The impact of interest groups on public policy

Interest groups impact upon public policy in several ways.  Firstly, when legislation is being prepared, those drafting it consider the likely impact upon any specific and identifiable groups.  They consider the likely effect on the population as a whole, which is normally beneficial, but also consider any sub-groups of that population which might be adversely affected.  A proposal to open foreshore areas to ramblers will benefit those who might take advantage of their new-found rights, but might impact negatively on those who have previously enjoyed exclusive access.

Secondly, the legislators who are to determine public policy will take account of how interest groups might respond to it.  Some do this because those interest groups include numbers of their constituents whom the legislator wishes to represent properly, while others take account of the likely electoral impact.  All things being equal, they would rather have members of interest groups vote for them rather than against them.  Some politicians have made a policy of assembling sufficient support from interest groups to build a majority, even though their support of some interest groups has adverse effects on others.

Thirdly, it is sometimes the interest groups which take the lead in lobbying for legislative changes that will benefit their members.  This often takes the form of rent-seeking, in which the aim is to use legislation to secure improvements for their members that would not be attained in its absence.  A proposal that hairdressers should licensed, and that only qualified ones should be allowed to practise their trade, is one that brings advantages to existing hairdressers at the expense of those who might otherwise enter that trade in the future.  By limiting the numbers of competitors, it facilitates higher prices than would prevail otherwise.  Much lobbying for new regulation is of this form, seeking to benefit current practitioners at the expense of new ones.  A large established firm can afford the cost of meeting regulatory requirements more readily than can a start-up would-be competitor.

It is also common to see interest groups lobby against proposed changes in public policy because they perceive a threat to the continued well-being of their members, or some undermining of advantages they currently enjoy.  A proposal to end academic tenure in the United States might open up many employment and promotion opportunities to young academics, but it would meet with determined opposition from organizations that represent those who either have tenure or who perceive themselves to be on the brink of securing it.

There are, in addition, interest groups composed of those who share an ideological view and who are prepared to defend it against legislative changes that might run counter to it.  Those committed ideologically to promoting equality might well oppose any measures which could allow some to prosper more than others and thus bring about greater disparity.  Those of a conservative disposition who feel unsettled by change might well be prevailed upon to oppose measures that threaten to upset the status quo and replace it with something unknown.  This is not necessarily because they oppose the content of the proposed reform, just that they oppose change itself.

There are many groups who would not accept the description as conservative, but which nonetheless oppose many of the trappings of the modern world.  They can be rallied to oppose modern agriculture, genetic modification, new buildings, new modes of transport and new lifestyle freedoms.  At the root of some of this might lie a yearning for their own childhood when things were simpler and slower.  Many of them feel unhappy with growth and progress, and claim that the new opportunities and choices they present are unnecessary and even counter-productive.

Sometimes ideological opposition to change combines itself conveniently with self-interest.  It was 40 years ago in 1973 that I was first asked in the US to delineate the difference between a developer and a conservationist.  I was told that a developer was someone who wanted to build a mountain cabin in the wilderness, whereas a conservationist was someone who already had a mountain cabin in the wilderness.  Jocular and cynical though the answer is, it does express an essential truth: that many of those who oppose development already have access to enjoyment of amenities, and think these will be degraded if such enjoyment is extended to others.

Whatever the motivation that directs interest groups such as these, they present a serious problem to those who would provide innovative public policy solutions to social and economic problems.  Interest groups can thwart useful reforms, and they can also pressure legislators into introducing legislation that imposes costs on others to satisfy their rent-seeking aspirations.

In a democracy the size of an interest group is important, given the need of current legislators to secure re-election, and of would-be legislators to win votes.  Size, however, is not paramount.  The effectiveness of an interest group can, paradoxically, be inversely proportional to its size in some cases.  Consider the fact that in 1850 farmers in the US constituted 64 percent of the workforce. This had dropped by 1900 to 41 percent.  The figure today is 1.9 percent.  This means that US farmers have in one and a half centuries gone from nearly two-thirds of the workforce to fewer than one fiftieth of it today.  Yet few, if any, would dispute that farmers today comprise a far more effective interest group than they did then.  There is more pro-farmer legislation on the statute book, and they have more subsidies, supports and special rights than did their much more numerous predecessors.  It is easier for farmers’ lobbies to influence legislation now than it was then.

