Interest Group Inertia

I asked my local city councilman, why we don't get rid of laws that do not allow private companies to sell alcohol? He noted that our city owned liquor stores generate almost $1MM in revenue, and it would be impossible to replace that revenue, or cut that expenditure (total city budget around $30MM). So, my crappy city-owned liquor stores are here to stay.

Every theoretically possible connection to the current crisis is being offered as a 'root cause', so naturally arguing against the size of banks: if we had a bunch of little banks it would be much better (eg, former Mike Huckabee adviser Jim Pinkerton). I would say this is the stupidest diagnosis, but the field is pretty thick at the stupid end, so I'll just say, 'among the stupidest' diagnoses. For the longest time we had laws against have more than one branch ('unit banking'), or having branches across state lines. This prohibited banks from benefiting from the free lunch of diversification. For example, in the 1930's, there were about 9000 bank failures in the US out of 30,000 banks; in Canada, they had 10 banks, 0 failures. As technology made this more useless all the time (because you could in, effect, own assets in other states via securities markets), in the 1990's these interstate banking laws were repealed. But did you know, that the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which was signed into law by President Clinton on September 29, 1994 only became fully operative on June 1, 1997. This lag between passage and enforcement was intended to provide states with sufficient time to rewrite their tax laws in order to avoid losing substantial corporate tax revenues to the home states of out-of-state banks. That is, they rewrote their state laws, to make sure that no state lost tax revenue from this change.

Thus, a big practical hurdle in implementing new policies, is that they must be neutral to existing interest groups. Every new law should not make any single group with a veto, worse off. So in other words, I'm going to die with mainly the same set of stupid, antiquated laws we have today, and more importantly, can only buy Hoegaarden if I'm out-of-town in own of those fancy, newfangled 'private' liquor stores. Yippee!