Bootleggers & Baptists: How Economic Forces and Moral Persuasion Interact to Shape Regulatory Politics (17 page)

Despite their victories in the courthouse, the suits weakened the tobacco companies by increasing public awareness of the companies’ efforts to conceal tobacco’s health hazards. Internal documents revealed at trial showed that industry executives were aware of smoking’s hazards at a time when they were denying those very hazards publicly (Kluger 1996, 559–61; Roemer 2004, 688–89). The incriminating documents, along with publicity surrounding high-profile whistleblower cases, yielded a public relations debacle that turned public opinion against the tobacco interests by the 1990s.

In a dramatic series of events that followed, a third Baptist-anointed regulator entered the fray when the EPA in 1992 issued a report declaring secondhand smoke to be a carcinogen (EPA 1992). Then, in 1996, the FDA asserted its authority to regulate tobacco products without congressional approval. After proposing regulations with the support of the Clinton White House, the FDA was sued by the industry, which claimed the FDA lacked jurisdiction. The FDA was sent back to its former regulatory territory in 2000, when the U.S. Supreme Court sided with the industry.
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Then, congressional hearings were held in conjunction with Medicaid legislation that put smoking-related illnesses in the spotlight. Anti-smoking interest groups, burned by their past support for regulation that turned out to favor the tobacco industry, seem to have wised up; they were no longer available as a Bootlegger/Baptist coalition partner.

Meanwhile, tobacco imports were up, and production in the United States was headed to oblivion. The former tobacco states no longer relied significantly on tobacco as a money crop. The tobacco states’ delegation in Congress turned its interest to other matters, including health care. As time passed, new civil suits were brought successfully against the tobacco companies by state attorneys general suing on behalf of state Medicaid reimbursement funds (Orey 1999). With secondhand smoke now accepted as causing harm, it was no longer crucial to prove cause-and-effect links or grapple with “assumption of risk” defenses. Successful actions in four states brought recovery of Medicaid funds and delivered huge payments for legal services to attorneys hired to assist in the state attorneys general actions.

As the number of Medicaid reimbursement suits increased, the tobacco companies found themselves facing not just a well-financed group of plaintiffs’ counsel but a growing number of state government attorneys. By 1997, 22 state attorneys general had filed suit against the tobacco companies (Zegart 2000, 226). By the summer of 1997, 40 had done so. Instead of taking them on one at a time, the industry circled the wagons and called for settlement talks. The talks eventually produced an initial settlement agreement on June 20, 1997.

The tobacco companies were willing to concede a great deal but insisted on protection from future lawsuits and limits on regulation as the quid pro quo. The protections they sought required congressional action to approve those portions of the deal protecting the tobacco interests from future efforts by the FDA and health interest groups at the federal level. That relief was valuable. Three weeks after news of the settlement negotiations was announced, Philip Morris’s stock market value had increased by more than $10 billion, a testament to the value of ending the liability problem (Mollenkamp et al. 1998, 98). The stock rose another 11 percent when the
Wall Street Journal
reported an outline of what became the resolution several weeks later.

For the states, the resolution provided an annual payment by the participating tobacco companies. Tobacco companies were to pay $10 billion to the states up front and to make inflation-adjusted annual payments to total $358.5 billion over 25 years, with payments of $15 billion per year in perpetuity thereafter. Although substantial, the payments were less onerous than the numbers suggest. Because of the relative price inelasticity of tobacco sales, companies would be able to pass along a good chunk of their payments to consumers as higher prices. Furthermore, tobacco companies would be able to deduct the annual payments as ordinary and necessary business expenses on their income tax returns, thus reducing their tax liabilities. The monetary payments envisioned by the resolution were thus primarily a promise of a transfer to the states from future smokers (through higher prices) and taxpayers generally (through the deductibility of the payments) rather than from the tobacco companies’ shareholders.

