The Scourge of Upward Redistribution
America today faces two great challenges. First, the explosion in inequality threatens the public's belief in the justice of our economic system. Second, the slowdown in the formation of new businesses, a key metric of economic dynamism, endangers economic growth and employment. The solutions to these problems are usually in tension with one another — greater inequality is often the price of economic growth — and our politics has been divided according to this tension, with one side playing the role of the party of growth and the other the party of equality.
Historically, conservatives have championed the free market and defended the unequal distribution of wealth that capitalism generates, arguing that income inequality is just so long as it is produced by free exchange. Conservatives certainly have not abandoned their pro-growth position today, but they are increasingly willing to broach the issue of inequality when it comes to the bottom of the income distribution. Conservative Republicans have drawn attention to declining social mobility, the creation of a permanent underclass, and an increasingly fragile working class. For example, Florida senator and presidential candidate Marco Rubio has said, "America is still the land of opportunity for most, but it is not a land of opportunity for all. If we are to remain an exceptional nation, we must close this gap in opportunity."
Although they often strive to avoid it, conservatives have every reason to admit that exploding inequality at the top of the income scale is a major problem, too. To accept this is not to indict market capitalism. Much of the tension between equality and economic dynamism dissolves when we focus on inequality generated by public policies that distort market allocations of resources in favor of the wealthy — what we might call "upward-redistributing rents." These rents are large and growing, produced by inherent flaws in democratic governance that facilitate the use of the state to enrich the already advantaged. 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.
Any feasible attack on inequality must marry some degree of redistribution with an attack on the state's own role in producing inequality. The rich are getting richer because of some fundamental problems of democratic government, and these problems have been exacerbated by peculiar features of American political institutions and then super-charged by the recycling of high-end rents back into the political process.
Exploding high-end inequality is, in short, a symptom of what Francis Fukuyama calls "political decay," meaning the capture of the state by powerful interests seeking to entrench their social position and the resulting incapacity of the state to solve problems that threaten the public good. Reversing that decay will require creating new institutions to counter the influence of organized interests and rebuilding the autonomy and analytical capacity of the state itself.
THE CAUSES OF INEQUALITY
Most analyses of inequality do not focus on rents. On the left, there is a tendency, lately accelerated by Thomas Piketty's Capital in the Twenty-First Century, to see the expansion of inequality as a natural product of capitalism, a problem that only massive taxes and transfers can remedy. Most mainstream economic accounts of inequality, meanwhile, point to several economy-wide shifts as exacerbating inequality: increasing returns on skills and education, driven by a shift toward cognitively demanding jobs; the replacement of workers performing routine tasks with technology; and the expansion of the scope of the market due to free trade and reduced transaction costs. Based on this analysis, the most important remedy for inequality is improved education, which will allow workers to perform more cognitively skilled work that cannot be replaced by machine labor. Further to the right, authors such as Charles Murray have argued that growing inequality is the fruit of a more meritocratic society, one in which underlying aptitude is more closely measured and rewarded.
While they imply very different policy responses, all of these accounts assume that spiraling incomes at the top are a market-driven phenomenon — an analysis grounded in basic economics. In a classic statement of the tension between equality and efficiency, Arthur Okun claimed that, "[i]n an economy that is based primarily on private enterprise, public efforts to promote equality represent a deliberate interference with the results generated by the marketplace, and they are rarely costless." Okun here merely expresses an economist's common sense that inequality is a natural feature of market economies, that remedying the unequal distribution of income is primarily a matter of redistribution, and that redistribution is subject to familiar problems: reduced incentives to work and invest, and the inefficiencies and waste associated with processing resources through the state.
There is much truth in Okun's framework, but note that Okun begins by assuming the existence of "an economy that is based primarily on private enterprise." Most of our public discourse on political economy assumes that a wave of deregulation and privatization over the last few decades has produced an American economy characterized by "private enterprise." In certain respects, this is true, particularly in areas like airlines and trucking that were deregulated in the 1970s and 1980s. And in some cases, the movement toward a more perfectly free market has undermined the protections for the lower rungs of society, predictably generating more inequality. The most important market rigidities that have been weakened or eliminated in the last few decades, such as labor unions, have been those that protected the middle and working classes.
