Bootleggers & Baptists: LIV- Going Cashless

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In an age of digital banking, physical cash has become a cumbersome relic of a bygone era in the eyes of most Americans. It is easy to assume that we would all be better off in a cashless society, taking the lead of nations such as Sweden. The belief is that we would be better off in a digital monetary regime that would facilitate tax collection and tracking of criminal activity (p.2). Only demonstrating the tensions between law enforcement interests and the Fourth Amendment rights regarding financial crimes (p.3). Does the question become who benefits from the United States eliminating the use of money? It should be abundantly clear that it is axiomatically true that every policy selects winners and losers. The decision to abolish physical cash transactions is no different.

In the fashion of Bruce Yandle’s Bootleggers and Baptists (1983) theory of political coalitions, for every policy prescription; there is a moralizing agent and a beneficiary. In his 2018 paper, Norbert J. Michel, Special Interest Politics Could Save Cash or Kill It, details the parties that stand to benefit from the relinquishment of cash transactions. Some of the most conspicuous parties that prosper from a cashless society would be law enforcement, with a digital record of every economic transaction, it is hard to obscure illicit conduct. There are parities in the private sector that would find the move to electronic transactions advantageous. The credit card companies are likely one of the most salient groups of Bootleggers of anti-cash policies. The CEO of Mastercard has been a vocal exponent of getting rid of cash; it was even the first company to openly lobby on “… the behalf of bitcoin..” (p. 8). Any move towards digital payments over tangible currency would fatten the pockets of creditors. All credit card transactions are digital; it is not that farfetched to suspect that individuals who use cash would be more apt to use their Mastercard.

Other than law enforcement officials, who are the holy rollers of killing the dollar? One needs to look no further than the late Arizona senator John McCain, as he was an advocate of the COINS Act. This was a measure that was purposed to suspend production of the penny for approximately a decade. McCain defended this policy because it cost more than the actual monetary value of a penny to produce the coin. Very few American consumers would miss the penny; only twenty-six percent of transactions in 2018 patrons used pennies. Why would anyone miss a burdensome form of currency that cost more than what was worth to produce? It is important to note that McCain’s COINS bill did not dispense with copper coinage.

“ In addition, the bill provides for: (1) modifications to the composition of the five-cent coin; and (2) the replacement, in circulation, of $1 notes with $1 coins.”

The legislation would merely shift production towards the presumably more lucrative seigniorage of dollar coins. It would be naïve to not consider the local business interests in McCain’s home state of Arizona. Arizona has long held the reputation as a top copper producer and is the second-highest producer of natural minerals of any of the states. For a state that constitutes seventy percent of all cooper output, the COINS Act provides these firms with concentrated benefits. The COINS Act and the Arizona cooper industry are even Bootlegger and Baptists dynamic outside of the cashless society debate.

The Paradox of Implicit Logrolling: Bodily Integrity- Newports and Roe

The Paradox of Implicit Logrolling (Clark, 2021) demonstrates how intra-platform vote trading can lead voters to hold logically inconsistent policy positions. One example is; a Republican purporting to be Pro-life but concurrently supporting an aggressive foreign policy. In the current political climate of the United States, the topic of bodily integrity appears to be the nexus of the most salient examples of this phenomenon. After all, the genesis of this paradox came from the incongruency of Democrats favoring vaccine mandates (93 % of poll Democrats support mandates applied to private companies) and simultaneously defending Roe v. Wade from the standpoint of bodily integrity. 

However, the current trends in the Democratic party’s policy platform‘s lack of logical continuity regarding bodily integrity are evident from the policies the party has recently supported. Last week, the Biden Administration announced a plan to move forward with a national ban on mentholated cigarettes. A measure favored by 57 % of Democrats polled. The fervor of Pro-choice (predominately left-leaning voters) advocates protesting and repudiating the decision in the leaked draft of the Dobbs case. 

These examples are not intended to shame modern liberals, nor are these normative value judgments regarding their ideological positions; these examples are merely observations derived from an applied static model. The bundle of policies favored by the Republican party is also rife with logical contradictions. The DNC seems to be providing us with most of the conspicuous examples of this paradox. The fact that the Dobbs case and the menthol ban magnifies how the topic of bodily integrity causes political parties to adopt policy preferences that pose philosophical contraventions. If it is rational to assume that electing to obtain an abortion is a matter of self-ownership, then would not the same apply to an adult choosing to smoke Newports? It is perplexing how this lapse in logic eludes many folks on the left. President Biden openly spoke out on the Dobbs decision but opted to proceed with nationwide menthol prohibition. It is possible his vocal criticism of the SCOTUS draft decision is a political maneuver to curve the disappointment of the Progressive-wing of the DNC with his centrist policies. Making the correct statements on the right wedge issue can be gold in the sphere of social currency. 

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Bootleggers & Baptists- LI: The U.S. Ban on TV Cigarette Ads

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The enduring brilliance of Bruce Yandle’s concept of Bootlegger and Baptists (1983) coalition dynamics cannot be overstated. Often the policies supported by the “Baptists” end up benefiting various interest groups. The nature of this self-propelled relationship is steeped in irony. Superficially, many of the proposed initiatives would be detrimental to the interests of the “Bootleggers”, but frequently have consequences contrary to the aims of the morally motived activists. Carelessly crafted remedies to social ills can result in gapping loopholes or anti-competitive advantages to established firms producing goods that are injurious to public wellbeing.

An excellent example of this phenomenon was the FTC’s 1971 ban on televised cigarette commercials. This example seems to be timely considering the finalization of President Biden’s national prohibition on mentholated cigarettes. The impact of the 1971 advertising restrictions is detailed in Baptists, Bootleggers & Electronic Cigarettes (2016):

“….The tobacco industry was not as enamored with these regulatory initiatives as were some health-oriented groups. Congress reacted to such concerns with new legislation that weakened the FTC’s proposed label language while banning TV advertising starting in 1971.53 Far from a loss for the industry, this legislation erected a substantial entry barrier for potential competitors 54 The established brands enjoyed widespread name recognition, and new entrants would be unable to use television to establish their brands. 55 The elimination of television ads for cigarettes also brought an end to the offsetting public interest messages that attacked tobacco products and reduced cigarette company advertising costs. 56 The tobacco Bootleggers gained ground, and innovation took the back seat in what began to look like a comfortable cartel. Meanwhile, the health-care Baptists may have unwittingly cheered the new strictures that seemed to penalize bad Bootlegger behavior but actually protected their profits…” (p.325-326).

Based on the prima facie impressions of most people, it is easy to assume that the limitations on advertising would harm the tobacco industry; to a certain extent, it did. Cigarette consumption did decrease in the period after advertisements; were pulled from the airwaves. However, the magnitude of the impact is difficult to measure as other factors can also account for the lower smoking rates in the United States. This policy truly harmed the up-and-coming cigarette companies more so than the titans of the American tobacco market. Why would Marlboro need to advertise its products? The brand already had significant brand recognition by the early 1970s. Companies like Philip Morris and RJ Reynolds could comfortably rest on their laurels while the newcomers could flounder in their attempts to gain a little piece of the market share. Effectively, this ban significantly increased market concentration among the established firms.

The Menu Board Theory of Voting

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The Menu Board Theory of Voting:

If the government is a service provider, a middleman providing goods and services to the public, the policy is nothing more than purchasing choice. Laws, regulations, government programs, infrastructure, and other services are chosen or “purchased” by voters and elected representatives. Every form of government action does incur monetary costs, as it is necessary to pay the program staff responsible for administration, implementation, and compliance. There is a direct parallel between purchasing goods on the private market and the policy selection process. But on a more abstract level, it is like a market exchange since even voters and decision-makers are making tradeoffs in this exchange for a specific policy. Therefore, providing some validation for the observation of politics being an exchange.

The one voting scenario that most proves this point is state-level referendums. The most salient issue placed on state ballots in recent years has Propositions seeking to legalize, tax, and regulation of Marijuana. Choosing to vote in favor of or against the proposition question is somewhat analogous to ordering a combo meal at a fast-food restaurant. Arguably, taxes and regulation are more features of implicit logrolling. In the form of the Marijuana legalization ballot question, they are complementary goods. Most polls indicate that the public favors regulation (especially when it comes to consumer protection), perceiving it as a necessary service necessary to be protected from delirious products. The excise taxes collected from Marijuana sales; can be used to fund other government-provided services. Few citizens are willing to challenge the veracity of sin taxes. The abolition of restrictions on Marijuana sales and consumption would be the proverbial burger, while the regulations and taxes are the fries and drink. It is important to note that a minority of (when compared to all voters) cannabis consumers and vendors will find these concessions onerous. 

What about forms of political voting that include bundled goods? The best example is an election where the constituents vote for elected officials. Each candidate (typically corresponding with an established political party) has a platform, in other words, a collection of various policies they support. The political consumer is still selecting options from the menu board, but it is more like purchasing cable television services back in the 1990s. Several packages give a different grouping of 500 channels; the patron cannot simply omit or cherry-pick the channels they want. If a voter selects a Republican candidate because they oppose gun control, they are not just selecting looser gun laws but every other policy in the candidate’s campaign platform.

