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One time political payouts are not time consistent

November 8, 2011

Suppose you have a special interest group that has enough political power to lobby for a policy regime which benefits them over time by $x per year, but hurts society by double or triple that. It is tempting to suggest that they could be paid off in a “once and for all” payment of the present value of the stream of payments and the policy could be abolished and everyone would be made better off. However, current lawmakers cannot create binding agreements with future lawmakers, because future lawmakers can always repeal whatever laws they don’t like from the past.

That’s one of the reasons why it is better to negotiate a big cross industry free trade agreement rather than doing it industry by industry. By increasing the stakes, you are making the protectionist’s collective action problem even more difficult. Protectionists may be able to organize themselves across an industry, but it is much harder for various industries to cooperate with one another to lobby against the agreement. Diverse trade agreements also make it more likely that people will benefit overall. By abolishing one area of protectionism, the gains are highly spread out and the losses are concentrated. In conclusion, polical payouts tend to be streams of payments over time because the special interest’s political power is likewise spread out over time. The lack of credible commitment devices on the part of politicians limits the types of market reforms which will be effective.

Further Reading
Transitional Gains Trap (gated)
No Transitional Gains Trap?

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