Jefferson’s beautiful and powerful words from the Declaration of Independence set out a fundamental premise for the founding of the new nation. Governments are organized to secure the rights of men to pursue happiness, not to provide them with happiness.

Derek Bok speaks to this point in the opening chapter of The Politics of Happiness, but strays beyond Jefferson’s fence lines when he asks what government can learn from new happiness research that might be adapted to national policy actions. To suggest that government learns, as indicated by the book’s subtitle, is to assign a misplaced concreteness to the institution itself. People learn. And people participate in government. But governments seemingly never learn.

For those who have not become engaged in happiness research, Bok provides a well-organized survey. But disappointment awaits those who expect to find evidence of the emergence of a coherent field, characterized by clearly stated theories that evince refutable hypotheses and generalized findings. Instead one finds an array of ad hoc studies that, typical of fledgling fields of study, may offer insights. For example Bok puzzles over the finding that white women were happier than white men for many years, based on happiness surveys, but that their level of happiness has fallen relatively in recent years, even while career opportunities have improved. In contrast, black women have kept pace with black men in their level of happiness and unlike white women have not become unhappier. But the author offers no discussion of multivariable modeling with control variables that might help clear the air a bit.

Another difficulty relates to whether happiness scales are cardinal as opposed to ordinal rankings and can thus be compared across experiments. For example the effects of divorce or separation are found to generate on average an eight-point drop in happiness, on a scale of 100. Loss of a job generates a drop of six points, and belief in God, for Americans at least, lifts the level of happiness by 3.5 points. While all this is somewhat interesting, it isn’t likely, in a methodological sense, that one would expect a person who has lost his job and his wife but has found God to have a net loss of 10.5 units of happiness.

Bok is aware of some of these difficulties and discusses them in terms of Jeremy Bentham’s felicific happiness. He is cautious in recommending that government attempt to assess the happiness weight of pending legislation such as the complex health care package. However, he is not bashful in urging government to build new “happiness protection,” for example, by covering the cost of long-term home nursing care for everyone. While noting that such policies are costly, Bok indicates that cost shouldn’t stand in the way of doing them. He never discusses government deficits nor debt, and how dealing with those burdens may reduce the happiness of future generations.

The book offers numerous suggestions to government leaders for policy actions that might make us all happier—instead of letting us find happiness on our own terms. The areas explored include reducing inequality, blunting the threat of financial hardship and other suffering, engaging in efforts to strengthen marriages and the family, and supporting education. Bok’s abiding faith in government’s ability to make life better is contradicted by the surveys he discusses. With that apparent paradox in mind, he recommends improvement in government’s public relations efforts. He is convinced that over the decades, the federal government has improved overall well-being, yet somehow the same people who respond to happiness surveys in useful and apparently accurate ways miss the boat when responding to surveys about the efficacy of government.

The author ends with the claim that “researchers have succeeded in doing what Bentham could not accomplish: to devise a way of measuring how happy people are and how much pleasure or pain they derive from the ordinary events and conditions of their lives.” I am left with just the opposite conclusion, that happiness scientists have many miles to travel before reaching Bentham’s hoped-for destination.

In spite of Bok’s overly optimistic conclusion, I find his book to be useful and one I would recommend to others who wish to tangle intellectually with the happiness literature. At least Bok’s belief in government’s ability to do good things is balanced with competing points of view that take the opposing position.

Later the President explained there would be a $5,000 tax credit for employing an additional worker, forgiveness of the employer’s 6.2 percent portion of Social Security payroll taxes for newly added salaries and other salary increases, an end to capital gains on investment, and continuation of rapid write-offs for new capital investment, all to be targeted to businesses with 50 or fewer workers.

Mr. Obama was right to be concerned about small businesses. According to ADP’s latest report, firms with fewer than 50 workers employed some 48 million people in December 2009; those with more than 50 had 60 million on the payroll. So America’s small businesses employ close to half the workers in the economy. But their hiring plans have been decidedly bleak.

On first hearing the President’s message, and captured by the moment, I shouted out, “Right on! Now we are getting somewhere.” According to press reports, I was not alone in my enthusiastic reaction. John Arensmeyer, CEO of Small Business Majority, happily said, “These tax credits are simple and straightforward, and will support small businesses to generate the jobs Americans so desperately need. And they’ll start doing it now.”

My response must have come from a stored-up love for small businesses that goes back more than 40 years. But after settling back in my chair, I had other thoughts on the matter. Let me explain.

For some 15 years, starting when I was still a college student in 1952, I was a part-owner of a small business enterprise, which in 1967 had about 50 employees. As corny as it may sound, I still remember what it takes to make a payroll on Friday night. I understand how hard it is to generate enough additional dependable business to add just one more employee. And I know how great it feels to bring one on and to introduce the new employee to the team members he or she will join. I also know how much it hurts everyone in the firm to cut back, to have to fire a good worker because business has fallen off. Because of the pain that goes with layoffs, I know how careful one will be before hiring another worker. In the case of small business, that person is likely to be a friend, former colleague, or family member. Also, if the firm employs ten people, which is common, adding one more amounts to a 10 percent increase in personnel. And that ain’t hay, especially in a recession when you are not sure if the next month will be your last.

I hope that some of Mr. Obama’s close advisers know these things as well as, if not better than, I do. I am betting they do.

No one in his right mind wants to bring on a new employee only to face the plight of having to pass out more pink slips. Before hiring that one person I would want to see a lot of black ink on the operating statement, not just one or two profitable months. Because of this, I don’t think a $5,000 tax credit will get the job done. What we need is some certainty.

This seemed to be a base concern when Susan Eckerly, senior vice president, federal public policy, of the National Federation of Independent Business, was asked about the Obama tax credit. She indicated that small businesses wouldn’t start hiring until earnings improved. “An employer is unlikely to hire someone just to get a $5,000 credit,” she said. When I read Eckerly’s comments I was reminded of a wise guy’s response to tax incentives that allowed a firm to “to take it off your income tax.” The response: “First off, I’ve got to have income.”

Obama wants to see one million new employees added to the ranks of America’s small businesses. I do as well. But adding just one new full-time hire when your toes can barely touch the bottom in a recession’s deep end is risky business, and for one major reason. At this point there is no way to know what really lies ahead; there is no way to distinguish between stimulus and the real economy. Too many policy boulders are being dropped in the water. One can hardly determine the effects of one before another one is thrown in the pool.