Bootleggers and Baptist:L- Addendum: The Axiom of Monetary and Bank Regulation; The Fed Always Wins.

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The enduring axiom of fintech and digital asset regulations and taxes; barriers to entry benefit the legacy banking system. Because legal restrictions and taxes reduce incentives to participate in the financial services markets. There may be other parties that benefit from placing limitations on cryptocurrencies. Ultimately, the banking establishment enjoys diminution in competition. Many factions within the pro-regulation coalition, advocate for the regulation of cryptocurrencies in fintech services, often under the veil of consumer protection. For example, Elizabeth Warren likened Bitcoin to the 2008 Housing Bubble. Whether Warren stands to gain or not from regulating cryptocurrencies is immaterial; such behavior is merely doing all the dirty work for the Federal Reserve and the large banks with Fed fund accounts. That is to help mold public opinion to be receptive to crypto regulation. Ironically, she is unwittingly aiding and abetting the same banking system she purportedly to wants to reform. Most consumer protection measures pick winners and losers. Regulating crypto arguably picks the wrong set of winners that would not stand a chance of victory in the face of natural market pressures.

Bootleggers & Baptists: XLV- Baptists, Economists, Careers, & QE

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What is Quantitative Easing?

Quantitative easing (QE) is the controversial and unconventional monetary policy tool first introduced in the United States in 2008 [1]; as a countermeasure to the Great Recession. The practice of Quantitative easing (QE) is where a central bank purchases long-term government securities, corporate bonds, mortgage-backed securities, and other assets from banking institutions with newly created money. The ultimate goal is to boost the money supply encouraging lending in a sluggish economy by lowering interest rates. The Federal Reserve’s strategies for managing interest rates are divided into pre and post-financial crisis eras. Before 2008 how the Federal Reserve maintained interest rates were different (operating under a corridor system). Per the New York Federal Reserve:

Before October 2008, the Federal Open Market Committee (FOMC) communicated the stance of monetary policy by announcing a target for the federal funds rate. The Fed would then use open market operations to make small adjustments to the supply of reserves so that the effective federal funds rate (EFFR) would print close to the target set by the FOMC. This type of implementation regime that relies on reserve scarcity is often referred to as a corridor system (as explained in this article). Under this framework, depository institutions, or banks, were incentivized to hold as few reserves as possible since they did not earn interest on their Fed account balances. Reserve balances that banks held in their Fed accounts added up to a very small amount, as can be seen in the next chart. The banking system operated with aggregate reserve scarcity and relied on the redistribution of reserves in an active interbank market.

Amid a phase of quantitative easing, the Federal Reserve injects massive quantities of money into the economy through large-scale asset purchases on the open market, increasing the risk of interest rates becoming too low. In the post-crisis, the Fed has opted to implement a Floor System, where the central bank pays interest on excess reserves (IOER) for funds held by member banks at the Feder Reserve beyond the mandate reserve requirements. Procedurally assists with stabilizing the interest rate (Fed funds rate) even when the Fed pumps vast amounts of liquidity into the economy. The excess money held by Fed-associated financial institutions acts like an interest rate floor; through paying on IOERs the opportunity cost of holding money is eliminated. Effectively, maintaining the target interest rate. The Fed’s convoluted attempt to skirt the Law of Supply and Demand, the Federal Reserve, nothing more than an attempt to have its cake-and-it-too (avoiding a liquidity trap and concurrently stimulating the loans market).

The Baptists and Economists of QE:

The monetary establishment expresses that QE is a necessary and effective policy instrument. The promoting of this interventionist policy has created fertile ground for Bootlegger and Baptists (1983) coalition dynamics. Much of this pro-QE sentiment is perpetuated by the research of Federal Reserve economists. It is hard to pinpoint clear Baptists in the pro-QE coalition, several parties that benefit from defending the practice.

In some instances, politicians who champion QE could be viewed as Baptists, arguing for it as means of stabilizing the economy. However, politicians stand to benefit from the unorthodox monetary policy in the form of Fiscal QE (coined by George Selgin), directing the money created through QE to non-macro-economic objectives (e.g. funding the Green New Deal through QE). There is the potential of politicians assuming the role of “pure” Bootleggers and Dual Role Actors. But while QE could be used to “achieve” macro stability (full employment, etc.) and other extraneous policy goals, it operates as a double-edged sword. It is important to note that the inflation rate is a metric that matters to the voting public. Inflation has become a focal point in political discourse and is politicized (p.129-163[2]. The next logical possibility for  Baptists would-be journalists. However their position on QE is “mixed”. Some outlets like to diagram the pros and cons, others are outright hostile, and some echo the positive sentiments acting as a mouthpiece for the Fed.

There is one faction in the QE advocacy coalition that unquestionably fits the definition of Bootleggers, the economists employed by the Federal Reserve. In the book Money and the Rule of Law (2021) Boettke, Salter, and Smith detail the numerous incentive problems facing Federal Reserve officials armed with “constrained digression” (CH 3; p.58-94). Pollical pressures asides; there are other reasons why favoring QE would be appealing (p.67-70), but also substantial internal pressures as well. The authors expound upon the impact of “bureaucratic inertia” on the central banks; like any other center of governance, there is a bias towards maintaining the status quo (p.64). After approximately fourteen years and four rounds of QE, the policy has become normalized. Initially, QE was an aberration in American monetary policy [3]. Favoring QE in 2022 is an example of institutional inertia, but not during QE1 (2008).

However, the obtuse and obstinate inflexibility of the sluggish nature of the Fed is far from the most troubling rationale for unwaveringly defending QE. That would manifest itself in the form of promotion opportunities. We need to consider that the Federal Reserve is one of the largest employers of economists in the United States (p.64), urging researchers to conform to internal norms of the Fed. (p.65). One paper that beautifully describes the incentives of the career concerns of Federal Reserve economists was Fifty Shades of QE: Comparing Findings of Central Bankers and Academics (2020; revised 2021). In their NBER paper, Fabo, Oková, Kempf, & Pástor found that central bankers are more likely to describe QE in sanguine terms in their research when compared to unaffiliated academics (p.15). Fabo et al. found that there was some evidence that:

“…One possible mechanism is career concerns. In principle, bank management could make promotion decisions in a way that encourages bank employees to assess the bank’s policies favorably… (p.18).

“… We find that the interaction between the effect on output and Seniority is positive and significant. A one standard deviation increase in Seniority raises the sensitivity of career outcomes to the estimated effect on output by about 50%… (p.21).

“..These could involve concerns about the bank’s reputation and, for very senior researchers, concerns about their reputation. Like career concerns, reputation concerns reflect researchers’ incentives because in both cases, a researcher derives a private benefit from reaching a particular research outcome. We have no evidence on the potential contribution of reputation concerns to our results…” (p.25).

We must not interpret this correlation between the promotion of senior economists and research validating the “positive” effects of QE as these actors intentionally manipulate the results. In the absence of sufficient evidence; making such an assessment is made in bad faith, but there is most likely a third variable connecting these outcomes. For example, Fabo et al. describe the potential of economics who end up working for the Fed having priors that make them more apt to favor interventionist monetary policy (p.4 & 25). They even explore the possibility of researchers inadvertently selecting modeling techniques that would make QE appear to be more effective (p.2 & 17).

Footnotes:

  1. The initial introduction of quantitative easing in the US in 2008 was dubbed QE1. In March 2020, the US Federal Reserve initiated its fourth round of QE (QE4).
  2. In Boom-and-Bust Banking (2012) (ed. David Beckworth), Scott Sumner argues for adjusting monetary policy to  NGDP targeting versus inflation targeting. A stance also advocated by David Beckworth. Sumner explains how inflation targeting is more politically appealing than a Nominal GDP target. After all, inflation is very salient, especially if you are old enough to remember stagflation. Side note, the author of this blog post was born in the late-1980s but is an avid fan of economic history.
  3. The policy of Quantitative easing developed in Japan in the early-2000’s and was subsequently implemented in the United States nearly a decade later.

Bootleggers & Baptists: XLIV- Russian Vodka Boycotts

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Protests often tend to be more figurative forms of political expression than effectual forms of collective action. The process of organizing a demonstration incurs a myriad of monetary and nonmonetary costs including, but not limited to: costs of communication, coordination, transportation, creation of signs, and other varieties of picketing paraphernalia. The one exception to this rule is boycotting goods. Sure, the costs of communication and finding substitute goods can be high; but on the margin are substantially lower than traveling across the country to participate in a protest. The other economic difference between boycotts and live demonstrations is the ability to measure the direct impact. The influence of live demonstrations on public opinion can easily be conflated with other factors to quantify. In contrast, with boycotts, the effect is easily measured by a company or section of business experiencing a slump in sales. Money frequently outweighs principles, making it a persuasive mechanism for facilitating change. In other words, boycotts would be a more rational and economically superior form of protest.

