Tag: Rent-Seeking Society

The Captured Economy: Book Talk at U.C. Berkeley | Tu Apr 10 @ 2 PM | Blum Hall Plaza Level

Posted on by Brad DeLong

https://www.icloud.com/pages/0o9LLDvrhW-xkx2N_NL7x-hVw | 2018-04-10

HL 2018 04 10 The Captured Economy pages pdf 1 page

“The best attempt so far at a social democratic–libertarian synthesis of the origins and cure of our current political-economic ills…”—Brad DeLong

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality

Brink Lindsey and Steve Teles

Niskanen Center: https://niskanencenter.org

“A compelling and original argument about one of the most pressing issues of our time, The Captured Economy challenges readers to break out of traditional ideological and partisan silos and confront the hidden forces that are strangling opportunity in the contemporary United States.”—Matthew Yglesias http://vox.com

“Are you looking for how to get out of our current mess? The Captured Economy is perhaps the very best place to start.”—Tyler Cowen, Professor of Economics, George Mason University

“American politics is mired in endless arguments about how much downward redistribution we want and how to provide it. But as Brink Lindsey and Steven Teles point out in this engaging, powerfully argued book, the reality of our political economy often looks much more like upward redistribution. In one arena after another, public policy enriches the already rich and advantages the already advantaged.”—Yuval Levin, editor of National Affairs

“Steven Teles and Brink Lindsey ask one of the most important questions of our times: What are the political reforms we need to reduce the ability of the wealthy to maintain their capture of our government? Combining the analytic forces of liberalism and libertarianism, they provide a much-needed investigation into why the U.S. government works on behalf of the powerful and the steps we can take to address rising inequality and regressive regulation so that it instead acts in the public interest.”—Heather Boushey, Democratic Economic Policy Director, 2016

Available at Powell’s: https://tinyurl.com/dl20180402a

Available at Google Books: https://tinyurl.com/dl20180402b

Takeaways:

  • Today: a stagnating economy and sky-high inequality
  • Breakdowns in democratic governance: wealthy special interests capture the policymaking process
  • Regressive regulations that redistribute wealth and income up the economic scale
  • Stifling entrepreneurship and innovation
  • New regulatory barriers shield the powerful from competition inflating their incomes extravagantly:
    1. Subsidies for finance’s excessive risk taking
    2. Overprotection of copyrights and patents
    3. Favoritism toward incumbents through occupational licensing schemes
    4. The NIMBY-led escalation of land use controls that drive up rents for everyone else.
  • Needed: improve democratic deliberation to open pathways for meaningful change

Synopsis

For years, America has been plagued by slow economic growth and increasing inequality. Yet economists have long taught that there is a tradeoff between equity and efficiency-that is, between making a bigger pie and dividing it more fairly. That is why our current predicament is so puzzling: today, we are faced with both a stagnating economy and sky-high inequality.

In The Captured Economy , Brink Lindsey and Steven M. Teles identify a common factor behind these twin ills: breakdowns in democratic governance that allow wealthy special interests to capture the policymaking process for their own benefit. They document the proliferation of regressive regulations that redistribute wealth and income up the economic scale while stifling entrepreneurship and innovation. When the state entrenches privilege by subverting market competition, the tradeoff between equity and efficiency no longer holds.

Over the past four decades, new regulatory barriers have worked to shield the powerful from the rigors of competition, thereby inflating their incomes-sometimes to an extravagant degree. Lindsey and Teles detail four of the most important cases: subsidies for the financial sector’s excessive risk taking, overprotection of copyrights and patents, favoritism toward incumbent businesses through occupational licensing schemes, and the NIMBY-led escalation of land use controls that drive up rents for everyone else.

Freeing the economy from regressive regulatory capture will be difficult. Lindsey and Teles are realistic about the chances for reform, but they offer a set of promising strategies to improve democratic deliberation and open pathways for meaningful policy change. An original and counterintuitive interpretation of the forces driving inequality and stagnation, The Captured Economy will be necessary reading for anyone concerned about America’s mounting economic problems and the social tensions they are sparking.

