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Recorded October 23rd, 2017
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COWEN: Today on the podcast, we’re gonna have Brink Lindsey and Steven Teles. And they have together co-authored a new book “The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality.” What happens in this book is that you have a liberal and a libertarian come together. In fact, together they’ve helped produce something called liberaltarianism and try to show or set out a series of policy changes we could make that would both boost the rate of economic growth and give us a more equal society. I think this is one of the most important books of the year, but the podcast today, we’re gonna do a little differently. Rather than talk to the two of them together, we’re going to do them sequentially. First, will be Steven Teles, second will be Brink Lindsey. And I’m actually even gonna ask them some of the exact same questions, or at least parallel questions, so you can compare the different answers because again, part of the interesting feature of this book is that it is a co-authored product from people of two different points of view.
COWEN: To introduce Steve, he is a professor at Johns Hopkins University in the Department of Political Science, and he is also a senior fellow at the Niskanen Center. Welcome Steve.
TELES: Thank you very much.
COWEN: We just dive in with questions. First question, if we think about inequality in America today, how much of it is due to bad policy as opposed to people not having the right skills or there being some kind of cognitive or human capital gap?
TELES: I hate to disappoint you but I don’t think there’s any way to measure that. We dug around to try and figure out for good, aggregate ways to measure the extent of rent-seeking, and its interaction with skills, and the extent in the market, and we weren’t able to find them. In some sense also, measuring rent-seeking may be simply analytically impossible. We certainly tried to figure out how you would do it. Part of it is rent-seeking is to some degree a judgmental category, rather than one that’s easily measured by some neutral measure. I think the main thing you can say, is we have evidence in the book that it’s substantial. We sure have some evidence that the distribution of rent-seeking is changing but being able to come up with any good aggregate measure of how it compares to other causes of inequalities is impossible, which is not a very desirable or satisfactory answer. But that’s about the best answer you can give.
COWEN: We have this thing in public choice economics, I’m sure you know it, it sometimes called the Tullock paradox. Gordon Tullock, my former colleague, he set out to measure how much was spent on lobbying, relative to how much is handed out by government. And Tullock, at least, thought that the amount spent on lobbying is actually remarkably low. It may appear large if you’re sitting in Arlington, Virginia but relative to GDP, it’s pretty tiny, and the amount of resources controlled by government is pretty significant. How is it that you think about the Tullock paradox, at least on the surface, some kind of rent-seeking costs would seem to be low?
TELES: Right. As I understand the Tullock paradox, it’s that essentially the amount of lobbying should approach the overall amount of rent, right? That is the amount that everyone expends, trying to capture whatever rents there are, should go up to that level, and the paradox is, why doesn’t it? One is, that can be a institutionally established equilibrium, that is in the Tullock model, there’s no institutions. Whereas, we have a very substantial separation of powers that tends to lock in the status quo and reduce therefore the incentives for investing in lobbying. You also have severe limits on the political agenda which again means there’s only so many things that you cannot debate simultaneously. That creates a very substantial protection for the status quo. In that sense, if you’re given that a huge amount of lobbying is designed simply to keep political actors from doing anything. From simply having them take a walk and not on challenge the existing status quo, both institutions and the institutional factor of limited agendas. A limited agenda space would suggest that they don’t need to invest all that energy and at least protecting their existing rents, it would all go into expanding the ones they don’t have.
COWEN: Let me play devil’s advocate for a moment and try to defend crony capitalism. You look at the last 50 years and you ask yourself, “What are the two greatest growth miracles that have been seen on planet Earth?” Maybe the two greatest ever. It seems plausible candidates would be one, China and two, South Korea. And they’re about the most crony capitalistic societies you could imagine. If someone says, “Well, there’s two kinds of crony capitalism. Under one kind, the incentives are for the cronies to invest in infrastructure and human capital and then it does just fine. And then there’s other kinds of crony capitalism that stifle investment in education and infrastructure, but maybe the key is education and infrastructure and we just need a better crony capitalism of the sort, that say, South Korea and to some extent China have had.” What’s your reaction?
