Review: The Captured Economy

The Captured Economy: How the powerful enrich themselves, slow down growth, and increase inequality by Brink Lindsey and Steven M. Teles

There is a tendency on the right to confuse a defence of the status quo with a defence of free market capitalism. Left-wing concerns about a rising share of the national income flowing to the top 1% are typically dismissed. “Equality of opportunity not equality of outcome” is the canned response. The problem is that today’s distribution of wealth is not the sole result of a fair market process, rather regulations restricting competition and construction have redistributed wealth upwards.

In The Captured Economy Brink Lindsey and Steven Teles, scholars at the Niskanen Center, show how the American political system has enabled rent-seeking elites to stifle competition through regulation and subsidy. The traditional trade-off between greater equality and slower growth has broken down. Regressive regulations not only enrich the politically connected, they also contribute to wage stagnation and eliminate economic opportunities for the marginalised.

Often regressive regulations have seemingly reasonable justifications. Intellectual property incentivises creative endeavours. Occupational licensing protects consumers from quacks. Subsidies for mortgage interest promote home ownership. Green belts stop urban sprawl. But in each case, regressive regulations have been expanded in size and scope by politicians ill-equipped to resist the pleading of special interests.

There is no better example of upward redistribution than planning. Lindsey and Teles document how restrictive zoning laws have raised house prices by preventing the construction of new homes where they’re most desirable. As low-income workers spend more of their pay packets on rent, well-off homeowners benefit from ever rising house prices. Thomas Piketty found fame highlighting a dramatic increase in wealth inequality yet rather than being a natural result of market forces, Northwestern University’s Matthew Rognlie found that the rise was driven almost entirely by housing.

Not only do high housing costs eat into wages, they also create barriers to mobility. In today’s information economy workers are most productive when they’re packed together in big cities. The average worker in London can expect to earn £250 a week more than a worker in the North-East. In the past such regional inequalities would lead workers to ‘get on their bike’, but rents are so high that workers in London only end up marginally better off. Zoning locks workers out from where they are most productive: economists Enrico Moretti and Chang-Tai Hsieh reckon this effect reduced aggregate GDP by 13.5% in the US. The situation is almost certainly worse in the UK, where planning restrictions are even stricter.

The Captured Economy is not a laundry list of policy recommendations. In most cases the necessary reforms are clear. The problem is that rent-seeking elites will fight them and that unless you rent-proof politics, they will win. There is a mismatch of incentives. Take occupational licensing: you need a licence to work as a florist in Alabama. Florists earn more when they are insulated from competition, but consumers pay the price and would-be florists are stuck in worse jobs. Alabama’s florists have a massive incentive to campaign for stricter restrictions, but consumers will only gain marginally from cheaper flower arrangements. As a result, such laws remain unreformed.

Rent seeking will need to be tackled from multiple angles. We will need to end the kludgeocracy that prefers off-balance sheet regulatory solutions to transparent cash payments (see Help to Buy). We should move decision-making to more favourable terrain – city mayors have less of an incentive than local planning committees to reject new development.

Lindsey and Teles’ hope for a liberaltarian movement uniting free-marketeers and social democrats seems unlikely in the UK where Corbyn’s Labour rules out the hope of any pro-market consensus. But The Captured Economy is necessary reading for the Conservatives. Recent attempts at Tory renewal implicitly concede Corbyn is right that free market capitalism isn’t working, proposing toned down versions of Corbynism. To counter Corbyn’s anti-capitalism, the Tories need to tackle the regulations that redistribute upwards. It won’t be easy, but it is necessary.