However, this is not to say that every boycott is rational. Boycotts are often subject to the same fallacies that impact other spheres of political behavior. It is easy to perceive an inefficient or mistargeted boycott as a symbolic message analogous to a demonstration, but it could be a misallocation of time and communication costs, as boycotts can exert their influence more quickly and definitively. The romanticism of protest may capture the more visceral and polemical aspects of political participation but yield no results. Certainly, a cost analysis, overlooked by the droves of wide-eyed and quixotic-minded college-aged activists. All too often, boycotts latch on to the most salient products rather than what would drive an economic agent to behave differently. If a salient luxury product is only a drop-in-the-buck compared to a country’s annual exports. Often boycotts are directed towards commodities that would bear no economic impact, being more of a symbolic gesture. Case and point the absurdity of the Russian Vodka boycott [1].

Vodka must be the most ubiquitous Russian export, but Vodka doesn’t even make the top-five commodities that Russia exports to the United States. Per the Office of the United States Trade Representative, the top Russian imports for the United States included:

“….The top import categories (2-digit HS) in 2019 were: mineral fuels ($13 billion), precious metal and stone (platinum) ($2.2billion), iron and steel ($1.4 billion), fertilizers ($963 million), and inorganic chemicals ($763 million)...”

Socially conscious activists should be calling for a boycott of Russian mineral fuels since it is the largest export to the US. Arguably, validating South Carolina Senator Lindsey Graham’s assertion that to crush Putin, you need to hit their “..oil and gas sector..”. Where does Russian Vodka rank in overall imports into the United States? It doesn’t even account for a sizeable amount of the Vodka consumed in the United States. As of 2017, Russian Vodka only accounted for 1.4% of all Vodka imported into the US. None of the top five vodkas sold in the United States were of Russian origin: Tito’s (produced in the US), Smirnoff (UK, US, Ireland, Italy, Brazil, and Latvia), New Amsterdam (US), Svedka (Sweden), and Absolute (Sweden).

https://www.statista.com/statistics/463960/us-leading-brands-of-vodka-volume-sales/

Even the perennial favorites among the “vodka snobs” are produced outside of Russia: Grey Goose (France, Cognac region), Ketel One (Netherlands), and Belvedere (Poland). Some brands ( Stolichnaya) are being mistaken for being Russian by ill-informed consumers. Overall, a symbolic gesture, the Vodka boycott is a hollow gesture as they are plenty of viable substitutes for Russian vodka. Arguably, Americans weren’t drinking much in the way of Russian Vodka, to begin with. It is safe to say that the financial sanctions placed on Russia be more effective than the feeble effort among the lay public banning Vodka. Mirroring the fallacy of voting; your vote has little probability of influencing election results. Likewise, opting to drink a Grey Goose martini versus a cocktail using a Russian brand will have no sizeable impact on Russia’s economy.

Regardless of the impact of the boycotts, it is still a form of collective political behavior that picks winners and losers. It is ultimately susceptible to the formation of Bootlegger and Baptist (1983) coalitions. After examining the Vodka boycott, the prima facie impression of most observers would be the protesters would be the Baptists, and non-Russian Vodka producers would be the Bootleggers. There is some truth to this interpretation of the boycott, but it does not capture the whole story.

Invariably, there will be Dual-Role Actors lurking within the Baptist faction of the coalition. Political activism has its incentives structure for rational actors hopping on the self-righteous bandwagon. Participants in a protest can forge careers, earn social currency, network, gain more business, earn the right to virtue signal, and even gain a sense of moral superiority. Despite their sincere belief in the moral justification for not economically supporting Russia, they still obtain personal benefits.

Foot Notes:

1. I was planning on writing this blog post on Saturday, February 22; however, due to a busy work schedule and other obligations, I am writing this essay a week later. Damn you, Forbes, you beat me to the punch!

Bootleggers and Baptists: XLIII- Family Dollar, Rodents, Contamination, and Voluntary Recalls

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For a firm, a product recall can be a publicity nightmare. Aside from the loss in revenue and the money spent on corrective measures. A business faces the issue of losing consumer confidence in its products. The recent recall of Family Dollar merchandise due to a rodent infestation in their corporate warehouse in six states is no exception. How does a firm even begin salvaging its sullied public image after such an egregious oversight? Perhaps, their image wasn’t so great, as they were known as a bottom-shelf discount retailer. However, this does not absolve them from taking corrective actions to remedy the situation. Family Dollar has opted to issue a voluntary recall after the FDA issued an alert detailing the squalid conditions of their storage facilities in Alabama, Arkansas, Louisiana, Mississippi, Missouri, and Tennessee.

The superficial observer may perceive this scenario as the least they can do. After all, Family Dollar did risk getting many of their customers sick due to selling contaminated goods. Such an observation fails to acknowledge how the firm stands to benefit from issuing a voluntary recall. At this point, Family Dollar is in the damage control stage of managing this debacle. The firm is seeking to revive its image to mitigate the loss of future business. This scenario has features of a Bootleggers and Baptists (1983) coalition. One side of the faction; provides the normative or moralistic argument for a specific policy position or course of action. The other subset goes along with the moral policy as they would benefit from such a policy position. 

The question becomes, the event of Family Dollar’s voluntary recall, who are the Bootleggers and the Baptists? The Baptists are most likely the FDA[1]. In this scenario, the FDA provides the consumer advisory; and inspection of Family Dollar’s warehouses, done in the name of consumer safety. Even though such measures do validate the salaries of the FDA inspectors (remember Richard B. McKenzie’s concept of “joblism”), this action is still done to promote “consumer welfare”.Regardless of how we feel about the nature of a government agency acting in the purported interest of public safety, it is a moral position.

If the FDA is the Baptist, making Family Dollar the clear Bootlegger in this scenario. It is important to note that under Food Safety Modernization Act (FSMA), per section 206, the FDA has been conferred the authority to mandate recalls for contaminated food products. The rodent infestation impacted food and non-consumable products sold by the retailer. Family Dollar can take control of their image by choosing to recall these items before the FDA has an opportunity to force them to withdraw the contaminated merchandise. The nature of the recall would take on a different tone if done at the request of a government agency. 

Footnotes:

  1. As much as it pains the author to admit that a government agency has the high ground in this situation, that might be the case. However, if this controversy is the demise of Family Dollar, it would be purely the byproduct of market forces, making their market failure legitimate. 

Bootleggers and Baptists: XLI- Polymarket vs CFTC

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One of the latest innovators in Predictions Markets blockchain-based Polymarket has stirred the ire of the CFTC. Polymarket is:

 “… is a decentralized information markets platform that lets people trade real-money markets on the outcomes of the most highly debated current events and follow the odds to garner accurate insights about the future. Users buy or sell Outcome Shares, which can be redeemed for $1 if the outcome is resolved as correct, and become worthless if it’s incorrect. Owners of outcome shares are never locked in and can sell their position at any time…”.

Why would CFTC regulators place this innovative consensus aggregating mechanism in their crosshairs? 

Since the interpretation of the incentives structure of Prediction Markets are contingent on the regulatory framework, such activities are analogous to gambling or a form of derivates trading. The legal scholar Tom W. Bell suggests that public Prediction Markets run a high risk, while private PMs run a lower risk of being subject to the scrutiny of the CFTC (p.6). Bell states that:

“…As the CFTC has observed, prediction markets often offer binary options contracts akin to those over which the Commission has claimed exclusive jurisdiction. Any public prediction market that offered real-money trading on such contracts, and that does so within the reach of U.S. law, would thus arguably fall within the CFTC’s regulatory purview—especially if the market offered significant hedging functions…”.

Purely based upon the above description, it becomes clear that Polymarket may qualitatively fulfill the CFTC requirements for the regulatory authority. However, placing such exchanges under the regulatory scope of the CFTC does present several barriers to entry. After the enactment of the  Dodd-Frank amendment to the   U.S. Commodity Exchange Act (the CEA), as a consumer protection measure, “…swaps generally can only be offered on a bilateral basis among eligible contract participants, or over a platform that is registered as a DCM (Designated Contract Market) or SEF (Swap Execution Facility)…”. Section 5h of the Commodity Exchange Act details the arduous requirements to obtain and retain operable status as a swap facility. These stringent requirements make compliance difficult for up-and-coming exchanges.

This situation mirrors a multitude of scenarios where regulations create barriers to entry. These obstacles are erected in the name of consumer protection, but their actual effects are contestable. Certainly, most laws select winners and losers, creating discrepancies that would not otherwise exist. Even if a regulation does make the average citizen better off, there is still a distant party in the background that stands to benefit. In effect, regulatory crusades forged in the name of consumer protection are frequently subject to Bootleggers and Baptists (1983) coalition dynamics. One faction of the advocacy coalition provides the moral reasoning for the new policy, the proverbial “Baptists”. Then lurking around the corner are our beneficiaries of the new regulation, the “Bootleggers”. The Bootleggers do not necessarily have to be vocal exponents of the causes; their role in the coalition can be diverse. Ranging from providing vocal support for the Baptists, providing financial resources for political campaigning, to even being a silent and distant beneficiary. In other words, there are certainly are moralistic arguments for erecting barriers to establishing Prediction Markets, but it would be inaccurate to assume that no one stands to benefit.

