How the Rich Rig Regulations

A new book exposes the pernicious regulations that make the rich richer and the poor poorer—while shrinking the total economic pie.

If you rent or buy a place to live in New York, San Francisco, Washington, D.C., or any other high-priced city in the country, you’re taking a big financial hit from restrictive land-use policies designed to reduce the supply of housing. That’s done in the name of “preventing over-development” or “protecting the quality of life,” but in practice, it’s a huge transfer of wealth from those who need places to live to those who own existing housing stock, including both homeowners and owners of apartment buildings. The resulting high-priced housing discourages people from moving to where they can get good-paying jobs, thus making the economy less productive and worsening inequality. It also tends to lengthen people’s commutes, damaging their physical and mental health and exacerbating air pollution.

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality
by Brink Lindsey and Steven M. Teles
Oxford University Press, 232 pp.

That makes restrictive land-use policy terrible on almost every possible dimension. But as a renter in New York at election season, I’m deluged with campaign literature from City Council candidates promising to support, and even tighten, these same bad policies, to protect my neighborhood from greedy developers. These flyers even promise more “affordable housing,” which seems to imply that the candidates and their consultants are confident that most voters won’t notice that making housing scarcer and making it more affordable are contradictory goals. Here as elsewhere, these hopelessly anti-egalitarian, anti-environmental, and inefficient policies are understood to be “progressive” and “environmentalist,” while less restriction is understood as a “pro-business” and therefore “conservative.”

Matt Yglesias told this specific story a couple of years ago in his book The Rent is Too Damned High. But in The Captured Economy, Brink Lindsey of the Niskanen Center and Steven Teles of Johns Hopkins University set out to generalize this phenomenon, arguing that regressive regulation is a major contributor to inequality and a major drag on growth, explaining how such policies prevail in political competition, and ultimately crafting a strategy for beating them back.

That strategy is part of a larger project, one that Lindsey and Teles have been working on for years: forging an alliance between liberals and libertarians. Liberals hate inequality. Libertarians hate regulation. If you were trying to create a “liberaltarian” platform, then, you’d start by going after regulations that increase inequality by redistributing wealth and income upward, while also creating inefficiency and stifling economic growth.

I find the book convincing in its broad strokes and in the abstract. There’s lots of double-bad (inefficient and anti-egalitarian) policy around, and fixing this problem could carry substantial benefits both for overall economic well-being and for more egalitarian income distribution, while also helping to clean up politics by reducing the element of rent-seeking in political activity. The project of attacking such regulation deserves the support of liberals and libertarians alike, with one potential benefit of peeling some libertarians away from their unnatural and unconsecrated liaison with the Trumpified Republican Party.

But The Captured Economy isn’t nearly as convincing in detail—it would be stronger if it were more carefully and patiently argued. With only 180 pages of text, the book is mercifully short, making it a highly cost-effective read. But its brevity forces the authors to try to do too much too quickly: diagnose a political-economic disorder, analyze four complex policy areas, and plot a political strategy.

Lindsey and Teles choose four instances to show how politically powerful players benefit at the public’s expense. In addition to anti-growth land-use policies, they discuss occupational licensure, “intellectual property” rights (patents, copyrights, and trademarks), and the wide array of policies that encourage both the hypertrophy of the financial sector at the expense of the rest of economic activity, and the sort of reckless herd-following that generated the bubble in mortgage-backed securities and the ensuing financial crisis. They had a wealth of other targets to choose from, including the regulation of the telecom industry, especially wireless and cable; real estate brokerages; automobile sales; and statutes such as the Jones Act, which allows only U.S.-flag ships to carry trade between U.S. ports. (Some of these make cameos in the book.)

Their analysis of how such awful policies became entrenched draws on the “public choice” tradition in political science, which understands political struggle primarily as economic struggle carried on by other means. Those with political power use the machinery of the state to create economic “rents”: flows of income not justified by the costs of production and artificially protected from competition by law. The costs of such “rent-seeking”—crafting self-benefiting policies, publicizing them, hiring lobbyists to promote them, making campaign contributions—can be paid for out of the resulting profits. (Promoters of California ballot initiatives, for example, starting with the real-estate owners who massively cut their own taxes with Proposition 13, have developed this into a systematic racket. That not only degrades the political process but also wastes resources that could otherwise be put to productive use. As they point out, this is the opposite of the textbook “great tradeoff” between efficiency and equity. Upward-redistributing, inefficient regulation is like a football player who’s small, but slow.

