Political ignorance and "The Captured Economy"

In their excellent new book The Captured Economy, Niskanen Center scholar Brink Lindsey and political scientist Steven Teles argue that the "capture" of government regulation by wealthy interest groups has slowed economic growth, increased inequality, and inflicted great harm on the poor. They examine four major areas of government policy where such capture has occurred: finance regulation, intellectual property, zoning, and licensing. In each case, government intervnetion in the economy has benefited the wealthy at the expense of the poor and middle class, rather than the reverse. Lindsey and Teles argue that capture was successful in large part because voters have little understanding of these issues, and do not realize how policies adopted at the behest of organized interest groups are harming them.

I. The Perils of Capture.

In two of the cases analyzed by Lindsey and Teles, zoning and licensing, there is broad cross-ideological agreement among experts. In the case of zoning, economists and property law experts across the political spectrum agree that government restrictions on building massively drive up the cost of housing for the the poor and lower middle class, in many major cities. In addition to increasing housing prices, zoning also prevents many lower-income people from moving to areas with greater job opportunities. By artificially inflating the price of housing, zoning enriches (mostly already affluent) current property owners, and politically connected developers. But it inflicts vast harm on poorer people seeking opportunity.

The effects are enormous. If zoning restrictions were reduced to the level of those of the average city, US GDP might be some 9.5% higher, and millions of working class Americans would have access to job opportunities from which they are currently cut off. Few if any other reforms can do so much to simultaneously help the poor and increase our overall prosperity.

There is a similar story to be told about licensing restrictions. As Lindsey and Teles point out, some 30 percent of American workers are now required to have a license to do their jobs. These include such ridiculous cases as the licensing of florists, tour guides, and casket makers, in some states. Onerous licensing restrictions prevent large numbers of people (particularly the poor) from pursuing their preferred occupations, and also artificially inflate prices for consumers, while providing little or no measurable improvement in quality.

Lindsey and Teles do not limit their critique of licensing to relatively "easy" case cases such as florists. They also explain in detail how licensing of professionals such as doctors and lawyers also often increases costs without improving quality. Even if these types of licensing cannot or should not be abolished entirely, there is great need for reform. Anyone who has ever taken a bar exam can see that much of what is tested has little if any value for most practicing lawyers, and is instead a barrier to entry that serves to protect incumbent lawyers against competition. Economists and many legal scholars have long pointed out that the cost of legal services—especially for the poor—can be greatly reduced by cutting back on licensing and letting nonlawyers (such as paralegals and others) take on various tasks that are currently reserved for licensed members of the bar.

Finance regulation and intellectual property are far more controversial among experts than licensing and zoning. Nevertheless, Lindsey and Teles make a strong case that government regulations created a range of perverse incentives that increased investment in dubious securitized mortgages, and perhaps also over-investment in the finance sector generally. And the authors argue that it did so through regulating and subsidizing the relevant industry too much, not too little. In the case of intellectual property, they cite considerable evidence indicating that IP protections go far beyond what is reasonably necessary to encourage innovation, and indeed often have the effect of stifling it.

II. How Capture is Facilitated by Voter Ignorance.

The cumulative impact of these and other regulations that favor well-organized affluent interest groups at the expense of the poor and the general public is very large. So much so that it is worth asking why such policies persist. Why don't voters rise up and get rid of the politicians who perpetuate them?

The main reason cited by Lindsey and Teles is that most voters have little or no idea of what is going on. All four of these issue areas are highly complicated, and it is very difficult for nonexperts to understand them. Given widespread voter ignorance about even far simpler and more prominent aspects of public policy, it is not surprising that most of the public is unaware of how zoning regulations and licensing restrictions impact their lives. The problem is not that the voters are stupid or that information is unavailable to them. Rather, in most cases it is perfectly rational for them to devote little or no effort to seeking out political information, because the chance that any one vote will make a difference is infinitesimally small.

The ignorance of the general public creates opportunities for well-organized interest groups to manipulate policy in their favor by lobbying, monopolizing the attention of policymakers, and otherwise exercising influence behind the scenes. Although experts across the political spectrum recognize that some of these policies inflict great harm on the economy and massively constrict opportunities for the poor, they rarely come up in public debate. And it is even less for them to become significant campaign issues.