Blum Center logo square pdf 1 page

Monday Smackdown: Treasury Document Translation: Steve Mnuchin Is Not a Professional Treasury Secretary. He and His Personal Staff Are Grifters

Posted on by Brad DeLong
  1. The U.S. Treasury’s Office of Tax Policy (OTP) and Office of Monday Smackdown: Steve Mnuchin Is Not a Professional Treasury Secretary. He and His Personal Staff Are Grifters

Tax Analysis (OTA) agree with the Congress’s Joint Committee on Taxation (JCT) that the Republican Senate tax “reform” bill as written will raise the debt by 1.5 trillion dollars over the next decade, and boost growth by 0.08% per year

  1. OTP does not believe that growth will be 2.9% per year over the next decade.

  2. If growth were to be boosted from the baseline 2.2% per year over the next decade to 2.9% as a result of the tax “reform”, it would pay for itself. But it won’t.

  3. No office in the Treasury Department is willing to go on record as having written this one-page document.

  4. No official in the Treasury Department is willing to go on record as having written this one-page document.

  5. Not even Steven Mnuchin has put his name on this one-page document.

Mnuchin

Beating America’s Health-Care Monopolists: Fresh at Project Syndicate

Posted on by Brad DeLong

J. Bradford DeLong and Michael M. DeLong: Beating America’s Health-Care Monopolists: BERKELEY – The United States’ Affordable Care Act (ACA), President Barack Obama’s signature 2010 health-care reform, has significantly increased the need for effective antitrust enforcement in health-insurance markets. Despite recent good news on this front, the odds remain stacked against consumers.

As Berkeley economics professor Aaron Edlin has pointed out, consumer abstention is the ultimate competitor. Companies cannot purchase or contrive a solution to consumers who say, “I’m just not going to buy this.” But the ACA requires individuals to purchase health insurance, thus creating a vertical demand curve for potential monopolists. Under these conditions, profits – and consumer abuse – can be maximized through collusion. Read MOAR at Project Syndicate

ObamaCare Increases the Salience of Antitrust in Health Insurance Markets

Posted on by Brad DeLong

From Last January: ObamaCare Increases the Salience of Antitrust in Health Insurance Markets from “Important” to “Essential”: As the extremely-sharp Aaron Edlin has taught me, apropos of the current wave of proposed health insurance mergers–Aetna-Humana, Anthem-Cigna, and Centene-HealthNet:

The coming of ObamaCare makes any willingness on the part of antitrust authority to allow these mergers to go through extremely dangerous and destructive policy indeed.

The imposition of the individual mandate to purchase health insurance makes maintaining competition in health insurance markets significantly more important. Usually, the exercise of market power and the ability to easily collude implicitly or explicitly made possible by large market shares are curved by the possibility of exit. The ‘exit the market and buy something else’ option for consumers is the one competitor that the firm cannot acquire and merge with. It is the one competitor with which the firm cannot collude, implicitly or explicitly.

Imposing an individual mandate to purchase is a wise policy in a market place where the major market failure is adverse selection. It threatens to be a catastrophic policy in the marketplace where the major market failure is the exercise of sellers market power.

We see this flashpoint–and it is a dangerous flashpoint–in health insurance right now. But the issues are actually much broader. Here is the wise Kevin Drum:

Kevin Drum: Our Four-Decade Antitrust Experiment Has Failed: “We have four airlines serving 80 percent of all passengers…

…We have four cable and Internet companies providing most of the nation’s cell-phone and television service. We have four big commercial banks, five big insurance companies (only three if two proposed mergers go through this year), and a handful of producers selling every major consumer product. Even when you think you have a choice, like in the array of online travel-booking sites, two companies (Expedia and Priceline) own all the subsidiaries…. Over the past few decades, America has undergone a sea change in antitrust law. It’s now all about ‘consumer welfare’—which means, in practice, that big mergers are fine as long as the mergees can make a credible case that the combined entity will be good for consumers. You will be unsurprised to learn that high-powered marketing departments are very good at collecting data to show exactly that, and that high-powered attorneys are extremely good at turning this data into bulletproof legal arguments. The result is that very few mergers are ever turned down.

