A majority of Americans believe that government is run for special interests, not the public interest, surveys show. This awareness represents a triumph for the so-called economic theory of regulation, which focuses on the ability of government to create artificially high returns for special-interest groups at the expense of taxpayers and consumers. The essential insight of the economic model is that legislation and regulation are sold to the highest bidder, just as other goods and services are.

Private interests (often through their political action committees) pay politicians for beneficial legislation through campaign contributions, in-kind benefits and other forms of recompense. The sales are overt, and "PAC excesses" have become standard fare for editorial hand-wringing in the press. Much of the criticism is deserved, though it usually falls too heavily on the buyers. The politicians who sell the legislation deserve as much opprobrium.

Moreover, much of the criticism is misplaced. Many payments are not made to secure special favors. Rather, they are extorted by politicians who threaten to hurt firms or industries legislatively unless they are paid off.

Many types of legislation — including taxation—entail only costs, not benefits. The passage of sharply focused taxes and regulations will reduce the returns that a company may receive from its skills and investments. To protect these returns, a company has an incentive to strike bargains with legislators, as long as the side payments to politicians are lower than the expected losses from compliance with the threatened law. Politicians can profit by first threatening baleful legislation and then—for a price—removing the threat.

Examples of this sort of political extortion are not hard to find. Consider the episode involving threatened federal regulation of used-car sales. In 1975 Congress ordered the Federal Trade Commission to initiate a rule to regulate used-car dealers’ warranties. In 1982, the FTC promulgated a rule imposing costly warranty and auto-defect disclosure requirements.
The Used-Car Rule created the opportunity for legislators to extract payments from dealers in exchange for voiding the burdensome FTC measures. Upon promulgation of the rule, used-car dealers and their trade association descended on Congress, spending millions for relief. Later in 1982 Congress vetoed the rule.

Legislation was not for sale; no special breaks were being sought. Rather, repeal of legislation was sold. An industry was targeted for harmful regulation unless the politicians were bought off. The winners were not the "special interests," but politicians. The losers were the used-car dealers, who managed—at considerable cost—to remain unregulated.

More recent threats to business that also proved lucrative to politicians include the 1982 statute requiring financial institutions to start costly reporting and withholding of taxes from depositors’ interest and dividends. After passage of the statute, the banking industry contributed millions of dollars to politicians and won repeal a year later. Congressional proposals to impose "unisex" premiums and benefit payments on insurance firms similarly elicited payments to politicians from the insurance industry. The proposals were never enacted into law.

Threatening taxes is another way politicians extort money. Excise-tax increases are a particularly potent threat. There has not been an increase in federal beer taxes for decades, for instance. But politicians rattle the tax saber frequently, and brewers pay regularly (through speaking honorariums, campaign contributions and so forth) to avoid higher taxes.

This sort of extortion typified much of the action behind the scenes of the Tax Reform Act of 1986. Tax lobbyists reported that they had never seen such ravenous appetites for contributions.

The same game of political extortion goes on at the state level. The California legislature is notorious for politicians’ use of "milker bills" and "juice bills" introduced solely to milk or squeeze payments from those who would be harmed. When the payments are made, the legislation is withdrawn. For example, from 1979 to 1982 California’s oil industry spent $2.5 million to prevent the imposition of a severance tax on oil shipped out of the state.

From the standard populist perspective often adopted by the media, payments mean that fat-cat lobbyists have corrupted a basically upright but weak legislator. While this interpretation may sometimes be true, it ignores repeated episodes of politicians taking the lead by threatening legislative harm just to extort contributions.

From the perspective of the payors themselves, it is often protection from harm that is being purchased, not special breaks. As Larry Sabato of the University of Virginia reports in a study of political action committees, PAC officials view congressional "invitations" to purchase tickets to political receptions as blackmail. Those who do not ante up fear that they thereby expose themselves to future legislative liabilities.

Even if politicians eventually allow themselves to be bought off, the payor loses in another way. The possibility that politicians may reduce a firm’s returns unless they are paid off not only reduces the firm’s incentives to invest in the first place, it also induces inefficient shifts of investment to forms of capital that are more difficult for politicians to threaten.

This is an important similarity between capital expropriations in developing countries and "mere" regulation in developed nations. Both at home and abroad, the losses from politicians’ ability to extract returns from private capital are measured by investments that are never made. The consequences are identical to those of ordinary theft: The less protection goods have, the less likely they will be produced in the first place.

One would not blame a nationalized industry or a victim of theft for the losses they suffer. It is just as nonsensical to blame those forced to pay our own politicians in what amount to schemes of political extortion.