At the same time, however, we have seen an explosion in regulations that shower benefits on the very top of the income distribution. Economists call these "rents," which we can define for simplicity's sake as legal barriers to entry or other market distortions created by the state that create excess profits for market incumbents. These rents can sometimes include an absence of government action, such as a failure to properly regulate externalities or enforce market rules. Where the destruction of these rents is concerned, Okun's famous tradeoff between equality and efficiency does not apply, since their removal simultaneously allocates social resources more efficiently while also draining the ability of the wealthy to extract wealth from everyone else.
A focus on rents points us to the role that state action plays in the increase in top-end inequality and suggests that preventing the further entrenchment of plutocracy must have a deregulatory component. Progressive deregulation alone will not eliminate inequality, of course, because market rigging mainly benefits the wealthiest. Other factors, like the decline in unionization, the rise in mass incarceration, family disorganization, spatial segregation, and other factors partially explain the sluggish incomes of the middle and bottom of the income distribution. But inequality cannot be remedied just by pulling up the bottom. This suggests that conservatives ought to be more concerned about top-end inequality and that liberals ought to be more supportive of certain kinds of deregulation. Indeed, it suggests some real room for agreement where so far we have tended to see only political conflict.
While large parts of the top 1% of the income distribution are surely made up of entrepreneurs and innovators, the image of the United States as a free-market paradise is hard to square with the actual composition of the top strata of American earners. Start for simplicity's sake with a widely read breakdown of the occupations of the top percentile done by the New York Times in 2012. What immediately jumps out is the huge over-representation of financial-service providers, doctors, dentists, and lawyers, all of which are professions characterized by large-scale market distortions. A recent study by Jon Bakija, Adam Cole, and Bradley Heim showed that the occupational concentration of the wealthy in rent-suffused sectors is even more dramatic in the top 0.1%.
Doctors, dentists, and lawyers are all licensed professionals, and licenses are an obvious barrier to entry and competition. In addition, the specific regulatory structures of some of these licensed professions (which are almost always functions of state-level regulations) serve to redistribute income upward. Dental hygienists, for instance — often female and more modestly paid — are often required by state law to practice in the offices of, and under the supervision of, a licensed dentist, who is typically male and wealthier. This requirement allows dentists to extract a percentage of their hygienists' income simply because of regulation while also preventing hygienists from competing with them by setting up independent offices.
Medicine displays a similar pattern because the law specifies tasks that only licensed doctors can perform, even though nurses are capable of performing them. Dean Baker, co-director of the Center for Economic and Policy Research, has shown that the incomes of doctors and dentists are artificially inflated by constraints on the number of practitioners trained in any given year, the number of foreign-trained practitioners allowed to practice in the country, and the lack of third-party compensation for services provided abroad. Licensing statutes frequently define "dental practice" or "veterinary practice" very broadly, allowing dentists and veterinarians to swallow up activities that involve none of the risks that justify licensing, such as teeth whitening and animal massage — activities that they can then charge far more for than could non-licensed operators. Finally, as a recent Washington Monthly article shows, doctors play a central role in determining their own compensation through their control of the committees that set prices paid by Medicare. In short, doctors and related professionals in the United States do not earn much more than their counterparts in other advanced countries because of the impersonal workings of the market. They make more because of the rules that govern them — rules that give them far more power than their foreign counterparts.
