Steven Pearlstein is a Washington Post business and economics columnist and the Robinson Professor of Public Affairs at George Mason University.
Among liberals, income inequality has become "the defining issue of our time," as President Barack Obama once put it. The fact that the top 1 percent of households now earns about a fifth of all income and controls a third of the country's wealth is seen as glaring evidence that American-style capitalism has run off the moral rails.
Among conservatives, nothing animates political passions like overreaching government regulation, which they see as draining the economy of efficiency and vitality and threatening individual liberty. No surprise then that the first (and so far the only) major accomplishment of the new Republican Congress has been to use an obscure law to roll back every major regulation promulgated in the final months of the Obama administration.
Now comes a pair of Washington policy wonks with a book arguing that both sides are right — that overzealous regulation and rising income inequality are part of the same phenomenon creating a vicious cycle that has hurt the economy, slowed social mobility and weakened American democracy.
In "The Captured Economy," Brink Lindsey and Steven Teles argue that wealthy special interests have used misguided government regulation to divert an ever-increasing share of wealth and income to themselves while robbing the economy of its entrepreneurial dynamism. Identifying what they call a "bipartisan blind spot," they call on conservatives to see concerns about inequality not simply as class envy or disdain for markets, but as "a threat to the political consensus in favor of market competition and dynamism." At the same time, they ask liberals to see how well-meaning regulations make government complicit in increasingly unequal wealth, income and opportunity.
Lindsey, a libertarian-leaning researcher at the Niskanen Center, and Teles, a left-leaning political scientist at Johns Hopkins University, build their thesis around case studies of four different types of regulation.
They start with financial regulation, which they argue has created an oversize financial sector that has extended way too much cheap credit to businesses and consumers. The result has been massive misallocation of investment capital and talent, and a series of booms and busts that have weakened the economy and made it less stable, all while enriching financiers. This should be the book's strongest section, but it isn't, perhaps because it focuses too much on misguided policies to encourage homeownership and too little on the booms and busts of commercial real estate, the failures of financial engineering and the triumph of speculation over long-term investment on Wall Street.
Lindsey and Teles make a more convincing case that giant pharmaceutical, entertainment and technology companies have captured the system of copyrights and patents, needlessly expanded their scope and duration, and made cynical use of litigation to quash competition and extract ransom from rivals. Although our system of patents and copyrights started out as a legitimate effort to encourage innovation and protect intellectual property, the authors demonstrate how it has been turned into a legal racket that creates entrenched monopolies and discourages innovation. The outsize profits earned by these industries have created huge gaps in incomes between the executives and professionals of these industries and those in the rest of the economy.
Libertarians have long made great sport of ridiculing the lengths to which the nanny state will go to protect consumers from their own stupidity. A favorite target has been professional licensing, which has been gradually expanded from professions such as medicine and law to cosmetologists, manicurists, athletic trainers, taxidermists, florists and interior designers.
In their third case study, Lindsey and Teles demonstrate that these licensing regimes turn out to be considerably less effective in raising quality of service in these industries than they are in raising prices for consumers and incomes for those with licenses. Less convincing is their assertion that professional licensing has been a big wet blanket on the entire economy, and that it has created a significant barrier to the upward mobility of the poor. If becoming a hair braider or a florist or a plumber is a ticket to the middle class, as they allege, it is only because the price for those services has been inflated by the licensing regimes that the authors would do away with.
For me, the weakest part of the book concerns zoning laws that limit the supply of new housing, a topic of great fascination these days to bloggers on both the left and the right. It is certainly true that in fast-growing, high-income cities such as San Francisco, New York and Boston, overly restrictive zoning has prevented local economies from growing even faster, both by raising the price of housing and making it impossible for badly needed workers to move into those regions. And it is true that higher housing prices have forced low-income workers into residential enclaves far from the central cities, while encouraging industries that rely on middle- and low-income workers to relocate to lower-priced regions of the country. That resorting of where people live and where businesses locate is implicated in the widening income gap not only within cities, but between them.
What is less convincing is their argument, borrowed from other researchers, that the American economy would be nearly 10 percent bigger if New York and San Francisco had simply allowed their housing stock to grow with demand, rather than forcing people and jobs to move to what the authors disparagingly refer to as "low productivity" cities such as Atlanta, Austin, Charlotte, Dallas and Las Vegas. Such calculations are based on the faulty assumptions that high wages are always a sign of high productivity, rather than inflation, and that the beneficial economic spillovers from urban agglomeration are never offset by the hassles of congestion, the costs of expanding public infrastructure and the loss of human scale. The idea that the American economy would be far more prosperous if everyone lived in a couple of skyscraper-filled megacities is the kind of hokum that social scientists come up with when they bury their noses in data and models without ever talking to city officials or other people who actually live, work and run businesses in these places.
The strength and originality that Lindsey and Teles bring to "The Captured Economy" is the simple, elegant way they frame the issues and summarize the recent research. That's also something they have done as organizers of a lively and informal salon for Washington economic writers that I have attended over the years. Their contribution is to highlight the ways that government regulation has contributed to rising income inequality, even if they overstate the impact these regulations have on the rate of economic growth.
In the book's final chapters, Lindsey and Teles argue that we could prevent special interests from capturing the economy by shining a brighter light on the process by which regulations are written, and creating an elite and better-paid corps of civil servants to oversee the process. These are lovely ideas. But given the stubborn know-nothingism of our current president and the number of former industry lobbyists he has brought in to staff an administration that makes all its decisions behind closed doors, such ideas are likely to strike the reader as fairy tales rather than realistic proposals.
By Brink Lindsey and Steven Teles
Oxford. 221 pp. $24.95