Book Review: The Captured Economy

Epistemic Status: The choir

On Tyler Cohen’s claim that it was an important book, I read The Captured Economy by Brink Lindsey and Steven Teles. Its thesis is that regressive regulation is strangling our economy and increasing inequality. They claim that the damage from such policies is larger than we realize, and suggest structural reforms to start fixing the problem.

They focus on four issues: Financial regulation, zoning and land use restrictions, patent and copyright law, and occupational licensing.

I already strongly agreed on all four, although not on all the details. No reasonable person could, at this point, claim the regulations in question have not been subject to regulatory capture, and extended far beyond any worthwhile public interest.

This review advocates for reform of those policies. This is as political as I hope this blog ever gets. Politics remains the mindkiller. Down that road lies madness.

The book updated me on the scope of the damage, and on how to improve policy.

While I liked the book, I had three problems.

The first was the presumption of the centrality of inequality, as opposed to deadweight loss and economic growth. I hate to reinforce the gauntlet that inequality is the thing to be concerned about.

The second was that it played somewhat loose with its arguments. It used the trick of comparing the ‘top X’ to the ‘bottom X’ things and then being shocked at how these two were not equal. It used the frame that calling intellectual property ‘property’ was a trick, all but calling all intellectual property theft. Their analysis of financial regulation suffered from lack of insider knowledge, and their case for zoning was enriched by assumptions that seem too strong.

The third was not addressing the legitimate cases for the policies the book opposed, or what the transition away from them would look like. Occupational licensing has gone way too far, but if you’re going to target lawyers and doctors (as you should, better to go after the real culprits and Play in Hard Mode) then you’ll need to explain why the alternative isn’t madness. Similar objections apply in other sections.

On the margin, the cases are ironclad. I knew I would know most of it already, but there was some new material even for me.

I recommend this book if and only if you want a book-length case for its thesis. Otherwise, this review is sufficient. The arguments and facts are not new.

Would you rather read an important book, an impactful book or a good book?

I

Financial Regulation

Their basic premises are that financial institutions are permitted too much leverage,  given discounted implicit and explicit government guarantees, and set up to skim large profits off subsidized retirement accounts and mortgages. They don’t go over how current regulations form barriers to entry, especially for banks.

The call for decreasing bad regulation rather than new rules to offset existing bad regulation is refreshing. Restricting leverage ratios and charging market prices for deposit and other insurance don’t add complexity. I do worry about their love for Dodd-Frank, but this mostly seems like a ‘take what we can get’ attitude.

They especially blame Basel I’s lax requirements for worsening the financial crisis.

II

Land Use and Zoning

Restrictive zoning is enormously destructive. Housing costs in New York and greater San Francisco are ludicrous, preventing productivity gains from migration. The surplus produced in cities is largely eaten by landlords. They estimate 0.2% GDP growth per year is being lost to this effect, which adds up fast and seems a reasonable estimate. They only hint how this effects the culture.  The case for building more housing is easy. The case for building it where it would be most valuable is easy. They handle both well.

The principled case against it, as opposed to the rent-seeking case, is absent. They do not consider housing as an exclusionary or positional good, or that cities lack sufficient infrastructure to support additional people, that such construction is a taking of others’ property, or other ‘good’ objections. These complications require a response, but not on the current margin. If you think Palo Alto has enough housing stock, I’m guessing you own some of that housing stock.

The book’s suggestion is to require zoning to allow increases in density, but let local authority decide exactly where that density goes. Implementation details need to be worked out for such ideas to become practical, important work that it seems is not being done.

An additional cause they don’t mention is to allow existing buildings to be renovated or re-purposed without meeting new regulations and safety rules that make any use uneconomic, wiping out entire communities.

A fifth section of the book might talk about regulations surrounding infrastructure.

III

Intellectual Property

Among the people I know, I am on the extreme end of believing intellectual property is real property, and violations of intellectual property are not ethical or acceptable. I respect most intellectual property ‘in the dark’ on principle. Yes I am judging all of you for not doing this. I certainly respect IP far more than the book’s authors.