For the FDA, the resolution offered authority to classify nicotine as a drug and cigarettes as a drug delivery device (albeit with some restrictions on agency action), the power to regulate health claim advertising, and the ability to treat tobacco product approvals in much the same way the agency treated new drug approvals. The resolution also contained detailed rules that affected marketing and advertising and underage tobacco restrictions. For example, the use of a human image to promote a product was banned: no more Joe Camel or Marlboro Man; no more outdoor advertising. Providing gifts based on proof of purchase of tobacco products was prohibited.

Congress began deliberations nearly a year after the resolution was signed; by that time, it was apparent that the general mood was for the industry to feel pain. As the legislation moved through the Senate Commerce Committee, the payments required from the tobacco companies were raised to $516 billion from $365 billion over 25 years, a $1.10 increase in the federal cigarette tax over five years was added, a higher level of FDA regulation was allowed, and litigation immunity was eliminated.
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Eventually, the price apparently became too high. The tobacco companies rejected the revised proposal and launched a massive advertising campaign to kill the bill (Kelder 1998, 6). The bill died.

With the failure of the federal legislation in the Senate, the seven tobacco companies and the state attorneys general began discussions. A revised settlement agreement without the federal portion of the deal—what is now known as the Master Settlement Agreement—was signed on November 17, 1998. The revised deal did not address warning labels (where the FDA had exclusive jurisdiction), include any expansion of FDA authority, or provide the crucial national immunity provisions, which would have required congressional approval.

But the industry got a better price. The expected flow of payments from the industry to the states dropped from $365 billion to $200 billion. Within days of signing the MSA, two producers announced the largest price increase in history; the others soon followed (Capehart 2001). Over the next five years, 14 industry-wide price increases were announced. By 2001, the firms had more than doubled the per pack wholesale price of cigarettes.

Despite the collapse of the original deal in Congress, the federal government was not yet done with the tobacco industry. Unsuccessful efforts were made in Congress to drain some of the settlement funds headed to the states and to extract wealth from the industry by way of U.S. Justice Department suits. The MSA also alarmed U.S. tobacco growers. Fearful that their political protection was ebbing, farmers sought to cash out the value of their government-provided price supports and quotas. Joined by cigarette producers interested in seeing an end to government programs that kept a floor under tobacco prices, the farmers negotiated for redemption of their government-created tobacco growing quotas and compensation for the end of government price support programs (Womach 2005). Holders of tobacco quotas received some $6.7 billion to retire their rights. Tobacco farm operators (many of whom leased quotas) received $2.9 billion. The revenues to fund the retirement and buyouts came from government sources and, as might be expected, from the cigarette producers, who nudged cigarette prices upward again to generate a contribution of $5.5 billion toward buyouts.

In spite of numerous attacks on antitrust and other grounds, and despite competitive entry by small cigarette producers, the MSA cartel has thus far remained relatively durable—and for good reason. The MSA is a cash cow for the states and a source of funding for health interest groups. MSA cash flows are now woven inextricably into the finances of all 50 states, national interest groups, and private litigators who guard the gates, and these groups are not likely to allow their streams of funds to dry up.

Aftermath: Downhearted Baptists

One last question remains to be addressed. Did the MSA accomplish a public interest goal? The public interest inspiration for the initial deal was the aim of reducing smoking and recouping state Medicaid expenditures. By the time the deal had been made concrete in the MSA, however, much of that was lost. The promise that MSA revenues would be devoted to smoking reduction programs has not been met; the majority of the proceeds has been devoted to other activities. Only about one-third of the revenue has been spent on health enhancement or cancer prevention programs. Little has been spent on efforts to reduce teenage smoking, which had been one of the main public causes associated with the MSA (Campaign for Tobacco-Free Kids 2011). The Baptists were downhearted. Bruised but not beaten, the Bootleggers went to the bank.