TELES: Well, so first of all, the politics of rent in the economics or in operations we think very differently whether you’re at the outer edge of growth like the United States or Germany or Britain, and very different if you’re in a developing country… That is developing countries, first of all, have a lot of catch up growth that they can do, and if they… They’re not since they have a potential for 10%, 11%, 12% growth. If some of that, substantial amount of that, gets filtered off into payoffs and lobbying or whatever, that’s not a big deal. They’ve got, in some sense, more room to do that. Also there’s some political science that suggest, at least at that level of development, some level of cronyism might actually facilitate growth in a way that it wouldn’t necessarily in an advanced economy. I wouldn’t assume that you can look at the two sides as being parallel in that sense.
COWEN: If we look at the federal budget and the tax system that accompanies it, that’s relatively easy to measure. Do you see the net impact of our tax and budgetary decisions as being progressive or regressive?
TELES: For one thing, so the book is all about the regulatory system. And I know that by saying that one argument we make, and this relates to an article I wrote called “Kludgeocracy,” which is that it’s really these other parts, other ways the government influences the economy other than directly through taxing and spending that are most likely to have these anti-growth, incumbent-protecting kind of qualities. That is the more salient, the more visible the policy instrument is, the more easy it is to capture for the purposes of upward redistribution. Given that a substantial amount of our spending is entitlements and they… We have difference of opinion. I think those are basically progressive on net given the inflow and outflow in them. And that our tax system, if anything, may be too progressive. That is, it’s too progressive to raise the amount of revenue that we need for the amount of state that we want. I think our tax and benefit system, which could be doing better or at least doing better than our regulatory and litigation systems.
COWEN: What if there is a potential default hypothesis? That policy just doesn’t change the distribution of wealth very much. The tax and fiscal side, that makes things somewhat more progressive. The regulatory side, as you argue convincingly in the book, that’s regressive and inefficient. And in part, we let the regulatory side get away with that because on the fiscal side we adjust, and maybe policy as a whole just doesn’t change the overall broad features of the distribution of wealth, something a bit like Pareto’s old law. And maybe it’s just much harder to change the distribution of wealth than we think because rent-seeking is another activity and the forces that are good at other things. And is government when it comes to distribution actually, ultimately, maybe awash? Yes or no?
TELES: There’s two things wrong with that. One is the argument from Pareto you made doesn’t have a mechanism. That is, it might accidentally be the case of the two sides would equilibrate. That doesn’t mean that there’s… But your argument assumes there’s a mechanism connecting them somehow, although it is unspecified exactly what that mechanism is…
COWEN: But think of lobbying as another sector. If we add on like the ski wear sector to the economy, that won’t change the distribution of wealth much because people who are good at building software maybe are also, on average, good at building ski wear. So lobbying is just another sector and the mechanism is adding on more sectors, it won’t change distribution much.
TELES: To go to the other side though, A, I do think that there are substantial evidence in the book that the policy regime has in fact redistributed upward, or it has created protection. If you look at finance I do think…
COWEN: Even adjusting for the tax and fiscal side.
TELES: Yes. Well, ’cause A, I don’t think the tax and fiscal side… I think the tax and fiscal side has been more or less neutral over the last 30 or 40 years. I think, especially if you include state and local taxes which tend to be much more regressive than federal taxes, that pushes even more in the other direction. But I think certainly there’s evidence in our book that both the finance and the IP regime have led to very substantial upward distribution and have in fact changed the distribution of income in the economy. So A, I would question your assumption that while everything’s basically have been awash over the last 50 years, I think even including both the tax and benefits system and the regulatory system, there’s pretty substantial evidence that the policy regime has re-distributed upward.
COWEN: As you probably know, Walter Scheidel has a fairly new book and it’s called “The Great Leveler.” And he argues another version of the default hypothesis that inequality tends to stick, and you have big egalitarian changes essentially only through war and widespread destruction. What’s your opinion?