Today the main subject of the entry is the analysis of why our societies subsidize interest groups even when it goes against the global good or interest.
“Economists have come up with the theory of political behavior that when it comes to interest group policies, it pays to be small”. Gary Becker, University of Chicago Nobel Prize winner, theorized that “small well-organized groups are most successful in the political process”. This is because the costs of paying for their pleads is spread over a large unorganized fraction of the society.
When it comes to discuss about one specific interest group benefited from public policies, e.g. carbon mines in Spain, the miners strongly defend and fight to keep their status quo because they have a lot to lose while it represents a small quantity in taxes for the rest of the country, not worthy enough for fighting against them.
These situations have an impact in economy:
First, too many subsidies or public benefits for a country economy. Each of these “inefficiencies” may not involve great sums of money but in global the budget notices it and hence it jeopardizes the functioning of market economy (“taking inputs and producing goods and services as efficiently as possible”).
Wheelan wrote what he says is one of his favorite definitions of tax shelter: “some kind of investment or behavior that would not make sense in the absence of tax considered”. The governments should not finance those activities that would not exist in the absence of such stimulus.
Apart from subsidies or tax cuts, the government also make use of regulation to benefit one firm or market. One example of regulation that favors interest groups are the certifications that add entry barriers to specific markets.
The Air Traffic Controllers in Spain may be included in this group. A restricted entrance to a market that rewards the ones inside with incomes quite over other similar qualified jobs average salaries. The Air Traffic controllers group is very special, similar to the pilots one, because they are powerful enough to damage basic structures such as the air traffic business, needed to keep the country running. So they can easily, or at least more easy than other groups less organized and “critical” for the country, force specific changes or regulations in their favor. On the other hand, this “privileged” status can also been used by governments as a political tool to create an adverse public opinion against them to enforce the acceptance of unwanted changes of regulation (e.g. Crisis of Traffic Air Controller in December of 2010 where the government forced the military state to recover the air traffic activity).
Who owns the truth? Any of them defended their interests but the government has to watch over global good and it is unpleasant if not upsetting that there are groups so powerful in our country able to “blackmail” the whole society in their best interest.
Moreover, it is not proven that certifications help to increase the productivity. Most of the times the content of the certifications is kept to date for new entrants but not mandatory for updating the know-how of professionals already in the sector. On the contrary, they add barriers and restrain the market growth. As we have seen before, the capacity of an interest group to add an entry barrier to its market will depend on its size (the smallest the best) and therefore on the distribution of the impact of the action in the rest of society.
Second, why should I change? I have always done the same job. I am not qualified to do something different thing, etc. We find again the painful but necessary “creative destruction” of Schumpeter: “capitalism is a process of incessantly destroying the old structure and creating a new one”.
A new efficient way of producing goods makes obsolete the old one. People and firms in the old structure are left out of the market. The public politics can either, keep them artificially within the market via regulations that barrier imports or new technology; or subsidies; or can help them to recycle within the new structure, with allocation policies or educational programs.
The first option makes the society worst off with expensive products, entry barriers and lower participation in global economy in the long term. The second is harmful for the people involved in the process but here is where the society and the government as its executive arm must show their capacity to integrate and protect those less favored in the group.
And last, it helps politicians to win elections and to enforce specific interests of their electorate. To vote for one policy with almost no impact on your electorate, will not arise your people´s complaints, while on the other hand it will avoid the veto of other politician to policies that benefit your group.
Now the video for today. “The Maestro” is an example about entry barriers in the market of food supply within movie theaters (does it ring a bell?)
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