But this siren call has led us down a long, blind alley. It turns out that in the short term, plenty of big mergers really can be good for consumers. In the longer term, though, very few are…. We’d be better off returning to an older, cruder rule: ensuring that there are plenty of competitors in every market and refusing to allow any single company to become too dominant. As near as I can tell, there’s a real tipping point around the number three or four. If a market is dominated by four companies or less, that’s when it starts to wither….

Needless to say, even a crude market share rule doesn’t make things simple. You’ll still have arguments over what counts as a single market (online advertising or the entire advertising industry?). You’ll have arguments over just how big a single company should be allowed to get (30 percent share or 50 percent share?). You’ll have industries where it’s not easy to have lots of competitors. And you’ll have some industries where the returns to scale to are so potent that small companies just flatly can’t compete. There’s no easy panacea. But ‘consumer welfare’ is an open invitation to thousand-page regulatory filings that dive deep down a rabbit hole and never come up for air…. Competition is the core engine of capitalism. If you have plenty of it, you can make do without a lot of other regulations. But once you allow competition to wither, there’s little choice left…. The federal government should do its best to ensure that markets have plenty of competition, and then it can afford to get out of the way and regulate fairly lightly. Other companies will do their work for them. What’s not to like?

Must-Read: Nell Abernathy, Mike Konczal, and Kathryn Milani: How to Check Corporate, Financial, and Monopoly Power

Posted on by Brad DeLong

Must-Read: Nell Abernathy, Mike Konczal, and Kathryn Milani: How to Check Corporate, Financial, and Monopoly Power: “The policies we propose specifically address rules that have distorted private sector behavior and provided benefits to multinational corporations and rich individuals at the expense of average workers and the economy…

…If taxed and regulated properly, big business, banks, and wealth-holders can contribute to broadly shared prosperity. But tailoring the rules to serve their interests—in essence, leaving these powerful forces untamed—promotes rent-seeking and greater inequality and leads to weaker long-term growth and a less productive economy. Untamed builds on recent analysis of economic inequality and on our 2015 report, Rewriting the Rules, in which we argued that changes to the rules of trade, corporate governance, tax policy, monetary policy, and financial regulations are key drivers of growing inequality…

Must-Read: Nicholas Warino: The Bay Area Housing Crisis Is Caused by and Can Be Solved by Local Government

Posted on by Brad DeLong

Must-Read: Nicholas Warino: The Bay Area Housing Crisis Is Caused by and Can Be Solved by Local Government: “Professor Walker… presents some reasonable ideas and even some good policy solutions…

…(rent control, eviction controls, low-income public assistance, etc.) As far as I can tell, he’s on left, so I bet we’d agree on many issues. That said, Professor Walker’s analysis of the housing crisis is not good…. I’ll quote them directly and respond.

But while it’s true that we need to expand the region’s housing supply, building more housing cannot solve the problem as long as demand is out of control, as it is today. There is simply no way housing could have been built quickly enough to avoid the price spike of the current boom.

This is a common argument: building more housing will help, but we nevertheless ‘can’t build our way out of the problem.’ This is wrong in two ways: 1) The only way for demand to be ‘out of control’ is for demand to consistently outpace supply. So it’s logically true that ‘building more housing cannot solve the problem as long as demand is out of control’ because within that sentence is the assertion that demand will always be greater than supply. In other words, this paragraph is true in the same way ‘you cannot fix The Problem as long as The Problem still exists.’ True but meaningless.

2)…. The housing crisis problem is not a binary problem, where it either exists or doesn’t. The problem with out-of-balance supply-and-demand is a continuous pressure on the housing market…. Every single additional unit added to the housing market turns the valve and releases some pressure, leading to lower prices than would be the case if that unit had never been built.

Three basic forces are driving the Bay Area’s housing prices upward: growth, affluence, and inequality. Three other things make matters worse: finance, business cycles, and geography.

