Bootleggers’ Delights

In the name of "stimulus," Washington is radically broadening its supervision of the economy, so it is time to ponder the paradox of the Baptists and the bootleggers: When politicians ban Sunday liquor sales, they please Baptists by purifying the Lord's Day, and they please bootleggers by stimulating demand for the bootleggers' services. So Baptists praise politicians who do something that enriches bootleggers, who give some of their riches to the politicians in campaign contributions.

This lovely lesson about government regulation comes from Bruce Yandle, a Clemson University economist who argues that many well-intentioned regulations have the equivalent of bootleggers in the background—self-interested and sometimes unsavory factions that make money from the good intentions of others. Russell Roberts, a George Mason University economist, says the moral of the story is that an asymmetry of attention makes the political world go 'round: Normal voters have lives to lead and so pay little attention to the actual workings of the government interventions that they applaud. Bootleggers, however, have a lucrative stake in the interventions, so they pay close attention to the details, wherein the Devil lurks. Consider, for example, two sorts of smoking, that of smokestacks and that of cigarettes.

In the 1970s, Roberts says, sulfur dioxide emitted by Midwestern power plants caused acid rain to fall on the Northeast. Encouraged by environmentalists, the public demanded cleaner air. The most efficient way to get less of something is to make it more expensive, so the obvious solution was to tax smokestack emissions. "But Congress didn't impose a tax," Roberts says, "it imposed a technology."

It required extremely expensive scrubbers on every utility's smokestacks, the costs of which were passed on to consumers of electricity. The air became cleaner, and scrubber manufacturers, who joined environmentalists in lobbying for the requirement, became richer. The environmentalists were the Baptists, the manufacturers were bootleggers, sort of.

But the biggest bootleggers were West Virginia coal companies. A tax would have been an efficient incentive to burn the cleanest coal, much of which comes from the West. By pushing the requirement that utilities use scrubbers, Senator Robert Byrd of West Virginia was able to preserve the market for West Virginia's dirtier—high sulfur—coal. Hence, says Roberts, improved air quality was purchased at an unnecessarily high price. Environmentalists felt good and the West Virginia coal companies did well.

Politics continues to make similarly strange bedfellows concerning tobacco. Last month, before this Congress turned to stimulating us back to prosperity, it rushed to expand the State Children's Health Insurance Program. Begun in 1996, SCHIP was supposed to subsidize health care for families not poor enough for Medicaid but not affluent enough to purchase health insurance unassisted. Hitherto it was pretty much confined to families with incomes no higher than 200 percent of the poverty line. That has now been raised to 300 percent, and by various complex (hence undecipherable by the inattentive) provisions, some families with incomes of $125,000 a year will be eligible for SCHIP subsidies. This will be paid for, in part, by a whopping increase in the federal cigarette tax, from 39 cents to $1.01 per pack.

So in the name of improving health care, government has increased its stake in making sure that lots of people continue to smoke. The Baptists in the ongoing "punishment" of tobacco companies are the majority of Americans who want to help children and hurt Big Tobacco. The bootleggers? Well.

They include the trial lawyers, who are still harvesting billions from their participation in the Master Settlement Agreement of 1998, under which tobacco companies agreed to pay $206 billion over 25 years to compensate states for the costs of caring for people with smoking-related illnesses. Other bootleggers included the "punished" tobacco companies.

Most of their increased tax burden is paid by the 21 percent of Americans (disproportionately low-income people) who smoke. They pay most of the tax, which is passed along in the price of a pack. And although price increases have decreased the tobacco companies' sales, the settlement makes it difficult for generic brands to expand their market share or for new entrants to enter the cigarette market. So Big Tobacco's profit margins and profits have increased.

And now Washington is, like the states, addicted to tobacco-tax revenues. So Washington must carefully calibrate the tobacco tax, keeping it high enough to provide a reliable revenue stream for ongoing programs, but not so high that it jeopardizes those programs by depressing smoking "too much." The average state tax is $1.19 per pack, and at least 16 states are thinking about increasing their tobacco taxes to help their ailing budgets. But because of the increased federal tax to fund SCHIP, states have less latitude to increase their tobacco taxes.

State taxes range from 7 cents per pack in South Carolina to $2.75 in New York. Surely there is a black market in New York selling cigarettes trucked in from South Carolina. What should we call the people running that market? Bootleggers.