III. Is there a "Liberaltarian" Solution to the Problem?

Unfortunately, Lindsey and Teles' proposed solutions are less compelling than their analysis of the problem. One of the main fixes they advocate is giving policymakers more and better staff so that they will be less dependent on organized special interests for information. Improved staff might well be useful. But it is hard to believe it will make anywhere near as much difference as the authors claim. Lawmakers don't need much in the way of additional staff expertise to get good information on the perils of zoning, licensing, and other similar policies. A great deal of work on this subject has already been done by academics and policy analysts. Lindsey and Teles rely on it heavily in their book. Legislators with a genuine interest in getting at the truth can readily access this work, much of which is available online for free. Members of Congress can also use the Library of Congress to get free access to almost anything published anywhere in the world.

In most cases of regulatory "capture," the problem is not that politicians are unable to get information, but that they either don't care much about the truth or at least prioritize ideology and reelection ahead of it. Like partisan voters, they also tend to evaluate new information in a highly biased way.

More promising is the authors' advocacy of stronger judicial review of to curb regulations that benefit special interests at the expense of the general public. I have advocated a similar approach myself, in the field of constitutional property rights, where capture is also often a problem. However, it will not be easy to persuade judges—especially left of center ones—to set aside their longstanding aversion to taking up "economic" issues. Progress in this field is possible, but is likely to be slow.

Unfortunately, the authors dismiss what may be the best strategy for fighting capture: reducing the complexity of government by cutting back on its size and scope. Lindsey and Teles argue that we can make government simpler and more transparent without reducing the range of issues that it controls. But this is highly unlikely. So long as state and federal governments continue to spend nearly 40 percent of GDP and regulate nearly every aspect of society, it is inevitable that their activities will be highly complicated, and provide many opportunities for interest groups to exploit public ignorance. There just isn't any simple and clear way to regulate so much. And voters cannot effectively monitor more than a small fraction of all this government activity.

As Lindsey and Teles point out, regulatory capture can sometimes be curbed if the issue in question becomes the focus of public controversy. But they also note that such cycles of attention are fleeting, as voters and the media quickly move on to the next outrage du jour. The more issues the state controls, the less time any one is likely to spend in the spotlight. Cutting back on government intervention in some areas increases the odds that the remaining functions of government will get significant public attention.

If, like Lindsey and Teles, we want a simpler, more transparent government that is less vulnerable to interest group manipulation, we need government to be smaller, or at least take on fewer functions. There is no way around this fundamental tradeoff.

That does not necessarily mean that government need be anywhere near as small as a libertarian "minimal state." But it does mean it will have to control many fewer aspects of our lives than it does today. A simpler state with fewer functions can still do much to help the poor, for example by bolstering their wages through an expanded earned income tax credit. But it will have to stop trying to control so many aspects of the economy through regulation.

In the last part of their book, Lindsey and Teles argue that the danger of regulatory capture creates opportunities for new cross-ideological alliances between free market advocates on the right, and those on the left concerned about economic inequality and increasing opportunity for the poor. In these cases, deregulation can simultaneously promote economic liberty, increase efficiency, and reduce inequality. Lindsey (a liberal-leaning libertarian) and Teles (a libertarian-leaning liberal) themselves exemplify the sort of "liberaltarian" coalition they advocate. For the moment, neither right nor left seems much interested in this sort of alliance. To the contrary, both seem to be moving away from it, towards various forms of big-government populism.

But recent events in both the United States and Europe suggest that political alignments may be more fluid than we previously imagined. Only a few months ago, Emmanuel Macron upended French politics, and won the French presidential election on a platform that combines deregulation with traditional left-wing ideas, in ways at least somewhat similar to what Lindsey and Teles advocate. The odds against a comparable development in the US seem long. But if Lindsey and Teles' ideas get enough traction, perhaps we can take at least some significant steps in the same direction. At the very least, both right and left would do well to give serious consideration to this important book.

UPDATE: Lindsey and Teles recently discussed their thesis in a column at the National Review website, and in an interview with economist Tyler Cowen. Back in 2009, I reviewed Teles' outstanding earlier book, The Rise of the Conservative Legal Movement.