Other basic forces…. People, money, consciousness, the Sun, the lack of worldwide plagues, and the Big Bang…. ‘Growth’ and ‘affluence,’ which is to say people earning more money, which is to say ‘demand,’ is a part of the problem. Hence supply-and-demand. And yes, finance contributes to the problem, in the sense ‘finance’ means the flow of money throughout our economy and the Bay Area housing market is part of our economy. Geography? You bet… but luckily we’ve invented ways to build up, not just out…. But both building up and building out require a focus on BUILDING.

All of these operate on the demand side of the equation, and demand is the key to the runaway housing market.

There is always ‘demand’ in an economy, unless everyone is dead. The relevance of demand is how it relates to supply. Even if the total amount of demand for housing in the Bay Area is accelerating, it would not be a problem if the supply of housing was also accelerating…. Reminder: demand in an economy simply means the amount of money in the economy that wants to be spent on a good or service. Generally, one of the primary goals of a society is to increase how much money people have, so they have more money to demand things and pay other people who will have more money to demand other things. And so on. This is how societies–if they ALSO focus on the equally critical goals of equity, justice, and fairness–lift people out of poverty, increase happiness, increase the tax base for new public goods and services, and increase the amount of money that can be used for innovation and progress. When the demand in an economy increases, like you’re seeing in the Bay Area housing market, the healthy response from the market is to increase supply…

Must-Read: Noah Smith: Republic of Science or Empire of Ideology?

Posted on by Brad DeLong

Must-Read: Noah Smith: Republic of Science or Empire of Ideology?: “[Jim Tankersley of] The Washington Post has a long story about Charles’ Koch’s attempt to influence the economics profession with massive donations…

…The Post’s article is titled ‘Inside Charles Koch’s $200 million quest for a ‘Republic of Science'”. This is a reference to a 1962 article by Michael Polanyi called ‘The Republic of Science: Its Political and Economic Theory’….The Post article’s author, Jim Tankersley, drily notes:

[Koch’s donation effort] raises the question of whether Koch has become, for university researchers, the sort of distorting force that Polanyi warns against.

Why yes. Koch is making a sustained, multi-hundred-million dollar effort to push the academic economics profession toward a libertarian ideology. This is a ‘Republic of Science’ to the same degree that North Korea is a ‘Democratic People’s Republic of Korea’…. I don’t like it…. It sets back our understanding of the world when people try to flood any portion of academia with researchers whom they think will promote a certain set of conclusions. I don’t have much more to say than that, so here’s one of my favorite Feynman quotes:

Our responsibility is to do what we can, learn what we can, improve the solutions, and pass them on. It is our responsibility to leave the people of the future a free hand. In the impetuous youth of humanity, we can make grave errors that can stunt our growth for a long time. This we will do if we say we have the answers now, so young and ignorant as we are. If we suppress all discussion, all criticism, proclaiming ‘This is the answer, my friends; man is saved!’ we will doom humanity for a long time to the chains of authority, confined to the limits of our present imagination. It has been done so many times before.

A real ‘Republic of Science’ would focus on an open-minded search for truth, not the enshrinement of one pre-decided dogma.

Updates: I also thought this passage from Tankersley’s article was interesting:

None of the largest recipients of Koch dollars appear on a list of the most influential academic economic departments in the United States, as calculated by the research arm of the Federal Reserve Bank of St. Louis. Only one professor who works at one of Koch’s most-supported centers cracks a similar list that calculates the top 5 percent of influential economists in the research community
Koch-funded researchers make a larger impact in the public arena. They frequently testify before Republican-led committees in Congress. Their work often guides lawmakers, particularly conservatives, at the state level in drafting legislation, and they have provided the foundations for judicial opinions that affect the economy on issues such as whether the government should intervene to stop large companies from merging.

