Of Special Interest; L. Cohen

192 Of Special Interest by Lloyd Cohen I n every election campaign of recent mem ory, the phrase" special interest" has been used pejoratively to describe the programs and appeal of one candidate or another. While the phrase is frequently used, it is never de fined. Although the failure to define a commonly used term sometimes reflects a general under standing of its meaning, the more reasonable conclusion in this case is that it represents and conceals various forms of misunderstanding and misinformation. This imprecise usage is not only a reflection of sloppy thinking but a cause of it as well. It is impossible to think clearly and argue convincingly when using language care lessly and imprecisely. In an effort to add a measure of intellectual content to popular political discourse, I offer a definition of "special interest" that is clear and concise, permits meaningful distinctions be tween different kinds of government activity, and is in accord with the moral opprobrium usu ally attached to the phrase. While what follows may seem like a lesson in elementary econom ics, it is not. It is, rather, a discussion of polit ical rhetoric and morality, employing econom ics as a vulgar but powerful tool to facilitate understanding.

Every proposed government project will ben efit some and harm others. Any project that would benefit all has either long since been en acted or will be enacted with minimal opposiLloyd Cohen, Ph.D., J.D., is a JohnM. Olin Fellow in Law and Economics at the University of Chicago Law School, and Associate Professor ofLaw (on leave) at the California Western School of Law. tion. On the other hand, those proposals that would harm everyone have no proponents. The only proposals that are of any interest fall in the middle; they help some and hurt others. The mere fact that a given program would help some and hurt others cannot be sufficient to qualify it as a special interest project. Other wise the term would lose all power as an ana lytical tool, since every government program would satisfy the criterion. Yet, both the public and the media seem to use the phrase "special interest" in precisely this fashion. If someone disapproves of a proposed government activity, he simply points out a discrete set of people who will benefit, and proceeds to tar the project with the special interest brush. Thus in the 1984 Presidential campaign, Walter Mondale was ac cused of favoring projects such as domestic content legislation that would benefit labor unions, while Ronald Reagan, who favored lower marginal tax rates, was portrayed as a tool of moneyed interests.

The special interest critique of proposed gov ernment activity is sometimes presented in a slightly more sophisticated form. The critic de picts the group that would benefit from a project as narrowly as possible, and the group that would be injured as broadly as possible. Then the argument is made that because the losers outnumber the winners the project obviously serves only a special interest and therefore should be abandoned. For example, those who argue for quotas or tariffs on low-priced imported shoes tend to count only foreign producers and importers as those who gain. They ignore consumers who benefit from lower prices and those employed in exporting industries who benefit from the in crease in trade. (Imports are ultimately paid for with exports.) Similarly, the class injured by shoe imports is expanded beyond those who participate in the domestic shoe industry by pre senting an apocalyptic vision of a decline in other sectors of American life which surely must follow in the wake of imported shoes, as for example, "our soldiers could be left without boots to wear in the event of war. ' , The proper focus of the pejorative phrase, "special interest," must be a narrower and more precise category. The general interest can never be determined by a mere show of hands, whether or not those hands are properly counted. Whatever virtue there may be to dem ocratic hand counting, it isn't synonymous with the general interest.

And as a corollary, the failure of a project to benefit more individuals than it injures can never be a sufficient condition to classify it as serving a special interest. A mere counting of hands would fail to reflect the character and magnitude of the gains and losses to the affected individuals. For example, those who would gain by the confiscation and general disbursement of the property of a single individual will always out number the one who would lose. Nonetheless, it is generally understood that the loss to the owner weighs more heavily on the scales of justice than the gain to the thieves. When the government protects that individual's right to his property, no one refers to that as a special interest activity in any pejorative sense of the term. I would like to think that the following illus trates a widely shared public moral understand ing that defining a political special interest isn't merely a matter of head counting. Near the end of the 1988 campaign, when Michael Dukakis proclaimed that while George Bush represented the interests of Wall Street, Dukakis repre sented Main Street, he was labeling George Bush as representing a special interest (the wealthy) and declaring that he represented an other special interest (the unwealthy). It was, I suppose, Dukakis' hope that a majority of the American people would vote their narrow self interest. Dukakis' decline in the polls after tak193 ing this, tack, and his ultimate defeat, were per haps in part a recognition by the electorate that he was trying to appeal to special interests, and vindication of the principle that a President should represent a general interest rather than anyone's or even everyone's special interest.