There was stimulus one. Then stimulus two. And now talk of stimulus three. There was TARP. Cash for Clunkers. Cash for Appliances. First-Time Homebuyer tax credits. Health care revision. Copenhagen. Cap and trade. Jobs programs. Financial reform. Each announced in short succession. The effects of some of these programs are so large that they are readily seen in GDP and construction data. By some counts, about half of 2009’s fourth quarter 5.7 percent GDP growth is explained by Cash for Clunkers, a program that came on like gangbusters and then faded into oblivion.

Imagine yourself as owner of a small business with 20 employees who’s trying to decide if you should build up inventories again, hire one or two people, and lease another pickup truck. Would you make your decision on the basis of the fourth-quarter GDP numbers? Would you base your plans on the explosion of existing home sales that followed the First-Time Homebuyer stimulus? Most likely not. I’ll bet you would wait so that you could get a better fix on the real economy.

Perhaps we need six months of political silence.

When I think about the situation and Mr. Obama’s proposal, I wonder if it might be better to expand the noble elements of his idea to all businesses, small and large, and do so permanently. Instead of having a complicated jobs-based tax system, why not just cut the marginal tax rate? And instead of allowing a temporary moratorium on capital gains taxes for small businesses, why not just abolish capital gains taxes for all businesses? Doing this would put an end to trying to determine what is stimulus and what is real and what may change at the end of the year.

There is a supply side to the economy that wants to spring forward. A growing economy will produce more jobs. This is the time to give a nudge and then stand back and let the real economy recover.

Maybe they do get it. Maybe, just maybe, we, the electorate, and our political representatives are the ones who don’t get it.

Bailout Incentives

The current outrage about banker behavior coming from Mr. Obama and the White House brings back memories of my own behavior when my two teenage boys were regularly coming home late at night in the family’s second car with just enough gas fumes left in the tank to make it down the driveway. “When are you going to understand?” I would shout the next morning after being frustrated in an attempt to get a car out of the driveway to get to work. “Why do you have to be so selfish? Don’t you know there are other people in the family who need to be able to get around, too? Don’t you get it?”

After giving one more sanctimonious lecture to them about caring for others, we would go our separate ways–until the next time, when the car ran out of gas with one of the boys halfway home from town.

You see, trying to be a providential father, I had a rule about gasoline. I provided one tank of gas a week for my two sons’ use. And they used every drop of it.

After a few more gas-outs, I began to get it. Instead of ranting and raving about their selfish behavior, I changed the rule. I began giving them the dollar equivalent of a tank of gasoline each week. Guess what? No more out-of-gas car in the driveway. No more running out of gas on the way home. In fact, they pretty much quit using the car. They walked or called a friend to pick them up.

They had money, and money was better than gasoline. And when there was a gas-out, they paid. Finally, I really got smart. Welfare turned to workfare. Many of my problems about gas and cars went away.

The problem for Obama with the bankers is a lot like the situation I faced with my sons. It’s about bailout incentives. This is not a story about good and evil, or selfish and unselfish behavior at all, even though casting it that way plays well on the hustings.

Cousin Jack’s Shack

Economists and others call the problem “moral hazard,” but let’s not get caught up in jargon. The essence of the problem is captured in the lyrics of Irving Berlin’s 1940s’ song, “Doin’ What Comes Natur’lly.” The relevant refrain goes like this:

Cousin Jack insured his shack
And now he plays with matches
He’ll collect just wait and see
Doin’ what comes natur’lly
Doin’ what comes natur’lly

Of course, no fire insurance company will write a policy that covers the full replacement cost of a home or shack. The owner must bear a substantial part of the risk; he must coinsure. Insurance companies are also pretty careful about writing a policy in the first place. Casualty insurance contracts are short, and if the risks are high and the exposure large, the insurance folks will be around frequently to inspect and give instructions about how to behave. (But of course, all this tends to change when the insurance companies get government bailouts.)

Consider some of the institutions surrounding consumer banking. Yes, there is FDIC insurance, and yes, FDIC regulators check frequently in attempts to make certain the car does not run out of gas. But no bank voluntarily buys deposit insurance; banks are required to buy it. And there is no competition for the business. Before the days of government deposit insurance, the owners of the banks were personally liable to depositors; they often listed their personal guarantees in bank advertisements. Then, up until the 1980s, there were state-operated deposit insurance companies as well as the federal program that began in the Great Depression, but the state programs got in trouble too.

Government insurance companies are usually not price-savvy; they do not respond to shareholders; they pay no shareholder dividends; they hardly ever modulate insurance premiums to reflect risky behavior; they do not run the risk of being taken over by other firms as a result of financial market monitoring. In short, these institutions are not bottom-line driven; they face no bankruptcy constraints. The FDIC is a political creature living in a commercial halfway house.

When the deposit institutions got in trouble in the 1980s, the politicians gave them another tank of gas, and they tended to use it. To make matters worse, following the great 2007 credit-market meltdown, the politicians doubled the gas allocation. And deposit institutions responded accordingly. They wanted to drive a bit faster and more often, which is to say they tended to take on more risk. In an effort to offset the risky behavior, the regulators came around more frequently and frowned a lot more. Now the FDIC is mandating higher premiums paid three years in advance in an effort to cover Cousin Jack’s adverse behavior.

The presence of government-provided deposit insurance is the alpha, but certainly not the omega, of all that is troublesome with banking. In fact, even though deposit insurance guarantees the bulk of deposit institutions’ liabilities, the effects on Cousin Jack’s careless behavior begin to pale when compared with TARP and TARP-related events.

An Odd Kind of Regulated Public Utility

As noted, once the credit-market crisis came, government responded first by upping the ante on deposit insurance. That quieted the depositors’ panic, and Cousin Jack relaxed a bit. Then the politically elected and appointed rolled out a green carpet to troubled institutions with injections of cash, arranged marriages between strong and weaker firms–and, to make matters worse, began paying interest on the reserves provided. The banks got a 100 percent sure thing with interest. Cousin Jack was assured that gas would be no problem. So why not take the family on a much-needed vacation? Bonuses and pay became an issue.