The bottom of the top 1% is full of owner-proprietors who, in a more deregulated market, would be lower-paid employees of larger, more efficient firms. Car dealers, for instance, have a sizable presence in the top 1% of earners, have a major lobbying presence in almost every state capital, and have made contributions to almost every member of Congress. That should not be surprising, because regulations (again, often at the state level) protect car dealerships from competition by limiting direct sales, restricting the termination of franchises, limiting the entry of new dealers, and preventing manufacturers from offering preferential pricing to larger franchisees. Together, these rules, economists Francine Lafontaine and Fiona Scott Morton found in a 2010 study, "almost guarantee dealership profitability and survival," while simultaneously driving up costs to consumers. Although recent pressure from new firms and economic downturns have challenged the profitability of traditional car dealerships, their powerful coalitions — which include self-proclaimed pro-market Republican governors in states like Michigan — keep even well-resourced policy disrupters like Tesla Motors from threatening their rents.
Similar rules protect other owner-operators, like those in the surprisingly lucrative field of burial services, from consolidation or lower-cost competition. Optometrists in California, like those in many other states, are protected from consolidation by laws that prevent eyeglasses companies from providing on-site examinations. Such artificial market fracturing may be worth the cost in particular sectors where macrostability is a real issue, such as in banking, where the consolidation and securitization of the mortgage market played an important role in the housing bubble and crash. But no such justification applies in most other markets.
A concentration of high incomes also characterizes the field of government contractors, such as private-prison managers, defense contractors, and for-profit colleges. All these industries are characterized by dependence on government as a nearly exclusive source of revenue, by extraordinary levels of lobbying, and by asymmetries of power between firms and their government counterparts. Or consider the field of management consulting, which attracts an extraordinary percentage of Ivy League college graduates. As Christopher McKenna shows in his book, The World's Newest Profession, the outsized incomes of consultants do not come from their ability to recommend innovative practices to firms. Instead, they come from the rent they extract from performing a legally mandated due-diligence ritual for firms or from performing tasks that could otherwise be done at lower cost by public employees. These are not, in short, meaningfully "private" firms at all, despite their high profitability.
At the very highest end of the income spectrum, rents are pervasive in the fields of finance, entertainment, and technology. Regulations subsidize large banks through the implicit insurance of the too-big-to-fail status, the creation of a huge pool of assets for investment managers through a variety of tax-advantaged savings devices, like the 401(k) and IRA, and the construction of a massive and highly liquid securitized finance market.
While the financial industry presents itself as hyper-efficient and technologically sophisticated, the fruits of advances in the field appear to have gone entirely to the producers of financial services rather than their consumers. New York University's Thomas Philippon showed in a study last year that "the unit cost of intermediation," meaning the cost of providing access to the financial system, "does not seem to have decreased significantly in recent years, despite advances in information technology and despite changes in the organization of the finance industry." This helps explain why finance went from the source of 4.4% of the fortunes in the Forbes 400 in 1982 to 20.3% in 2011.
The capture of social resources on this scale can occur only through extraordinary social power rather than simply through direct monetary investments in politics. The financial sector has prevented attacks on its rents through "cultural capture," legal scholar James Kwak has argued, meaning the perception among regulators, legislators, and others that practitioners of financial engineering are unusually intelligent and engage in activities beyond the capacity of ordinary decision-makers to comprehend. And the decline of Congress's internal analytic capacity has rendered policymakers dependent on the financial sector for knowledge of the effects of regulation, as Lee Drutman of the New America Foundation and I have pointed out.
Those who hold intellectual property in the technology, pharmaceutical, and entertainment industries are also a large presence at the very pinnacle of the income distribution. Nearly all returns in these fields result from patents and copyrights because the marginal cost of producing copies in these areas is close to zero. While some intellectual-property protection is necessary to incentivize production in areas like entertainment and the arts, the same does not appear to be the case with pharmaceuticals. Dean Baker has shown that other policy approaches, such as offering prizes for developing drugs, could produce superior medical benefits with vastly superior distributive outcomes.
The increasing importance of intellectual property in generating inequality is not simply a natural outgrowth of the expansion of markets and technology, since legal protection in national and international law has increased substantially over the last third of a century. According to Harvard's Yochai Benkler, this expansion has happened in highly obscure, largely uncontested ways. For instance, the Copyright Term Extension Act of 1998 extended protection of existing copyrights, substantially increasing the wealth of all existing copyright holders. The law drew almost no lobbying among opponents, as economists Michele Boldrin and David Levine have shown — remarkable for a law that redistributed such an enormous amount of wealth.