General Interest vs. Special Interest If it is not merely the number of winners versus the number of losers that is the proper criterion for the pejorative phrase "special in terest," what criterion is appropriate? In order to distinguish intelligently between special in terest and general interest projects, it is neces sary to compare what is gained by those who are served by the project with what is lost by those who must pay. But, on what scale are these gains and losses to be compared? The early utilitarians such as Bentham and Mill believed it was both meaningful and theo retically possible to delve into the souls of the individuals affected and measure pleasure and pain on some sort of scale in order to compare those quantities among individuals. Were we to employ such a standard, it would require that we determine the number of utils (units of plea sure or pain) each affected person would gain or lose from a project, and sum those numbers over all the affected individuals. A special in terest project would then be one for which the utils gained by the winners were less than the utils lost by the losers. However, having faith neither in the metaphysical existence of the theoretical concept, utility, nor a fortiori in the operationalization of that concept, measuring utils, I prefer the use of a more concrete and accessible measure.

Although the concept of utility suffers sev eral deficiencies, it also has one important vir tue. Unlike a mere counting of hands, it gives different weights to different people's interests in a project. Its disabling shortcoming, how ever, is that the weight it gives, utils, is little more than a theoretical construct, about which modem scholars could argue with the same suc cess as did our apocryphal medieval ancestors over questions such as how many angels could dance on the head of a pin. As an alternative to utility, social wealth is a 194 THE FREEMAN • MAY 1989 far more accessible measure. The gain or loss to each individual that would be generated by a proposed project can be measured by his will ingness to pay. Summing those gains and losses provides a measure of the effect of a given proj ect on social wealth. For example, if building a dam would confer a benefit on someone for which he would be willing to pay as much as 100 dollars, then 100 dollars represents the value of the dam to him.

If another individual who would be harmed by the project requires a payment of 150 dollars to compensate him for his loss, then 150 dollars represents the cost of the project to that person. A special interest project may be defined as one for which those who oppose the project would require more in dollars to accept it, than those who benefit would pay to enact it. Expressed another way, a general interest project is one for which the winners could compensate the losers for their losses and still retain some winnings, whereas a special interest project is one for which compensation of the losers by the win ners would result in the winners joining the camp of the losers. 1 A Theoretical Tool The definition of special interest projects that I offer, Le., projects for which the dollar gain to the winners is less than the dollar loss to the losers, is a theoretical tool. You may still ask of what use is this tool. Armed with it are we any better off than the utilitarians in our effort to operationally distinguish special interest and general interest projects? How can we deter mine how much someone is willing to pay?

Surely we cannot ask him. Once it was known that willingness to pay was the criterion by which government projects would be judged, it would be all too easy for people to lie and claim a willingness to pay enormous sums both for the projects that they favor and to prevent those they oppose. How can we determine their true willingness to pay? We have at hand an institution to help us in this inquiry-the market. It is through the use of markets that those who gain from the transfer of resources (the winners) can compensate the owners of those resources (the losers). The op eration of the market doesn't require coerced transfers of resources by the government. If a product or service is offered on a market, no one need pay more for it than its market price. Therefore we can infer that if someone is un willing to pay the market price, then the good or service simply is not worth that price to him.

Anyone advocating a government project that results in wealth transfers-and of necessity they all do-should be required to explain why, if the transfer is a net benefit, it hasn't already occurred. The only legitimate answer must involve some notion of market failure. That is, for some reason, although it is of net benefit in that the gain to the winners is larger than the loss to the losers, the market fails to provide this project. The usual reason for such a failure is that it is impossible to exclude from the benefits of the project those who value it, but do not pay for it. Hence, although many would be willing to pay if they had to, since they do not have to in order to get the benefit they will not, and the project will not be financed. The quintessential example of such a project is national defense. The self-declared pacifist who refuses to pay for national defense claim ing that he has no fear of the Soviet Union cannot be excluded from the protection that the rest of us .pay for. Since it is in the narrow self-interest of each of us to free-ride on the provision of this collective good, it is likely that we would have a severe under-provision with out the coercive power of government to com pel a contribution from each of us.

It is out of necessity, but nonetheless with some reluctance, that I acknowledge the valid ity of a market failure/collective good justifica tion for government-financed projects that pro vide benefits to some at the expense of others. The existence of collective goods and the effi ciency problems they create explain the neces sary role of government in providing for such things as the national defense and a system of criminal justice. However, the market failure argument is all too easy to make, and virtually impossible to prove or disprove. As an extreme example of the difficulties in disposing of alleged market failures, consider the following. The women of America could argue that perfume and dress purchases should be subsidized because when they smell and look nice it gives pleasure to others, men in partic ular. The men would be willing to pay for that pleasure if they had to, but because they cannot be excluded from smelling and seeing women wearing perfume and dresses they will not pay for it. Therefore in order to achieve an efficient level of perfume and dress purchases, the gov ernment should use tax dollars to subsidize wo men's shopping.

