Why Businesses Can't Stand Free Markets: Veronique de Rugy

For almost two decades, the monks of St. Joseph Abbey in Covington, Louisiana, supported themselves by making and selling unadorned handmade pine and cypress caskets.

But if embalmers and funeral directors in the state of Louisiana have their way, the monks will be barred from earning a living by making coffins without a license issued by a state government board, eight of whose nine members work in the funeral industry.

Business people love to say how much they cherish free markets, all the while decrying government that limits entrepreneurialism and personal freedom.

But the truth is there is nothing most business people like less than free markets.

Think about it. Competition is good for consumers because it keeps prices low while increasing the quality and choices of products and services. Yet competition is hard work for businesses. They have to fight for customers by innovating and evolving in ways that consumers demand.

To avoid the gritty work of fighting it out in a free market, organized private interests -- such as Louisiana’s licensed funeral directors -- lobby the government for special regulations, preferential tax treatment and laws that keep out competition. They lobby lawmakers to constrain the same free markets in which they originally achieved success.

This practice has been around for as long as there have been businesses and governments. The great economist Milton Friedman cited the example of the Interstate Commerce Commission in his 1990 book “Free to Choose.”

Farm Power

In the late 1800s farming interests demanded that government rein in the railroads amid the perception that they misused their power to influence local politics and set freight rates too high. The railroads responded by working with Congress to form the ICC, a regulatory agency populated with industry insiders. It fixed prices and limited new railroads from entering the business.

At the urgings of the railroads, the ICC brought the trucking industry -- a source of competition -- under its jurisdiction in the 20th century. It limited the number of trucking licenses, thereby constraining entry into the industry as shipping volumes ballooned and helping to prop up prices that would have fallen in a free market.

These and similar practices are rampant today, and not just among railroads or funeral directors. Each year, private corporations in America receive about $100 billion in subsidies from the federal government, gaining an advantage over those that don’t receive such handouts.

Double Prices

Take the Fanjul family, which controls Florida Crystals Inc. and Domino Sugar, owns more than 400,000 acres of sugar cane farms and produces one-third of Florida’s sugar. Yet, the federal government protects them against competitors by imposing U.S. import quotas that maintain sugar prices at artificially high levels. U.S. consumers and businesses have had to pay twice the world price of sugar on average since 1982, according to economist Mark Perry.

Why? The fact that the sugar industry spends millions in lobbying might be one reason.

The U.S. sugar lobby contributes millions of dollars to political campaigns to maintain federal support for the subsidies, according to the Center for Responsive Politics. The Fanjul family alone spent $715,000 on lobbying in 2008 and has spent an estimated $2.6 million on political campaigns from 1979 to 2006.

Capture Theory

Such spending surely gets attention. Economists know how potent this type of lobbying can be. In his seminal 1971 article, “The Theory of Economic Regulation,” Nobel laureate George Stigler introduced so-called capture theory. Stigler argued that regulatory agencies are subject to pressure from both interest groups and the electorate at large. But, as interest groups are better able to organize and promote their interests, they hold power over what regulations are put in place.

Stigler also pointed out that regulation requires in-depth industry knowledge, so regulatory agencies tend to hire directly from the very companies they must oversee. Consider the former secretary of the Treasury Department, Henry Paulson. The former chairman and chief executive officer of Goldman Sachs played an important role in shaping and directing the government rescue of the financial industry, including Goldman. Is it any surprise that critics of the rescue say that it was too favorable to bailout money recipients?

Big Surprise

Surprisingly, many Washington watchers were shocked to discover last year that the most formidable lobbying force in the capital is the U.S. Chamber of Commerce, which reported spending almost $150 million on lobbying in 2009 out of the overall $183 million spent by industry associations on arm- twisting and favor-seeking.

According to the data from the Center for Responsive Politics, one of the leading contributors to the lobbying effort was the National Federation of Independent Business, representing some 600,000 small business owners. This shows that large corporations aren’t the only ones who dislike competition and crave special favors such as loan guarantees, tax breaks, lighter regulations and different government contracting rules. These companies even have a taxpayer-backed lobbying arm in the Small Business Administration’s Office of Advocacy.

Unfortunately, this phenomenon isn’t just concentrated at the federal level. It is the same power of the business lobby over the executive branch in Louisiana that has forced the monks of St. Joseph Abbey to take the state to federal court to fight for their ability to make and sell inexpensive caskets.

Let’s hope that any court ruling deals a blow to the practice of entrenched businesses using government to impose higher costs on consumers while also thwarting upstart entrepreneurs. No one said loving free markets was easy.

(Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. The opinions expressed are her own.)

To contact the author of this column: Veronique de Rugy at vderugy@gmu.edu

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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