Left-Right Convergence on Rent-Seeking?

It’s been noted on and off for decades that hostility to government favors for particular private interests–typically referred to as “corporate welfare”– was shared by people at widely disparate points on the ideological spectrum. It’s been an eternally recurring theme for the libertarians of the Cato Institute, the centrists of the Progressive Policy Institute, and the progressives associated with Ralph Nader. Different opponents of corporate welfare have different abuses they emphasize, of course, and have many irreducible differences with each other, making trans-ideological reform coalitions difficult to assemble and maintain, especially given the power of those who fight for corporate subsidies and find ways to rationalize them.

It’s no great surprise that Johns Hopkins University’s Steven Teles, who has long been a missionary in the field of finding common ground between liberals and libertarians, has come up with a new framework for identifying and opposing government-sponsored market distortions and how to connect them with the growing inequality almost everyone perceives, per a new paper at National Affairs focused on “upward redistribution” of income and wealth.

Here’s a sample:

While large parts of the top 1% of the income distribution are surely made up of entrepreneurs and innovators, the image of the United States as a free-market paradise is hard to square with the actual composition of the top strata of American earners. Start for simplicity’s sake with a widely read breakdown of the occupations of the top percentile done by the New York Times in 2012. What immediately jumps out is the huge over-representation of financial-service providers, doctors, dentists, and lawyers, all of which are professions characterized by large-scale market distortions. A recent study by Jon Bakija, Adam Cole, and Bradley Heim showed that the occupational concentration of the wealthy in rent-suffused sectors is even more dramatic in the top 0.1%.

Doctors, dentists, and lawyers are all licensed professionals, and licenses are an obvious barrier to entry and competition. In addition, the specific regulatory structures of some of these licensed professions (which are almost always functions of state-level regulations) serve to redistribute income upward….

Medicine displays a similar pattern because the law specifies tasks that only licensed doctors can perform, even though nurses are capable of performing them. Dean Baker, co-director of the Center for Economic and Policy Research, has shown that the incomes of doctors and dentists are artificially inflated by constraints on the number of practitioners trained in any given year, the number of foreign-trained practitioners allowed to practice in the country, and the lack of third-party compensation for services provided abroad. Licensing statutes frequently define “dental practice” or “veterinary practice” very broadly, allowing dentists and veterinarians to swallow up activities that involve none of the risks that justify licensing, such as teeth whitening and animal massage — activities that they can then charge far more for than could non-licensed operators. Finally, as a recent Washington Monthly article shows, doctors play a central role in determining their own compensation through their control of the committees that set prices paid by Medicare. In short, doctors and related professionals in the United States do not earn much more than their counterparts in other advanced countries because of the impersonal workings of the market. They make more because of the rules that govern them — rules that give them far more power than their foreign counterparts.

The bottom of the top 1% is full of owner-proprietors who, in a more deregulated market, would be lower-paid employees of larger, more efficient firms. Car dealers, for instance, have a sizable presence in the top 1% of earners, have a major lobbying presence in almost every state capital, and have made contributions to almost every member of Congress. That should not be surprising, because regulations (again, often at the state level) protect car dealerships from competition by limiting direct sales, restricting the termination of franchises, limiting the entry of new dealers, and preventing manufacturers from offering preferential pricing to larger franchisees. Together, these rules, economists Francine Lafontaine and Fiona Scott Morton found in a 2010 study, “almost guarantee dealership profitability and survival,” while simultaneously driving up costs to consumers…..

A concentration of high incomes also characterizes the field of government contractors, such as private-prison managers, defense contractors, and for-profit colleges. All these industries are characterized by dependence on government as a nearly exclusive source of revenue, by extraordinary levels of lobbying, and by asymmetries of power between firms and their government counterparts. Or consider the field of management consulting, which attracts an extraordinary percentage of Ivy League college graduates. As Christopher McKenna shows in his book, The World’s Newest Profession, the outsized incomes of consultants do not come from their ability to recommend innovative practices to firms. Instead, they come from the rent they extract from performing a legally mandated due-diligence ritual for firms or from performing tasks that could otherwise be done at lower cost by public employees. These are not, in short, meaningfully “private” firms at all, despite their high profitability.

At the very highest end of the income spectrum, rents are pervasive in the fields of finance, entertainment, and technology. Regulations subsidize large banks through the implicit insurance of the too-big-to-fail status, the creation of a huge pool of assets for investment managers through a variety of tax-advantaged savings devices, like the 401(k) and IRA, and the construction of a massive and highly liquid securitized finance market.

So there is a vast potential target of government supported professions and entire sectors out there that contribute to inequality at the top and in ways that ought to violate both free-market and progressive values. The great value Teles is adding is to encourage scrutiny of routinized forms of rent-seeking that are not always viewed as politically vulnerable:

State regulation of doctors, Commodity Futures Trading Commission rules for derivatives, and local land-use planning decisions rarely if ever occur to citizens and policymakers as having anything to do with the larger social debate about inequality. If the case is made effectively — if policymakers do start seeing these diverse policies as part of a larger problem — then it would be possible to generate political conflict in arenas that are currently too quiet and uncontested.

It is definitely worth a try. As Teles notes, right now political and ideological gridlock have produced a wonderland for rent-seekers with strong footholds in both major political parties and ideological points of view. That needs to change.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.