Beyond the intended financial protection measures (e.g. accountability and transparency) implied in Dodd-Frank, the moralistic arguments for regulating binary contract markets such as Prediction markets extends to other areas of public wellbeing. More opportunities exist for other parties to join the Baptists side of the coalition. Other exchanges similar to Polymarket, are denied the ability to register or shut down over the varieties of wagers placed. This mirroring the concerns that arose over the DARPA PMs established in the early-2000s. A more recent example was when CFTC denied the ability to host a political events contract market under CEA: 5c(c)(5)(C)(i), Section 5c(c)(5)(C)(ii), Section 1(a)(19); the agency citing

“..Section 1(a)(19), that “involves, relates to, or references terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law”; WHEREAS, several state statutes, on their face, link the terms gaming or gambling (which are used interchangeably in common usage, dictionary definitions and several state statutes) to betting on elections, and state gambling definitions of “wager” and “bet” are analogous to the act of taking a position in the Political Event Contracts..”.

In the case against Poly Market, it seems as if the exchange is under fire from the CFTC for not following the registration process. Directly linking the CFTC’s argument for pursuing legal action against Polymarket to the CEA requirements.

“..Because the betting contracts were deemed swaps, the CFTC found that Polymarket violated Section 5h(a)(1) of the Commodity Exchange Act and Regulation 37.3(a) thereunder which prohibit the operation of a facility that offers a trading system or platform in which more than one other market participant can execute or trade swaps with more than one other market participant unless such facility is registered as a SEF or a DCM. Under the order, Polymarket is required to cease offering access to trading in noncompliant markets and to wind down those markets unless the offering, solicitation, or trading in those markets complies with CFTC regulations. Polymarket was also ordered to pay a $1.4 million civil penalty. While Polymarket did not admit or deny the findings in the order, it is required to cooperate with the CFTC on an ongoing basis and is prohibited from making statements denying the findings or conclusions of the order and from giving the impression that the order is without factual basis…”.

The question remains, who benefits from CFTC taking action against Polymarket and the stringent regulation of binary option derivative markets? Existing exchanges that have either registered or have been granted exemptions (e.g. a no-action letter), one example being the Iowa Electronic Markets (IEM). If the barriers to entry remain high, exchanges like the IEM remain one of the few domestic options Americans have for wagering on predictions contracts.

Bootleggers & Baptists XXXIX- AB-5 and Uber

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The emergence of the Gig Economy has allowed millions of Americans to earn additional money without the constraints of rigid work schedules. However, the flexibility allotted to contractors through ride-sharing and food delivery services is under threat in California. Back in 2019, the California legislature passed Assembly Bill 5 (AB-5) that would classify many freelance workers as “… workers bona fide employees, with schedules and hours determined by the company rather than the worker..” (p.4). The California courts apply AB-5 under the three-prong test developed in Dynamex Operations v. Superior Court to distinguish contractors from full employees; after AB-2257 passed in 2020, “..109 categories of workers were exempted from AB-5..” (p.7). In response to AB-5, delivery and ride-sharing platforms collectively generated Proposition 22 to exempt these services from the law (p.7). Unfortunately, the law was ruled as unconstitutional 2021; per the Los Angeles Times:

That’s in part because the law, Roesch wrote, infringes on the power of the Legislature explicitly granted by the state Constitution to regulate compensation for workers’ injuries.

 Hector Castellanos, et al. v. State of California, et al.

Amid all the AB-5 turmoil, one question emerges, who benefits from labeling gig workers as full-employees? It certainly isn’t the Uber driver. Considering, 80% of surveyed independent contractors “…reported having done some sort of independent contracting gig in the last year said that it was a part-time occupation…” (p.6). Also, most gig workers have insurance benefits either from their primary job or spouse (p.5) and prefer the flexibility over fringe benefits that “…bear opportunity costs in the form of foregone income they could have received if not for the benefits.” (p.6).

When viewed through the lens of Bootleggers and Baptist (1983), it is clear that few economic agents are hiding within the smokescreen of the workers’ rights coalition. The irony is, the demographic that AB-5 is designed to “help’, vehemently opposed the legislation. It can be assumed that the California legislature is a Dual-Role Actor in this coalition. Why? State lawmakers most likely passed this law as a worker protection provision for gig economy employees. However, Judge Roesch’s admission that excluding gig workers interferes with the authority of the legislature. Lawmakers are also Bootleggers for having an invested interest in not relinquishing political power.

 One notable economic agent on the bootlegger side of the coalition would be labor unions. Some readers may wonder why labor unions would not be considered a Baptist or even a Dual-Role Actor. Unions are heavily involved in the political process (p.410), theoretically could be perceived more as political interest groups than employee protection organizations. Arguably, these organizations do little to advance the interests of workers. Labor unions within the state of California had angled to organize ride-share drivers, “…contributing to the pressure on legislators to make a change..”(p.7). Various labor unions throughout California have expressed that AB-5 would reduce the exploitation of contract employees. However, they benefit from this legislative victory because it reinforces their political currency as an interest group. One union that stands to gain the most from reclassifying Uber drivers are taxicab unions. It is well known that the taxicab industry has struggled to compete with the convenience and lower rates of ride-sharing apps. The state of Nevada has placed restrictions on platforms offering ride-sharing services. Uber has faced many regulatory barriers often supported by taxi drivers (p.191); most notably “medallion systems” where governments issue a limited number of licenses to operate as a driver (p.574). Classifying Uber drivers as full-employees would make employing contractors more costly and onerous, thereby disturbing Uber’s operations. All of this to shield taxi drivers from the Schumpeterian gales of creative destruction.

Editorial Graveyard- Part III: The Bootlegger and Baptists of Woke Capitalism

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Op-Ed submission was rejected by the Foundation For Economic Education for being too “abstract” and “academic”. The corresponding paper proposal for George Mason was also rejected. I am currently working on another proposal for GMU focused on intellectual property.

Introduction:

Bruce Yandle’s Bootlegger and Baptist (1983)  theory of regulation presents a practical explanation for why such unorthodox coalitions are effective vehicles for camouflaging rent-seeking behavior by a firm. In brief, armed with the public appeal of the moral arguments posited by the Baptists, the Bootleggers can quietly lurk in the shadows, funding initiatives that will advance their self-interest. In other words, the ethical advocates create a smokescreen that provides cover for the business interests, superficially obscuring the stigma of corporate advocacy, since few examples of political action invoke the ire of the average citizen than policy campaigns that line the pockets of big business.

           The trend of “woke capitalism”, however, is bringing the Bootleggers out of shadows and into plain sight. CEOs are now openly standing in unison with political activists, speaking out against topics ranging from police brutality to environmental issues. The Bootleggers can work openly with the Baptists to promote a positive image while still silently providing monetary support in the background. Moreover, the social justice messaging of “Woke Capitalism” extends beyond corporate activism and is observable in the product market and advertising. Some companies, for example, adopt marketing that emphasizes social consciousness to secure the business of Gen-Z. A clear example is Gillette’s 2019 advertising campaign addressing “toxic masculinity”. Typically, companies use this tactic to target younger consumers with higher preferences for ethical products and brand authenticity, requiring companies to go beyond philanthropy and mandating community services hours for their employees; their woke ethics are thereby conveyed in their branding.

The Four Main Categories of Woke Capitalistic Coalitions:

           The most recent alliances forged between business interests and political activists take the form of four main taxonomical categories. Some of the various types of Bootlegger and Baptist coalitions feature collaboration between firms and activists. Other coalition types  form within the technocratic structure of the corporation or emerge between different departments within the organization. Woke coalitions thus have several notable classifications of “woke” corporate alliances. Two further subcategories include proactive and reactive forms of rent-seeking.

Reactive Coalition Models:

           The reactive models for “woke” coalitions include two subtypes of collective action organization, the interaction between external actors and collaboration between internal employees. The first variety of reactive coalitions are rent-seeking alliances formed to restore the company from a sullied reputation caused by criticism, the objective being to mitigate the loss of sales and reputation amid public controversy. Some firms thus attempt to distance themselves from the controversy through their activistic partnerships. By way of example, Bank of America in the past was accused of engaging in “discriminatory” lending practices. To counteract this negative publicity, last year BOA pledged to donate $1 Billion over the next four years to community programs to address economic and racial inequality. Such an act of philanthropy can easily make the general public forget about the firm’s past indiscretions.

The second type of reactive “woke” coalitions are the intracompany factions designed to divert attention from potentially costly internal controversies. In instances of hostile work environment ligation, the legal team, the human resources department, and executive management band together to deescalate the publicity nightmare. Human Resources and management work together to legally distance the company from a harassment incident and shield executive management from more scrutiny and accountability. Legal navigates the statutory and tort concerns and works internally to establish an anti-harassment campaign intracompany. A prime example of an internal diversionary coalition was Vice media’s response to sexual harassment claims. After settling several cases, the company decided to form an advisory board to educate employees on diversity and proper workplace deportment. Even if such an initiative on the part of the human resources department failed to soften the bad publicity, at least it may decrease the probability of another incident.

