Stock market chart displayed on a street

Economic Rent-Seeking Run Rampant

The debate over economic regulations is missing the point.

Stock market chart displayed on a street

The United States requires a seismic shift in the framing of its economic debate.

By SHARE

In our national debate about economic outcomes, we sound like highwaymen arguing over spoils. This is economically irrational in a way that is dangerous. It focuses our thinking – and with it our investments, public and private – on wealth that has already been generated.

As any venture investor worth his salt knows, the money is in harnessing untapped potential. Particularly, it is in the capacity of innovators to capitalize on change and meet needs in new ways. Wealth already generated represents a critical source of cash and capital, of course, but economies thrive when they renew their capacity to generate value in response to changing needs.

[See a collection of political cartoons on the economy.]

However, bureaucratic, legal and regulatory requirements have mushroomed in our age, to the point where upstart players struggle to navigate the rules in order to compete. As General Electric alumnus and Adam Smith Society chapter founder Scott Keenan puts it:

I can’t stand a game that has so many rules that the creative effort gets poured into becoming an expert on getting around the rules rather than being put towards game strategy. In this regard, I see that many big guys (banks, GE, big record labels) win because they can employ rules experts and keep the umps in their corner. I guess that’s my fear, that many regulations discourage innovation and competition.


[See a collection of political cartoons on the budget and deficit.]

To focus on the costs of rampant economic incumbency is not to diminish the powerful feelings about fairness that drive the arguments on both sides of our debates about everything from taxation and financial regulation to CEO pay and public funding of programs for the poor. Depending on your emotional and philosophical makeup, you are likely to be more compelled by one notion of fairness or the other. You may be focused on what you see as the fairness of protecting the property holder from having his wealth redistributed, so his incentives stay in place and the rewards of his efforts remain his own. Or you may focus on the fairness of meeting the needs of those who have little, so they are in a position to strive for more.

But let me propose that as much as fairness matters, it is the fairness of allocating opportunity, rather than spoils, that should be our focus. If we want to grow the pie and bake newer and better ones, instead of arguing over the last one out of the oven, we must refocus the debate squarely on fairness of opportunity for the ambitious. In short, we must shift the debate from spoils to access – from an argument over protecting wealth on the one hand and distributing it on the other to one about how to reestablish the conditions conducive to building it.

To achieve this requires that we rein in regulations that make rules-expertise our chief growth industry, while restricting big players from foisting their risks and costs onto others. Today, though, we have the worst of both worlds: We face onerous regulations that inhibit small business and favor incumbents; taxes that take dollars out of the small businessperson’s pockets and effectively donate them to large corporations that can work the system better; and a legal system that is often prohibitively complex and expensive for small players to use.

[See a collection of political cartoons on Congress.]

We have worsening educational opportunities for people who have not inherited them; an increasingly obsolete communications and transportation infrastructure; slow investment in the kinds of dramatic advances that public investments spawned during the cold war (aerospace, the Internet); and huge effective subsidies for outmoded systems for everything from food production to transportation, subsidies that actively disadvantage private investors in alternatives.

In the face of this sobering drift, we retain powerful strengths, from our cultural attitudes toward social, political, and economic mobility, to the pace of disruptive innovation and its role in unseating economic incumbents. To no small degree, we continue to reap the benefits of an era in which economic opportunity was more widely accessible to those who had not inherited it than at any time in world history. Yet in many ways we are like farmers who have failed to rotate our crops. We do not recognize the degree to which we are enjoying the benefits of investments we have failed to sustain, while the soil erodes beneath us.

Opportunity may always be allocated through some combination of earning it and reserving it, but when the latter comes to dominate, the pump stops working and the system stalls. The next phase of meaningful growth in America, if it is to occur, will depend on private activity and public policy that resist the metastasizing of incumbency advantages. This is needed if we are to succeed in developing new ecosystems to rival the old bastions for nurturing talent and providing access for the ambitious – to markets, experience, capital, and resources. To achieve this will require a seismic shift in the framing of our economic debate. Such a shift is necessary now, not merely for the sake of fairness; it is requisite to maintain our capacity to innovate and to grow.