Political Protection vs. Markets

April 2, 2004 • Commentary
This article was published in Nation​al​re​view​.com, April 2, 2004.

Most people understand political disagreement in America through the following prism: One party (the Republicans) believes in free markets and letting the economic chips fall where they may. The other party (the Democrats) believes in taking the rough edges off capitalism and providing insurance against the “creative destruction” of well‐​functioning national economies.

If that’s true, however, how can we explain the recent news story concerning publicly owned dams in the west? The contracts that govern the sale of water from the federal projects in California’s Central Valley are up for renewal. A spokesman for the Bureau of Reclamation said that the agency will stand by policies first drafted in the 1940s that give water to farmers at one‐​eighth the price paid offered to urban consumers.

Democrats rightly charge that the administration is avoiding reform to provide benefits to its political supporters. But while Democrats are on the side of markets and “letting the chips fall where they may” in this particular fight, they are no more inclined to let capitalism ravage their favored constituencies than are the Republicans. Teachers’ unions, for example, are important members of the Democratic base, so Democrats resist the introduction of market forces into education through vouchers because it might threaten union jobs.

Both parties, regardless of their rhetorical posturing, want privilege and protection for their political supporters and markets for everyone else.

Politics is the provision of exemptions from market forces. Such policies are wonderful for beneficiaries — who are few in number — and not too great a burden on the rest of us. Costs are diffuse and nearly invisible to those of us paying the higher taxes and consumer prices necessary to keep beneficiaries happy.

This makes policy reform difficult. Recipients of market privileges are well organized, give lots of money to their political champions, and vote en masse against any politician who proposes change. Prospective winners from reform are rarely aware that they would indeed benefit from changing many of these arcane government interventions and, thus, are unlikely to go out of their way to reward politicians looking out for their interest.

We would all be better off if none of us organized politically to gain market privileges. But once one group gets subsidies, preferences, or other forms of exemption from competition, the incentives are for others to organize to do likewise. Refusing to sit at the table of government help simply clears a spot for someone else to eat from the government trough at our expense. In the end, most citizens get something from the political system, but we are all worse off because of the economic inefficiencies that result.

Unfortunately, once everyone is organized and getting market privileges from the government, true reform is almost impossible because it requires everyone to cooperate to give up their privileges at the same time. This requires extraordinary leadership to organize and political trust to keep it from falling apart.

The great tax reform of 1986 is a rare example of success. Lower marginal rates for everyone in return for the elimination of loopholes and exemptions was exemplary public policy. But since then the tax code has again become filled with privileges and exemptions; it seems in retrospect to have been hardly worth the trouble.

The essence of politics is the use of the coercive power of government to take from the general population and give to your supporters in return for votes. So we can concede that Republicans like to give subsidized water to farmers in California’s Central Valley and no amount of effort is likely to dissuade them from doing so. But why not let farmers resell the water at market rates and, perhaps, even stop farming altogether? Granted, the farmers will still receive the wealth transfer from the political system and, in turn, give incumbents their political support — all bad things in an ideal world but tough to change in the real world. But by allowing farmers to sell their water rights (from which they stand to profit more than they would by using that subsidized water to grow rice in the desert), society saves all the wasted resources that would have otherwise gone into farming.

Such creative reform would allow farmers to continue getting something while improving the lot of conservationists and taxpayers. There’s good, creative work to be done for politicians interested in something other than simply rewarding their supporters.

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