Are Interest Groups the Source of Our Economic Woes?

David Leonhardt’s New York Times Magazine piece on how to transform (not just stimulate) the American economy is worth reading. But I don’t share his enthusiasm for Mancur Olson’s explanation of national economic success.

Firms, workers, and citizens tend to organize in interest groups, and those groups sometimes obstruct markets and solicit government favors that benefit themselves at the expense of the larger society. Olson argued, in a 1982 book titled The Rise and Decline of Nations, that in democratic countries such groups grow increasingly powerful over time. Regulations, tax preferences, and government expenditures end up more and more directed toward these special interests rather than the general interest. Economic growth suffers. (The theory is a bit more complicated than that, but I’ll set the complexities aside here.)

Leonhardt says this helps us understand why economic growth in the U.S. has been slower than we’d like it to be. He endorses Olson’s sentiment that what’s needed is to periodically weaken interest groups’ strength and influence.

Olson’s hypothesis seems sensible enough. The trouble is, it’s difficult to find supportive evidence. Leonhardt, like Olson, looks to the experiences of rich nations. He contrasts the United Kingdom with Germany and Japan:

England’s crisis was the Winter of Discontent, in 1978-79, when strikes paralyzed the country and many public services shut down. The resulting furor helped elect Margaret Thatcher as prime minister and allowed her to sweep away some of the old order. Her laissez-faire reforms were flawed in some important ways … and they weren’t the only reason for England’s turnaround. But they made a difference. In the 30 years since her election, England has grown faster than Germany or Japan.

It’s helpful to broaden the comparison to include other countries. Olson suggested we assess his theory based on the timing of the last major societal disruption each country experienced. The longer the period since a disruption, the more powerful interest groups will be and hence the slower the rate of economic growth. The following chart uses this measure (based on a scoring by Erich Weede), with an update to account for the Thatcher disruption in the U.K., Reagan’s in the United States, and a similar one in New Zealand beginning in the late 1980s. Economic growth needs to be adjusted for the catchup effect, whereby nations with lower per capita GDP grow more rapidly simply by virtue of borrowing technology from richer countries. The chart shows catchup-adjusted economic growth in twenty nations since 1973, when the postwar “golden age” of rapid growth for all countries ended. Olson’s hypothesis predicts a positive association. But it isn’t there.

The level of unionization is another indicator Olson used in assessing his theory. Here Olson’s hypothesis predicts a negative association. It too doesn’t pan out.

Olson’s interest group account of economic success and failure may have some merit. But it offers little help, if any, in understanding economic growth patterns over the past few decades.

6 thoughts on “Are Interest Groups the Source of Our Economic Woes?

  1. Maybe I’m a bit of an innocent here, but why is the phrase “special interests” (as a pejorative) generally refer only to social interests like unions, illness affinity groups, cultural groups and intellectual/scientific associations?

    It seems to me that associations of CEOs, chemical manufacturers, arms manufacturers, money jugglers and other well-funded interests are far more likely to distort statutes and tax systems and their economic environment. I believe we have seen this demonstrated.

    Noni

  2. adam smith anticipated the problem of special interest groups when he demonstrated contradictory incentives of self interest that work against each other as the basis of the wealth of nations

    one incentive was portrayed to improve one’s welfare in one’s self interest independent of others’ welfare, while the other acts to obstruct that outcome for others, in order to improve one’s own welfare

    the first case represents pure growth from a libertarian perspective of unhindered pursuit of self interest with no necessary trade-offs, while the second case represents impediments to that growth by special interests

    smith’s warning of the second case implied interference which would prevent the first case from resulting in maximum growth, the latter dependent on unified forces of self interest, competition and free markets which worked together to form the invisible hand

    in other words, back then, competition and free markets meant the same thing (to smith) as desirable outcomes of the pursuit of self interest which drove resources to their highest valued use – in contrast to now, where monopoly capitalism has emerged as the vulgarized version of free markets and competition, both undermined by special interests whether through private market power or public manipulation

  3. If you accept 1973 as the flashpoint (the data appears to support 1967/8 as well, but the economists’s consensus is currently clear), then there is an Obvious Cause: floating FX rates.

    Changing the off-diagonal data in the covariance matrix from zero (so that it was subject to Slutsky effects) intuitively should impede direct growth measures.

    (I am in no way against floating FX rates; they’re both a weapon in the arsenal, and an indicator of confidence and a good thing–ask the “I want to be paid in Swiss Francs” crowd. But if you’re looking for cause and effect, it seems that Changing the Rules would have more of an effect than “special interest groups” [especially since RE translates to “I got mine Jack”].)

  4. I don’t think interest groups are the problem so much as how they are used by policy-makers. Oil was still being subsidized with tax breaks while it hit $150/barrel. Ideally there would be sunset clauses in policy. An oil tax break until profits reach a certain threshhold.

    I view the lobby heuristic as:
    1) Someone screens the lobby applications to Congress or whoever.
    2) The application explains how a certain policy shift does more good than harm, and Congress verifies the analysis.
    3) Either the lobby bill is discovered to be able to overcome its own transaction costs and still do good, and is passed. Or not, or it is close and is rewritten.

    Right now pork scales with lobby budget. IDK where things are getting screwed up…media could help educate Americans to screen #1 better. Alot of administrative work that prevents Congress from analysing the bill especially under a deadline.

    What I’m saying is that when Bills are passed now, not including sunset clauses results in inertia and sweeps the hard part of how to re-evaluate the bill under the rug. When you look at cutting stuff, you have to relearn why a Bill was passed all over again (which is great if you get paid 6 figures to plagerize history).

  5. Can it really be that France has a lower unionization rate than the US, as indicated by the last chart?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s