Self-awareness is often of more importance than the numbers in an interest group.  If people perceive themselves to be members of a group with known interests, the group itself can be more effective than if people lack such self-awareness.  Farmers know they are farmers and stand to benefit from pro-farming legislation.  Pensioners know that they are affected by changes to pensions that are introduced.  Rural dwellers know they can be affected by changes that take place to the countryside.  

Groups which are not self-consciously aware of their status are less effective.  If people do not realize how forthcoming legislation will impact upon their interests, they have no particular motivation either to endorse it or to oppose it, and will be difficult to rally on either side.  A measure which increases farm subsidies will, in general, command the enthusiastic support of farmers.  They can be organized to lobby legislators, to demonstrate, to write letters and to campaign in other ways.  The taxpayers who will foot the bill for these subsidies might be many times more numerous, but they are less self-consciously aware of their status.  They do not, in general, perceive themselves as losers, and are difficult to mobilize in favour or against specific measures that will affect tax levels.

Sometimes a group which stands to gain or to lose from particular policy proposals might not realize that it is in this position.  Those who object to a new power station being built, be they local residents or conservationists, can identify their interest.  Their amenity will be downgraded, or their ideological preferences circumvented.  They can organize opposition with those similarly affected and constitute an effective interest group.  On the other hand, the users of electricity, both present and future, those who stand to gain cheaper and more reliable energy supplies do not see themselves as beneficiaries.  They are dispersed and not conscious of their status as beneficiaries.  They will not normally organize as a lobby in favour of the power station to set against that which opposes it.  They are dispersed and their interest is not obvious to them.

There is a second important asymmetry.  It is that the smaller interest group which sees its advantage sees it as significant, whereas the larger group, if they do perceive their disadvantage, see it as relatively small.  A subsidy might make a huge difference to the living standards and prospects for farmers, yet cost taxpayers a near-negligible amount, maybe pennies a year.  The ones who stand to gain big have more motive to campaign than the larger group which sees its potential losses as tiny.

In this way legislators can act to benefit large numbers of small groups, all of which might be grateful from their gains and campaign for them.  And while the cumulative cost to taxpayers might be large, no individual measure is seen as worth campaigning about because the cost of each is small, and it is only the cumulative cost which is large.

Similarly the gains to large numbers from a new proposal might be seen by them as small, even marginal, whereas the loss of value perceived by the small group might be highly significant to them.  Thus the small group has a motive to campaign, whereas the large group does not.

A proposal for a new housing estate is seen by local residents as making a big difference to their lives.  It might degrade their view and impair the quality of some of their countryside.  It will probably mean more vehicles on the roads and more congestion.  It might lower the value of their own homes.

On the other hand, those who stand to gain, the people who might live in those new homes, do not usually know who they are.  To young people wishing their own home, or urban dwellers who would prefer to live in the country, the one new estate adds marginally to the choices and opportunities open to them, and even this small gain is usually unknown to most of them.  A big and perceived loss to a few contrasts with a marginal and unknown gain to the many.  This is why such contests are usually seen as being between local residents who stand to lose, against big business developers who stand to profit, rather than against the unknown people who might benefit from the development.

This asymmetry is particularly significant for the Conservative Party.  While its leadership might want economic development and growth, including new house-building, many of its MPs represent rural county constituencies whose residents are anxious to protect their existing amenities against the encroachment of new developments.  They might recognize a case for new housing and opportunities for young first time buyers, but all of them would prefer to have it take place somewhere else.  And all of the somewhere elses added together constitute almost the whole country.  This is the famous NIMBY phenomenon.

While the NIMBYs are prepared in principle to see development take place elsewhere, rather than in their own back yard, those whose ideology looks down on growth and development as such, preferring what they see as the measured rhythm of a slower pace of life, do not want any kind of development anywhere.  The acronym for them is BANANAs rather than NIMBYs, in that it stands for “Build Absolutely Nothing Anywhere Near Anyone.”

The effect of all these factors is twofold.  Firstly it acts as a brake on progress and development.  Entrenched interest groups, even though they might constitute a small minority, know their advantage is at stake, and are in a position to campaign, and the adverse publicity they generate can weaken the resolve of legislators to press ahead with the intended reforms. Thus policy proposals calculated to benefit the population in general can be thwarted at the hands of perhaps small numbers who perceive adverse consequences for themselves, and are sufficiently concentrated to be effective.

Secondly, relatively small interest groups can use the political process for rent-seeking activity that acts against the common good.  One by one they can impose burdens on the general populace that convey concentrated advantages for themselves, and even though the burden in each case might be small, taken together they can constitute a substantial drain on the resources of the many in order to secure advantages for the few.