With incentives askew and bankers responding predictably, Obama frowned, gave the bankers sanctimonious lectures, and ordered his pay czar and the Federal Reserve chief to put the screws on executive pay. He then said the bankers needed to pay a tax on their uninsured liabilities, just to keep them honest. U.S. banks now face a complex of regulatory spaghetti. What they can lend, how they lend, and to whom they lend are regulated with greater stringency. How they pay and how much they pay is regulated. How much and what kind of debt they incur are regulated. And most recently, what they do with excess capital to increase earnings is further regulated. Yet while the spaghetti thickens, there is a lot of uncertainty as to which financial institutions will get caught in the mix, when, and how. Regulatory uncertainty takes its toll on decision-makers: If in doubt, keep quiet, lay low, and avoid risk. The banks are on the way to becoming a strange breed of regulated public utilities without the benefit of due process.

There is talk about financial institution reform, but so far, I’ve heard no conversation about letting the boys buy their own gasoline.

Later the President explained there would be a $5,000 tax credit for employing an additional worker, forgiveness of the employer’s 6.2 percent portion of Social Security payroll taxes for newly added salaries and other salary increases, an end to capital gains on investment, and continuation of rapid write-offs for new capital investment, all to be targeted to business with 50 or fewer workers.

Mr. Obama was right to be concerned about small businesses. According to ADP’s latest report, firms with fewer than 50 workers employed some 48 million in December 2009; those hiring more than 50 had 60 million on the payroll.  So America’s  small businesses employ close to half the workers in the economy.  But their hiring plans now are decidedly bleak.

On first hearing the President’s message, and captured by the moment, I shouted out, “Right on!  Now we are getting somewhere.”  According to press reports, I was not alone in my enthusiastic reaction. John Arensmeyer, CEO of Small Business Majority, happily said, “These tax credits are simple and straightforward, and will support small businesses to generate the jobs Americans so desperately need. And they’ll start doing it now.”

My response must have come from a stored-up love for small businesses that goes back more than 40 years.  But after settling back in my chair, I had other thoughts on the matter.  Let me explain.

For some 15 years, starting when I was still a college student in 1952 to 1967, I was a part- owner of a small business enterprise, which in 1967 had about 50 employees.  As corny as it may sound, I still remember what it takes to make a payroll on Friday night.  I understand how hard it is to generate enough additional dependable business to add just one more employee. And I know how great it feels to bring one on and to introduce the new employee to the team members he or she will join.  I also know how much it hurts everyone in the firm to cut back, to have to fire a good worker because business has fallen off.  Because of the pain that goes with layoffs, I know how careful one will be before hiring another worker. In the case of small business, that person is likely to be a friend, former colleague or family member. Also, if the firm employs ten people, which is common, adding one more amounts to a 10 percent increase in personnel.  And that ain’t hay, especially in a recession when you are not sure if the next month will be your last.

I hope that some of Mr. Obama’s close advisers know these things as well as, if not better than, I.  I am betting they do.

No one in his right mind wants to bring on a new employee only to face the plight of having to pass out more pink slips.  Before hiring that one person I would want to see a lot of black ink on the operating statement, not just one or two profitable months.  Because of this, I don’t think a $5,000 tax credit will get the job done.   What we need is some certainty.

This seemed to be a base concern when Susan Eckerly, senior vice president, federal public policy, of the National Federation of Independent Business, was asked about the Obama tax credit.  She indicated that small businesses wouldn’t start hiring until earnings improved.  “An employer is unlikely to hire someone just to get a $5,000 credit,” she said.  When I read Eckerly’s comments I was reminded of a wise guy’s response to tax incentives that allowed a firm to “to take it off your income tax.”  The response:  “First off, I’ve got to have income.”

Too Many Boulders

Mr. Obama wants to see one million new employees added to the ranks of America’s small businesses.  I do as well. But adding just one new full-time hire when your toes can barely touch the bottom in a recession’s deep end is risky business, and for one major reason.  In February 2010 there is no way to know what really lies ahead; there is no way to distinguish between stimulus and the real economy.  Too many policy boulders are being dropped in the water.  One can hardly determine the effects of one before another one is thrown in the pool.

There is stimulus one.  Then stimulus two.  And now talk of stimulus three.  There is TARP.  Cash for Clunkers.  Cash for Appliances.  First home buyers tax credits. Health care revision.  Copenhagen.  Cap and  trade.  Jobs programs.  Financial reform.  Each announced in short succession.  The effects of some of these programs are so large that they are readily seen in GDP and construction data.  By some counts, about half of 2009’s fourth quarter 5.7 percent GDP growth is explained by Cash for Clunkers, a program that came on like gang busters and then faded into oblivion.

Imagine yourself as owner of a small business with 20 employees.  You are trying to decide if you should build up inventories again, hire one or two people, and lease another pickup truck.  Would you make your decision on the basis of the fourth quarter GDP numbers?  Would you base your plans on the explosion of existing home sales that followed the first-home-buyer stimulus?  Most likely not.  I’ll bet you would wait so that you could get a better fix on the real economy.

Perhaps we need six months of political silence.

When I think about the situation and Mr. Obama’s proposal, I wonder if it might be better to expand the noble elements of his idea to all businesses, small and large, and do so permanently.  Instead of having a complicated jobs-based tax system, why not just cut the marginal tax rate?  And instead of allowing a temporary moratorium on capital gains taxes for small business, why not just abolish capital gains taxes for all businesses.  Doing this would put an end to trying to determine what is stimulus and what is real and what may change at the end of the year.

There is a supply side to the economy that wants to spring forward.  A growing economy will produce more jobs and more tax revenue.  This is the time to give a nudge and then stand back and let the real economy recover.

Maybe they do get it.  Maybe, just maybe, we, the electorate, and our political representatives are the ones who don’t get it.

Lessons from Gasoline and Teenage Boys

The current outrage about banker behavior coming from Mr. Obama and the White House brings back memories of my own behavior when my two teenage boys were regularly coming home late at night in the family’s second car with just enough gas fumes left in the tank to make it down the driveway.  “When are you going to understand”? I shouted the next morning after being frustrated in an attempt to get a car out of the driveway to get to work. “Why do you have to be so selfish?  “Don’t you know there are other people in the family who need to be able to get around, too?   “Don’t you get it?”

After giving one more sanctimonious lecture to them about caring for others, we would go our separate ways –until the next time, when the car ran out gas with one of the boys halfway home from town.

You see, trying to be a providential father, I had a rule about gasoline.  I provided one tank of gas a week for my two sons’ use.  And they used every drop of it.

After a few more gas-outs, I began to get it. Instead of ranting and raving about their selfish behavior, I changed the rule.  I began giving them the dollar equivalent of a tank of gasoline each week.  Guess what?  No more out-of-gas car in the driveway.  No more running out of gas on the way home.  In fact, they pretty much quit using the car.  They walked or called a friend to pick them up.