Even more dramatically, a series of trade deals since the late 1980s extended the reach of American intellectual-property law globally. The Office of the United States Trade Representative provided American technology and content companies with exceptional access to its deliberations and helped frame the issue of intellectual-property protection in quasi-mercantilist terms. By entrenching such rules in trade law, which must be renegotiated multilaterally, the beneficiaries of strict intellectual-property rules have made the destruction of their rents all but impossible.
Finally, rents also play a critical role in the increasing concentration of wealth among the already-wealthy few. In a widely discussed critique of Piketty, economist Matthew Rognlie shows that the real driver of increased wealth at the top end is not returns on industrial or financial capital but housing-price appreciation. Housing is a highly regulated and subsidized sector of the economy, and constraints on housing supply relative to demand are especially severe in the areas with the highest concentrations of high earners, like San Francisco, New York, Washington, Seattle, Boston, and Los Angeles. Estimates by Harvard's Edward Glaeser indicate that constraints on housing supply can increase prices in these markets on the order of 50%.
In other words, by preventing housing supply from equilibrating with housing demand, insiders in these expensive housing markets — necessarily the already wealthy — are able to use regulation to take resources from housing outsiders. The same constraints on supply also generate rents for those in real-estate development with the political connections to acquire permission to build, and a considerable amount of these rents are redistributed back to politicians through political contributions (of which real-estate developers are almost always the largest providers in urban elections).
We do not currently have good estimates of the share of rent in the income or wealth of the top strata of American society, but there is sufficient evidence across these different areas to look to the suppression of competition as a core driver of skyrocketing inequality. Land-use regulation has increased over the last third of a century. Intellectual-property protection is stronger than it once was. Banks are larger, as is the pool of securitized finance and subsidized private savings. We have seen a huge increase in occupational licensing. Contracting and privatization have increased. The last third of a century, in short, has been an era in which inequality has been driven at least as much by an expansion of regulation as by the emancipation of markets.
THE POLITICAL ECONOMY OF RENT-SEEKING
Upward-redistributing rents are pervasive, growing, and rooted in fundamental problems in the American political system. What, if anything, can be done about them? If one consulted only the economists who pioneered the idea of rent-seeking, the answer would be terribly depressing.
Economists from Mancur Olson on have traced the political success of rent-seeking to the unbalanced incentives to organize of rent extractors and those from whom the rents are being extracted. While those with concentrated interests have a strong incentive to invest in political activity and the ability to strategically target their resources, those with diffuse interests do not. Thus, rent extraction is a natural law of democratic political systems, limited only by constitutional constraints.
A broader view actually suggests that the problem extends even further than imbalanced organization. Many of the most powerful forms of upward-redistributing rent-seeking take place in obscure decision-making contexts. Occupational licensing operates through state or municipal licensing boards. Development decisions are made at the state and local level, often by government entities that are almost the definition of low visibility, such as historical preservation commissions. Financial regulation operates through multiple regulatory bodies in highly technical rule-making processes. Intellectual-property decision-making has, for the last couple decades, been pushed into international trade deals that operate under unusually closed rules, which are then controlled by global trade bodies. The regulated entities have strong incentives to monitor the proceedings of these regulators and participate in highly technical and low-visibility decision-making processes, making these institutional venues especially susceptible to capture.
These rent-seeking arrangements are also protected by wealthy rent-seekers' reputations among policymakers for sophistication, intelligence, and responsibility — the "cultural capture" discussed above. The professional status of doctors and dentists comes with a reputation built over decades for serving the public interest. In housing, those opposed to new development in cities draw on the widely accepted (if intellectually backward) belief that development hurts the environment and only serves the interests of developers and wealthy gentrifiers. Defenders of strict intellectual-property rules claim that they are protecting the preconditions for economic and cultural creativity, as well as providing an incentive for the preservation of culture. Real-estate agents spend considerable energy convincing Americans that their very high, collusive fees ensure that American home buyers are well-advised and informed. While these arguments are typically wrong, the evidence for them does not need to be particularly strong if nobody actively seeks to present the other side.