Reactive Coalition Models:

Finally, the last two variants of “woke” coalitions aligning business interests with moral advocates to facilitate proactive forms of rent-seeking. Similarly, these proactive coalitions can be delineated into examples of internal and external collaboration models. Proactive partnerships form to capture potential gains and avert the costs of prospective controversies. The most salient example of such external cooperation would be firms standing behind a woke cause, anticipating that such an alliance will obscure the firm attempting to shape current regulation (regulatory capture).  A notable example was detailed in the Fall 2021 issue of Regulation magazine, which showed how providers of cloud computing services IBM and Oracle joined forces in 2017 to advocate for the passage of  the Stop Enabling Sex Traffickers Act (SESTA) and the Fight Online Sex Trafficking Act (FOSTA); effectively becoming bedfellows with various factions of human rights activists. Both laws intended to attribute liability to digit platforms for any user content that promotes sex trafficking. The article’s author Thomas A. Lambert speculates that IBM and Oracle could have done this with the hopes crafting potential exceptions to the platform liability portions of SESTA and FOSTA.

Additionally, we cannot forget the proactive inter-department coalitions that are emerging within corporations. For example, several companies are hiring diversity and inclusion “coaches” as a peripheral subset of human resources. The demand for this job role has become so prevalent that a number of colleges offer programs to become a certified “diversity practitioner”. The human resources department defends the existence of these staff members by emphasizing the need to educate employees to avoid instances of harassment and discrimination. The diversity coaches preach the virtues of cultural sensitivity and other tenants of the “woke” philosophy, thus producing a self-reinforcing spiral justifying further diversity initiatives.

Conclusion:

 Superficially, these alliances between big business and “woke” activists seem relatively benign, but in reality, these coalitions have profound consequences for the integrity of capitalism and the rule of law. The four types of woke B&B coalitions described above undermine capitalism and the rule of law because woke capitalism has made it easier than ever for business interests to create the façade of morality but are unjustly bending the rules-of-the game in their favor. Wokeism provides the veil obscuring corporate America’s hand in the legislative till. Generating more anti-competitive laws that undermine both the rule of law and free trade. 

The emphasis on firms getting involved with “woke” causes not only disguises crony capitalism and rent-seeking behavior, but also distracts companies from their primary custodial duty to their shareholders. As Nobel laureate Milton Friedman expresses in his own Friedman Doctrine , a firm has a duty to maximize its profits for its shareholders. After all, these individuals have invested in the company expecting a higher return. Without this financial support the firm could not achieve its current level of success. Diverting funds that could be used for investment in capital to increase productive efficiency for political activism is tantamount to theft.

Bootleggers & Baptists: XXXVII: Salmon in Alaska (The Fight Against GMO Food)

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Genetically modified food is a flashpoint in the public debate over the wholesomeness of the modern diet. Many speculate that consuming GMOs has been linked to several various health problems. Few people question whether there are any benefits to producing genetically modified food products. There is a bit of irony here since most anti-GMO activists also happen to be exponents of environmentalism. In certain situations, GMO food could feasibly be sustainable alternatives to dwindling supplies of natural food sources. One salient example is in the market for edible fish. 

The Fall 2021 issue of Regulation magazine details the struggle of AquAdvantage to obtain approval from the FDA for their edible genetically modified salmon. However, even after nearly 13 years of pending FDA approval, AquAdvantage still has other legal hurdles to clear, obstructing their entry into the market of consumable fish. This threat is coming from the political and business interests in the state of Alaska. Sen. Lisa Murkowski (R–AK) assuming the veneer of consumer production advocate; argues that consumers need to know what they are consuming. Murkowski:

“… attached a rider to the FY 2019 appropriations bill that required genetically engineered salmon approved before the labeling standards created by the U.S. Department of Agriculture’s National Bioengineered Food Disclosure Standard regulation to include the words “genetically engineered” in its market name — a requirement seemingly intended to spook consumers…” (P.3).

The “moral” concern expressed by Murkowski; creates a dynamic conducive to Bootlegger and Baptist’s (1983) coalitions. Murkowski can be considered a Baptist for articulating consumer protection concerns for the stringent labeling requirements. She also could arguably fall into the category of Duel-Role Actor if her consumer protection advocacy is sincere. After all, Murkowski is a politician and has an incentive to appease her constituency. Consumer protection advocacy is a win-win strategy. Since the average voter may superficially perceive this initiative as being in their best interest, of their health and safety, continue to vote for Murkowski. But arguably, the most more powerful voter-bloc she will need to win would be the salmon fisherman and hatcheries. The industry surrounding food-grade salmon production is estimated to generate $600 million annually in economic output. Making it quite evident who the Bootleggers are! However, placing restrictions on genetically modified salmon creates a bit of a Prisoners Dilemmaas the U.S. producers cannot meet domestic demand for salmon, 90 % of all salmon sold in America is imported.  

Bootleggers and Baptists XXXIII- The Three-Tiered Distribution of Beer in the “Bible Belt”

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The southeastern region of the United States has a peculiar relationship with alcoholic beverages. Southern states such as Kentucky and Tennessee have a long history of whiskey production. The south is also the home of many conservative Baptists that view alcohol consumption as being immoral. The result of the ethical opposition has been the formation of dry counties and onerous laws governing alcohol production and sales. Presenting more opportunities for interest groups (Bootleggers) to find ways of strategically gaming the system from multiple points of the supply chain (p.386). Often the Bootleggers, operate as a source of backdoor funding for morally justifiable policy campaigns (Regulation Magazine, Vol 44, No.1, p.14-15). The geographic “chessboard” strategy of keeping dry counties adjacent to wet counties dry is far from the only approach deployed by various interest groups (p.397).

Another strategy used by business interests in the south’s beer industry is regulatory capture. A means of leveraging market power to mold regulations to the benefit of corporations; is a typical extension of soft-political power used by corporations throughout the United States. States such as Georgia have long prohibited direct-to-customer sales from breweries, historically referred to as tied-house (p.390). States that have permitted self-distribution by smaller brewers since 1978 have seen more growth in craft breweries (p.392). These restrictions date back to the legally sanctioned distribution arrangement of tiered distribution systems. In this system, beer is distributed to retail outlets via a licensed distributor. Favored by larger breweries such as Pabst and Miller since the market share they lost in the years before the Volstead Act from smaller breweries self-distributing their beer (p.390). The reason why bigger breweries still favor these archaic laws is that they would rather not have to compete with the dizzying array of microbreweries for shelf space (p.395).

However, has the moral argument of limiting direct sales reduced the instances of problematic drinking held up to scrutiny? That would be resounding no. Empirically, restricting direct alcohol sales has had little influence on overall alcohol consumption (p.399). It also should be noted that craft breweries have stronger connections to their communities. As stated by the executive director of the Georgia Craft Beer Guild:

“….I would like to think that craft breweries, because of the community connection, aren’t nearly the threat to intemperance that multi-nationals are, or Wal-Mart…”

Bootleggers and Baptists XXXII: The Bootleggers of Mask Mandates

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The COVID-19 Pandemic impacted almost every facet of daily life. The emergence of this unknown pathogen has generated an enormous amount of panic; acting as a pretext for laws and regulation.  It is easy to see how the insights of political economist Robert Higgs have been validated by the number of laws and relief bills that have proliferated in the name of the pandemic. Government action hardly ever has a neutral effect on the incentive structures of constituents, business interests, bureaucrats, and politicians.  There is always a beneficiary of any implemented policy that exists within every decision-making structure. Even in the context of an apolitical governing institution such as a Home-Owners Association

The most common form of COVID-related laws have been mask mandates, like another policy, there are disparate effects. Since benefits can be conferred through mask mandates they apply to Bootlegger and Baptist’s (1983)  coalition building. In almost any scenario the scientists would be our proverbial “Baptists” due to their vocal concern for public safety. This statement does not validate whether masks are effective at curtailing the spread of COVID-19. It most likely connotes a sincere concern for public welfare making it a normative position, therefore a moral argument for mask mandates.