They had money, and money was better than gasoline.  And when there was a gas-out, they paid.   Finally, I really got smart.  Welfare turned to workfare.  Many of my problems about gas and cars went away.  But of course, there were always other wonderful challenges that remained to make family life interesting.

The problem for Mr. Obama with the bankers is a lot like the situation I faced with my sons.  It’s about bail-out incentives.  This is not a story about good and evil, or selfish and unselfish behavior at all. Even though casting it that way plays well on the hustings.

Cousin Jack’s Shack

Economists and others call the problem moral hazard, but let’s not get caught up in jargon.  The essence of the problem is captured in the lyrics of Irving Berlin’s 1940s’ song, “Doin’ What Comes Natur’lly.”  The relevant refrain goes like this:

Cousin Jack insured his shack
And now he plays with matches
He’ll collect just wait and see
Doin’ what comes natur’lly
Doin’ what comes natur’lly

Of course, no fire insurance company will write a policy that covers the full replacement cost of a home or shack.  The owner must bear a substantial part of the risk; he must coinsure. Insurance companies are also pretty careful about writing a policy in the first place.  Casualty insurance contracts are short, and if the risks are high and the exposure large, the insurance folks will be around frequently to inspect and give instructions about how to behave.  (But of course, all this tends to change when the insurance companies get government bail outs.)

Consider some of the institutions surrounding consumer banking.  Yes, there is FDIC insurance, and yes, FDIC regulators check frequently in attempts to make certain the car does not run out of gas.  But no bank voluntarily buys deposit insurance; banks are required to buy it.  And there is no competition for the business.  Before the days of government deposit insurance, the owners of the banks were personally liable to depositors; they often listed their personal guarantees in bank advertisements.  Then, up until the 1980s, there were state-operated deposit insurance companies options as well as the federal program that began in the Great Depression, but the state programs got in trouble too.

Government insurance companies are usually not price savvy; they do not respond to shareholders; they pay no shareholder dividends; they hardly ever modulate insurance premiums to reflect risky behavior;  they do not run the risk of being taken over by other firms as result of financial market monitoring. In short, these institutions are not bottom-line driven; they face no bankruptcy constraints.  The FDIC is a political creature living in a commercial halfway house.

When the deposit institutions got in trouble in the 1980s, the politicians gave them another tank of gas, and they tended to use it.  To make matters worse, following the 2007 great credit-market meltdown, the politicians doubled the gas allocation.  And deposit institutions responded accordingly.  They wanted to drive a bit faster and more often, which is to say they tended to take on more risk. In an effort to offset the risky behavior, the regulators came around more frequently and frowned a lot more. Now the FDIC is mandating higher premiums paid three years in advance in an effort to cover Cousin Jack’s adverse behavior.

The presence of government-provided deposit insurance is the alpha, but certainly not the omega, of all that is troublesome with banking. In fact, even though deposit insurance guarantees the bulk of deposit institutions’ liabilities, the effects on Cousin Jack’s careless behavior begin to pale when compared with TARP and TARP-related events.

Turning Banks to an Odd Kind of Regulated Public Utility

Once the credit-market crisis came, government responded first by upping the ante on deposit insurance.  That quieted the depositors’ panic, and Cousin Jack relaxed a bit.  Then, the politically elected and appointed rolled out a green carpet to troubled institutions with injections of cash, arranged marriages between strong and weaker firms, and, to make matters worse, began paying interest on the reserves provided.  The banks got a 100 percent sure thing with interest. Cousin Jack was assured that gas would be no problem.  So why not take the family on a much needed vacation?  Bonuses and pay became an issue.

With incentives askew and bankers responding predictably, Mr. Obama frowned, gave the bankers sanctimonious lectures, and ordered his pay czar and the Federal Reserve chief to put the screws on executive pay. He then said the bankers needed to pay a tax on their uninsured liabilities, just to keep them honest. U.S. banks now face a complex of regulatory spaghetti.  What they can lend, how they lend, and to whom they lend is regulated with greater stringency.  How they pay and how much they pay is regulated.  How much debt, and what kind of debt they incur is regulated.  And most recently, what they do with excess capital to increase earnings is further regulated.  Yet while the spaghetti thickens, there is a lot of uncertainty as to which financial institutions will get caught in the mix, and when, and how. Regulatory uncertainty takes its toll on decision makers; if in doubt, keep quiet, lay low, and avoid risk.  The banks are on the way to becoming a strange breed of regulated public utilities without the benefit of due process.

There is talk about financial institution reform, but so far, I’ve heard no conversation about letting the boys buy their own gasoline.

In an earlier comment on the fracturing of the U.S. Climate Action Partnership (USCAP), an industry-environmentalist coalition pushing for cap-and-trade carbon emission controls, Environmental Defense Fund president Fred Krupp repeated a commonly held misconception about government regulation when he said: “It’s very unusual for big corporations to raise their hands and say, ‘We want to be regulated for something that we’re not regulated for now.’” Exelon, PG&E, and PNM apparently make his point.

But as a matter of fact, industry support of regulation is not rare at all; indeed, it is the norm. And in the United States it is as American as apple pie.

Historical Examples

A somewhat casual investigation of business history reveals that it was the U.S. Chamber of Commerce, with the special assistance of General Electric president Gerard Swope, that supported passage of President Roosevelt’s 1933 National Industrial Recovery Act. The Act, with its Blue Eagle codes affecting 2.3 million employers, attempted to place all American industry in a price-fixing cartel. But while the Chamber and many large firms supported FDR’s cartel, many other firms, including Ford Motor Company, did not.

Going back further, we are reminded by Howard Marvel, writing in the 1977 Journal of Law and Economics, that it was the owners of the newly built water-powered textile plants that supported the English Factory Acts (1802 and on), not the owners of older mills that used far more labor per unit of output. The legislation limited child labor and hours and conditions of work, which raised the costs of labor-intensive producers. The industrialists who joined with other crusaders to support the legislation are remembered as philanthropists.

In 1907 it was the electric utility industry, led by Samuel Insull, that lobbied for state regulation in the hopes of escaping less predictable and intractable municipal control. In 1910 American Telephone and Telegraph Company chairman Theodore Vail successfully called for federal regulation of long-distance telephone calling just when the Bell patents were expiring and new competition was, as he put it, “skimming the cream” from the market. Even the Magna Carta (line 35) specifies a standard width for all cloth sold in the kingdom—all in the name of consumer protection, scholars tell us. The standard happened to be the width of looms operated by the London weavers. The less fortunate Bristol weavers had to break and modify their looms to compete.