Nuthin’ But a “B&B” Thang: California Attempts
to Legalize Marijuana Use

So far, we have discussed Bootlegger/Baptist interaction in the development of rules affecting marketing practices for alcohol and cigarettes. Alcohol is a mature consumer product, widely regulated at every level of government, and has been legal, on a restricted basis, since Prohibition ended in 1933. Cigarettes have never been banned by the federal government, but their marketing practices have been subject to a complex array of regulatory actions taken by colonies and states centuries ago, by the FTC and the FCC in modern times, and most recently by the FDA.

As we saw, Bootleggers and Baptists have interacted continually in the development of marketing practices for alcohol and cigarettes. Such is not the case for marijuana. There are Bootleggers—lots of them. But the Baptist side of the winning coalition has not fully emerged. In this section, we examine marijuana and one episode involving an attempt to legalize marijuana production and consumption in California. Here we meet some burgeoning Bootleggers and some conflicted Baptists.

A Product in Transition?

The marketing practices associated with marijuana, a product not legal since 1937 when the U.S. Congress passed the Cannabis Prohibition Act, are murky and very much an evolving story. Although federal law makes growing, selling, possessing, or using marijuana illegal, the plant is nonetheless grown widely, sold extensively, and used by a meaningful percentage of Americans. Important for our story, a growing market exists for medicinal marijuana, which can be sold in 18 states to consumers with a medical doctor’s prescription, as of 2013. Some see the medicinal market as a precursor to marijuana legitimacy.

At least four factors help support the existence of a large, illicit marijuana market: (a) the weed can be grown in flowerpots, gardens, and larger plots so that detection costs are high; (b) small but valuable amounts of the product can be carried in pockets, purses, and other small containers, which means distribution costs are low; (c) as a high-value, low-weight product, marijuana can easily be exported from abroad to U.S. markets; and (d) Bootleggers want to maintain the market’s illegal status, while Baptists, for the most part, are happy to assist them. Circumstances do change, however, especially during a Great Recession.

These strands came together on November 2, 2010, when California voters turned down Proposition 19, a highly publicized initiative known as the Regulate, Control and Tax Cannabis Act. The vote was close, with 54 percent opposing the action (“California Prop 19 and the Electoral Results” 2010). Had it passed, the act would have allowed an adult to possess one ounce of marijuana and to grow plants in an area no larger than 25 square feet. (Going to larger production would be too much for Bootleggers.) As part of a vanguard effort to relax laws that restrict marijuana production, sales, and personal use, California in 1996 was the first state to legalize marijuana’s medicinal use (Klare 2011).

As doctors’ permission became easier to obtain, marijuana shops began to grow like weeds in the Golden State. Moreover, as marijuana use became more acceptable, California reduced the penalty for possession to about the same fine charged for a speeding ticket. Governor Arnold Schwarzenegger signed a law reducing the penalty to $100 in October 2010, just a month before the November vote, some say in an effort to weaken support for the initiative (Neff and Wohlson 2010; Aaron Smith 2010).

How the Bootlegger/Baptist Coalition Formed and Reformed

An interesting array of Bootleggers and Baptists held forth during the prelude to the vote, with ample passion on both sides. But passion does not necessarily translate into campaign contributions and election-day votes. Our theory suggests that what matters most are dollars that go to the bottom line. Thus we should expect those who have a lot to gain (or a lot to lose) in concrete terms to be counted among the most vehement partisans in the struggle. Furthermore, groups that are already organized will have an advantage over masses of people who, however individually passionate about the cause, are not a part of a solidified interest group.

Let us now explore the potential winners and losers in the struggle to pass the law. First, consider the state itself. The California state government was practically bankrupt at the time and was engaged in the painful business of cutting programs, closing state parks, and laying off state employees. Some had projected that legalizing and taxing the sale of weed could bring in as much as $1.2 billion annually, if a state sales tax was imposed (Kennedy 2010). Later, as legislation developed, taxing authority was to be vested with local governments. Needless to say, $1.2 billion was a nontrivial amount for a nearly bankrupt state. There were also indications that legalization would make marijuana production, sale, and use an activity like any other in the legal marketplace. As a result, the crime associated with marijuana activity would be reduced, as would related law enforcement expenditures.