The current state of patent and copyright law, however, is far beyond what anyone I know, including me, thinks is reasonable. Things are out of hand and must be scaled back.

The book does a good job explaining how this came to be, and showing the current madness does not increase innovation or creation on the margin, in case anyone disagreed with that.

If it were up to me, I would scale back maximum time on copyrights to about 10 years (including retroactively), require active registration, and also require mandatory licensing as we do for music on the radio. For patents, I would make them harder to get, harder to enforce, require mandatory licensing, and require owners to set a buyout price that the government could pay to invalidate the patent. Then I’d tax that price above some threshold. That’s harsher than I would have been before reading the book.

The book only superficially discusses the benefits of IP protection. It brushes off their value, arguing we didn’t have such protections in earlier eras, treating calling it ‘property’ as a propaganda trick. I don’t think that is fair. Different eras face different problems and different technological landscapes. I wish the book had seriously engaged with such issues.

I have another idea about how to help with such issues, which I will share some time.

IV

Occupational Licensing

I love that they go straight for lawyers and doctors. If you are going to go after occupational licensing, go after it. In the comments for Hero Licensing, I was challenged by ‘are you going to let people be doctors or lawyers without a license, too?’ I was tempted to reply “Yes.” The book pulls no punches, painting doctors and lawyers as guild members whose conversations long ago ended in a conspiracy against the public – and all would-be lawyers and would-be doctors.

With doctors and lawyers, things are out of hand, but there’s a real case to be made that the public needs protecting. For those giving manicures and selling burial caskets, and such, not so much. If you think interior decorators need an occupational license, I have a guess what your profession is. In many cases, the licensing requirements are mind-blowing to those who don’t understand how toxic such dynamics can be. These restrictions prevent people from working in order to allow insiders to form a cartel and steal from us.

Lawyers use rules to control supply and inflate costs (e.g. lawyers legally have to own and run their firms, which kind of does require someone to have been mailed their villain card), pushing up legal fees far beyond those in other countries. Doctors are so stingy with legally allocating residency slots that a quarter of all graduates from US medical schools don’t match to a residency. That’s completely insane.

At a minimum, we should ban occupational licenses for activities that don’t risk serious harm. If you want to decorate an interior, or sell a wooden box, go for it. Also at a minimum, we should ensure enough supply for professions we do license. There’s no excuse, for example, to not make funding available for enough residency slots to support every graduate of a US medical school and every worthy foreign applicant (as determined by the hospitals involved), and that change alone would greatly improve our health care system.

I know of two worthy objections to abolishing licensing entirely.

The first objection is that such work done badly is dangerous. The book doesn’t get into solutions for this, such as requiring insurance (that unqualified people would be unable to get), or reputation systems, or simply market forces.

The better objection is that such substandard care or representation could be forced upon the poor or unsuspecting, or upon those who show up to the wrong hospital at the wrong time. Public defenders and emergency room doctors are forced upon people, and we need to ensure quality.

But while the authors don’t make a strong case that we can completely eliminate licensing, they don’t have to. We don’t need impractical libertarian should-we-get-rid-of-drivers-licenses purity/bravery debates. We can get rid of most of the damage such rules do while retaining most of the benefits, especially if we fix our supply problems, by limiting scope to narrow ranges of activity of a few professions, even if that means some amount of regulatory capture. I’d happily settle for that as would the authors. There’s no need to even approach truly dangerous waters.

Again, I understand limiting book scope. Brevity is important.

V

Laying the Groundwork

I found the final section most informative. What’s a made-of-gears model of how these rules get into place? What would help?

I understood special interests caring a lot about an issue and apply concerted pressure in places no one else cares enough to pay attention or fight back. Classic slow but inevitable regulatory capture. The book suggests structural reforms that make it harder to change the rules while no one is paying attention, but admits this won’t be enough.

The more interesting intervention they suggest is funding think tanks and academic departments to create position papers, people to call for information, impact analyses and, most importantly, full draft legislation ready to go when the moment arrives.