It’s possible that the Koch doesn’t want to influence economic science itself, as much as he wants to sculpt its public-facing component. The end result could be two econ professions – a dispassionate, truth-seeking one occupying the upper levels of the ivory tower, at MIT and Princeton and Stanford, doing hard math things and careful honest data work that slowly trickles out through traditional media channels, and another in the lower-ranked schools, doing a slightly fancier version of the kind of political advocacy now done by conservative think tanks. The former would have the best brains and the best understanding of the real world, but the latter would have much more policy influence and impact on the wider intellectual world. This is different from the wholesale yoking of science to ideology that I was envisioning, but it also doesn’t seem like a pleasant vision of the future.

Must-Read: Paul von Ebers: Mega Health Insurance Mergers: Is Bigger Really Better?

Posted on by Brad DeLong

Must-Read: Paul von Ebers: Mega Health Insurance Mergers: Is Bigger Really Better?: “Health insurance… the announcement of three large mergers: Aetna/Humana, Anthem/Cigna, and Centene/HealthNet…

…But many benefits of megamergers put forward by these companies will not materialize, and there will be few benefits for consumers…. Scale economies, where fixed assets and overhead decrease with firm size, are very uncertain in health insurance mergers…. Studies in other industries suggest that even when economies of scale exist, the advantages dissipate with very large company sizes. Since administrative costs are a small portion of health insurance prices (10 to 15 percent, on average) it would take a large reduction in administrative costs to create a meaningful price reduction. For Aetna, this shouldn’t come as news….

Meanwhile, the American Hospital Association and the American Medical Association are worried that mega insurers will have more negotiating leverage in provider contracts with hospitals and doctors. The reality is more nuanced…. The impact of the Anthem/Cigna will depend on particular state circumstances. Anthem is the dominant insurer in states where it has the Blue brands and it usually pays lower prices for health care in those states. Anthem also has access to the Blue national network, which also generally pays lower prices. If Anthem converts the Cigna business to the Blue brands in those states, current Cigna customers will have lower medical costs…. Consolidation will somewhat increase the leverage mega insurers have with hospitals and doctors, but not as much as many expect…

Must-Read: James Bessen: Lobbyists Are Behind the Rise in Corporate Profits

Posted on by Brad DeLong

Must-Read: James Bessen: Lobbyists Are Behind the Rise in Corporate Profits: “I tease apart the factors associated with the growth in corporate valuations relative to assets (Tobin’s Q) and the growth in operating margins…

…the roles of R&D, spending on advertising and marketing, and on administrative costs, including IT. I also consider investments in lobbying, political campaign spending, and regulation; and I look for links between rising profits and industry concentration and stock volatility. I find that investments in conventional capital assets like machinery and spending on R&D together account for a substantial part of the rise in valuations and profits, especially during the 1990s. However, since 2000, political activity and regulation account for a surprisingly large share of the increase…. Lobbying and political campaign spending can result in favorable regulatory changes, and several studies find the returns to these investments can be quite large. For example, one study finds that for each dollar spent lobbying for a tax break, firms received returns in excess of $220.

It is less obvious, however, that regulation in general should be associated with higher profits. Indeed, critics of the regulatory state regularly decry the costs imposed by regulations. Yet even regulations that impose costs might raise profits indirectly, since costs to incumbents are also entry barriers for prospective entrants…. The pattern around the 1992 Cable Act is representative: I find that firms experiencing major regulatory change see their valuations rise 12% compared to closely matched control groups. Smaller regulatory changes are also associated with a subsequent rise in firm market values and profits. This research supports the view that political rent seeking is responsible for a significant portion of the rise in profits….

Two characteristics make these changes particularly worrisome. First, the link between regulation and profits is highly concentrated in a small number of politically influential industries. Among non-financial corporations, most of the effect is accounted for by just five industries: pharmaceuticals/chemicals, petroleum refining, transportation equipment/defense, utilities, and communications. These industries comprise, in effect, a ‘rent seeking sector.’… Those firms may skew policy for the entire economy. For example, the pharmaceutical industry has actively stymied efforts to address problems of patent trolls that affect many other industries. Second, while political rent seeking is nothing new, the outsize effect of political rent seeking on profits and firm values is a recent development, largely occurring since 2000…