Once we start to address who benefits from mask mandates the conversation starts to get interesting. Similar to the COVID engendered microchip shortage the beneficiaries of mask requirements have changed over time. The most notable “Bootlegger” of the nascent period of the pandemic were Mask producers. Specifically, mask manufactures are based out of China. It would be a mistake to interpret this observation as a tacit critique of free trade, this fact is self-evident.  The increase in mask sales does not require any further explanation beyond mask mandates and fear of the virus spreading. The question of why this was more fruitful for Chinese producers than other mask manufactures does need to be elucidated. That was largely a byproduct of the recommendations of the FDA.  Per the Brown Political Review:

“…A lack of knowledge and trust in these companies has led hospitals to severely ration their workers’ N95s rather than purchase additional supplies. The private market is no better: Facebook, Amazon, and Google are largely blocking domestic N95 manufacturers from advertising and selling their products. At the same time, most consumers feel obliged to use less-protective cloth or surgical masks due to continuing CDC guidance to reserve N95s for hospitals that will not even accept them. The CDC defends this policy by pointing to the relative efficacy of cloth masks and citing “reasons supported by science, comfort, costs, and practicality,” though these reasons seem increasingly outdated. So, the pandemic continues, millions of Americans live in fear of getting sick, and all the while tens of millions of life-saving products are sitting unused in storage facilities. The N95 shortage is an illusion, and as the virus and its variants continue to spread, more must be done to disseminate the essential products throughout the population…”

Even though domestic producers invested millions into expanding their production capacity, foreign masks were still preferred. It is estimated that “… between March and September 2020…” the shipping containers containing N95 masks imported into the U.S. increased from 6 to 3,000. While “…National Institute for Occupational Safety and Health (NIOSH) approved 19 domestic manufacturers to begin to produce N95s..” the agency neglected to promote the masks and clearly articulate the distribution plan. Even outside of China’s relative comparative advantage for manufacturing other factors funneled production demand in their direction. Several domestic policies made the sale and distribution of domestically produced masks more onerous. Clearing the U.S. market for Chinese producers.

China’s domination of the mask production market has advantages that extend beyond economic benefits. China also garnered some soft political power through possessing a surplus of N95 masks. The Chinese government utilized the distribution of masks as a tool of diplomacy. Whether this decision was a moral one is a firm subject for debate. It is undeniable that China appropriates some “political purchasing power” from their superior efficiency in manufacturing masks. This is true even in the absence of some of the more obtuse regulatory policies implemented by the United States. The Chinese government capitalized on this opportunity to exercise the nation’s political and economic strength.  Many of the countries that received the most generously mask donations were nations that had the friendliest relations with China. Fully recognizing the potential for gaining social currency through these “benevolent” humanitarian gestures turned this venture in foreign aid into a publicity campaign.

The Chinese government seized the opportunity to “tell China’s story well” (Jacob 2020) and started donating medical equipment to other countries. While China sought discretion from donors such as the EU (when foreign medical supplies were sent to Hubei province in January 2020), the Chinese state media were quick to portray China’s donations as acts of benevolence (Popescu 2020). Many leaders of recipient countries duly praised China in return. For example, Serbia’s president welcomed a team of Chinese doctors in March 2020 by kissing the flag of the People’s Republic (CGTN 2020).

Many Americans may view the pandemic global aid initiative as a cynical ploy on China’s part. Such evaluations may be relatively inconsequential at least China was willing to help someone. In contrast, China could have opted to just horde all the N95 masks and callously sell what they could share from their domestic demand. However, it would also be naïve to completely ignore the political optics of the situation.


As time has passed and the pandemic continues, we have seen a shift in the beneficiaries of domestic mask mandates. Irrespective of the U.S. mask supply, the mask shortages of the early pandemic period have fallen out of public consciousness. Now the debate over mask mandates has devolved from a civil liberties debate to a diametrical shouting match. This uncivil discourse leaves little to no room for any grey area. Either you are either pro-mask or anti-mask with the underlying implication being that you either favor the mandates or oppose them. Few, if any pundits enrapture in this schoolyard squabble, would ever dare to oppose the mandates, but actively choose to wear a mask in public. Despite the fact, such a position is perfectly rational. Once again, we do live in an age of hyper-political polarization. In a similar manner to how the vaccines would later become politicized, any precautionary measure against COVID has morphed into the rhetorical argument. Where both sides of the debate completely dispense with facts and reason, leading to the assumption that both factions are more concerned with winning the debate than generating effective policy.

From the pro-mask campaign, an insidious and morally objectionable practice has emerged. That is the public shaming of mask and vaccine skeptics that have died of COVID. It is reasonable to argue that these media campaigns from the predominately left-wing media are more morally depraved than China’s mask allocation policies. The media has been joyously publishing headlines highlighting how COVID-skeptical public figures ranging from politicians to radio talk show hosts have succumbed to the virus. This public ridicule goes far deeper than utilizing these narratives as evidence that COVID is truly dangerous. There is a deeply ingrained derisive cruelty implied in it this public displace. In all honesty, is tantamount to dancing on the graves of these vocal opponents of mask mandates. The pro-mask camp unscrupulously benefits through utilizing these individuals as examples of why masks are necessary. In the same breath derive callous amusement out of mocking their “stupidity” with no regard or respect for the person that died.

Bootleggers and Baptists: Volume 2

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Bootleggers & Baptists: Volume 1

Below are the blog entries 10-20 of the Bootleggers and Baptists series. Going forward collective volumes of the series will be published for every ten blog posts composing a volume. These volumes include supplemental essays and addendums written within the timeframe of the corresponding blog posts.

Essays 10-20:

Bootleggers and Baptists X: Marijuana and Taxes

Bootleggers and Baptists: Part XI: Workplace Diversity****

Bootleggers & Baptists Part: XI: CVS and Tobacco****

Bootleggers and Baptists Part XII: Dual-Role Actors on Both Sides of Proposition 205 (Arizona, 2016)

Bootleggers and Baptists XIII: The Dawes Act of 1887

Bootleggers and Baptists: XIV: Massachusetts Bans Menthol Cigarettes

Bootleggers and Baptists XV: Term Limits

Bootleggers and Baptists: XVI- Marijuana Industry and Delta-8

Bootleggers & Baptists-XVII: Dual-Licensing In Arizona

Bootleggers & Baptists: XVIII: Corporate Virtue Signaling

Bootleggers & Baptists: XIX- Ron Paul and The Federal Reserve

Bootleggers & Baptists: XX- The Death Penalty

***On installments XI & XII there is a sequencing error.

Supplemental Content:

Bootleggers and Baptists XVI: Delta-8- Addendum

Bootleggers and Baptists- XXX: USB-C Mandate in Europe

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USB (Universal Serial Bus) connections and ports have become a ubiquitous item in our daily lives. Whether it temporarily storing documents on USB flash drives and other peripherals (e.g. hardwired keyboards), we all use USB connections in some capacity. The matter of USB connections would hardly be a topic that could be conceivably politicized. However, the European Union has succeeded in turning the USB ports on electronic devices into a public policy debate. Next month the European Commission intends on presenting a “draft law” that would require all electronics producers to have a “common charging interface”. This would effectively prohibit the Lightning connections utilized by iPhones. If passed all other formats other than a USB-C connection would be banned in the European Union.

The question becomes what is a USB-C connection and why is the European Union so adamant about making it the compliance standard for the continent? USB connections and ports have been in existence since 1996. One of the latest innovations in USB connections came in the form of the USB-C (software version 3.1) in 2014. The USB-C connection boasts several technological advantages USB 2.0 and USN 3.0. Some of the benefits include thinner cables, greater capacity for transmitting data, and backward compatibility. Although these are most likely not the reasons why the EU is pushing for all electronics to have the USB-C standard for charging ports. The campaign for the USB-C mandate is arguably not directed towards consumer protection. Rather is more oriented towards environmentalism. One outstanding advantage of the USB-C format is that is more durable, meaning that it will not wear out as quickly as previous models of electronic port connections. The goal of mandating USB-C connections would be to reduce the amount of E-Waste a plank in the platform of the EU’s New Circular Economy Action Plan.

This initiative brought forth by the European Commission cannot escape the potential of a Bootleggers and Baptist (1983)  coalition from forming. The moralizing agent in this situation would be the European Union. Yes, there are some political gains for advocating for environmental causes. For instance, you look “progressive” and you earn the right to virtue signal. Above all, you win over the progressive vote, which is presumably sizable in Europe. The EU  may be a potential Dual-Role Actor, but for the sake of clarity, let’s assign the role of “Baptist” to the EU. Who are the Bootleggers in this scenario? It is highly unlikely that no one would benefit from the EU placing such compliance requirements on the charging ports for electronic devices. Regardless of whether the regulation is purported to target consumer safety or environmentalism disparate effects are inevitable. This was an observation implicit in Yandle’s theory since the nascent period of its development. Hence why in Yandle’s seminal paper he suggests there is a “demand” for regulation among corporations. The implementation of regulations operates as a backdoor way of reducing competition without violating antitrust laws. Granted, antitrust laws in the EU are different than those in the United States; however, this is still circuitous means of subverting the legal constraints of anti-competitive market behavior among firms.

Most electronics producers are on board and have already adopted all of the purposed EU requirements; except for Apple. While other Apple products have been reformed to include USB-C ports, the iPhone still uses a Lightning connection. Apple has even openly stated that such a requirement would hinder innovation. Yet, the other giants such as Samsung have remained silent on the matter; expressing tacit agreement with the purposed EU measure. It should be noted that Apple is a major competitor in the Smartphone market. The iPhone has approximately a 50% market share of the Smartphone market in the U.S. However, the global market share is primarily held by Samsung and other competitors. Nevertheless, Apple is still a serious competitor for companies such as Samsung in the global market. The silence of other producers most likely is due to rational business interests rather than the normative virtues of environmentalism. Therefore, Apple’s competitors in the Smartphone market are the “Bootleggers” of the EU’s USB-C mandate.

