Information distortion and competitive remedies in

government transfer programs: The case of ethanol

Ronald N. Johnson and Gary D. Libecap

Motivation

• Wittman (1995): Democratic politics are inherently efficient. Competition creates sufficient info on costs and benefits for voters to make efficient choices.

• Market analogy.

• Does this behavior mimic market efficiency? Does survival indicate efficiency given costs of change?

Response

• Problem: Analogy breaks down. Govt. is often needed to provide info about transfers.

• Why? Politicians have incentives to limit and distort info.

• How? Ex. Framing a program as having wider appeal by extolling positive externalities, when it only benefits a small group.

• Result => Competition is unlikely to remedy problem.

• Q. Why do politicians get away with this?!

Problem

• Within industry, deceivers are subject to greater scrutiny & legal action. Discovery poses threat. (Unlike politics)

• Unclear prop. rights in political arena means politicians do not fully internalize costs or benefits of adhering or cheating.*

• Within politics, politicians are highly immune to constituents and recourse. Framing private transfers as public ones is likely to go unpunished.

• Why are politicians insulated from recourse?

Problem

1. Politicians do not punish each other, and organized opposition is needed.

Strategic decisions: future log-rolling opportunities; support from hurt interest; reelection.

Tradeoffs: weight expected gains from exposing lies vs. expected losses.

2. Uncertainty remains even when competition exists for other reason (gathering, synthesizing, disentangling, evaluating).

The case of Ethanol - Background

• Benefits in the form of price manipulation and deficiency payments, received by a narrow interest group at the expense of all taxpayers.

• Exploding deficiency payments in the 80’s ==> $88m to $25b

• Readily available MTBE a cheaper and more efficient substitute.

• Ethanol not competative.

So what happened?

• 1986: Corn interests able to suppress unfavorable USDA cost benefit analysis because of a lack of an organized opposition.

• Touted the externalities to obscure report (environmental, reduction in foreign oil dependence, rural development, reducing farm costs)

• But when opposition forms…

• Pro-ethanol legislation is scrutinized and defeated in congress (starting in 1987).

• Info is revealed: ethanol might actually have a negative environmental effect.

• New info is discovered: MTBE health risks.

• Implication: competition exists, but biased interest and the complexity of the issue cloud voter judgment => hardly an efficient info distribution.

The Federal Civil Service System and the Problem of

Bureaucracy

Ronald N. Johnson and Gary D. Libecap

What is the problem?

• “Lack of accountability, responsiveness, and productivity.”

• Civil servants face different incentives:– promotions not based on performance– insulated from political control– agency and personal motivations

• Federal supervisors are constrained in punishing or rewarding performance.

Q. Why have efforts to reform been unsuccessful?

Principal/Agent Relationship

• Lack of clear property rights (i.e. confusion over who controls the bureaucracy built into Constitution)=> Rivalry between Congress and President for control.

• Principals (voters) are heterogeneous in their objectives; also cannot monitor agents (bureaucrats).

• Bureaucrats do not always have same goals as politically appointed superiors. (Motivations)

• Federal Unions

• (+) Constrains opportunistic behavior by politicians and ‘crats. Congress or President cannot completely control them. Historical specter of spoils-system patronage.

• (-) Civil service system reduces the ability of politicians to reward or punish bureaucrats (or implement agenda)

• 1982 example: EPA officials resisting new authority; conflicted with “personal and bureau goals”.