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    The Psychology of Concentrated Interests and Diffuse Costs

    The standard account of concentrated benefits and diffuse costs suggests that self-interested voters rationally allow themselves to be robbed a penny at a time. The cost of repealing each little wasteful subsidy is greater than the cost of organizing a political campaign against it. Citizens coolly accept the trade-off and focus on more important things – like capturing their own payments from the government.

    I worry that the underlying psychology is more complicated than this.

    People tend to avoid controversy and disagreement. A classic demonstration is the Asch Conformity Experiment. In the experiment, a test subject is asked to compare the length of one line to several others and determine which two are the same length. Before the test subject gives his answer, several other participants pretending to be test subjects give intentionally incorrect answers. A third of the time, the real test subject conforms to the answers of the fake participants and gives incorrect answers to simple and objectively obvious questions. Only about 25 percent of participants always refuse to conform and only give correct answers.

    The Asch Experiment produces only weak (~35 percent) conformity to the group, and only under very strict circumstances (the test subject faces a unanimously incorrect group and has to disagree with them openly). But the Asch test asks an easy question, with an obvious answer that requires no specialized knowledge.

    Questions about domestic policy do not have obvious answers. Voters often do not have have the kind of basic knowledge that they would need to participate meaningfully in politics. For example, Ilya Somin tells us that only 38 percent of Americans knew the Soviet Union was not a member of NATO in 1964, 57 percent did not know who Newt Gingrich was in 1994, and, most recently, 22% of Americans now believe that the recent Democratic health care bill has already been repealed. In order to form an intelligent position on domestic policy, people need more than a basic understanding of politics. They ought to have an understanding of the actual effects of policy – preferably an understanding of economics. But ignorance about economics is also common, even among those with a college education.

    Political ignorance is rational. In a nation of 300 million people, few people can influence policy, so very few waste their time trying to understand it. If political questions do not have obvious answers for most people, the tendency to conform should be much stronger than in the Asch experiment. Organized interest groups (doctors, farmers, unions, soldiers, the poor, etc.) stand in for the fake test subjects. These groups make loud but false claims about how their narrow interests serve the greater good. The general public can either blindly accept the false claims of interested parties or antagonize them without knowing any reason that they should disagree.

    In other words, people do not simply ignore wasteful subsidies just because it is in their self-interest. The passionate claims of interest groups encourage the rationally ignorant to conform to the self-interested beliefs of their neighbors in order avoid controversy over policies they can’t evaluate themselves. Conformity helps explains why even obviously stupid policies that support interest groups remain so popular. When Ezra Klein interviewed Department of Agriculture Secretary Tom Vilsack, Vilsack gave a number of absurd justifications for agricultural subsidies, including the moral importance of having rural communities:

    There is a value system that’s important to support. If there’s not economic opportunity, we can’t utilize the resources of rural America. I think it’s a complicated discussion and it does start with the fact that these are good, hardworking people who feel underappreciated….

    The military service piece of this is important. It’s a value system that instilled in them. But look: I grew up in a city. My parents would think there was something wrong with America if they knew I was secretary of agriculture. So I’ve seen both sides of this. And small-town folks in rural America don’t feel appreciated. They feel they do a great service for America. They send their children to the military not just because it’s an opportunity, but because they have a value system from the farm: They have to give something back to the land that sustains them.

    Yet agricultural subsidies are overwhelmingly popular, despite the tiny number of people who benefit from them, and their clear costs. How many public policy battles are really different? Nobody wants to antagonize their neighbors. People have doctor neighbors, union neighbors, unemployed neighbors, and neighbors that belong to a thousand other little interest groups, and they politely adopt their neighbors’ nonsense as if it was their own.

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    Concentrated Benefits and Diffuse Costs

    Interest groups tend to lobby the government to redistribute money to them because people face concentrated benefits and diffuse costs.

    People in an interest group receive all of the benefits of redistribution to that group: the benefits are concentrated. They only pay a portion of the cost – usually the costs are diffused among taxpayers in general. Because of this, interest groups often favor even subsidies that decrease social welfare, because they receive more in benefits than they pay in costs.

    Members of an interest group often will do more to create or defend a subsidy than a taxpayer will do to destroy it. The members of the interest group should be willing to spend as much as they receive in benefits to defend the program. Individual taxpayers should only be willing to spend as much as their tiny share of taxes to challenge the program.

    An example:

    There is a town with five people in it: a doctor, a farmer, a lawyer, a poor man, and the mayor. The first four men lobby the mayor separately, and each manages to convince him that they are part of an important interest group (doctors, farmers, etc.). The mayor passes a law paying members of their group $1000. The mayor decides that he is an important interest too, so he gives himself a $1000 pay raise. The townspeople pay $5500 in taxes, because each subsidy costs $100 to organize. The men in the town split taxes equally, so they pay $1100 apiece – more than each gains from his own subsidy.

    The townspeople would benefit from abolishing all of the subsidies together. But no one wants to abolish his own subsidy. The doctor, for example, receives $1000 from the town but only pays one fifth of its cost: $220. The subsidy is worth $780 to him. While he is willing to spend up to $220 to get rid of any other subsidy, he will spend up to $780 to defend his own subsidy. Only all four of the other townspeople organized together would be willing to spend more than the doctor to repeal his subsidy: $220 per person, or $880.

    Money isn’t everything, but it is important. An interest group can use money to defend themselves by paying for positive advertisements, by buying support from politicians, or by lobbying in retaliation against other interest groups that have challenged their subsidies. Interest groups can also spend money lobbying to make their subsidies hard to see. For example, it is harder for consumers to see doctors’ subsidies that are disguised as licensing requirements and restrictions on nurse practitioner drug prescribing.

    When the number of taxpayers is large enough, the taxes they pay for each subsidy is tiny. The costs of a program may be diffused so widely that it isn’t worth the cost to organize people against it. If 300 million people pay taxes for a billion dollar subsidy, each pays only a few dollars. It costs money, time, and energy to identify rents, to explain to voters why they should care enough to vote against them, and to convince politicians that they should be removed. Democracies can fall prey to rent-seeking – unwilling to resist a million little bites from a million little parasitic programs. In societies that do not resist rent-seeking, individual success depends on the ability to manipulate government to the detriment of others.