A focus on environmental regulation reveals a host of Bootleggers and Baptists who have coalesced, sometimes quietly, to support output restrictions. In hearings before passage of the 1972 federal Water Pollution Control Act, industrialists located along the Ohio River argued for the law. They faced pollution controls imposed by the Ohio River Sanitation Commission and wanted a national level playing field. Only federal regulation would solve their problem, and they supported it. It was the coal interests in Ohio and West Virginia, along with environmentalists, that lobbied for the 1990 Clean Air Act amendments requiring scrubbers on newly built and modified coal-fired electric utilities. As Bruce Ackerman and William Hassler famously noted in their 1981 book, Clean Coal/Dirty Air, the scrubber requirements eliminated the clean-burn advantage of western coal and kept the eastern coal producers happily burning their higher-sulphur coal.

Yes, industry support of legislation that imposes restrictions on output is commonplace, but one begins to understand this more fully after careful scrutiny of the lobbying process. It is seldom the case that every firm in an industry supports restrictions. When John Deere petitioned the EPA (Environmental Protection Agency) to increase the stringency of the air-emission standard on small gasoline engines, it was because Deere had a patent on cleaner engines. When the Chicago meat packers lobbied Congress to pass the 1906 Meat Inspection Act, it was because of markets lost to consumer fear over Upton Sinclair’s The Jungle and Argentine beef producers who were invading the U.S. market with lower-priced food.

And when nuclear-power producers Exelon, PG&E, PNM, and others lobby for a federal statute that would impose high costs on coal-fired competitors, there should be no question why.

EPA’s endangerment finding endangers the U.S. economy. Whether dealt with by the brute force of command-and-control regulation or through cap-and-trade legislation, avoiding endangerment imposes high cost with little benefit on a people caught in the throes of the Great Recession.  Unfortunately for those who seek a meaningful reductions in total greenhouse gas emissions, reductions taken unilaterally by richer nations will quickly be replaced by expanding emissions from the developing world.  Wishing it were not so will not make it so.  There is a better “no regrets” path that should be considered.  Let’s now consider these points.

Paving the way to Copenhagen

Orchestrated in ways that would make a Shakespearean play director green with envy, the EPA announcement was perfectly timed to coincide with the start of the Copenhagen Conference on climate change.  The proclamation armed President Obama with much needed rhetoric for his Copenhagen soliloquy.

Frank O’Donnell, president of Clean Air Watch, enthusiastically described the news this way: “This means the US can go to Copenhagen and negotiate from a position of strength. It shows the world that the Obama administration is serious about tackling the climate problem even if legislation in the Senate falls flat.”  And then, Mr. O’Donnell unveiled the political knife beneath the robe: “It’s also a reminder to the Senate that if they sit on their hands, the Obama EPA is going to do something to regulate these emissions.”

Even though the U.S. Congress is the constitutionally ordained body that makes laws in this country, Mr. Obama will be able to point to the EPA ruling and say something like this:  “We are serious about change. Here’s what we are doing to lead in the fight to save our threatened planet.”

While paving the way for some high-sounding speech making and reams of green publicity, the endangerment finding endangers the U.S. economy by forming one side of a green regulatory/legislative vise that will transfer wealth to powerful political interest groups while environmental angels sing the praises of the party in power.

As Senator John Kerry, sponsor of the Senate cap-and-trade bill, so deftly described the outcome: “The message to Congress is clear: get moving.  If Congress does not pass legislation dealing with climate change, the administration is more than justified to use the EPA to impose new regulations. Those who now aim to grind the legislative process to a halt would later come running to Congress to secure the kinds of incentives that we can pass today.”

The jaws of the vise are set to tighten.  And the sellers of political favors will have a heyday.

Money for Nothing Meets Bootleggers and Baptists

Endangerment marries Professor Fred S. McChesney’s “Money for Nothing” theory of regulation with my “Bootleggers and Baptists” story.  And this unholy matrimony will produce the most toxic regulatory process witnessed since Franklin Delano Roosevelt cartelized the U.S. economy when he established the National Recovery Administration in 1933.  How so?  Let’s consider the theories, their interaction, and the sorry forecast they produce.  I’ll then offer a no-regrets policy.

McChesney’s theory is described in his 1997 Harvard University Press book, Money for Nothing: Politicians, Rent Extraction, and Political Extortion.  The book builds a strong and elegant political economy theory that is used, for among other things, to explain the prevalence of “milker” or “juice” bills that politicians write.  These bills have as their purpose milking funds from the industry or group about to be regulated or squeezing as much juice as possible from those who previously gained a political advantage by regulations written by the same politicians. In economist’s jargon, the extracted juice or milk is called “rent.” Thus the term “rent extraction.”

With no intention of guiding a bill to final law, but with no certainty that the laws might not become final, the deft politician can auction his or her promise not to act to the highest bidder.  With campaign contributions in the drawer, the threatening legislation can quietly be ushered to the coffin to rest till it rises again in a future legislative session, a perennial annuity producer for the canny politicians.

Endangerment-based command-and-control regulation poses a threat to every industry, small and large, in America.  Since all human activity produces carbon emissions, just how far the regulations might reach is unknown, and unknowable.  It is clear that automobiles, all other forms of transportation, and coal- and petroleum-burning industries are targets.  It is not as clear that large restaurants, hospitals, enclosed football stadiums, large cattle operations and other heat-generating, and greenhouse gas-producing, enterprises will be caught in the regulatory net.

If the regulatory remedy becomes the path to carbon-emission reductions, payments will flow from targeted industries that seek solace from the regulatory process.  They will be willing to pay money for nothing.  Here nothing means not being listed in the Federal Register when the rules are written.

“Bootleggers and Baptists” ride next to “Money for Nothing” in the toxic endangerment mix. Tens of thousands are making the pilgrimage to Copenhagen to demand penance and payment from the unwashed engaged in producing food, clothing, medicines, medical care, and other sources of life’s pleasures in a carbon-consuming world.  These “Baptists” seem to be taking the moral high ground when they claim the Copenhagen meeting is mankind’s last chance to reclaim the globe from the pending horrors of disappearing island nations, lost species, and the rising devastation of increased hurricanes, tornadoes, and droughts.