The analysis thus far constitutes a critique.  It explains why policy proposals which could benefit the many are often blocked, while those that benefit the few at the general expense can succeed.  To these effects must be added the insights of Public Choice Theory, that legislators and administrators pursue policies which serve their own advantage, sometimes even in circumstances where this runs counter to the interests of the public they are nominally employed and empowered to serve.

These factors explain why reform can be difficult to achieve and why sometimes policies injurious to the general good are enacted.  The critique aids analysis, but does not, of itself, aid innovation.  The question arises as to whether there is a creative counterpart to this critique, an approach to policy formulation which takes account of the interest groups involved and somehow manages to neutralize or circumvent their opposition. 

The answer is that there is such an approach, and it is one which takes on board the likely responses of interest groups and which incorporates into the proposals measures calculated to prevent or to overcome their hostility.

One such technique is to identify the interest groups that will be affected by a policy innovation, and to build into the proposal measures to protect their perceived advantage.  This was done when the Post Office monopoly telephone service was privatized.  Rural dwellers were concerned that a telephone service run for profit would be less ready to connect remote country areas, and the county MPs were concerned on their behalf.  A requirement was written in to require the new company to connect remote areas, so the concerns were satisfied.  Groups representing disabled people worried that a for-profit service might be less prepared to offer the same services to disabled people, so it was made a requirement that the new company must offer such services.

Another technique is to offer affected groups something in exchange for their perceived loss of benefit, something that they value sufficiently to accept it as compensation.

Employees of the Post Office telephone service were concerned that a private company could not offer the same job guarantees as a public body could.  Their unions ran a campaign against privatization with posters depicting a pair of scissors cutting the cord of a telephone handset.  The company’s response was to offer employees the chance to become shareholders in the new company, and to share its success.  Employees were given preference in share applications, and any of them who bought 200 shares was given a further 200 shares free.  The union urged its members to oppose privatization, but over 90 percent of them took up the offer to buy shares.  The tactic here involved the recognition that the interest group’s leaders did not necessarily represent the opinions of their members.  In effect the government bid over the heads of the leaders with a direct appeal to the members themselves.

BT was successfully privatized in what was then the largest share issue in the world.  Some consumer groups feared that a BT monopoly would be exploited to the disadvantage of customers, so the privatization created a smaller competitor, Mercury (owned by Cable & Wireless), and BT was required to carry its signals into customers who chose it.  This assuaged the consumer groups, the more so when subsequent reviews were built in, at which time the number of permitted competitors would be increased.  One consequence is that the UK now has one of the world’s most competitive telecoms markets.

The approach of offering an interest groups something of greater value than the benefit foregone was used in housing policy in the late 1970s and early 1980s. Some 35 percent of Britons lived in state-owned houses, most at rents well below market levels. The political problem was that they constituted almost a rotten borough, electing legislators who supported subsidized rents at a cost to others paying local and national taxes.  The council house dwellers were an interest group well aware of their advantage, and all attempts to move rents towards market levels failed at a political level because state tenants voted against candidates who attempted this.

The new policy was the famous right-to-buy initiative.  If people valued their subsidized rents, they might value even more the opportunity to become home-owners at a discounted price.  State tenants were offered the chance to buy their own homes, with huge discounts on assessed market values, depending on how long they had lived there.  It was, in effect, a capital cost since for a one-off discount on the market price of the property, the government achieved an end to the annual subsidy on it.

Housing and house-building have always been an area in which interest groups impinge on policy.  It was true in the past and remains true today.  Ministers talk of the need for new homes, appealing to the young voters who might become home-owners, but must contend with the fact that large numbers of new houses will depress the price of the existing stock, adversely affecting current home-owners.  Since for most people their home is their most substantial item of saving or investment, their interest lies in rising values not in falling ones.  Current home-owners know who they are; future ones generally do not.

The technique of compensating an interest group with something of greater value has been used many times.  British Airways, when it was state-owned, needed to slim from 59,000 to 39,000 employees before it could operate efficiently and profitably as a private company.  None was threatened with dismissal.  Cash sums were offered instead to those prepared to leave voluntarily, and the sums were set high enough to encourage enough of them to do so.  Some used the money to achieve long-held desires to set up in business.  Again, from the BA point of view it was a capital cost, paying money up front in order to buy more efficient operation in future.