But the devil is in the details. The four examples in The Captured Economy aren’t all alike; they’re not really all about “regulation” in any narrow sense of the term; the “public choice” analysis is more gestured at then argued in detail in the course of the four case studies; and the political strategy at the end is beyond sketchy. And neither in the four case studies nor in general do Lindsey and Teles offer an account of how the legitimate goals that are sometimes distorted by rent-seeking policies ought to be served instead. In contrast to many tomes that would have been better had they been shorter, this is a thin book with a fat book inside, struggling to escape.

The “public choice” framework, and the “rent-seeking” idea in particular, can shed light on some situations. But the claim that any given bad outcome results from rent-seeking needs to be argued rather than merely asserted. Anti-growth land use regulation certainly benefits owners of existing structures, and especially housing, at the expense of those who want housing near economic opportunity. But is “rent-seeking” really a good descriptive model of homeowners trying to protect what they see as the quality of life in their neighborhoods? And while it’s true that rent-seeking policies will tend to benefit the politically powerful at the expense of others, the powerful and the wealthy are not co-extensive categories; as a result, some of what the public choice condition calls “rent-seeking” winds up redistributing income down rather than up. Where do “liberaltarians” stand on that class of policies?

The authors proclaim “regulation” as their theme. But patent and trademark laws aren’t “regulations” in the usual sense of that term; they’re grants of property rights, giving some private parties rights to tell other private parties what they may and may not do. And the financial-services story isn’t in any obvious sense about excessive regulation that freezes out competitors and leaves consumers at the mercy of an artificially created oligopoly; it’s at least as much about the effects of unwise deregulation. That dilutes the relevance of the story Lindsey and Teles tell of “regulatory capture”: the process by which regulated industries manage to take hold of the regulatory apparatus.

Again, the book has little to say about cases in which regulation improves efficiency and distribution. One important form of regulation is antitrust law, which has been seriously weakened by a series of judicial decisions rewriting the statutory language to fit the very sort of “public choice” framework Lindsey and Teles embrace. If, as they argue, American industry is becoming more concentrated—to the detriment of consumers and entrepreneurs—weaker antitrust rules must be among the suspects. But that doesn’t fit the “regulatory capture” story at all.

Nor is it clear that the destruction of small-scale retailing by “big-box” chains (and then by Amazon)— which the book celebrates as a triumph of Schumpeterian “creative destruction”—actually represents a net social gain, given its role in the destruction of small-town life and in spreading the very economic devastation that The Captured Economy attributes to rent-seeking regulation. The demonstrated record of Walmart in particular—building a big store outside a town, temporarily lowering prices until all the town’s retailers go belly-up, then raising prices after the competition is mostly gone—is precisely what an earlier interpretation of “unfair competition” was designed to prevent. (I’m still not sure which side I should be on in the “big-box” wars: if we count the contribution of Walmart and its kin to dragging China out of poverty, perhaps they did more good than harm, all things considered. The point is just that not every regulation designed to protect existing businesses is necessarily a bad thing.)

And of course the regulatory capture problem is just as relevant to cases of under-regulation—in financial services, telecommunications, environmental protection, and worker health and safety protection—as it is to over-regulation. Thus an analysis focused entirely on reducing regulation is one-sided.

What is most missing in the book is any sort of detailed policy analysis of any of the cases, or a more general account of what “good” regulation would look like. “Get rid of rent-seeking” is a slogan, not a policy prescription.

For example, even accepting the premise that current U.S. patent and copyright laws are excessive, the question remains of how to fulfill their original purpose: encouraging invention and creation. This is well-trodden territory in the economics literature, and the fundamental problem is the “public goods” market failure: if a good is non-rival in consumption (my using it doesn’t interfere with your using it) and non-excludable (I can’t be forced to pay for it by being deprived of its use if I don’t pay) then its efficient price to the consumer is zero, but at zero price no one has an incentive to produce it in the first place. Knowledge and information—the knowledge that a particular molecule cures tuberculosis, or the information encoded in recorded music—are among the clearest cases of public goods. Of course the grant of monopoly rights to producers of knowledge and information—making the goods “excludable” by law—is only one of many ways to encourage public-goods production, and it’s not obviously the best, because it leads to inefficiently high prices. Alternatives include producing those goods publicly, or privately with public funding, as most basic scientific research is currently produced; offering cash prizes for making specific inventions (that’s how the British Admiralty solved the problem of making a naval chronometer); and so on. But Lindsey and Teles, having made the argument that we’re currently doing patent and copyright wrong, don’t bother to tell us how to do that job right. And if, as I strongly suspect, the answer involves spending tons of tax dollars on subsidizing directly the activities we now subsidize via grants of monopoly rights, it’s far from clear that libertarians can embrace that solution and continue to call themselves libertarians.