The environmental Baptists are joined by “bootleggers,” who may be producers of wind-driven turbines, solar cells, electric automobiles, clean-burning natural gas, and even nuclear energy producers.  Together, they lobby for limits on carbon emissions from the industrialized nations that raise competitors’ costs, give advantage in markets, and subsidize favored operations.  Special friends and interest groups will be showered with exceptions to rules that fall on the politically weak.  For example, the Senate version of cap-and-trade contains free allowances for a wide range of steel, cement, aluminum producers, gas companies, oil refineries, and gas and home heating oil consumers.

But can actions embraced by the developed world really deliver emission reductions for all the world?

Presbyterian College economist Jody Lipford and I have just completed a research project on carbon emissions from a sample of industrialized and developing world economies.  Our latest data indicate that carbon emissions to produce another dollar of per capita income vary widely across countries.  For example, China emits 2,173,000 metric tons of carbon to yield a $1 increase in per capita income. The U.S. emits 204,000 metric tons to get a dollar, and France emits just 2,470 metric tons to yield a dollar increase. China has just indicated a deep commitment to continuing economic growth while also taking steps to increase production of clean energy.  But any meaningful reduction in emissions from the United States or France will quickly be offset by expanding GDP in China.

A No-Regrets Policy Proposal

Given this insurmountable collective action problem and the prevalence of Bootleggers, Baptists and Money for Nothing in an endangered world, is there nothing that might be done to improve environmental quality?  Clearly there is.  And that has to do with creating wealth.

A no-regrets policy involves doing things that will pay off even if global climate change is found to be a passing phenomenon as opposed to being a permanent life threat. Environmental quality as defined by features of life that people value improves systematically over long periods of time when income per capita rises.  Hundreds of studies involving everything from forests to clean drinking water to lower concentrations of sulfur dioxide and suspended particulates show this to be the case.  Once people are threatened and have the income to take action, actions are taken.  Freeing people to produce and conserve more wealth is the longer run solution.

A no-regrets climate change policy calls for elimination of capital gains taxes so that investment in new (and therefore cleaner) capital is accelerated.  It calls for elimination of all subsidies or taxes on alternate forms of energy, so that people will make energy decisions on the basis of cost that reflect scarcity.  The policy calls for the elimination of all tariffs and non-tariff barriers that lead nations to engage in higher cost, lower value activities.  And the policy calls for opening the gates for the migration of capital and people, with accountability, so that all forms of wealth can move to preferred environmental- and economic-wealth creating locations. Freeing up economies so that income rises more readily seems to be the no-regrets policy.

The new EPA endangerment finding has endangered the U.S. economy.  This is the time for no regrets.

“Nudged” by federal policy, the previous owners accepted a handsome payment from the rest of us for ridding the nation of older, more heavily carbon-emitting vehicles and replacing them with shiny new machines that required a lot of energy to produce but would, on average, yield lower carbon exhaust and greater fuel efficiency. The clunker statute gave consumers $3,500 vouchers if they purchased vehicles that yielded a four- to nine-miles-per-gallon (MPG) improvement in fuel economy, and $4,500 if the yield was ten or more MPG.

In all, according to Bloomberg, some $2.88 billion in tax money helped buy some 700,000 vehicles made up of the popular Ford Focus, Toyota Corolla, Camry, and Prius, along with some Hummers and Ford F-150 and F-250 trucks. These and a wide variety of other cars and trucks moved quickly from dealer lots to the homes of the blessed. In fact, the speed of the transactions was more than government could handle. The program was wildly popular.

Taken together the trade-ins had an average fuel economy of 15.8 MPG, while the replacements averaged 24.9 MPG. And according to Ford Motor Company, this kind of fuel-economy improvement translates to a reduction of five to ten million barrels of oil consumed over the next five years. (The nation currently consumes nine million barrels a day.) This will be oil that some other people can enjoy.

President Obama cheerfully termed the program “successful beyond anybody’s imagination.” Secretary of Transportation Ray LaHood, who administered the program, said the effort was “a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work.” LaHood quickly added that while all this happened, “[W]e’ve been able to take old, polluting cars off the road and help consumers purchase fuel-efficient vehicles.” Economist John Lott surmised that “Only in Washington could a program that is spending money 13 times faster than was planned be labeled a ‘success.’”

Long-Term Costs

Obama’s Council of Economic Advisers (CEA) predicted the economy would be spurred as the auto industry geared up to meet inspired demand.

The program was predicted to raise third-quarter GDP 0.3–0.4 of a percentage point and lift year-end employment by 42,000. August auto sales did indeed reach to the sky, but September sales plunged back into the basement again. The program stole sales from the future; it did not fertilize future sales.

Considering final costs, there’s serious doubt that the program was successful even in the short term. The doubt arises for at least three reasons. First, the program got political support primarily for its much-touted environmental benefits. Carbon emissions would be reduced—but at about ten times the cost of alternate ways of removing carbon. Second, there is Bastiat’s parable of the broken window to consider. And third, there is a serious matter of eroding social norms for conserving wealth. A crushed clunker with a frozen engine is lost capital.

Let’s consider each of these points.

University of California-Berkeley economist Christopher Knittel developed a rigorous assessment of the implied cost of carbon emissions under the clunker program (“The Implied Cost of Carbon Dioxide Under the Cash for Clunkers Program,” www.tinyurl.com/mrmtuy). Knittel made plausible assumptions about the average life remaining in vehicles removed from the road, the average fuel economy associated with those vehicles, and the resulting levels of carbon emission that would have survived in the absence of clunkers. Eventually, of course, the clunkers would have died a natural but less dramatic death. Knittel then estimated the carbon reduction gained by replacing the large fleet of clunkers with a new fuel-efficient fleet. When he ran the numbers, Knittel found the cost per ton of carbon reduced could reach $500 under a set of normal values for critical variables. That fell to $237 per ton under best-case conditions. And what does this tell us? The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates it costs $28 to reduce a ton of carbon across U.S. industries. Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it.

Frédéric Bastiat’s brilliant parable of the broken window reminds us that a street hoodlum throwing a brick through a window generates a series of job-generating transactions that might raise GDP by a trivial amount, if it could be measured. Indeed, the idea seems so compelling that people today often speak of the silver lining found in the clouds that create hurricanes. Think of the roofers that become employed.

But Bastiat’s key lesson is that a window has been destroyed—and it had value. Before touting the total benefits of the program we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation. As Tony Liller, vice president for Goodwill, put it: “They’re crushing these cars, and they’re perfectly good. These are cars the poor need to buy.”