The voluntary and non-confrontational aspect of this approach has led to it becoming almost routine.  When local governments or business firms have to slim down owing to financial constraints, it is commonplace now for this to be don by voluntary redundancy, voluntary early retirement, or ‘natural wastage,’ meaning that departing and retiring employees are not replaced.  The approach is popular because the interest group is assuaged by this approach and does not cause trouble or embarrassment to the local authority or the business concerned.

The offer to an interest group to compensate them for loss of advantage need not be monetary.  People might be prepared to accept greater opportunities for advancement in return for lower job security.  It is often the case that the private sector does not provide the same level of job security as its public sector counterpart, but might provide easier opportunities for promotion.

Some people will accept greater independence and flexibility as compensation for a forgone advantage, valuing the chance to exercise more initiative and take more control over the circumstances of their employment.  The essential point is to adapt the policy initiative to incorporate some compensatory advantage, monetary or otherwise, to offer to an affected interest group, preferably at a level sufficient to soften their opposition.

The effect of all this is often to make the proposed initiative rather messy, with all kinds of ad hoc clauses included to placate interest groups that might otherwise thwart its passage.  This is true, but a messy proposal that succeeds is better than a clean one that fails to be implemented. Sometimes the concessions to interest groups will lower the value of what is being achieved.  Again, this is true, and again it is to be preferred to no achievement at all.

There can even be an issue of fairness, with critics saying that the advantages enjoyed by interest groups were unjust, and should not be compensated for.  The response to this might be that the compensatory offer is preferable to the continuation of that unjust advantage.  When state-owned houses were offered to their tenants, some middle class home-owning Conservatives objected.  Their case was that they had bought their houses the hard way, while the state tenants had for years paid below-market rents, made possible by the taxes paid by home-owners. Now the government was offering those tenants a chance to buy at a price below what their house was worth, and they thought this unfair.  The answer at the time was that the sale of council houses would end the continuing annual subsidy to support their rent, and that this one-off concession would reduce the demands made on taxpayers in the future.  

It undoubtedly entered the thinking of the government of the day that if state tenants became home-owners, they would no longer have an interest in voting for candidates who supported cheap rents, but might now have an interest in voting for candidates whose outlook seemed more favourable to home-owners.

Interest groups founded upon a shared ideology are often more difficult to compensate, since their interest might not be based on any personal advantage, but on a shared view of how society should operate or be constructed.  Teachers unions have opposed giving choices to parents or operating independence to schools because they are committed to a view of education in which children are allocated to school based on what are seen as the needs of the community, and in which schools are required to operate in like manner to each other.  For similar reasons the unions tend to oppose measures that devolve powers away from local education authorities down to individual schools.  There is probably no compensation that could be offered which would wean them away from that position.

There is the possibility, however, that even where an interest group cannot be placated by the offer of alternative or compensating advantages, it might be possible to call into being an interest group that could outweigh them.  In the case of the state houses, most local authorities were totally opposed to the initiative which reduced their housing stock and their ability to allocate it.  They were, however, outweighed by the new group of state tenants who saw themselves as prospective purchasers, and who had no interest in supporting their local authority’s resistance to the reform.

In the case of school choice, it is unlikely that any advantage offered to the teachers’ unions would placate their opposition, but there are two new groups that could outweigh their opposition by perceiving advantages for themselves in supporting it.  The first comprises parents who think their children might benefit if they had free choice between schools.  Those previously allocated places for their children in low quality schools would see benefit in being able to choose a better one for them, and like the prospective home-buyers, they would constitute a group much larger than the teachers’ unions, albeit more dispersed and less experienced at lobbying.

The second group is constituted from among the headteachers.  Many of them welcome the extra authority which comes with operating independence for their schools.  Many relish the chance to make and implement real decisions about how the school should be run, instead of being ciphers for a central authority which sends out detailed guidelines for them to follow.  While not as numerous as the teachers; unions, the headteachers generally command the respect of parents in a way that teachers’ s do not.

Thus the combination of school choice and operational independence for schools, while it cannot placate one interest group whose ideology sets it in opposition, can nonetheless conjure up two new groups to outweigh its influence.  A policy initiative, if it is to succeed, might therefore first consider how to win over any interest groups who might otherwise stand to lose out from its introduction, and secondly how to create new interest groups to counter-balance those who cannot be won over.

It was in this spirit that the Adam Smith Institute set out to solve the problems of a housing shortage without alienating existing home-owners whose amenity and value might be adversely affected, while securing the acquiescence of many of the environmental lobbies which have hitherto opposed more building.

The proposal began with an overview of existing land use in Britain.  Some 90 percent of us live in urban areas, and we occupy 8.6 percent of the total land space to do so. Nearly three-quarters of Britain (72 percent) is classified as ‘open space,’ and 11.6 percent is forested.

