Tuesday, March 1, 2016

Political compromise is like collusion, ...

... in that both harm consumers.  Steven Landsburgh's famous essay from The Armchair Economist:

Driving through northwest Washington, D.C., I remarked on the opulence that is so conspicuous in that quarter of the city. My friend Jim Kahn, in the passenger seat, wondered how such great wealth could have accumulated in a city that is notorious for producing almost nothing of value. I was too quick with the obvious cynical response: Most of it is the moral equivalent of stolen, partly through direct taxation and largely through political contributions that constitute the collection arm of a vast protection racket. 

But Jim was quicker than I and saw that according to economic theory, my explanation was not cynical enough. In the presence of competition between the parties, all of those ill-gotten gains should be used to buy votes. If the Republicans are in power, pocketing $100 billion per year, then the Democrats can offer to duplicate Republican policies exactly plus give away another billion per year to key constituents. Unchallenged, this strategy would enable them to buy the next election, pocketing a net $99 billion. But the Republicans would counter by offering to give away an extra $2 billion and settle for $98 billion for themselves. Our experience with competitive markets tells us that there is no end to this bidding war until all excessive profits are competed out of existence. 

When an industry is dominated by two highly profitable firms, theory tells us that if there is no price war then there is probably collusion. In the case of the Republicans and Democrats, the requisite collusion is on display for all to see. It is called bipartisanship. 

When Republican and Democratic legislators meet to "hammer out a compromise," they are engaging in an activity that could land any of their private-sector counterparts in jail. We do not allow the presidents of United and American Airlines to hammer out compromises regarding airfares. Why do we allow the majority and minority leaders of the Congress to hammer out compromises regarding tax policy?

Adam Smith observed that "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." That truth is the basis for the antitrust legislation that attempts to prevent such conspiracies and contrivances from getting off the ground. When the president of United runs into the president of American at a picnic, he is forbidden by law to say "I will not undercut you on the Chicago-to-Los Angeles route provided that you do not undercut me on New York-to-Denver." Yet we allow Republican leaders to greet Democrats with offers like, "I will support housing aid to your urban constituents if you will support agricultural programs for the farmers in my district.”

When people get rich running airlines, I can surmise that it is because they have an extraordinary talent for delivering good air service. When people get rich in the political establishment, I am reluctant to surmise that it is because they have an extraordinary talent for delivering good government. Economics provides an alternative explanation: the absence of political antitrust legislation.

I propose that all political compromise—indeed, all discussion between candidates, officeholders, or officials of competing parties—be fully subject to the same provisions of the Clayton and Sherman Antitrust acts that regulate the activities of every private business in America. I predict that political antitrust legislation will confer on voters the same benefits that economic antitrust legislation confers on consumers. Once the wealth of northwest Washington is depleted by the resulting political price wars, politicians might be forced to compete by offering more efficient government. 


  1. This is a fantastic economic primer for has already turned out to be the craziest election year in my lifetime. And although I would love to agree with all the points regarding political collision in this essay, there are a couple of misnomers i’d like to call out.

    As it relates to corporate collusion, both parties stand to benefit by achieving higher profits. But in the case of bipartisanship, specifically the example cited in the essay regarding urban housing aid and rural farming aid, it is unclear how either of the politicians benefits financially? In fact, if their bipartisan deal making leads to concessions for their constituents, those citizens are the real winners.

    Clinics would say, as the article points out, that politicians benefit directly from these deals because as a result their benefactors donate more their coffers. But that in and of itself is not illegal in any way. It’s not a perfect system, but until the entire system is overhauled, which is highly unlikely, those that best play the game within the rules stand to benefit the most.

  2. The economics view of politics is even more cynical than most people’s view of the activities going on in Washington, D.C. When Republicans and Democrats hammer out a compromise on different policies, it is applauded as cooperation and working together to get the job done; furthermore, gridlock and a lack of working together is what makes the American public dislike government. In the private sector, however, it would land business leaders in prison for violating antitrust laws. Looking at political compromise under the economics lens of collusion would seem to demonstrate that working together and negotiating may not be best for the American people. Price fixing and volume limits are illegal in the private sector because they hurt customers and artificially drive up prices. Would subjecting political leaders to the same provisions of the Clayton and Sherman Antitrust Acts create as much of a benefit for the American people as the acts do in the private sector? Would it actually create “price wars” that would force politicians to compete for more effective government? I’m not sure it would. Since laws have to pass with a majority of votes and then be signed by the president, there needs to be come sort of compromise to get enough votes. There are fundamentally different beliefs when it comes to tax policy, and without compromise, it is possible that nothing would be accomplished. If we were in a true direct democracy, it might be possible, but since that is not the case, perhaps, political “collusion” might be the only way to keep the country moving forward.