How Wealthy People Use the Government to Enrich Themselves

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Picture of Ben Franklin Looking Displeased.
Have you ever noticed how annoyed Benjamin Franklin looks on the hundred?

The progressive narrative about America’s skyrocketing levels of inequality goes something like this: Since the 1970s or so, conservatives have racked up a series of victories in rolling back government’s role in taxing and regulating the rich and powerful. As a result, the rich and powerful — who often lavish conservative politicians with donations — have run roughshod over poor and middle-class people, sucking up a horrifying proportion of the nation’s wealth in the process.

In their new book The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality, Brink Lindsey and Steven M. Teles argue that this is only part of the story. “What this approach misses is the role of government action itself, rather than the government’s mere failure to act, as a cause of inequality,” they write. This means that anyone concerned about addressing inequality should be focusing on the many ways in which government policy itself actively redistributes money upward.

Lindsey, vice-president and director of the Open Society Project at the Niskanen Center, and Teles, a fellow at the Center and a political science professor at Johns Hopkins, focus on four key areas in which, they say, government policy has been ruthlessly taking money from the have-nots and bestowing it upon the haves: finance, intellectual property (that is, the patent system), occupational licensing, and land use.

Whereas the standard progressive narrative about inequality and government inaction is fairly intuitive, Lindsey and Teles’s arguments are sometimes a bit more nuanced. Take their occupational-licensing case study, for example: They argue that many state licensing laws pertaining to physicians and attorneys are much more about artificially constricting labor supply in these fields than any sort of compelling quality-control argument, which in turn drives up the salaries of physicians and lawyers (the desired effect from the physicians and lawyers who lobby for strict licensing laws), which in turn drives up costs for consumers, which in turn cuts off the access poor and middle-class people have to the sometimes literally life-saving services of a good attorney or physician.

What this and other examples show is that sometimes the “conservative” argument that deregulation and a scaling-back of government intervention can reduce inequality is, well, true. It’s just complicated, and depends on a lot on context. There’s no one-size-fits-all approach to solving anything as complicated as America’s inequality crisis.

In a recent email Q&A, Lindsey and Teles answered some questions about his book’s theses and the ways he wished progressives would reframe their thinking about inequality.

I think the ways in which conservatives get inequality-talk wrong are pretty well-documented among progressive-minded folks — among other things, they have a delusional amount of misplaced faith in the power of “the market” itself to bring about fair outcomes. But what’s your elevator-pitch version for the ways in which progressives might reconsider their own positions by reading your book?

Progressives have a hard time seeing how much government policy actively contributes to inequality by redistributing upwards. Progressives typically think of inequality as the natural result of unrestrained markets and see more government power as the solution. Yet in many important cases — in our book we focus on financial regulation, intellectual property, occupational licensing, and land-use regulation — misused government power is the problem and greater reliance on markets is the egalitarian solution.

Progressives have no problem recognizing the political power of big corporations and the rich, yet curiously their implicit assumption is that this power is wielded with amazing restraint. They understand that the rich and powerful can unfairly dominate the policymaking process, but their main worry is that they will use their power to restrain government — to keep their taxes and regulatory compliance costs inappropriately low. But doesn’t it make sense that if you have all this power, you’ll use it for more than just playing defense? If you’ve got that power, you can go on offense as well, empowering government to restrain competition from outsiders so that the rich and powerful benefit at the expense of everybody else. And that is precisely what has happened.

Maybe one reason for the progressive blind spot you mention is that government regulation used to have much more progressive distributional consequences — that is, it did a lot of redistributing from richer to poorer. You argue that the main action is now in the other direction; in your words, “rent-seeking,” or lobbying for special privileges, “has moved upmarket.” Explain what’s happened.

What economists call rent-seeking is bad for economic efficiency by definition: it’s the attempt to make profits through the political process rather than by creating value for customers. The effects on the distribution of income, however, are unclear: rent-seeking could be progressive, regressive, or a wash. When the era of activist government really kicked off during the New Deal, lots of regulatory interventions in the economy — some of which we consider bad policies that stifled competition and cartelized industries — nonetheless had progressive consequences. Think rent control, universal service requirements, and of course pro-union labor legislation. Even when policies favored big business, those businesses frequently had large, semi-skilled, unionized workforces, so some of the rents got shared with workers in the form of higher pay. In more recent decades, though, regulatory interventions that favor the rich have been the norm.

One reason is the decline of unions: nothing has replaced them as a muscular lobby for government interventions on behalf of the less-well-off. Meanwhile, the biggest, most technologically progressive industries (which are usually the focus of regulatory activity) now hire mostly highly skilled workers. So subsidies to these companies don’t leak out much to ordinary workers.

Isn’t it simply the case that a ton of powerful progressives benefit greatly from the rent-seeking you document in the book? I don’t expect the doctors and lawyers and finance types who provide the Democratic Party with a big chunk of its funding, for example, to be all that sympathetic to the idea that they’re contributing to the inequality some of them rail against every two or four years. This seems like a pretty serious impasse.

When we were writing the book, we joked that we were doing our best to antagonize the very people most likely to read a serious nonfiction book from Oxford University Press: doctors, lawyers, financial professionals, and affluent homeowners in big coastal cities. But you’re right, we’re also picking fights with some of the biggest funding sources for the Democratic Party: Wall Street, Hollywood, and Silicon Valley. You can see our book as a critique of progressives from the free-market left. The Affordable Care Act didn’t do nearly enough to address doctors’ inflated fees and incomes; Dodd-Frank didn’t do nearly enough to roll back the regulatory subsidies for financialization and excessive risk-taking.

Of course what we’re proposing is difficult. It’s never easy to take privileges away from a well-organized lobby, especially when it represents the interests of extremely rich and powerful people. We don’t say reform is easy; we say it’s necessary. And given the immense frustration in the electorate, on both the left and the right, and the sense that governing elites are failing to help anybody but themselves, we think there are possibilities to channel that frustration into a sustained political assault on upward redistribution. Every victory, however, will be hard-won.

Toward the end of your book you present this fascinating idea from political science that one of the main reasons various special interests wield so much influence in D.C. is simply because they are able to present the government with useful-seeming information — and the government’s capacity to produce this information for itself has degraded over the decades. Why did that degradation occur and what can be done about this fundamental asymmetry?

Worrying about lobbying and special-interest influence is nothing new, but almost all the focus has been on somehow reducing the power of lobbyists — and, in particular, reducing their power to spend money on candidates and causes they favor. We argue that looking at the other side of the equation is long overdue. In other words, rather than trying to disarm lobbyists, we should fortify policymakers so they are less dependent on special interests for the information they need to govern. At the same time that the scope and complexity of government policies have been increasing, we’ve been cutting congressional staff and analytical capacity throughout the executive branch. Conservatives were behind this trend, thinking they were cutting unnecessary bureaucracy. In fact, they were just increasing the information asymmetry between rent-seeking special interests and policy-makers trying to regulate in the public interest. A Congress staffed by smart but relatively inexperienced, overworked young people is one that is easy pickings for lobbyists armed with data purportedly showing that a change in policy would cause the sky to fall. Boosting the government’s brainpower — its internal capacity to generate and process policy-relevant information — would help to reduce that asymmetry and produce better policies as a result.

How Wealthy People Use the Government to Enrich Themselves