Bootlegger’s and Baptists XXIX- Arkansas and “Wet Counties”

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In the political process, many coalitions are symbiotic relationships that require the resources from both groups to successfully achieve results. The classic Bootleggers and Baptist  (1983) model best exemplify this very fact. However, there has always been the implication that this political relationship has always been one-sided. The Baptists do all the heavy lifting from a public relations standpoint, meanwhile, the Bootleggers lurk in the shadows as silent beneficiaries. Superficially it almost seems as if the Bootleggers are free riders how to prosper at the expense of those who risk their reputation for controversial positions. But typically in the political landscape of the United States morality isn’t enough. In the absence of adequate funding, a political campaign ends up being dead on arrival. Because money is required for advertising, organizing outreach events, and other means of communicating the campaign’s message. Often for what the Baptists lack in finances, the Bootleggers tend to contribute to the initiative. This is due to the Bootleggers frequently being involved in business and having a serious monetary stake in the issue. It would be a mistake to interpret this previous statement as a value judgment since anyone of us would do what we could to defend our paychecks.

One excellent example of this dynamic was detailed in the Spring 2021 issue of Regulation magazine (Vol 44, No. 1), published by the Cato Institute. Presented in the article Not So Unlikely Coalitions (p.12-15) written by economics professor Jeremy Horpedahl. The article focused on the legalization of alcohol in various counties throughout the state of Arkansas. Since the repeal of prohibition, the re-legalization of alcohol sales has been done incrementally at the county level. By state law, the legal status of alcoholic beverages can be altered by being voted on as a referendum. Similar to how the Marijuana relegalization issue is being handled now, except at lower level governance. For the initiative to appear on the ballot a petition must be signed by 38 % of the “.. jurisdiction’s voters..”. The author also notes that regionally voter turn is approximately less than 50 %, meaning that last-minute campaigns to halt the legalization process tend to be ineffective (p.14).

In Arkansas, the alliance between religious leaders and liquors stores in adjacent “wet counties” in Missouri have been proven to be effective. Both sides of the coalition found that it is better to direct campaigning efforts towards keeping the referendum on the ballot rather than beating it at the ballot box. Generally, once an initiative to re-legalize alcohol reaches the voters in Arkansas it tends to pass.  During the 2010s, Craighead, Crawford, Faulkner, Independence, Johnson, Randolph, and Yell counties all successfully prevented alcohol legalization from appearing on the ballot. Bootlegger interest groups easily raising over $100,000 to fund various PACs to defeat the bill before it even reaches the ballot box. Funds are being allotted to press interviews with local religious leaders and various media campaigns (p.14). It should be noted that areas that are landlocked between other dry counties lack any liquor stores to act as the Bootlegger interest group leaving the Baptists on their own for obtaining funds (p.15). However, per Horpedahl there has been a new entrance to the political interest game operating as Bootlegger for the legalization side, Walmart. The titan of retail raised over  $700,000.00 in 2014  to support the legalization effort in  Saline county dwarfing the contributions of the opposing set of Bootleggers ($157,500.00) (p.15).

It is easy to perceive the role of the Bootlegger as being almost parasitic. The Bootlegger interests idly standby while the Baptist do all the leg work of persuading the public. Upon reviewing Professor Horpedahl’s s article it becomes quite clear that the Bootleggers do assist in supporting political advocacy, they just happen to do so in the shadows. These business interests are forced to conceal their direct involvement in public policy due to the stigma of the intermarrying of business and politics. Demonstrated by the fact terms such as “dark money” have now entered the public consciousness. Leading most to express skepticism of the purported intentions of corporations when they tip their toes into the pool of political advocacy.  

Bootleggers and Baptists: XVII- Prediction Markets and Regulation (Gambling?)

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Arguably there are few methods of aggregating data that are as effective as using Prediction Markets. Prediction Markets are exchanged markets where speculators purchase “… that yield payment based on the outcome of uncertain events..” (p.877). One of the biggest misconceptions regarding this method of forming consensus on the accuracy of future events is that experts will be supplanted by amateurs. However, this concern is unfounded because of the knowledge necessary to succeed in such a speculative market. The experts would tend to dominate these markets (p.85). Separating Prediction Markets from gambling in a legal context. Dumb luck is not rewarded, but the diligent and concentrated study is. The legal lecture identifies gambling as having an element of chance (p.102). The intention of opening the trading pool to laypeople is not to give them to trade based on arbitrary “hunches”. Rather, to supplement the data pool by contributing the “on-the-ground” information absent in academic analysis (p.82).

Even though the work of legal scholar Tom W. Bell (p.102-104) demonstrates that Prediction Markets are distinct from games of chance. If a Prediction market is poorly designed, it has the potential to be subjected to anti-gambling laws (p.419). Although Prediction markets reflect the features of a decentralized form of “consulting “services than a sports betting pool (p.419). Many privately hosted sports beating pools escape prosecution due to their discrete manner. Even an in-house prediction market hosted by a corporation may raise the attention of prosecutors (p.102). It should be noted that prediction markets also face potentially regulated by the SEC and CTFC. Unfortunately, placing great barriers to entry for institutions looking to host such data aggregation markets. Prediction markets are being stifled by massive layers of red tape.

Although, it is possible under certain circumstances to be granted exemptions by regulatory agencies. 

For example, one of the best-known legal prediction markets in the United States is the Iowa Electronic Markets (IEM). In the early 1990s, the CTFC issued two no action letters granting the IEM immunity from the commission’s regulatory authority (p.25). Essentially, all federal agencies are immune from anti-gambling laws (p.419). A fact confirmed by Robin Hanson by describing the immunity enjoyed by the DARPA’s PAM project (p.77). Why not grant regulatory exemptions to all purposed prediction markets? Certainly, a novel solution. There are those voicing moral concerns and those who can prosper from prediction markets remaining heavily regulated. Presenting the classic features of any Bootlegger and Baptists coalition (1983).

Baptists:

One of the most evident examples of a Baptist would have to be the regulators. Despite the numerous examples of employees of regulator agencies engaging in rent-seeking and other pursuits of aggrandizement, there is still a concern for the rules being enforced. This does not mean that the rules are necessarily rational or even moral, but there is an ethical commitment to duty. Unfettered access to trading or gambling markets can result in adverse consequences for participants and the economy. If prediction markets were erroneously designed, they could operate similarly to securities and futures markets. Making prediction markets susceptible to dishonest practices such as insider trading leading to disparate effects for less privileged participants. Also, keeping prediction markets within the bounds of gaming regulations could help reduce the externalities of problematic gambling. In most jurisdictions domestically, as a condition of being granted a gaming license establishments are required to have their staff trained on awareness programs. Even requiring signage offering resources for those suffering from gambling addiction to seek treatment. If prediction markets are in theory like other forms of gambling, it could be a welcomed substitute for individuals with gambling problems. Casinos are often encouraged by state governments to implement exclusion programs for problematic patrons. The trading of cryptocurrencies, precious metals, stocks, etc. is free from the reach of gaming regulations. Potentially providing problem gamblers with a slightly different type of impulsive thrill. Prediction markets could fall into this category even if they are regulated as securities or futures commodities. If prediction markets lack age restrictions barring minors from participating. It may operate as a backdoor form of underage gambling.

Bootleggers

  • Casinos, lotteries, bingo-halls, dog/horse tracks, and other gaming venues either online or brick-and-mortar. None of these establishments are going to take the time to research whether prediction markets are the same as gambling. Perceiving prediction markets as an alternative to gambling with potentially fewer regulations. Incentivizing vendors providing gambling services to favor any restrictions that can be placed on this potential competing form of “entertainment”. Prediction markets are a hyper-competitive form of consulting service.
  • Foreign-based prediction markets. Overseas prediction markets in countries such as Ireland provide real monetary compensation to users with leading regulatory interference (p.414). If America’s regulatory system became more friendly towards prediction markets, these existing prediction markets would lose participants.
  • Experts and professional consulting firms. Prediction markets place professional consulting firms and other subcategories of experts in direct competition with other participants. Consequently, disrupting the current status-quo of the consulting services market. Traditionally, a firm will hire a firm, freelancer, or agent of a firm to provide consulting services. Irrespective of whether the consultant is providing flawed advice, they still receive their whole salary. This is analogous to paying full price for a defective product. Even in the service industry patrons receive refunds for a lousy meal. Prediction markets resolve this issue by rewarding the consultants providing correct information. The hosting institution benefits from receiving a large pool of data for a low cost. This practice is more cost-effective than purchasing traditional consulting services. However, concurrently threatening the bottom line of consultants operating within the framework of the original model.

Bootleggers & Baptists: XXV- The Energy Drink Crusader

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One of the greatest insights from Bruce Yandle’s seminal paper Bootleggers and Baptists-The Education of a Regulatory Economist (1983) was that there was a demand for regulation. This observation is quite counter-intuitive, but corporations due benefit from regulation. As Dr. Yandle once mentioned in a lecture that they often have an anti-competitive impact on the market. Often the costs are of compliance tend to be much lower for larger companies but can be disastrous for small start-ups. Frequently eliminating competition without violating antitrust laws. Quickly dispelling the myth that large companies are vehemently opposed to regulation. Although the state action of taxation is a whole other story.

