English economist Arthur Cecil Pigou (1920) is often (mistakenly) seen as the godfather of the public interest theory. Pigou famously argued that governments could take steps to correct all kinds of problems that plague unregulated private markets. Leaders could address the uncompensated harm done when sparks from railway engines set woods aflame, when land management practices caused rabbits to invade neighboring property, or even when construction practices tended “to spoil the lighting of the houses opposite.”3 Pigou worried about automobiles that wore out the surfaces of roads, the sale of intoxicants that then required additional expenditures on law enforcement and prisons, and in his own words “[p]erhaps the crowning illustration of . . . the work done by women in factories . . . for it carries with it, besides the earnings of women themselves, grave injury to the health of their children” (Pigou [1932] 2009, 134, 186–87, 196–203).
The remedy? Pigou called on enlightened leaders to address these problems by taxing unwanted activity, subsidizing desirable activities that tended to be underproduced, and imposing regulations on producers who disregard the social costs of their behavior.4
Now, let’s take a peek at President Lyndon Johnson’s Economic Report of the President (1965, 135–36), in which we get more than a hint of Pigou and the public interest theory:
In the vast majority of industries, competition is the most effective means of regulation. But in a few industries, technological and economic factors preclude the presence of more than one or a few firms in each market. When these industries provide an important service to the public, direct control is substituted for competition. The independent federal regulatory commissions were established in the transportation, power, and communications industries because competition could not be expected to protect the public interest. In other areas, regulation is aimed at providing the public with reasonably full knowledge of the market. In particular, securities and certain commodity markets become so complex and technical that regulation is necessary to insure that buyers and sellers have access to accurate and reasonably comprehensive information.
The statement, prefiguring much of the recent rhetoric aimed at banks by the Consumer Financial Protection Bureau, makes a case for antitrust enforcement as well as regulation of certain consumer markets. Government, in President Johnson’s view, was there to protect and further public interests that would be jeopardized by unchecked private action.
We see a more detailed expression of market failure and public interest theory in President Johnson’s Economic Report of the President (1966). After describing the emerging problems of air and water pollution, the report claims that “in the case of pollution, however, those 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 knew that their power bills were slightly larger because of the rule. Meanwhile, the benefits were concentrated among a relatively small group of coal mine owners and operators, and coal workers. Additionally, eastern coal was produced by organized labor spread over several states, whereas cleaner western coal was produced by nonunion workers concentrated in lonely Wyoming. Because unionized labor is well organized, unions can far more easily speak with one voice to help influence the debate.
Capture theory also explains how the railroads won the day when Congress empowered the ICC to regulate motor carriers in 1935 (Felton and Anderson 1989). This occurred after carriers began cutting prices for carrying freight, in spite of organized opposition from agricultural and other shipper interests. The rail interests were successful in forcing ICC controls on truckers.
If all this sounds a little too simple, that’s because it is. After all, regulatory tradeoffs are made: political decisions create winners and losers. Thus, the question is not just whether a politician will be captured but which particular Bootlegger will do the capturing. Suppose a legislator is considering an array of proposals to set tighter limits on the nitrogen oxide emissions from diesel engines. Which of the several standards being considered serves the public interest? Is the burden of achieving cleaner emissions best placed on the producers of diesel fuel, on engine manufacturers, or on some combination of the two? Is a simple, uniform rule preferable to a more nuanced one that is sensitive to human exposure and differences between urban and rural operations?
Agents of Bootlegger engine and fuel manufacturers are only too glad to join the discussion—indeed, they better be at the table. Baptists from environmental