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Friday Interview: Yandle Discusses Bootleggers and Baptists

Expert discusses unlikely coalitions that push deals harmful to consumers

More than a decade has passed since attorneys general from almost every state settled lawsuits against the nation’s major tobacco companies. Even if you remember some details of that settlement, you might not know much about the coalition of “Baptists and bootleggers” who helped make that deal possible. Bruce Yandle, dean emeritus of the College of Business and Behavioral Science at Clemson University, discussed the concept of “Baptists and bootleggers” with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

Kokai: You are the originator of this idea of Baptists and bootleggers working together on regulation. What is that concept all about?

Yandle: That is right. And I think most of our listeners … can relate to Baptists and bootleggers. Those are familiar titles in our region of the United States. But the idea of putting together bootleggers and Baptists to explain something like the tobacco settlement does go back to the old story that bootleggers love laws that shut down the liquor stores on Sunday. That gives them one day a week when they don’t have much competition. And Baptists love laws that shut down liquor stores on Sunday because they favor a diminution in the consumption of alcoholic beverages. So you have, not a coalition that actively works together, but you have two … powerful interest groups that are lobbying for the same thing, even though they appear to be quite different in terms of their political complexions and, in a sense, that gets us to the tobacco settlement.

Kokai: How does it apply in the case of the tobacco settlement?

Yandle: What is called “The Master Settlement Agreement” was signed in 1998, and it applies, basically, to every state in the United States, even though some states signed early. But all states are covered. And what we have just right there is something very unusual in our political history of our country. We have something that was organized by state attorneys general, working together. And in a way, that sort of staggers the imagination that 50 state attorneys general could begin to work and favor one outcome.

In a sense we created another national government: the attorneys general banding together to get this agreement. The agreement is considered to be the largest legal settlement in our history — something like, it had a value of $206 billion — so that every state on average gets $180 million a year for 10 years from the settlement. But the settlement allowed the tobacco companies, encouraged them, to raise the price of cigarettes. As soon as the settlement was agreed on, the cigarette producers doubled the prices of their products, and they then handily were able to provide money to states. In effect, they were taxed, and cigarette consumers paid the price.

But now, what about the Baptists and the bootleggers? There has been a long, long effort, and still a very strong effort among people who wish to see an end to cigarette smoking — particularly among youth — pushing for, you might say, anything reasonable that would reduce those habits. So the American Lung Association, the American Heart Association, Tobacco-Free Kids — a major organization — were lobbying mightily to get something done.

And they saw the settlement as a way to reduce consumption of tobacco products, and they also required in the settlement that the funds raised going to states would be dedicated to programs of smoking cessation for, particularly for teens. So they were supporting it. The cigarette companies were supporting it. What they got was a cartel. They got a cartel — and basically there were four producers, there are four major producers — they got a cartel, which allowed them to double their price, markedly increase their profits, with a promise that there would be only limited competition in the future. And so, there you have your bootleggers. And then you have your Baptists celebrating an outcome. Both parties, you might say, settled, had a great party after the settlement was done.

Kokai: I heard you describe the Baptists in this case, and the bootleggers. I didn’t hear about any role for the smoker or the taxpayer or anyone else who is not involved in one of those two coalitions. Is this what is bad about this deal?

Yandle: Well, what you have just announced, in a sense, is that an important group of people — we consumers, you might say for practically every product — generally speaking, we are unaware that these kinds of things are taking place. We are rationally ignorant about things that are going on in Washington or Raleigh or in our city council meetings. Unless it is something we really tune into, it is happening to my neighborhood, or it is happening to my industry or my employer, then I am rationally informed. But when this process that led to the agreement was taking place, I would suggest that the average cigarette smoker would not have been able to answer a question about it. It was not on that person’s scope.

In addition to that, the price increase, while it might be a doubling of cigarette prices, there was no way in the world for a typical cigarette smoker to attach that price increase to this thing that was happening way off somewhere.

Kokai: With these coalitions of bootleggers and Baptists … what can we do about them?

Yandle: It is hard to suggest that there is anything that we can do, other than to require open analysis and publication analysis — that is, to go to transparency so that when the legislature is acting on the basis of some special interest group, they publish and explain their actions. Then you have policy groups who will help to illuminate.

But it is rather interesting when you say there may be some other instances. The one we are dealing with right now, what we call the subprime problem, has a rather interesting bootlegger/Baptist history. The American dream is that every family would have a home on a half-acre of land with a picket fence around it and a garden in the back yard. I mean it is a beautiful dream. Well, that dream has been a part of federal policy for a long time. But in the early 2000s there was an effort made to make that dream possible for people who could not make a down payment, who did not have enough income to make the monthly payments, and President Bush in 2003 signed a law that was called The American Dream No Down Payment Act.

In a matter of a few years, as a result of other legislation, there was huge lending to people who literally were not financially able to carry the load that was placed on their shoulders. With that, then, later came a huge wave of bankruptcies. That is not the whole story. Obviously, it is a much more complex story. But a piece of it has to do with Realtors, developers, builder associations who liked the idea of more houses being built, and then the wonderful Baptist element that says every American ought to be able to have a home of their own — let’s make it possible.