In the specific case of pharmaceuticals, it’s true that patent protection (or the equivalent in marketing exclusivity granted by the Food and Drug Administration) costs consumers and governments tens of billions of dollars a year in excess drug prices. But it’s also true that inventing new drugs, and especially proving scientifically that they are safe and effective, is an extremely expensive process, and that someone needs either a budget or an incentive to cover those costs. Arguably, the FDA is too demanding and ought to shorten the drug-approval cycle, and the result of the FDA’s strictness is to increase the value of the approved-drug portfolios of current pharmaceutical companies at the expense of patients and of the upstart competitors that might otherwise exist. But that’s not a case The Captured Economy tries to fit to the “regulatory capture” model, and it wouldn’t be an especially good fit.

Lindsey and Teles accept the necessity for a wide range of regulations to protect health and safety. But those regulatory processes, too, are subject to regulatory capture by firms that want freedom from regulation and rent-seeking by firms that want competitive advantage. What would good laws and regulations about air pollution or toxic waste or greenhouse-gas emissions or occupational health or food safety or auto safety look like, and what political strategy could bring such policies into existence? On that central point, the book is silent.

The political strategy proposed toward the end of the book seems overly concerned with the inside baseball of how interest groups influence regulators and is not attentive enough to the problem of how to persuade voters that inefficient and upward-redistributing regulation is something to worry about, let alone an issue important enough to justify supporting or opposing a candidate who is on the right or wrong side of that issue. As to the “neo-Lochnerian” project of having the courts strike down rent-seeking laws, that suggestion seems terribly remote from the world in which special interests are buying up state judiciaries wholesale.

The authors scoff at what they identify as the “Bernie Sanders complaint” that the deregulation of political money by the courts is a major part of the problem; they argue that persuasion is the chief weapon used by rent-seekers and that the massive deregulation of campaign finance had little to do with the growing capture of public institutions by private interests. The alternative viewpoint is that, as a lobbyist, you get more cooperation with a cute idea and a substantial campaign contribution than with a cute idea alone.

The gains from rent-seeking policies are often concentrated while the losses are diffuse. As Lindsey and Teles point out, this means the gainers have a natural organizational advantage over the losers. While the gainers from those policies show up and testify and lobby and vote and write checks, the losers—who may not even be aware of what they’re losing—don’t. All of us pay ransom to the holders of pharmaceutical patents in our health-insurance premiums, to licensed real-estate brokers protected from competition by lawyers and on-line brokerage services every time we sell a house, and to car dealers shielded from competition from direct sales by car companies every time we buy a car. But none of those is likely to be a voting issue for us as losers, while any attempt at change would generate well-financed fury from the gainers.

It’s hard to see what’s going to defeat the organized and wealthy beneficiaries of rent-seeking policies other than a mobilized citizenry. Both the populists and the progressives of a century ago managed to mobilize parts of the electorate against the use of public power for private gain. But they did so noisily and angrily. Without the noise and the anger, I doubt “reducing the rents” can be converted into a winning political slogan. And in any case, the opponents of upward-redistributing and inefficient regulation aren’t going to hold power on their own; they’re going to have to join or influence existing or new political coalitions. But how?

It would be churlish to complain that this book does something rather than everything. By calling out polices that make the rich richer and the poor poorer while also shrinking the total economic pie as a major public problem, Lindsey and Teles have performed a valuable service. But the next steps in their project will require, on the one hand, more detailed and careful political, economic, bureaucratic, legal, and policy discussions of specific instances of rent-seeking politics, and of the details of better policies, and, on the other, a political strategy capable of mobilizing forces proportionate to the massive task at hand.

Mark Kleiman

Mark Kleiman is a professor of public policy at the New York University Marron Institute.