Organizational imbalance, venue control, and protective policy images are all reinforced in their power by the disproportionate wealth of regressive rent-seekers. As Martin Gilens shows in his book Affluence and Influence, the public-policy preferences of the wealthy, and not those of the middle and working classes, are typically what get enacted. Additionally, Gilens finds that this influence is independent of the wealthy class's investment in lobbying and comes from a deeper relationship: Public officials tend to be disproportionately wealthy and have common social and educational experiences with those seeking high-end rents. Thus, when policymakers consider the claims of people like them — financiers, car dealers, undertakers, dentists, and doctors — they are likely to be sympathetic, especially when these claims are made outside of the brightest glare of public attention.
EMPOWERING THE OPPOSITION
The bad news on the politics of regressive rent-seeking is truly bad, mainly because democratic government is inherently vulnerable to capture by wealthy, concentrated interests. This vulnerability can never be entirely removed, but it can be reduced, in most cases by measures that, even in our partisan era, have the potential to attract interest across ideological lines. The place to start is with the severe organizational imbalance that ensures regressive rent-seekers get heard by government while the exploited do not.
An organizational imbalance plays a central role in all of the mechanisms of high-end rent-seeking discussed above. The empirical claims of those receiving rents are almost always weak, but someone has to actually produce the research and find ways of getting it before policymakers if those claims are to be effectively refuted. Exposing the self-interest behind rent-seekers' public-spirited claims is not rocket science, but finding opportunities to damage their reputations requires someone to be constantly, carefully building a case and on the lookout for opportunities. The insulated institutional venues in which rents are extracted are not, in fact, entirely closed to outsiders, but someone needs to show up at agency rule-making hearings, licensing-board meetings, or the sessions in which local land-use decisions are made, both to let policymakers know that they are being watched and to get counterarguments before them. In the absence of such organizational activity, upward redistribution is policymakers' path of least resistance.
Reducing upward redistribution requires, therefore, that we somehow solve the collective-action problem. The only way that we have durably figured out how to do so in the United States over the last half-century is through what the late political scientist Jack Walker called "third-party support" — funding from something other than the affected group itself. The entertainment and pharmaceutical industries will never have a problem raising money to pay for the organizational structure necessary to protect their intellectual property. Car dealers do not face any fundamental organizational problems raising money to make their presence known in every state capital in the United States — their survival is at stake, after all. But because the interests of the other side are so diffuse, the process of organizing a counterforce is far more challenging.
Efforts to claw back upward-redistributing rents depend significantly on the willingness of wealthy individuals and foundations to subsidize that countervailing organization. Thankfully, we have ample precedents for such broad-ranging philanthropic efforts. Two examples, one on the right and one on the left, are sufficient to show how potent a philanthropically subsidized anti-rent-seeking mobilization could be.
Pollution can be usefully understood as a form of rent because it extracts uncompensated benefits from those who pay its costs in the form of despoiled air and water. Polluters had effectively captured government agencies in the years before the institutionalization of the environmental movement, and they possessed a generally positive public image then, too.
Donors in the late 1960s and '70s, especially the Ford Foundation, poured huge sums into getting a broad range of environmental organizations started. That donor-subsidized anti-polluter mobilization helped make agency rule-making more pluralistic and repeatedly damaged the reputations of polluters in the public arena. Environmental organizations eventually took root in almost every state, ensuring that polluter interests would not be opposed by an organizational vacuum in state capitals. Most important, environmental interests were able to use their organization and newfound access to policymakers to switch political venues from states, where extractive industries had exceptional control, to the federal government, where the groups funded by foundations had an organizational advantage. In addition, these philanthropic investments helped shift policy venues from the legislative to the judicial branch, where environmental public-interest law firms had, if anything, an advantage over polluter interests.