This example may seem absurd and trivial, but it isn't clearly erroneous. Every private ac tivity may generate uncompensated benefits and costs to others. There is no simple or obvious way to distinguish the significant and worthy cases--deserving of government action because the benefits of such action will outweigh the costs-from the trivial and unworthy cases. Ul timately such questions must be decided by the exercise of an intelligent, good faith judgment. Nonetheless, the tools of economics can do much to winnow the wheat from the chaff. The number of projects that could pass a rigorous application of this "willingness to pay" test and be shown not to deserve the title "special interest" is, I believe, very small. The principle of the test is clear. It asks that we weigh equally the dollar costs to those who must pay against the dollar gains to those who receive the bene fits. Any other argument that proponents might OF SPECIAL INTEREST 195 raise must rest, either explicitly or implicitly, on invidious distinctions in how the welfare of various groups of people should be weighted on our collective scale of values.

A good example of a special interest project is an import restraint. Economic theory has taught for over 150 years that the net cost to the public of import restraints, above and beyond any benefit to the domestic industry, is im mense. In the steel industry, for example, the restraints proposed by the United States Inter national Trade Commission in 1984 were esti mated by the Commission staff to cost the American people several billion dollars a year, or $300,000 per American steel worker's job "saved." The people who would gain from the constraint were primarily those employed in the steel industry. Could the steel workers whose jobs are saved pay the rest of us $300,000 for each projected job paying $40,000 a year and still retain some of the gain of protection? Clearly not. Why then did they favor this protection? The answer is simple: special interest government projects never require that the winners compensate the losers. It is only because special interest protec tionist legislation imposes the greater cost of protection on others that the protected industries support it.

Those readers who view private property as inviolate may wish to treat the "willingness to pay" test I ha~e proposed as a necessary, but not a sufficient condition for approval of a gov ernment project. It may strike them as unjust that property rights be nullified for such a seem ingly arbitrary reason as whether other people place a higher dollar value on the property. In defense let me suggest that we normally treat every property right as contingent and lim ited in just such a fashion. For example, even the most extreme Lockean believer in the sanc tity of private property doesn't consider it tres pass if I light a match on my property and the photons of light emitted enter your property. It is so obvious that permitting such reciprocal invasions is mutually beneficial that it seems absurd to label it a trespass. But in its meta physical character it is as much an invasion of another's property as ordinary trespass; the fact that we do not treat it as such is a reflection of an implicit shared understanding that such so196 THE FREEMAN • MAY 1989 cial wealth-maximizing invasions should be permitted.

The "willingness to pay" criterion for defin ing a special interest project that is rightly de serving of condemnation, and distinguishing it from a general interest project deserving of ap proval, does not lead to the approval of new or different violations of individuals' property rights. Rather, the test simply provides a theo retical underpinning for those projects that even the most scrupulous property rights adherent would already approve. A Legal Tool for Limiting Special Interest Projects One legal tool for appropriately limiting the projects that get government funding is to take seriously the requirements of the eminent do main (takings) clause of the Fifth Amendment, which provides: "nor shall private property be taken for public use, without just compen sation. ,,2 This would require that the govern ment not take anyone's property for purely pri vate purposes and that anyone whose funds or property were taken for a public purpose must receive full compensation. No special interest project can survive the requirement that the los ers be fully compensated. If the winners must compensate the losers, they will do so only if the project has a net positive gain.

The primary benefit of rigorously defining special interest is that it provides economic, moral, and political meaning to the world around us. It weighs each person's interest in a project on a uniform and comparable scale. The inefficiency and injustice of special interest pro jects .have the same root. Social wealth is di minished by every special interest project; the pie becomes smaller. The injustice is also readily apparent. Advocating a special interest project implicitly requires giving greater weight to the welfare of some more than of others. Of course, those who favor such projects will use a variety of rhetorical devices to obfuscate the special interest nature of their proposals. They will describe the outcome of the market as "unfair," or assert that "we cannot expect the market to solve all our problems. " The use of such sophisms is meant to conceal the simple truth that those who promote such projects are in effect saying that the losses to those who must pay do not carry the same weight as the gains to those who benefit. The drawing of such invidious distinctions across individuals should be righteously condemned. It can only injure the fabric of a democratic society that rests its sense of nation not on a common race, religion, or culture, but on a political tradition of equality and liberty.

The groups helped by special interest legis lation are generally small and well defined in contrast to the larger, more diverse groups of individuals who are hurt. This helps explain why coalitions are formed that lead to the en actment of this legislation, but the explanation of its political origin doesn't define a special interest project, nor is it sufficient to explain the term's pejorative connotation. It is neither the failure to count heads nor the insular character of the group served that of fends our intuitive sense of justice. It is rather the willingness to diminish the combined wealth of all Americans to benefit a narrow group that is so morally odious. An evaluation of a proposed government action employing this definition of the special interest will reveal and clarify its moral, economic, and political character and consequences. D 1. For those with some formal training in economics, I note that this is the Kaldor as contrasted to the Hicks or Scitovsky compen sation criteria. See Henderson and Quandt, Microeconomic Theory (1958), p. 219.

2. Richard Epstein's excellent book, Takings: Private Property and the Power of Eminent Domain (1985), provides a full-blown description and defense of this largely ignored Constitutional doc trine.