Finally, over the eons, human communities have contrived all kinds of devices to transmit critical survival skills and compatible behavioral norms. One of these has to do with conservation of wealth. “Waste not, want not,” we are told. “A penny saved is a penny earned,” we are reminded. Using politics to pay people to destroy valuable vehicles, or to hold crops off the market, or to produce ethanol that may use more energy in production than it adds when burned, teaches a lesson of anti-matter and wealth destruction. Considering all this, Cash for Clunkers sounds like a sorry idea that should not be the model for future policy.

Even though a sorry idea, the Obama administration will soon go forward with a cash for old refrigerators program. Unlike the clunkers program, the appliance plan will not require destruction of the old refrigerators and other items involved. The transaction costs are just too high. Nevertheless, let’s stop Cash for Refrigerators before the idea spreads further.

An executive pay cartel seemed to be in the making.

Bernanke did not accept the proposition that market-generated information is superior to what a bevy of GS-12s can develop in Washington. The Fed chief indicated that past compensation practices “led to misaligned incentives and excessive risk taking,” suggesting that just such mischief contributed to the world financial meltdown. The time of centralized pay control was at hand.

Representatives of some of the affected firms sought to practice their First Amendment rights and petition the government to limit the new meddling. Their action was not celebrated in the White House. Commenting on the apparently unwanted politicking, President Obama said: “They’re doing what they always do — descending on Congress, using every bit of influence they have to maintain the status quo that has maximized their profits at the expense of American consumers, despite the fact that recently a whole bunch of those same American consumers bailed them out as a consequence of the bad decisions that they made.”

Feinberg and Bernanke may be on to something. But they have the wrong targets.

Yes, it is high time that pay and investment guidelines be mandated for all top level executives who may in the normal course their daily work push the entire economy too close to or even over the edge of systemic risk falls. If nothing else, this Great Recession has taught us that top executives can practically capsize the economy.

But the chief concern is not with presidents and vice presidents of too-big-to-fail banks and other bailed-out enterprises. As large as they are, they are small potatoes relative to the big generators of systemic risk. The critical concern is with top government executives who can create national and international panic, lay the groundwork for international inflation or deflation, and just by voting and writing regulations can change the risk profile of entire industries.

We taxpayer/investors demand a set of risk-sensitive compensation guidelines that will mandate pay and wealth-management rules for all federal government top executives starting with the president of the United States and all cabinet members and their deputies. While we’re at it let’s include all members of Congress and every member of the commissions and boards that manage the nation’s independent agencies, including, of course, the board of governors and chairman of the Federal Reserve System.

To properly align incentives of these elected and appointed executives (and others), we demand that each and every one be paid a base pay — some 75 percent of the current salary — plus incentive pay — the remaining 25 percent — based on improvements in real GDP growth over a five-year period that begins the day of their appointment or election. The base pay would be provided on the normal Office of Personnel Management pay schedule. The incentive pay, with recommended details worked out by Feinberg, would be provided on the basis of a three-year rolling average gain in real GDP, which means that the first incentive payment would be received three years after an executive’s first day of office.

But this deals with just part of the incentive misalignment. We must align incentives associated with government executive wealth.

Elected and appointed government executives routinely place their personal investment portfolios into management by a blind trust. While this action satisfies those who may be concerned primarily with ethics and upright behavior, simply being blindfolded as to capital gains and losses does not get to the systemic risk problem, which of course, is our chief concern here.

All high government officials described earlier must have their personal portfolios invested in a visible S&P 500 index funds, not to be redeemed until one year after leaving office. We taxpayer/investors do not want our executives blindfolded as to gains and losses. We want them to know exactly what is happening to the Great American Bread Machine, our economy, while they are in office. We want them to feel our pain and our gain.

Feinberg and Bernanke should focus efforts on those whose actions can capsize the economy—the top executives and elected officials in Washington. The others are small potatoes.

Empowered to regulate industry marketing practices, the FDA must develop warning labels that must cover 50 percent of the side space on cigarette packages. The labels must draw from a catalog of congressionally sanctioned phrases that include:

WARNING: Cigarettes are addictive. WARNING: Tobacco smoke can harm your children. WARNING: Cigarettes cause fatal lung disease. WARNING: Cigarettes cause cancer. WARNING: Cigarettes cause strokes and heart disease. WARNING: Smoking during pregnancy can harm your baby. WARNING: Smoking can kill you. WARNING: Tobacco smoke causes fatal lung disease in nonsmokers. WARNING: Quitting smoking now greatly reduces serious risks to your health.

As dramatic as this all seems, this extension of FDA powers received a somewhat mixed response from the medical and health-advocate communities.

John Cohn, a lung-disease specialist at Thomas Jefferson University Hospital in Philadelphia said, “It’s sort of like asking the police commissioner to regulate prostitution.” Perhaps Cohn anticipates agency capture of the sort typically seen in Washington.

Matthew Myers, president of the Campaign for Smoke-Free Kids, a leading lobbyist for the law, took a more optimistic but still somewhat guarded position. “You can stay with the status quo, with industry controlling the level of nicotine in products and companies deciding what health claims to make. Or you can give control to an agency with a history of scientific expertise in regulating products. This fills an important gap.”

All Bark

This somewhat tepid celebration was prompted by uncertainty about how the FDA would really manage its new authority. There is also the feeling that this statute, like many others, had a title that sounded more powerful than the content justified. The word “prevention” in the title sounds rather dramatic, but the teeth in the law itself are more like baby teeth than fully mature incisors. (Consider, for example, the exception made for menthol-flavored cigarettes.)

The politicians’ commentary that followed the law’s passage was much more boastful and self-congratulatory. Senator Edward Kennedy, long an advocate for more government control of the industry and sponsor of the Senate version of the law, exclaimed, “Miracles still happen. The United States Senate has finally said ‘no’ to Big Tobacco.”

Had Congress really said no?

In a way, Kennedy misstated what had actually happened. The Senate had not entirely said no. Indeed, the biggest of big tobacco, Altria Group, the producer of market-leader Marlboro, had lobbied long and hard for the bill’s passage. Altria’s two major competitors, Lorillard and Reynolds Tobacco, saw the law as giving Marlboro, with its market share locked and a lead in developing no-nicotine products, an unfair advantage. As is often the case, the Senate picked a winning horse and rode it. The Senate said yes to one and no to two others.

