can work.
In other cases—whether by design from the outset or over time as sympathetic interests are recognized in the course of a protracted political struggle—cooperative partnerships emerge as Bootleggers fund Baptists to bolster support for the political outcome both desire. In economic terms, the Baptist groups have comparative advantage in providing public relations efforts supported by less attractive Bootleggers. An extreme form of this mode of interaction is the notorious practice of “astroturfing,” in which corporate interests essentially create from whole cloth an advocacy group designed to seem like a grassroots effort by concerned citizens. Given the tendency of such charades to backfire when exposed, however, the savvy Bootlegger will typically prefer to bankroll an authentic, preexisting Baptist group with a reservoir of public credibility to draw on, even when this strategy requires sacrificing some control.
Finally, as regulation expands and becomes all encompassing across national markets, a still more complex dynamic may emerge. In this fourth type of interaction, presidents or other political actors take the initiative to coordinate a desired mix of national interest groups and regulators to achieve their ultimate political goal by way of a grand regulatory cartel. One could refer to this as the “grand slam” of Bootlegger/Baptist initiatives. When this happens, high-level politicians and Bootleggers profit while Baptists achieve their goals and provide moral cover, making it easier for coordinating regulators to control the industry group. Taken together, these diverse modes of Bootlegger/Baptist interaction yield expanding regulatory activity and rising costs that constrain GDP growth.
The Rising Tide of Social Regulation
A veritable tidal wave of regulation has emerged in the last four decades from the confluence of Bootlegger and Baptist elements. Any investigation of U.S. regulation quickly reveals the explosive growth in federal regulatory activity that began in the early 1970s. An examination of the count of new pages in the Federal Register provides the most vivid indication of the rising tide of regulation, although some may argue that levels of regulation need to be considered in terms of the size of the economy being regulated. To account for this argument, we show the count of pages weighted by real GDP in Figure 1.1.
Figure 1.1 FEDERAL REGISTER PAGES PER REAL GDP DOLLAR 1940–2012
SOURCES: Crews 2012, Economic Report of the President (various issues), and authors’ calculations.
The massive change in regulatory activity that occurred in the 1970s should prompt us to question whether an economy can absorb so much regulation in such a short time without significant production losses—and, indeed, whether that economy is still one driven primarily by private risk takers operating in a capitalist system.
When analyzing regulatory activity—like that reflected in the Federal Register pages—regulatory scholars divide regulation into two categories: economic and social. Economic regulation, the older of the two types, addresses such things as freight rates, permits to operate, interest rates, and geographic service areas. The economic regulatory agencies included the Interstate Commerce Commission, which regulated surface transportation; the Civil Aeronautics Board, which regulated air travel; the Federal Communications Commission, which regulates radio and television broadcast rights; and the Comptroller of Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Bank Board, which collectively regulated financial institutions. Joining these older economic agencies, the social regulators of the 1970s focused on safety, health, and the environment. These agencies included the U.S. Environmental Protection Agency, the Occupational Safety and Health Administration, the Consumer Product Safety Commission, and the National Highway Traffic Safety Administration.
The new wave of social regulation was fundamentally different from the older economic regulation for transportation, communications, and energy markets. Old-style regulation focused on single industries, yielding a natural constituency of regulated firms that sought to influence outcomes. Social regulation affected all industries. It created no natural constituency of targeted firms that might organize to influence outcomes—at least not easily.
Social regulation also brought something to the table that was lacking in economic regulation. Social regulation was about things that mattered deeply to ordinary people. Interest groups that formed to lobby for safer food, cleaner water, and more humane workplaces possessed a moral fervor that railway freight rules seldom inspire. Voters and interest groups alike became passionate about the new regulation that emerged full bore by the 1970s. New economic models and modes of thinking were needed to explain what was going on. Social regulation became a growth industry, partly because of accommodating Bootlegger/Baptist forces.
When the budgets (in constant dollars) of federal regulatory agencies are considered for the two categories—economic and social—the fast-paced growth of social regulation is astonishing (Dudley and Warren 2011, 5). Total spending on social regulation increased more than 19-fold from 1960 to 2010. By comparison, spending on economic regulation increased less than seven-fold, and total government spending for all federal activities increased just under four-fold across the same 50 years (OMB 2010, 26). Given that government revenues grew less than outlays for most of those years, we can say that regulatory growth was so important that it was funded with deficit dollars. With so much regulation occurring, what was the effect on economic performance?
Throttling GDP Growth
It is now more than 40 years (and 3.5 million Federal Register pages) since the surge of regulation that began in 1970. We believe the structure and performance of the U.S. economy has been significantly altered by the rise of what some call “regulatory capitalism,” what others might call crony capitalism, or what we would term Bootlegger/Baptist capitalism. In Figure 1.2, we show the annualized rate of per capita real GDP growth over a series of decades, beginning with 1951 and ending with 2010.
Figure 1.2 GDP GROWTH ACROSS THE DECADES
SOURCE: Officer and Williamson 2011.
The data show the large reduction in growth that occurred from 1971 to 1980. Some recovery takes place in the 1990s, but severe deterioration in growth occurs in the most recent decade. Clearly, this is not merely a function of the recent recession: the growth rate for 2000 to 2007 is still anemic. Obviously, regulatory expansion is hardly the only factor that affects GDP growth, but the scholarship on the matter leaves no doubt that regulation has taken a toll on the economy.3
Regulating the Regulators
As the newly formed and expanded regulatory agencies followed their congressional mandates and started pumping out new rules, few observers of the political process could believe what they were seeing. According to Eads and Fix (1984, 46–47), President Richard Nixon became so concerned by the unexpected flow of rules from the EPA, an organization his administration had spawned, that he called on OMB director George Shultz to find a way to rein in the regulators. Shultz and the Nixon White House team responded with the Quality of Life Review, located in the OMB, which required agencies to subject regulations to benefit/cost and economic impact analysis—and then to have the newly proposed rules reviewed by OMB officials.
The Quality of Life Review process was the first in a series of presidential initiatives developed to monitor and manage the growth of regulation. Following President Nixon’s move, each subsequent president added new features to the review process that is today managed by the OMB Office of Information and Regulatory Affairs. A recent executive order issued by President Obama added a few important features to the review process, which we will touch on later. But in every case, presidents—who