The engagement of philanthropists was especially vital at the very beginning, when political entrepreneurs had not yet identified a constituency willing to support them financially or generated successes they could leverage to appeal to potential supporters. In the 1960s and 1970s, foundations were willing to step into this breach, getting environmental organizations over this critical initial hump. The result was a correction in the political marketplace that allowed for a surge in environmental regulation, even in relatively challenging times. In fact, foundations were so successful in seeding the environmental organizational landscape that some analysts, like Northeastern University's Chris Bosso, argue that there may now be too many environmental interest groups for the movement's own good. That would be a problem opponents of rent-seeking would be happy to confront.
Equally potent has been the enormous investment by philanthropists in the cause of education reform over the last two decades. Until recently, teachers' unions dominated education policy in most jurisdictions, as Terry Moe demonstrates in Special Interest. Unions were able to dominate in ways similar to how the wealthy today extract rents, especially those rents that originate at the local level.
First, in most districts teachers' unions faced no countervailing organization whatsoever, so they were the only group capable of monitoring officeholders and generating policy alternatives. Second, teachers had a very attractive professional image, which made it easier for them to claim an alignment between their occupational interest, the public interest, and the interests of children. Third, policymaking was controlled by thousands of localized, specialized institutions, like school boards. While teachers' unions could organize to participate in these relatively obscure venues, what few opponents they had could not. Teachers certainly did not get everything they wanted all the time, but their superior organization and strong image, along with the local venue, gave them a substantial advantage.
In just the last 15 years, the Walton, Gates, Robertson, Arnold, Broad, and Fisher foundations, among others, have invested very large sums of money to increase the number of actors involved in K-12 education policy. Donors have invested heavily in research programs at think tanks like the Brookings Institution, the American Enterprise Institute, and the New America Foundation, making it harder for unions' claims to pass without scrutiny. Foundations have put considerable resources into supporting mayoral control of schools (which has pulled decision-making away from teacher-controlled venues like school boards) and charter schools (which also change the venue of decision-making).
Foundations have actively supported litigation, such as the lawsuit Vergara v. California brought by the advocacy group Students Matter to challenge the protective rules for hiring and firing teachers — the core of teachers' union interests. In just the last few years, these same foundations have put millions of dollars into grassroots organizing and lobbying, funding state-based organizations like 50CAN and Stand for Children, parent organizations such as Families for Excellent Schools, leadership pipelines like Students for Education Reform, and the advocacy efforts of charter-school operators like Success Academy in New York. This broad range of third-party-supported education-reform organizations has at least partially evened the playing field in education policy, to the point where at least some observers are starting to worry that it is the reformers who have captured the political system.
Regardless of whether you favor environmental protection or education reform, these examples show that it is possible to create an organized and effective opposition even in deeply entrenched, rent-addled policy areas. They also suggest, however, the scale of the challenge. These two domains are almost certainly the largest and most sustained examples of philanthropic engagement in building an organizational ecology for policy change in the last 50 years. In both cases, foundation interest was sustained over a long period of time, something that is rarely the case in the philanthropic world. While both initiatives challenged powerful interests, they focused on areas with intrinsic appeal to other wealthy, well-positioned donors.
It will be much harder to generate the same zeal for attacking the rents held by doctors, lawyers, undertakers, financiers, real-estate agents, and wealthy homeowners. But as difficult as it will be, philanthropic investment in these areas is essential.
RENT-PROOFING THE GOVERNMENT
There is one other form of countervailing organization that opponents of rent-seeking should but rarely do look to, and that is the state itself. There are numerous ways in which the way American political institutions are structured makes it easier for the wealthy to extract rents and harder for everyone else to oppose them. To reverse the upward flow of resources will require that we create new institutional arrangements that reverse this bias, while not making it harder for government to perform its basic functions.
One place to start is the pathology of agency capture, in which bureaucracies designed to police firms serve instead to protect them. Many libertarians discuss agency capture as if it were a natural law of government. Recent work by Harvard's Dan Carpenter and David Moss, however, argues that agency capture is less pervasive and more variable than previously assumed. Some agencies maintain their public-interest orientation better than others.
