by Dr. Roy Cordato
Senior Economist, Emeritas
What do subsidies for “green” energy, mandated health insurance benefits, and quotas on imported sugar have in common? Clearly, all three policies generate a wealth transfer from the consumers in the affected markets—energy, health insurance, and sugar—to producers in those markets. With green energy, it’s from electricity ratepayers to solar and wind power producers. With mandated health insurance benefits, it’s from insurance customers to the providers of the mandated benefits, e.g. chiropractors, marriage counselors, etc. And with sugar quotas, it’s obviously from those who consume sugared products to those who provide the sweeteners, which could be sugar cane grower but are just as likely to be corn farmers, for example, because the number one substitute for cane sugar is corn syrup.
But there is more. All three of these are examples of what public choice economists have labeled “the special interest effect,” which explains why, over time, the legislative process tends to generate more expansive government. The special interest effect goes beyond the fact that legislation gives rise to wealth transfers from some groups to others. It looks at how the benefits and costs of these transfers are distributed and how they give rise to special interest coalitions that impact the legislative process.
Noted public choice economist James Gwartney describes the effect as follows:
There will be a strong tendency for politicians to support positions favored by well-organized, easily identifiable special interest groups. When the cost of special interest legislation is spread widely among the voting populace, most non-special interest voters will largely ignore the issue…In contrast, special interest voters…will let candidates (and legislators) know how strongly they feel about the issue…Given the intensity of special interest voters and the apathy of other voters, politicians will be led as if by an “invisible hand” to promote the positions of special interests.
In other words, most legislation has “concentrated beneficiaries and diffused cost bearers,” i.e., the benefits are heavily concentrated on a few while the costs are spread thinly throughout the population. This divergence between those who benefit and those who bear the cost creates a similar divergence in incentives. Those who receive the benefits will have a lot to gain, on an individual basis, and therefore they will be more likely to come together to lobby and spend money to make sure that favorable legislation is passed or unfavorable legislation is thwarted. On the other hand, the costs are likely to be high in the aggregate but barely felt by individual citizens because their numbers are so large. As a result, those who pay the price have little or no incentive to organize in opposition to the legislation. Ultimately, a small number of special interest groups can exert intense pressure on the political process, thwarting what is, in fact, the general interest.
This is the case with each of the three examples discussed above. Subsidies for so-called green energy, which come in the form of tax incentives, direct payments, and mandates to purchase wind and solar power, provide massive benefits to particular companies. In fact, these subsidies are so important to these companies that many, if not most of them, would disappear if they were repealed. On the other hand, the costs to any particular rate paying family are very small and, indeed, almost unnoticeable. While these subsidies may be costing taxpayers and ratepayers millions of dollars, the individual costs are so small that it is in no one’s interest to organize against them. At the same time, high-paid lobbyists for the solar and wind power industries flood the halls of the state legislature and Congress to put pressure on elected officials to keep the subsidies in place or even expand them.
The state of North Carolina has 56 health insurance benefits that must be covered if a company is to sell policies in the state. (It should be noted that large companies that self-insure, including the state, are exempt from these mandates.) Obviously, if you are a health care professional, having it mandated that the service you provide must be covered by all insurance policies in the state is a huge benefit. When insurance, rather than the individual, is paying for a service, the patient is less likely to consider costs when using a service and therefore the service provider is able to charge more. Also, when third-party payment is guaranteed by all insurance policies, the number of patients likely to use the service is expanded.
These costs are spread widely across all policyholders, even if they don’t want the service. For example, it doesn’t matter that a policyholder has no interest in using chiropractic services, he or she is forced to pay for a policy that includes payments to chiropractors. The same is true for a woman who is past child-bearing years but is forced to pay for a policy that covers pregnancies and prenatal care. The added costs of covering any one of these services and many others, for a policyholder, is likely to be very small, maybe a few dollars out of thousands a year in premiums. On the other hand, the concentrated benefits to particular health care provider incentivizes them to organize, lobby, and pressure legislators to ensure that their particular service is included in the list of mandates.
The federal government’s sugar quota program places a cap on the amount of sugar that can be imported from other countries. These supply restrictions generate well over a billion dollars a year in benefits to U.S. sugar and sugar substitute producers, i.e., corn farmers (as corn syrup which has become an important sweetener because of the quotas). Sugar and sugar substitutes are found in all kinds of products from cakes and candies to catsup, pickles, and salad dressings. But the cost of providing these benefits are spread over many millions of sugar consumers, raising the price of products using sugar by only a tiny amount. In the U.S., the cost of a pound of sugar is increased by only about 6 cents to consumers, which might add up to a few dollars a year for a household, depending on how much sugar is consumed. On the other hand, a sugar farm in the U.S. reaps a reward of about $310,00 annually. This is the perfect scenario for special interests. A few powerful lobbyists, mostly representing corn and sugar growers, control the policy, while the masses have no idea that it even exists. And even if they did, there is no incentive to do anything about it.
One way to ameliorate the special interest effect is to craft legislation where there are both concentrated beneficiaries and concentrated cost-bearers. This way, special interests are pitted against each other in the legislative process. For example, a rule might be instituted requiring that increased subsidies for one group would always have to be offset with reduced subsidies for another. So, if solar and wind power subsidies are increased, then the subsidy for another industry, such as film and television production, would have to be reduced. Or, if a new health insurance mandate is added to the list, an existing mandate would have to be eliminated. The point is that concentrated beneficiaries need to be offset by concentrated cost bearers if the tide of ever expansive government is to be stemmed.