Brink Lindsey and Steve Teles’s new book, The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth and Increase Inequality, looks to build a new account of how rent-seeking shapes the U.S. political economy, and what we can do about it. I asked Lindsey (who is vice-president at the Niskanen Center) and Teles, an associate professor of political science at Johns Hopkins University, about the book.
HF — People have criticized “rent-seeking” in the U.S. economy for a long time. In a pithy phrase, you suggest that rent-seeking has now “moved upmarket.” What does this mean?
BL & ST — There is no plausible quantitative measure of rent-seeking, and we do not think that there can be. But it is reasonable to observe that the most powerful uses of state power to provide systematic, non-market advantages to politically mobilized groups used to benefit those further down the income spectrum more than they do today.
Airline and trucking regulation, for instance, provided significant rents to corporations, but unionization ensured that some of that rent went to workers — that’s why businesses and their unions so often were on the same side in politics up through the ’70s. Today the most consequential uses of political power to provide non-market subsidy and protection direct benefits to the relatively wealthy, with little mechanism for ensuring that some of that goes to average workers.
The financial sector has massively expanded as a result of mortgage securitization, implicit or explicit guarantees of bailouts, and massive subsidy of asset management through the tax code. The government protects existing homeowners in expensive areas against new construction (thereby jacking up the price of their homes) and subsidizes their mortgage interest, with very little trickling down to ordinary people. This pattern can be seen across the economy, and we think justifies the idea that rent-seeking has “moved upward.”
HF — What are the major factors that make it easier for these upwardly mobile rent-seekers to prosper in the face of democratic pressures toward more even distribution?
BL & ST — It’s easy to see why one might want to argue that there are “democratic pressures toward more even distribution.” But we’re not sure, in the abstract, that’s true. Certainly democracy may be useful in providing some checks against the use of the state to entrench some kinds of inequalities. But democracy also provides lots of opportunities for the expression of particularly intense preferences, and lots of openings for those with resources, reputation and information to triumph over those who lack them.
Relatively wealthy rent-seekers can use their resources and intense preferences to dominate low-visibility political venues. In an era in which congressional staff and other analytical capabilities of government have been cut back, policymakers’ deep dependence on industry sources of information gives insiders a powerful advantage in shaping rules to their benefit.
Furthermore, wealthy rent-seekers enjoy class advantages — not just more money, but common educational backgrounds and cultural tastes they share with policymakers — that heighten their ability to exert influence. We do argue, in contrast to traditional public choice analysts, that democracy has some valuable antibodies against rent-seeking, and the answer to rent-seeking is to strengthen them, rather than to radically shrink the scope of government. We seek what Madison called “a republican remedy for the diseases most incident to republican government.”
HF — People justify the surge of intellectual property regulation in the United States by arguing that it is needed given the failures of the market to protect ideas. Is there evidence to support this claim, and if not, what are the implications?
BL & ST — The market failure argument for patents and copyrights holds some water, but not nearly as much as supporters of current law think. Giving artists and inventors temporary monopolies sharpens their incentives to produce — that much is true. But these temporary monopolies also impose costs, not just on consumers who have to pay higher prices, but also on “downstream” innovators who need access to patented and copyrighted ideas. And a huge expansion in the scope of both patent and copyright law in recent decades has multiplied those costs greatly — including harassment suits by “patent trolls,” firms that buy up patent portfolios just so they can sue. The direct costs associated with these suits is equal to 10 percent of total U.S. private sector [research and development] spending — a colossal diversion of effort and resources away from innovative activity.
HF — Unlike in most books about the problems of U.S. politics, you specifically decline to give policy solutions at the end. Instead, you point to much broader institutional changes, including changes that are specifically designed to help improve the base of professional knowledge that Congress can draw on. What are these proposals, and why do you think they would help address rent-seeking?
BL & ST — One of the basic explanations of rent-seeking has to do with the resources for providing policy-relevant information and encouraging policymakers to put issues on the agenda. Those resources are very heavily weighted in the direction of the economically advantaged.
There are two ways of putting a finger on the other side of this information inequality. The first is to make government less dependent on outside information in making decisions or setting agendas, by providing it a larger budget to hire higher-quality and professionalized civil servants to assist policymakers in making decisions. Second, philanthropists who invest in political activity should consider systematically building up a cadre of anti-rent organizations, just as they did in earlier eras in building the environmental and school-choice movements.
Finally, we need to think about changes in institutions to make them less sensitive to the demands of wealthy rent-seekers. In the case of the housing market, that might mean pushing decisions away from localities controlled by “home voters” and upward to the state level. California is in the process of making some very modest moves in this direction, but to undo the stranglehold that wealthy homeowners have over construction in the state, much more will be necessary.
HF — You argue that ‘”liberaltarian” ideas — blending liberalism and libertarianism — haven’t gotten much attention in U.S. politics, but that they could prove highly valuable during the current slow-rolling political crisis. How could liberaltarian ideas help to open up questions of governance in new and helpful ways?
BL & ST — Liberaltarianism combines a commitment to social justice and the public good with a healthy skepticism of government as actually practiced. We think that it is a good match with our current era because it responds to both the widespread recognition that our economy is not working for ordinary people, and that government has become a very flawed instrument of the common good and is too often a tool for the protection of the powerful. Liberaltarians aren’t looking to shrink government but they do want to simplify it, since complexity always favors those with the resources to understand and manipulate it. Swapping many EPA regulations for a carbon tax, for instance, or replacing arcane regulatory schemes to subsidize mortgage credit with straightforward down-payment assistance, are examples of the direction in which we would like to move.
This article is one in a series supported by the MacArthur Foundation Research Network on Opening Governance that seeks to work collaboratively to increase our understanding of how to design more effective and legitimate democratic institutions using new technologies and new methods. Neither the MacArthur Foundation nor the Network is responsible for the article’s specific content. Other posts in the series can be found here.