To Reduce Inequality, Cut Red Tape

Regulatory and cultural capture means a government-induced upward redistribution of wealth.


A "considerable portion of America's exploding inequality," writes Steven Teles, "has been generated by government itself… While the state is sometimes the friend of those working to produce a more egalitarian society, it is just as often the tool of those who would entrench inequality."

Exhibit A: Virginia's Certificate of Need program.

That program requires health-care providers to get the state's permission before making new investments, such as building a hospital or buying an MRI machine. The result–the primary objective, in fact–is to restrict the supply of health care and limit competition. This raises prices and benefits market incumbents, especially large hospital corporations and the (often quite rich) doctors and executives who work for them.

Economists refer to that unearned benefit as "rent," which Teles defines as "legal barriers to entry or other market distortions created by the state that create excess profits." The interests that receive such rents fiercely defend them, which helps explain why efforts to repeal Virginia's COPN rules have fizzled.

Earlier this month a state panel that had been studying the regulations recommended several minor changes–starting with drafting a statement of purpose, since even that is unclear–but not eliminating COPN wholesale. Elimination of COPN would lead to greater supply, and lower prices, as even the Justice Department and Federal Trade Commission repeatedly have pointed out–which would allow the market to transfer wealth from suppliers to consumers.

Teles doesn't refer specifically to COPN laws in his article, "The Scourge of Upward Redistribution," which appears in the Fall issue of National Affairs. But he does point out that doctors, who make up a good part of America's richest 1 percent, extract rents from the public through other government policies. One of those is licensure: "The law specifies tasks that only licensed doctors can perform, even though nurses are capable of performing them."

Licensing limits the supply of physician services in other ways, too. Physicians in other countries often make considerably less than their American counterparts. But those who move to the U.S. usually have to take years of retraining, no matter how advanced their degrees or their skills. This despite the fact that parts of the U.S. suffer from a severe doctor shortage. Why not encourage immigration by foreign doctors – especially from advanced countries – and allow them to start practicing quickly? Or, to take another example: Why not let eyeglass companies offer on-site optometry exams, which Virginia and many other states prohibit?

The answer is obvious: the doctors' lobby. Medical providers have a large financial incentive in the status quo. The rest of us have a very real but much smaller financial interest in changing it. Guess who's going to lobby Congress about the issue? Bingo. This is the same problem of concentrated benefits and dispersed costs that causes so many other regressive policies, from farm subsidies to import tariffs.

But Teles argues that lobbying is only part of the problem. There is also "cultural capture": "Public officials tend to be disproportionately wealthy and have common social and educational experiences with those seeking high-end rents. Thus, when policymakers consider the claims of people like them–financiers, car dealers… dentists and doctors–they are likely to be sympathetic." Moneyed interests also have a cadre of influence-peddlers who can appear before boards and commissions, submit public comments to rule-making agencies, and produce studies designed to make self-seeking look like public-spiritedness. That is why nearly every major proposed government program, project or regulation is supported by "research" purporting to show that it will "save money in the long run." (If that were true, then at some point government spending would go down and stay down – which it never does.)

Health care is an extreme example, but upward redistribution of wealth through government action affects nearly every sector of the economy. In most states, direct sales of new automobiles to consumers are forbidden–you have to buy through a dealership. Roughly a third of all occupations now require a government license–up from only 5 percent of all occupations a few decades ago.

Technology has eroded the power of cartels and trade unions in some areas–newer market entrants such as LegalZoom can provide many standard legal services at a fraction of the traditional cost–but has left others untouched. Teles points out that the "unit cost of intermediation" in the financial sector has largely held steady–in part because the financial sector is so heavily regulated, and the regulators are so heavily influenced by those they regulate.

All of this is fixable: We can roll back occupational licensing, relax restrictive patents and copyrights, recognize foreign medical credentials, and more. Repealing Virginia's COPN requirements would be an excellent place to start.

This column originally appeared in the Richmond Times-Dispatch.

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  1. Reduce the size of government by 50%.

    1. Annually for the term of the president.

  2. SF City government pays poor people to live here and then the SJWs gripe about income in-equality.

    1. I was a volunteer teacher at a long-term homeless shelter in SF in 2002 (Next Door at Polk/Geary.) City residency required for GA assistance was achieved in 2 weeks. Newly arrived homeless people are able to get a check + food stamps almost immediately. That combined with a stout list of soup kitchens and shelters provide a strong incentive for the homeless to migrate there.

  3. You can make the same ‘regulatory capture’ argument about social welfare and other policy. Medicare is intended to boost doctor incomes (and mostly specialists at that rather than general practitioners) and serve as a government guarantee for their collections/AR. Section 8 housing is intended to boost land prices and landlord income – and reduce the (historic) remedy to poverty which is labor mobility. Federal education payments and federal R&D is intended to boost the income of tenured college professors and basically-tenured K-12 administrators. Deliberate failure to enforce immigration is intended to keep the bottom end of the ladder properly subservient to the top-end of the ladder by driving wages down at the bottom.

    Unfortunately for libertarians, these policies are all like out-of-the-tube toothpaste. You can’t simply reverse the policies and pretend that the toothpaste will go back in the tube. The competitive playing field itself is now structurally imbalanced in favor of the upper-income status-quo beneficiaries. Good to see that Hinkle is focusing on the sort of stuff that levels the playing field first.

  4. “But select capable men from all the people?men who fear God, trustworthy men who hate dishonest gain?and appoint them as officials over thousands, hundreds, fifties and tens. Have them serve as judges for the people at all times…”

    1. Men who have a conscience, men who do the right thing even when they think no one is watching, men who go against popular opinion or their peers…those kinds of men?

      1. Yes, righteous men. Men with integrity.

          1. Actually, the precise opposite, those who are humble and not prone to selfish ambition.

            Also, note that these men were to be judges, not legislators. In other words, repayment for aggression, not making up “crimes” against the state.

  5. “That is why nearly every major proposed government program, project or regulation is supported by ‘research’…”

    Economic Policy Institute…research my ass.

  6. It’s very simple. There must be a separation of Economy and State just like there is with Church and State. The proper function of government is to defend indivdual negative liberty with the retaliatory use force, that’s it period.

  7. Crony capitalism benefits two groups: the capitalist cronies, and the government cronies who collaborate with them. CThis happens because crony capitalists compete for government favor, whereas free-market capitalists compete for consumer favor.

  8. “This despite the fact that parts of the U.S. suffer from a severe doctor shortage.”

    We have no doctor shortage, we have a freedom shortage.

    The medical mafia is probably the most costly government enable monopoly, both in costs to people’s health, and in costs to their wallets.

  9. Hardly an industry exists that isn’t shackled by government barriers to entry. It is all about the hand and glove relationship between government officials and moneyed interests. Corruption is the rule, not the exception. Incumbents are all guilty of some form of conspiracy to defraud the public. Influence peddling is ubiquitous. We need to start calling this sort of abuse “treason” and prosecute it accordingly.

  10. Perhaps first off, someone neds to convince the public what constitutes inequality and why it should be reduced. Are they also planning on redcuing the difference between people’s heights? And weights? Stupid people, stupid ideas.

  11. There was a great panel on economic inequality at my university —

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