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NO FREE LUNCH

Fighting bad policiesCielito F. Habito

Philippine Daily Inquirer, October 14th, 2014

It is the greatest happiness of the greatest number that is the measure ofright and wrong, wrote 18th-century British philosopher Jeremy Bentham.With further elaboration by John Stuart Mill, Benthams principle later turnedinto the goal of seeking the greatest total happiness (greatest good), period.That became known as Utilitarianism, a theory in normative ethics holding thatthe measure of correct action is the maximization of utility or total benefit.Many of us would be uncomfortable defining that as a societal goal, implyingthat maximized economic growth is the end-all of economic policy. To be truerto Benthams original wording, that aim is now widely qualified to consider,

just as importantly, the incidence and distribution of that growth, captured inthe now commonly used phrase inclusive growth.

Imagine a hypothetical country of 100 million citizens. Suppose a lawmakersponsors a bill that would have government collect P100 from each citizenevery year, and the P10 billion raised will go to 100 specific individuals whoare free to use it as they wish. Outrageous? (Or sound familiar?) Americaneconomist Mancur Olson, in his book The Logic of Collective Action: PublicGoods and the Theory of Groups argued that such a law, unfair as it mayseem, is likely to pass.

The reasoning would go this way: First, the 100 favored individuals will find itso much easier to organize themselves to fight for the law than for the other99,999,900 to organize to resist it. Second, the overwhelming majority whostand to lose only P100 each have little incentive to move, compared to the100 who stand to gain P100 million each. That is the tragedy with peopleacting only in their own self-interest. And third, the lucky 100 would gladlyspend large sums of money to lobby legislators and get the media to supportthe bill. With an annual windfall of P10 billion (or P100 million each) to lookforward to, they wouldnt hesitate to spend a fraction of this amount to get the

law enacted, while the silent majority sinks into apathy and default. There maybe a handful of idealistic citizens who would mount a resistance, but theywould be no match against the millions in lobby money mobilized by the lucky100. And so, in Olsons prediction, the patently unfair proposal manages tobecome part of the law of the land.

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Olsons theory helps explain why we see so many clearly bad policies around,and not just in our own country. The award of high-tariff protection to certainfavored industries or firms is a traditional example. So are government-condoned monopolies that are clearly inimical to the common good. The long-running debate on open skies over protectionist arguments of domestic

interests could be another case in point. The list can go on and on.Elsewhere, massive subsidies by rich governments to their relatively smallfarm sectors favor only a few, and have time and again been shown to hurtthe majority of their citizens (along with small farmers in developing countrieslike ours). And yet, those governments have stubbornly held on to thesesubsidies through the years, making it the single biggest snag in World TradeOrganization negotiations. Every country has its share of such perversepolicies, or those that demonstrably go against the welfare of the majority infavor of a few, even in the most democratic societies.

Not a few believe that it was Olsons principle at work that led to the manglingof the Ramos administrations original proposed configuration for theComprehensive Tax Reform Program by the time it passed Congress in 1997.

Among other things, the law as passed then omitted the provision forautomatic inflation adjustment (indexation) of the sin taxes. Subsequentefforts to revisit the sin taxes attempted to correct, with varying levels ofsuccess, this major flaw that led to the large erosion in the real revenues fromthe tax over the years. In its last version passed in 2012, the Sin Tax Lawfinally provided that excise tax rates will increase by 4 percent every yearbut strong forces still managed to get Congress to make this take effect onlyin 2016 for distilled spirits, and in 2018 for cigarettes and beer. Notsurprisingly, there are new efforts to reopen the law at this time.

Years ago, a reformist neophyte legislator told me of her first brush withpolitical reality, as she fought the strong lobby to water down the excise tax billon the sin products. Unsuccessful in her plea to party mates not to give in, shereluctantly relented and told them: Ok, I will vote with you now, but I hope thiswill not happen again. The flippant response she got from her more seasonedcolleagues was: On the contrary, it will happen again, and again, and again.

Was Olson right? Are long languishing but long-needed legislation like the faircompetition act, national land use act, and freedom of information act naturallydoomed to failure?

Actually, Olsons thesis has not gone unchallenged. It has been argued thatOlson neglected the power of ideological motivation, not just money andconcentration, to spur activism. Also, contrary to Olsons characterization,weak and diffuse groups could possess a paradoxical political advantage:

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precisely because they are weak and diffuse, the wider public may see themas less self-interested and thus more credible. A more recent and compellingreason to question Olsons conclusion is the rise of the digital age and socialmedia, which now makes it so much easier for people to find each other andorganize to publicly advance their shared interests. So there must be hope,

after all.

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