Whenever there is a public outcry for regulation, it is a corporation’s dream come true. Why? Because it requires little to no effort on their part.  If the measure curries favor with the public, there is no need to even enlist the help of lobbyists, you can let the average-Joe voter do all the dirty work for you. Demonstrating a common misconception about safety regulations. Often they are not truly essential to the public good. From a prima facie standpoint, they seem advantageous to the average citizen. May even seem essential for promoting public welfare. The downstream consequences are typically divorced from the implementation of the policy. The disconnect due to the temporal separation between cause and effect generates repercussions mirroring the effects of fiscal illusion. Instead of severing the connection between spending and taxation, time distances the connection between policy and results. Leading to the misconception that safety regulations are beneficial to the public.

The emergence of exigent circumstances amid a public health crisis is an opportune time for the general public to unwittingly act as covert lobbyists. In most cases, these “public health crises ” tend to be more so perceived than real. Sometimes, perception carries more weight than truth. One prime example of an emerging health disaster is the public health emergency of the risk of energy drinks. Particularly the consumption of energy drinks by children. For the record, kids really should not be consuming energy drinks. However, this is not the job of the government departments to enforce this safety measure. But rather is the duty of parents to be diligent regarding the actives of their children. Easier said than done. However, one only needs to look at age restrictions on tobacco, alcohol, recreation Marijuana, pornography, and vaping products to know such measures usually fail to meet the goal of limiting youth consumption.

One recent advocate for placing age restrictions on energy drinks made international news.  U.K. bar owner Lee Kamen spent years consuming a staggering twelve cans of energy drinks a day. After suffering a near-fatal heart attack he swore off these hyper-charged caffeinated beverages for life. Recently the former avid energy drinker imbiber caught his daughter in possession of one of these high octane beverages.  Subsequently poured it down the drain.  He then called the school to alert them that children were purchasing these deleterious drinks from a local shop. In several published articles Lee was quoted as expressing a need to place age restrictions on energy drinks. His intentions are pure and coming from the ethical need to protect children from the consequences of choices they are not mature enough to make.  Making him our energy drink Baptist.

Several parties benefit handsomely from Mr. Kamen’s advocacy for age restrictions on energy drinks. For one, the school does. Unfortunately, public schools have taken on too invasive of a role in child-rearing. Ranging from the inculcation of normative values to even being overly invested in the wellbeing of the students. One salient example of this is the advent of mandated reporter laws in the United States. The schools not having to do the leg work to discover this issue makes it easier for them. Instead of devoting resources to investigating this issue now all they have to do is alert other parents and enforce a prohibition of energy drinks on campus.  The next benefiting party would be local coffee shops (whether mom-and-pop or corporately owned). Despite Mr. Kamen’s good intentions, he cast too narrow of a net. Sugary iced mocha lattes may not pack the same punch as a can of Red bull, but can still have detrimental effects on a child’s health. Not including all caffeinated beverages under the umbrella of “dangerous beverages” leaves coffee shops free and clear to see their products to minors. Even if the sale of all caffeinated beverages to minors was prohibited, there would still be the issue of the sugar content in beverages. Leading us to infer that producers of sugary juices and soda (regardless of caffeine content) would still be legally permissible to children. Apparent the prospect of a sugar buzz eluded all the anti-energy drink advocates. High-sugar beverages are a welcomed substitute to offset the absence of caffeinated beverages. Kids already hooked on Monsters and Red bulls could just consume more sugar to replace the missing caffeine.

Bootleggers & Baptists: XXII- Opposition to Joe Biden’s Mentholated Cigarette Ban

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Prohibition Never Works, Even for Cigarettes:

Prohibition has always been a fool’s errand that attempts to subvert the very faults of human nature.  Everyone is well aware of alcohol prohibition in the 1920s-1930’s being a complete and abject failure. The shortcomings of our decades long crusade against schedule I drugs are starting to become more apparent to the general public. Considering the colossal failures of alcohol and drug prohibition, why would the Biden administration be purposing a ban on mentholated cigarettes?  Any prudent observer of history can plainly see that odds are against you in terms of successfully enforcing such a restriction. Yet, despite the facts of history the Biden administration is proceeding full speed towards this potentially disastrous policy.

Last year Massachusetts imposed a state-wide ban on mentholated cigarettes, despite the “Baptist” intentions of this legal restriction has not come without consequences. Even the tired platitude of “saving the kids” from the dangers of flavored cigarettes cannot account for the unintended downstream effects of prohibiting them. Ultimately if consumers want a product they will find away to obtain it regardless of it’s legal status. All that happens is that sales shift from the legal market to the black-market, where incentives are low to provide a commodity of any repute or quality. The ironic history of Marijuana should serve as guide to why a mentholated cigarette ban would go up in smoke. As local, state, and now the federal government starts to tighten-up restrictions on tobacco, simultaneously states and municipalities are easing up on recreational Cannabis. The state of Massachusetts is a perfect example of this policy trend. Exemplified by the state legalizing recreational Marijuana in 2016 and banning mentholated cigarettes four-years later.

However, the Bay State’s hostility towards tobacco has not necessarily resulted in ideal outcomes. As previously mentioned any tobacco ban would have a high probability of creating a black-market.  This draws obvious parallels to drug and alcohol prohibition, but tobacco is no stranger to illicit secondary markets. One prominent example was the illicit Cuban cigar trade resulting from the decades long U.S. trade embargo with Cuba. Even when specific tobacco products can be legally sold, a black-market can emerge if taxation is too onerous. For example, there a thriving black-market for cigarettes in New York, which has some of the highest cigarette taxes in the country (p.21). If policy makers are not cautious when regulating tobacco it can certain backfire on them. Only months after Massachusetts banning mentholated cigarettes there was already ample evidence of  an illegal market for these unlawful cigarettes. Per the anecdotal account of one Boston convenience store owner people were still procuring mentholated cigarettes through illegal means. Typically being sold as “loosies”, selling individual cigarettes versus entire packs is crime in most U.S. jurisdictions (if not all).

Beyond the perils of the development of a black-market the state has taken a tremendous hit in tax revenue. The ban was in enacted in June of 2020. By August of that same year cigarette sales fell by 24 percent. Unsurprisingly, neighboring states such as Rhode Island and New Hampshire saw a surge in sales of mentholated cigarettes. Resulting in a loss of $32 million of tobacco excise taxes collected by the state. If extrapolated to annual loss in tax revenue would amount to the state forfeiting $128 million dollars in taxes within the first year of enactment.

The question becomes why would centrist politician such as President Biden advocate for such a drastic policy? Few moderates would consider the enforcement of a mentholated cigarette ban to be a good use of resources. Biden has quite a bit to gain  in political currency in seeing this policy through. Why? During the presidential campaign of 2020 it was quite conspicuous that he was far from the progressive starlet the extreme-wing of the DNC desired.  It appears that he is shifting  further left on his policies potentially to appease more progressive voters within the party. So far this strategy appears to be working in Biden’s favor. The rhetoric behind this the mentholated cigarette ban, is only partly an appeal to public health and safety. The emphasis on the fact that mentholated brands are disproportionately favored by African Americans has add a more progressive tone to the policy. Making it transcend beyond a mere public health policy, but also an implicit social justice campaign. Joe Biden is certainly a “Bootlegger” in this scenario. Due to the political currency he seeks to gain through imposing this ban.

The Bootleggers and Baptists of The Opposition:

Oddly enough, not every individual left-of-center is on board with Joe’s new policy. Why?  Isn’t the elimination of the nasty and vile cigarette a necessary crusade and a crucial stride towards human progress? Couldn’t a ban on mentholated brands such as Kools, Newports, Salems, etc. greatly improve the health of the African American community? Generally, the interaction of policy and the real world is never that linear. It is a relief to see some pundits on the left fully recognizing the reality of this issue. In banning a specific product the state is criminalizing a category of economic activity. The fact that this variety of cigarettes are favored by African Americans, who is likely to be involved in the sales and distribution of these illegal cigarettes? African Americans. Making this unjust law disproportionately harmful to African Americans. While many Caucasians may see this as victory for various African American communities across the country, many with closer ties to these communities understand the reality. Civil rights activists such as Rev. Al Sharpton have expressed in the past that criminalizing the sale of mentholated cigarettes would only serve to put more African Americans in jail. Making it perplexing that white progressives would be so tone-deaf and obtuse about the issue.

Opposition to the Menthol Ban:

Coalition A:

Baptists: Civil Rights Activists with ties to the African American Community (most notably, Rev. Al Sharpton). These individuals provide the moral justification for opposing a ban on mentholated cigarettes. The moral argument rests on preventing the needless incarceration of more African Americans. Even prior to such a ban African American males are imprisoned higher rates than other ethnic groups. Cigarettes are trivial thing to loose your freedom and future opportunities over.

Bootleggers: The tobacco companies.  How they benefit from keeping mentholated cigarettes in the shelf should be self-evident.