With Kennedy unable to lead the battle for his bill due to illness, Senator Christopher Dodd assumed leadership. Not quite as dramatic in his comment as Kennedy, but in a way equally inaccurate, Dodd said, “For more years than anyone can count, we’ve had an industry that’s gone basically unregulated.”

Unregulated Tobacco?

It is true that tobacco products have not been regulated by the FDA, though the agency has attempted to do so almost since its 1906 founding. But after decades of regulation by the Federal Trade Commission (FTC), the Federal Communication Commission (FCC), and Congress itself, hardly anyone who has followed the industry would say it has gone “basically unregulated.”

Instead, some would argue that it was regulation that defined the industry’s trade practices and, by doing so, maintained the industry’s high profits and expanded the sale of products in just those markets Tobacco-Free Kids and others worry about. (See John Calfee’s “The Ghost of Cigarette Advertising Past, Regulation, Nov.-Dec. 1986.)

How could this be? Consider the following capsules that come from a long tobacco saga (these and more can be found in Bruce Yandle, et al., “Bootleggers, Baptists and Televangelists: Regulating Tobacco by Litigation,” University of Illinois Law Review, 2008):

Almost from the start, tobacco products were regulated. The first government efforts to control tobacco consumption date at least to 1629, when the colonial authorities in Massachusetts Bay prohibited settlers from planting tobacco except in small quantities used for medicinal purposes. (Kennedy’s position follows a historic Massachusetts tradition.) Health interest groups have a long history of activism as well. The focus was on cigarettes. There were several hundred anti-cigarette leagues in the United States with more than 300,000 total members by the turn of the nineteenth century.

Twenty-six states banned the sale of cigarettes to minors by 1890, and 16 states totally prohibited cigarette sales by the end of 1909. World War I is said to have been a stimulus for cigarette consumption. As a result of extensive lobbying by tobacco producers, by 1927 all of the state bans on sales to minors were repealed. As bans declined, state taxes appeared, beginning in 1921 in Iowa and spreading to nearly all states by 1960. Politicians learned that tobacco products were a mother lode for tax revenues. There were no more total bans.

The FDA was explicitly denied authority to regulate tobacco when Congress passed the Pure Food and Drug Act of 1906, which created the agency. Just before passing the act, nicotine, then listed as a drug, was removed from the U.S. pharmacopeia. This assured the FDA could not regulate nicotine as a drug. Since 1906, when amending the FDA act and related legislation, Congress has consistently rejected proposed amendments to grant FDA regulatory powers. Congress regulated the industry itself.

While scientific data may have been lacking, popular recognition of the harms from smoking showed up in expressions that developed for cigarettes and related ailments: coffin nails, smoker’s cough, gasper, wheezer, lung duster. Yet a 1938 Consumer Reports article on smoking and health indicated no scientific evidence of harm from smoking. Nevertheless, marketplace recognition of health problems led the tobacco companies to go on the attack: “Not a cough in a carload” and “Remember Juleps, forget your cough” (Chesterfield); “Not a single case of throat irritation due to smoking” (Camels); and “Why risk sore throats?” (Old Gold).

In 1950 the FTC issued cease-and-desist orders against major cigarette companies on all health-effect advertising. The commission found that all popular cigarettes were harmless for healthy smokers. On these grounds, comparative health claims–”less smoker’s cough,” for example–were prohibited. Later, when cigarette producers introduced filters and began to advertise levels of tar and nicotine, the FTC struck again. In February 1960 the FTC announced that it had negotiated a voluntary agreement with the tobacco companies to cut all tar and nicotine claims from cigarette advertising. The agency heralded the “industry-government cooperation.” The FTC action brought to an end health-effect advertising that had led to a sharp decline in tar-weighted cigarette sales and the demise of some of the stronger cigarette brands.

In 1964 the Surgeon General reported a causal connection between smoking and lung cancer, chronic bronchitis, and coronary disease. He also stated that “cigarette smoking is a health hazard of sufficient importance in the United States to warrant appropriate remedial action.” Immediately, the FTC initiated proceedings to regulate cigarette advertising. In a final proposed rule, the FTC called for all cigarette packages to carry this warning: “Cigarette Smoking is Dangerous to Health and May Cause Death from Cancer and Other Diseases.” Congress intervened, sharply rebuked the FTC, and in 1965 passed the Federal Cigarette Labeling and Advertising Act that required a milder warning: “Caution: Cigarette Smoking May Be Hazardous to Your Health.” The FTC was banned from further meddling for at least four years.

Cigarette Regulation May Be Fatal to New Entrants

In May 1969 the FTC attempted to require all cigarette advertising to warn that “Cigarette Smoking is Dangerous to Health and May Cause Death from Cancer, Coronary Heart Disease, Chronic Bronchitis, Pulmonary Emphysema, and Other Diseases.” Once again, Congress countered and passed the Public Health Cigarette Smoking Act of 1969, which banned all cigarette advertising on electronic media after January 1, 1971,and mandated that all cigarette packages bear a milder statement: “Warning: The Surgeon General Has Determined that Cigarette Smoking Is Dangerous to Your Health.” The ban on radio and TV advertising ended the public-health messages required by the FCC, which had been shown to cut cigarette consumption, and reduced most of the $200 million annual advertising cost for existing tobacco products. The ban also made it more costly for new entrants to gain market share.

In 1998, 46 state attorneys general negotiated a settlement with tobacco producers after several successful state suits against tobacco companies based on recovering the cost of Medicaid payments for tobacco-related illnesses. The settlement yielded payments to the states that totaled $200 billion, which converted to an average annual payment to each state of $180 million in perpetuity. To generate the revenue the tobacco producers were allowed to collude and raise prices, doubling the wholesale price of cigarettes. Total sales volume went down. Profits went up. In effect the tobacco firms became well-paid tax collectors for the states. The settlement also contained a rich set of regulations that affected the marketing of tobacco products to youthful consumers.

Industry-Serving Regulation

No, there is no evidence to suggest that tobacco has until now been “an industry that has gone basically unregulated.” But there is ample evidence that tobacco regulation has served the interests of the industry and the politicians that broker favors to the industry. Meanwhile, consumers of tobacco products, who are generally a lower-income population, have been denied the benefits of competitively determined product information; they also have unwittingly become major sources of revenue for state politicians, who generally provide more benefits to higher-income than lower-income consumers.

One can only speculate about what might have happened had the FTC not outlawed health-effects advertising and had the industry not become one of the more regulated industries in America.