Who Broke the Economy?

Why has inequality increased so much over the past 40 years? Common answers to that question cite changes in trade, technology, globalization, and education. Cheap imports from low-wage countries, in particular China, sapped domestic manufacturing. Companies offshored jobs, fired people, and hired robots. Demand for skilled workers far outstripped the demand for unskilled workers, depressing earnings for those without an advanced degree.

In their excellent, slim new book, Brink Lindsey and Steven Teles—the former the director of the Open Society Project at the libertarian think tank the Niskanen Center, the latter a political scientist at Johns Hopkins—point to an important and overlooked additional cause. In The Captured Economy: How the Powerful Become Richer, Slow Down Growth, and Increase Inequality, they argue that it is not just that technology and offshoring have wiped away middle-income jobs, but that high-income individuals and big-profit businesses have rewritten the rules of the economy, “capturing” the regulatory system and using it to squeeze out their competition. The result is both  greater inequality, and a more sclerotic economy.

The “capture” of the economy shows up in preferential regulations enacted at the local, state, and federal level, Lindsey and Teles argue. Together, rules made to benefit not the public good, but big firms or rich people, have led to money and wealth being distributed from the poor to the rich and the small to the big. The result of all this “capture,” they write, is an overpaid white-collar professional class, a bloated financial sector, a lack of affordable housing, the growth of fewer and bigger companies, and a dearth of new startups.

The book offers four case studies, looking at land-use restrictions, professional-licensing requirements, intellectual-property law, and the regulation of big finance. Local zoning rules stifle the construction of affordable housing and pad the pockets of existing homeowners. Regulations prevent well-trained foreign doctors and nurses from meeting the country’s extraordinary demand for health care, and plump the salaries of existing workers. Patent protection, some of which can more fairly be described as patent trolling, raises new companies’ cost of doing business, with questionable and perhaps even nonexistent benefits for innovation overall. And federal subsidies for those taking on debt, along with the concomitant growth of Wall Street, have helped to blow bubbles that have caused widespread devastation when they pop.

Of course, wealthy families and big firms often make convincing arguments for such regulations as benefiting not just them but the public more generally. Homeowners argue that big, new apartment buildings would destroy the historic character of their neighborhoods. Companies argue that strong patents are necessary to protect their incentive to invest in risky new ventures. Trade groups argue that strict licensing requirements are necessary to keep consumers safe. All of these things might be true in some cases, of course. But taken together and projected economy-wide, regressive regulations kill new businesses and exacerbate wealth disparities. Removing land-use restrictions alone would boost American GDP by an estimated 9.5 percent, according to the economists Chang-Tai Hsieh and Enrico Moretti, translating to roughly $1.7 trillion more output as of this year—equivalent to the economic activity of the state of Texas.  

Recognizing regressive regulation as part of the reason the economy has slowed and inequality has increased also suggests reforming regulation as a way to bolster competitiveness and aid the middle class—and a potentially bipartisan one, too. Indeed, both Bernie Sanders and Donald Trump agree the system is rigged. “It’s not just the political system that’s rigged, it’s the whole economy,” President Trump told voters while campaigning last year. “It’s rigged by big donors who want to keep down wages. It’s rigged by big businesses who want to leave our country, fire our workers, and sell their products back into the U.S. with absolutely no consequences for them. It’s rigged by bureaucrats who are trapping kids in failing schools.” Similarly, Sanders argued during his campaign: “For the past 40 years, Wall Street and the billionaire class has rigged the rules to redistribute wealth and income to the wealthiest and most powerful people,” adding, “We must send a message to the billionaire class: You can’t have it all.” But the two and the two major parties could not be more diametrically opposed when it comes to how to deal that rigging or capture. Trump and the Republicans have been slashing regulations and pushing a tax plan that would bolster corporate profits, arguing against evidence that the benefits would trickle down to ordinary workers. Sanders has promoted a series of universal-benefit programs, to be paid for with hefty levies on millionaires and billionaires.  

Lindsey and Teles, a libertarian and a liberal, respectively, suggest a set of “liberaltarian” solutions. They argue for restructuring policy processes in the legislature, the courts, and the executive branch—and at the federal, state, and local levels—to promote competition, reduce rent-seeking, and thus help new businesses and the middle class. “There is no route to a competitive economy except through finding a way to a more deliberative politics,” they write. “Only when both sides to an economic question are represented in the political sphere, and when the side of those who pay the costs of regressive regulation can force a dispute to the political surface, is true deliberation on the merits possible.”

Of course, that will not be an easy thing to do. The rich and powerful are, it goes without saying, rich and powerful. Plus, reforming regulations requires working in every jurisdiction, and at all levels of government. “The sheer number of licensing and land-use restrictions in place over thousands of jurisdictions nationwide is more than even a well-resourced anti-rent organizational network could effectively challenge directly,” they write. “These restrictions are so pervasive and deeply ingrained that the political branches may never be able to root them out.” Still, their book suggests that regulatory reform is an overlooked and necessary, if not sufficient, answer to the country’s economic challenges—and one that both sides of the aisle might some day come to agree on.