The popular vision of a green and pleasant countryside does not always accord with the reality.  Much land, including land in the green belts, is used for intensive farming, with large monoculture fields of crops much as wheat or rapeseed.  UK farms have a very high level of productivity, backed up by intensive use of fertilizers and pesticides.  They do not provide a diverse habitat for wildlife, and are not particularly environmentally friendly.

The ASI proposal is to convert 3 percent of farmland in England and Wales over a 10-year period.  The land would be converted in the following ratio: 90 percent would be given over to new woods and forests. 5 percent would be for housing, and 5 percent for supporting infrastructure.  Thus a total of 0.15 percent of farmland would become housing, and a further 0.15 percent for infrastructure.  The remaining 2.7 of that 3 percent would become wooded.

The principal change would see tree cover increase by 130,000 hectares, an increase of 11 percent.  The proposal is for the creation of diverse woodland, including small streams and lakes, providing a habitat for animal, birds and insects, and considerably friendlier to the environment that much of the agriculture it would replace.

The remaining tenth of the 3 percent of farmland converted would allow 950,000 homes to be built, together with supporting infrastructure.  This would make a considerable impact on the nation’s housing shortage, giving more opportunities for young and first-time buyers, and providing many more opportunities for those wanting to live in rural areas.  It would create new jobs in rural areas and boost the nation’s economy at the same time.  Interest groups which seek a vibrant rural economy with jobs available for young people there should welcome this. 

Existing home-owners in the countryside constitute the biggest potential interest group opposed to new housing there, but they are offered something in return.  Fairly unsightly and unfriendly fields of monoculture would be replaced by woods with attendant wildlife.  None of the new houses need be overlooked by existing houses.  Instead of their view being spoiled by the sight of new houses, current countryside dwellers would find it improved by the new woods created. 

Environmentalists and conservationists who would normally object to new building in rural areas are offered something in return.  The new woods would be friendlier to the environment than the crop fields they replaced, and would provide a diverse habitat for wildlife.  Furthermore, the reduced use of fertilizers and pesticides, combined with the carbon absorbing effects of the extended tree cover, would count as a considerable environmental improvement.

People who are ideologically opposed to all development, growth and human activity would not be satisfied, but many environmentalists would accept the trade, regarding the new homes built as an acceptable price for the environmental gains of the new woodland.  There would be a very small loss of green belt land, but in compensation there would be major environmental improvement of other green belt land, nine times more than any lost.

It is quite common in disputes involving potential rural development to have winners and losers.  Usually it is either the developers or the conservationists who win, the one at the expense of the other.  This proposal, by contrast, is deliberately structured in such a way that there is something in it for most groups to come out ahead, with only a tiny group unsatisfied because it conflicts with their ideology.  The other groups can all benefit, and this includes the building firms, the would-be home-buyers, current rural home-owners, those wanting to sustain the rural economy, the environmentalists and conservationists who seek less chemical pollution and an improved environment for plants and animals, and those who simply want the countryside to look nicer.  It is structured so that nearly everyone can come out as winners.

This process of identifying the interest groups and incorporating measures to build in their support or to at least mute their opposition is not a particularly easy one.  It is comparatively straightforward to identify interest groups that might stand to lose out from a new policy initiative.  Indeed, some will step forward to identify themselves by noisy opposition to the proposals.  But the process of thinking up and incorporating measures that might assuage them is less straightforward.  It is essentially creative activity that requires the flashes of invention and insight that are required for new ides to emerge.  It is by no means a deductive process or one that can be carried out by following a formula.  

Nonetheless it offers a way round the impasse which is caused when groups which stand to lose an advantage currently enjoyed will campaign to thwart new policy initiatives that might benefit the many.  It minimizes the conflict which reform proposals can cause, especially in controversial areas such as development and land use change, and it does this by making allies of its potential opponents. By identifying potential opponents before the proposals are set in final form, and by co-opting them with bolt-on measures for their benefit, it smoothes the path for desired reforms without the rancour and adversarial politics that reforms can often trigger.

There are two extras.  This approach promises to shorten the time that reform measures can take as they make their way through the inquiries and court procedures normally put in their path.  And finally it has the additional effect of increasing the number of policy initiatives that make their way safely through onto the statute book or into implementation.  Whether or not you regard that as a good thing depends on how satisfied you are with the current status quo and how ready you are to accept that reform need not always be for the worse.