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Can the “Scourge of Upward Redistribution” unite left and right against the rent-seekers?

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Monopoly board game.
Monopoly board game.
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For a supposedly divided nation, Americans have surprisingly many points of agreement. Unfortunately, they are mostly about how terrible things are. For several years running, for example, overwhelming majorities report feeling dissatisfied with the direction of the country and think we are on the wrong track. Even stronger majorities also don’t trust the government, they think there is too much money in politics, and believe that lobbyists, corporations, and banks all have way too much power.

But as united as we may be in our feelings that our political system now only works for those at the top, we are deeply divided about what to do about it.

Disenchanted conservatives are clear on their solution: government is choking the innovative spirit of America and stagnating our economy. So, we need much less of it. Charles Murray, a leading conservative thinker, wants to turn back the clock to 1937 (when the Supreme Court finally went along with the New Deal), and provide a legal defense fund so ordinary Americans can disobey government regulations they don’t like. Jay Cost, another leading conservative thinker, has written a book entitled Republic No More: Big Government and the Rise of American Political Corruption that is thoroughly nihilistic: As long as government has power to do anything, that power will be corrupted by special interests. Ergo, the only way to prevent corruption is to return to the limited government of 1789. Get government out of the way, I suppose, and the private enterprise of small hard-working Jeffersonian farmers will rise up and restore American greatness.

Liberals, by contrast, have become very focused on runaway economic inequality, and they don’t like it. Some, like those who joined the Occupy Wall Street protests, are willing to camp out in the streets for month to scream about it -- "We kick the ass of the ruling class," goes the OWS tagline. But they have a harder time offering a solution. Once upon a time, liberals had faith in a government supported by progressive taxation as a great equalizer. But now liberals, like conservatives, tend to see government as mostly corrupt --- thoroughly in the hands of the big banks and multinational corporations and rich people who are running the country for their own narrow benefit (as Marx predicted!). To the extent that the liberal activists have a solution, it looks like some purely people-powered grassroots democracy that ignores logistics, institutions, and the humble limits of human cognitive capacity.

Okay, so I caricature somewhat. But in the absence of realistic solutions, it’s easy to see how improbably and impractical revolutionary ideas start to take hold.

So, craziness aside, is there a feasible framework that could marry some of the conservative critiques of excessive government and economic stagnation with some of the liberal critiques of inequality? Is there a way to channel this anger towards a shared agenda that might do some good, as opposed to just feeding two divergent revolutions whose increasingly fantastical political programs are doomed to fail?

A new frame: "the scourge of upward redistribution"

In a new essay in National Affairs, Steven M. Teles has a new and important way of thinking about the joint concerns of a stagnating economy and increasing inequality. His essay, "The Scourge of Upward Redistribution" is a significant attempt to fuse the conservative critique of excessive government regulation with the liberal critique of inequality into a single coherent framework.

Teles calls this new framework "upward-redistributing rents." It’s a term that is meant to encompass the many ways that government regulation helps "shower benefits on the very top of the income distribution." Examples include:

  • Occupational licensing regimes that artificially limit the supply of lawyers, doctors, dentists and other licensed professionals. These rules allow professions to reduce competition, keeping their own salaries high.
  • Management consultants, who extract rent from "performing a legally mandated due diligence ritual for firms".
  • Holders of intellectual property, especially in the technology, pharmaceutical, and entertainment industries, where intellectual property laws tend to be excessive friendly to patent holders.
  • Existing homeowners, who benefit from zoning laws that limit housing supply, thus raising prices.

Though these are somewhat disparate examples, they all describe groups of economic winners who have managed to hold onto and expand their winning by being on the right side of government regulations.

Looking at inequality as the product of regressive rents orients the conversation differently. It asks us not to see government and markets in tension with each other as much as to ask whether government rules that structure markets are unfairly favoring those at the top. In some cases, we may want more regulation; in some cases we may want less regulation. But in many cases, we just might want different regulations.

