James d. Gwartney

Exhibit 19: Trading Votes and Passing Counterproductive
Legislation
Net Benefits (+) or Costs (-) to Voters in Equal Size Districts
Votes of Districts
Sports Stadium
Indoor Rainforest
Project
Ethanol Subsidy
Total
A
€100
-€30
-€30
-€40
B
-€30
€100
-€30
-€40
C
-€30
-€30
€100
-€40
D
-€30
-€30
-€30
-€90
E
-€30
-€30
-€30
-€90
Total
-€20
-€20
-€20
-€60
Market exchange is a win-win, positive-sum activity: Both trading partners expect to
gain or the exchange will not occur. In contrast, “political exchange” can be a win-lose,
negative-sum activity, where the voting majority gains but the minority loses more. Here, there
is no assurance that the gains of the winners will exceed the losses imposed on others.

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The tendency of the unrestrained political process to favor well-organized groups helps
explain the presence of many programs that reduce the size of the economic pie. For example,
consider the case of the roughly 20,000 American sugar growers. For many years, the price of
sugar paid by American consumers has been 50 percent to 100 percent higher than the world
sugar price because of the federal government’s price support program and highly restrictive
quotas limiting the import of sugar. As a result of these programs, sugar growers gain
about $1.7 billion, or approximately $85,000 per grower. Most of these benefits are reaped by
large growers whose owners have incomes far above the national average. On the other hand,
sugar consumers pay between $2.9 billion and $3.5 billion, or approximately $25 per
household, in the form of higher sugar prices.
(56)
 As a result, Americans are worse off because
their resources are wasted in producing a good Americans are ill-suited to produce and one that
could be obtained at a substantially lower cost through trade.
Nonetheless, Congress continues to support the sugar program, and it is easy to see
why. Given the sizable impact on their personal wealth, it is perfectly sensible for sugar
growers, particularly the large ones, to use their wealth and political clout to help politicians
who support their interests. This is precisely what they do. During the most recent four-year
election cycle, the sugar lobby contributed more than $16 million to candidates and political-
action committees. A single firm, the American Crystal Sugar Company, gave $1.3 million to
221 members of Congress during this election cycle and spent another $1.4 million lobbying
Congress. In contrast, it would be irrational for the average voter to investigate this issue or
give it any significant weight when deciding for whom to vote. In fact, most voters are
unaware that this program costs them money. Thus, politicians gain by continuing to subsidize
the sugar industry even though the policy wastes resources and reduces the wealth of the
nation.
One could say that the primary business of modern politics is to extract resources from
the general public in order to provide favors to well-organized voting blocs in a manner that
will create a voting majority. Examples abound. Taxpayers and consumers from all over the
world spend their earnings to support specific sectors and thus specific interest groups in their
countries. Comically, the subsidy program, often promoted in the name of the equity, almost
never achieves its goal and often has the opposite effect. In 2014, less than 20 percent of

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Egyptian food subsidies benefited poor people. Gasoline subsidies in most countries benefit the
middle class, while the poor walk or take public transportation. In India, less than 0.1
percent of rural subsidies for Liquefied Petroleum Gas go to the poorest quintile, while 52.6
percent go to the wealthiest. Worldwide, far less than 20 percent of fossil-fuel subsidies benefit
the poorest 20 percent of the population.
(57)
While each of these programs imposes only a
small drag on our economies, together they expand the government budget deficit, waste
resources, and significantly lower our standard of living. The political power of special
interests explains the presence of direct subsidies, tariffs, or quotas on certain products, and all
these kinds of policies are politically motivated to special-interest effect rather than the net
benefits of the overall population.
The special-interest effect also tends to stifle innovation and the competitive process.
Older, more established businesses have built a stronger record of political contributions, have
better knowledge of lobbying techniques, and have developed a closer relationship with
powerful political figures. Predictably, the more mature firms will generally have more
political clout than newer upstarts, and they will use it to deter innovative rivals.
Consider the experience of Uber, which uses technology to bring willing drivers
together with potential ground-transportation passengers. Consumers searching for ground
transportation request cars via their smartphones and the Uber app immediately gives them a
wait time. Uber also provides feedback information about drivers to potential passengers and
vice versa. The technology reduces transaction costs and the process is often faster and cheaper
than traditional taxi service. As Uber has sought to enter markets in large cities throughout the
world, the traditional taxi industry has fought for and often achieved legislation prohibiting the
use of the technology employed by Uber and similar firms seeking to enter this market.
(58)
As a
result, the gains from the innovative technology and expansion in the volume of exchange have
been slowed.
The experience of Tesla, an electric car manufacturer, provides another example of
existing producers using the political process to deter the entry of a newcomer. Tesla’s business
model was based on the sale of its autos directly to consumers. But a well-organized interest
group, the established auto dealers, lobbied state legislatures demanding that they adopt laws
prohibiting manufacturers from selling their cars directly to consumers. Approximately half of

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the states adopted prohibitions on such direct sales. These laws made it much more difficult for
Tesla to enter the auto manufacturing market.
Interestingly, the development of Tesla itself was based on government favoritism.
Tesla received hundreds of millions of dollars in subsidies (grants, government guaranteed
loans, and tax credits) from the federal government to develop and produce its Model S luxury
electric car, which sells for more than $100,000. In 2014, the state of Nevada provided Tesla
with a package of subsidies estimated to be worth $1.3 billion to build a battery-manufacturing
facility near Reno. Tesla will not have to pay any payroll or property taxes for ten years and no
sales taxes for twenty years, and will receive $195 million in “transferable tax credits” that can
be sold to other companies to satisfy their Nevada tax bills.
(59)
 Perhaps there is a lesson here:
Crony businesses that live by government favoritism will sometimes get gored by other crony
businesses with even more political clout.
The framers of the Constitution of the United States were well aware of the problems
arising from the power of special-interest groups. They called the interest groups “factions.”
The Constitution sought to limit pressure from the factions in Article I, Section 8, which
specifies that Congress is to levy only uniform taxes for programs that promote the common
defense and general welfare. This clause was designed to preclude the use of general tax
revenue to provide benefits to subgroups of the population. However, through the years court
decisions and legislative acts have altered its meaning. Thus, as it is currently interpreted, the
Constitution now fails to constrain the political power of well-organized special-interest
groups.

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