered by Stigler claims that the political process’ behind instituting industry regulation defies rational explanation, due to unseen motives of both the political figure, and the firm. During the Obama era, his administration and the EPA initiated the Clean Power Plan, which was intended to reduce carbon pollution from power plants that combats climate change. This placed a set of regulations on new and existing power plants that demanded reductions in emissions and various technological installments for the purpose of protecting the human race, since it is claimed that the people adversely effected by damages involved with global warming is widespread. One must also examine other possible motives behind regulatory decisions and to examine the value beyond “face value”.
Think about this in terms of adopting environmental regulation. Given the time and money spent on the education and experiences necessary to attain high-level political positions, positions in which regulatory decisions are made, can it be true that these same people have also spent significant time and money on the education necessary to be considered experts in the field of environmental science? Of course not. This leads to the idea that regulatory decision makers can be, and are, influenced by outside sources! Admittedly, this is not a surprise since the complex issues we face as a society cannot be solved by one person. Stigler claims that an industry, if in possession of the ability to politically sway, will utilize any available resources to create regulation that benefits them.
Are industries capable of influencing political decisions?
Stigler seems to think so, and I agree with him. In The Theory of Economic Regulation, he says that “every industry or occupation that has enough political power to utilize the state will seek to control entry”. This statement illustrates a relation between an industry’s ability to utilize the powers granted to regulatory policy decision makers, and their competitive position. How can an industry utilize the powers granted to regulatory policy decision makers? One answer that increasingly seems to stand out is lobbying. This occurs when special interests hire highly-educated advocates, like lawyers and scientists, to present data to law-makers that is intended to result in an outcome that is favorable to the stakeholders of the special interest group. Special interest groups are subsections of industry, and they finance particular political campaigns with the hope of ultimately benefitting from the effects of the particular political figure achieving decision-making status. A flaw commonly attributed to lobbying is that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while mass-based interest groups and average citizens have little or no independent influence.
Political spending to help elect officeholders is often paired with lobbying to influence policy, and the Center for Public Integrity has reported an increase of 10 percent in the number of lobbyists registered at the state level between 2010 and 2014. In the race in becoming the Democratic Nominee in the 2016 Presidential Election, Adelson Drug Clinic contributed $27.5 million to the Bernie Sanders campaign. Not only is this ironic considering Sanders’ strong opposition to special interest’s funding political campaigns, it’s also ironic because one of Sanders’ core principles revolved around the government supplying public health care. This would place regulation on private health insurance operations, benefitting companies that are decided on by the government to be the avenue in which health coverage will be allocated. Adelson Drug Clinic is a company in the medicine industry that contributed the largest amount of money to the Sanders’ campaign. If Sanders’ had gone on to win the Presidential Election, and successfully followed through with his promise of providing “free” public health care, which drug clinics would his advisors choose to direct funds to? Would Adelson Drug Clinic be one? I’ll leave the answer up to you. It may have been this sort of question that drove Stigler to say that “politics is an imponderable, a constantly and unpredictably shifting mixture of forces of the most diverse nature, comprehending acts of great moral virtue (the emancipation of slaves) and of the most vulgar venality (the congressman feathering his own nest).
Another way an industry may influence political figures is by emphasizing the economic harm that will ensue due to the lack of a particular set of rules or regulations. This lead me to ask the question: why do certain states require that public higher-education institutions charge more tuition for out-of-state students than in-state students? According to The Economist, there are two reasons for this. First, most state schools are subsidized, and it is politically unappealing to have a situation where state taxpayers are subsidizing the educations of students from other states. And secondly, when funds are running short, it will be much easier, politically speaking, to raise tuition for out-of-state students than for in-state students. So, by not charging out-of-state students a higher tuition, it will be harder for the state schools to retrieve funds from the state. Deborah A. Verstegen and Richard A. King investigate and discover a positive relationship between school funding and student achievement. If charging tuition to out-of-state students allows for higher education institutions to gather more funds, and if funds increase student achievement, then it makes sense for schools to do this. Adverse economic effects are proven to occur to in-state students if out-of-state students were not charged a higher tuition, because of the relationship described above. Indirectly, the higher education industry benefits from state legislation that requires that a portion of local tax revenues shall be devoted to state institutions.
In closing, Stigler’s thoughts and proclamations involving the effects of regulatory presence on industry performance seems to be true. No matter the industry, an operating firm should take the necessary steps to become a viable contender in the political arena.