Teles’s message for liberals who want to blame private enterprise for inequality is that they need to understand the ways in many of the 1% have gotten rich not by through the bruising ruthless competition of free market capitalism, but by limiting their competition through favorable government regulation. This means that liberals need to accept some deregulation. They also need to be realistic about the politics. They should support going after government-enabled rents, Teles writes, because "it gives them an opportunity to make a real dent in inequality even though they do not control all the branches of government."

His message for conservatives is that they need to acknowledge that much of the inequality in society is not the benign consequence of hard work (and therefore an acceptable side product of the wisdom of capitalism), but it is the direct result of barriers to entry that undermine market forces and limit economic dynamism. They need to start being concerned about inequality. Even further, Teles argues, "if high-end inequality is not diminished by removing the ways the wealthy use the state to extract resources from the rest of society, the inequalities that conservatives believe are just – those that flow from innovation and hard work – will be in danger. In short, inequality will become a threat to free exchange itself."

But Teles is not content merely to name and describe the problem. He also devotes considerable attention to its institutional and organization causes, which means that he can devote even more attention to the institutional and organizational solutions. His solutions come in two varieties: "Empowering the opposition" and "rent proofing the government."

"Empowering the opposition"

"An organizational imbalance," Teles writes, "plays a central role in all of the mechanisms of high-end rent-seeking."

By this, he means that the concentrated beneficiaries of these upward-redistributing policies are almost always far better funded and better organized than the diffuse publics (i.e. everyone else) who are harmed. The policy justifications for the regressive rents may be dubious. But if policymakers only hear from the well-funded beneficiaries (and they often do), that may explain why these policies persist.

Too often they go unopposed. "Someone needs to show up at agency rule-making hearings, licensing-board meetings, or the sessions in which land-use decisions are made, both to let policy-makers know that they are being watched and to get counter-arguments before them," Teles writes.

But, since these countervailing organizations are not likely to sprout up themselves (it is very difficult to organize diffuse publics), they will need sustainers – either wealthy individuals, or foundations.

This is a very important point. It is very easy for concentrated interests with high stakes to devote considerable resources to policy advocacy. Pharmaceutical companies, to name one example, have learned that if they want generous patent protections, they need to make that case aggressively and repeatedly, and so spend about $230 million a year on lobbying. Patients who pay higher drug costs as a result of these protections are not well-enough organized to present a similarly forceful and ubiquitous case against extended patent exclusivity. To be anywhere close to competitive, they need some kind of external support.

"Rent-proofing the government"

"There is one other form of countervailing organization that opponents of rent-seeking should but rarely do look to," writes Teles, "and that is the state itself."

The basic argument is that if we invest in government, we might get some smart experts who can see past the self-serving arguments that rent-seekers offer up, and make policy that serves a broader interest. Teles draws on a longer essay that the two of us wrote together, which makes the case that the best way to reduce the influence of lobbyists was to give Congress capacity to rely on them less for expertise and knowledge.

But the big point here is that, pace Jay Cost and others on the political right, government is not inherently corrupt. Institutional design and resource allocation matters. We can be careless about our government institutions, and leave them open to "capture" by special interests. Or, by giving them adequate resources and thinking hard about processes that minimize the power of narrow special interests, we can, in Teles’s phrase,"rent-proof" the government.

The politics of ending upward redistribution

The "regressive rents" framework nicely combines two concerns that have long been separate. Conservatives have long complained about the ways in which government regulation undermines competition and innovation; liberals have long complained about growing economic inequality.

The "regressive rents" framework also forces both sides to acknowledge that the other side has some legitimate points.

Conservatives need to acknowledge that inequality is a problem, and also that some government is going to be necessary to make sure markets are dynamic and open enough to foster the kind of competition and innovation that drives a free enterprise system.

Liberals, meanwhile, need to acknowledge that in many cases, the free enterprise system is the best tool against inequality, and that in many cases, less government regulation could actually wind up redistributing wealth, though in ways that are less direct than the tax-and-transfer approaches that they have long been most comfortable with.

I’d like to think that both sides will realize that they have enough in common -- that the stakes are substantial enough to merit some experimentation and willingness to compromise. But there are many actors who gain from the current divisiveness, and many actors who also do quite well under the status quo.

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