As they model the legislative process, professional cartels (er, organizations) and industries don’t bribe politicians with money so much as with know-how. Industry lobbyists and experts tell politicians what impact various laws would have, and provide templates and ideas. Without sufficient staff or research available elsewhere, lawmakers turn to lobbyists for information and to avoid mistakes.

This springs the modesty trap. Most industry information is mostly true, if slanted. If you can’t do your own work, the only option is to trust them. That becomes a habit. Years later, they own the entire space.

The authors propose increasing the quantity and quality of congressional staff (including state and local levels), by giving them higher salaries and bigger budgets, and doing the same for research teams, with allocation strategies to ensure they work on policy and not partisan politics.

An even more direct solution they suggest is that we the people do the research. When the crisis happens and the people cry out for reform it is far too late to start brainstorming ideas and writing impact papers. That work needs to have already been done. Otherwise, at best you’ll get half baked ideas (hi, tax reform and health care reform 2017!) and at worst the new rules will be written directly by incumbents.

Even when everyone sees the moment coming, we don’t prepare properly. Again, see 2017 (or 2009). Garbled messes at best, no matter one’s politics. Creating good rules is hard, but it’s not seven years with the world’s economic engine on the line and we can’t even half-ass this properly level hard. Given that no one is doing a decent half-ass job on even the big things, it’s no shock the ball is dropped on stuff like reform of intellectual property or easing zoning restrictions. For all that we complain about these issues, there isn’t a carefully constructed bill waiting for its moment. There should be!

That seems like the cause. We can and should advocate for reforms, but more than that we should build trusted sources of information legislators can turn to, and draft actual legislation with actual legal language that could go into a bill at a moment’s notice. This seems like a neglected potential Effective Altruist cause, or at least neglected method.

VI

Culture

Missing was a discussion of what regressive redistribution does to the culture. We’re not only talking about GDP growth or Gini coefficients. How would America feel without these thefts?

This wouldn’t be the full libertarian paradise of freedom and opportunity (whether or not such a thing is possible), but nor would life be nasty, brutish or short. Most would experience much better freedom and opportunity, even before the effects of greater economic growth.

The cost of living would decline. It would once again be (more) legal to get pretty good versions of life’s goods and services at pretty good prices, all of which kings of old would have killed for. People would move, explore and experiment without being excluded from work, and without all their productivity gains captured by the landlords. We’d learn by doing, and do what we could do, rather than competing for rents paid for in suffering and lost time even for those who collect them. In our free time, we’d enjoy the full fruits of civilization’s historic creativity, with most of the world’s great works available for free, or almost for free, on demand, and be free to create in turn. Inventions would still be rewarded and celebrated, but also pass to the people and be built upon.

When one did succeed on one’s merits, there would be less fear it would be taken away. Inequality by theft and connection hurts the legitimately successful most of all. They get hit by redistribution from themselves to the thieves, then get hit again progressive redistribution to help the other victims of the thefts.

Sounds good to me.

 

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3 Responses to Book Review: The Captured Economy

  1. Quixote says:

    Those 4 domains, despite having a common theme are actually pretty different. I’m at first glance skeptical of anyone who claims to know optimal regulatory strategies in 4 different fields. I am exceptionally knowledgeable about finance, and I would claim to have a pretty good sense of how a very small subsection of it ought to be regulated. But I don’t know all my own field let alone claim expertise in 3 other fields.
    The book, based on your summary, also exhibits a few classic signs of people who don’t actually know what they are talking about who like to talk about finance anyway. That is, a weird fixation on “leverage” and an over reliance on leverage ratios. Every field has its own cranks and each set of cranks has their own idee’ fixe and for finance cranks it’s usually “leverage” or “printing money”.
    The problem with leverage is that different instruments have different levels of risk associated with them. A bond from Exon is much safer than a bond issued by Fly By Night Shipping Corp. To take the same level of risk, and earn the same level of profit, an intuition might need to own 8 or more times as much notional of Exon bonds as from FBNSC. Leverage metrics, as opposed to risk metrics, treat the two bonds the same and by monitoring notional instead of risk, they highly incentivise institutions to take more risky positions.
    I have a lot of opinions about the financial crisis, but there is a lot of blame to go around.

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