For instance, the architects of the Consumer Financial Protection Bureau consciously attempted to prevent its capture by giving it an independent source of revenue, which reduced its reliance on Congress. The National Science Foundation, while its major priorities are set by Congress, has sought to avoid being captured through the institutionalization of peer review. And, as James Q. Wilson famously argued, many agencies have preserved their public-interest orientation through the creation and perpetuation of a strong bureaucratic culture, as in the Social Security Administration.
Instead of throwing up our hands and deciding that government necessarily falls into the service of wealthy interests, we should focus instead on giving particularly vulnerable and sensitive agencies — like the Securities and Exchange Commission and the Patent Office — greater insulation from the interests they are called upon to regulate. Focusing on recruiting and retaining talented officials is one important way to insulate such agencies, as the constant circulation of individuals between an agency and industry firms brings the cultures of both dangerously close. We should consider giving sensitive agencies additional resources, higher salaries for senior officials, and a strong internal promotion track.
Where national-level rents are concerned, like those in finance and intellectual property, reforms to Congress are even more important for reducing rent-seeking policy changes in the executive branch. As Lee Drutman and I argue in a recent Washington Monthly article, lobbyists have so much power because they control information. Lobbyists for investment banks, pharmaceutical companies, and the entertainment industry simply understand the complex economic and legal contexts involved with governing these industries better than Congress itself does. This is partially a function of the immense resources that these industries have to spend on lobbyists, but it is also increasingly driven by the reduced analytical capacity of Congress. We have dramatically cut Congressional staff over the last few decades while leaving in place the patronage structure of Congressional personnel. As a consequence, Congress has less internal ability to master arcane issues, even as the environment it seeks to govern becomes more complex. This information asymmetry ensures that Congress has to rely for expertise on the lobbyists who represent the regressive rent-seekers themselves.
Congress should moderately increase the number of its permanent, committee-based staff while substantially increasing their pay and providing incentives to remain on Capitol Hill rather than heading to K Street lobbying firms. By providing greater independent capacity to evaluate the merits of highly technical — but very lucrative — legislation, this could go a long way to immunize Congress against the entreaties of regressive rent-seekers.
There are still other changes to governing structures that could cut into some of the more damaging forms of rent-seeking. Yale Law School's David Schleicher has shown that blockages in urban real-estate markets could be broken open by forcing jurisdictions to set overall targets for construction rather than simply making decisions on isolated projects. Mayoral control of schools, which strips the power of school boards, could provide a useful precedent for putting similar institutions, like occupational licensing boards, under the direct control of governors and mayors. The Obama White House has recently shown a surprising interest in the abuses of occupational licensing, which suggests that nationalizing these types of issues could disrupt cozy state policy monopolies. Such nationalization could also give anti-rent public-interest groups more of a fighting chance, since they would find it difficult to organize in all fifty states but could put together a respectable presence in Washington.
More generally, we might think of creating new forms of central policy clearance, of the kind that the Office of Management and Budget already performs for the federal budget and agency regulations. For instance, OMB could add some form of distributive analysis to the cost-benefit analyses it requires for regulations, which would highlight cases where new rules would enrich already powerful interests. Going further, in these pages ("Regulatory Review for the States" in the Summer 2014 issue), Edward Glaeser and Cass Sunstein have argued for extending central review of regulations to the states, where much of the relevant rent-seeking occurs. Creating 50 state Offices of Information and Regulatory Affairs would be harder than Glaeser and Sunstein think, since to serve as more than just a wing of gubernatorial power they would need to build the reputation and organizational culture that it has taken OMB years to generate. But it is very much worth a try.
The complicated forms of American public policy — what I have termed "kludgeocracy" ("Kludgeocracy in America" in the Fall 2013 issue) — also serve the interests of regressive rent-seekers. Complexity is the friend of the organized and well-resourced. The more complex policy mechanisms are, the higher the costs become for opponents to research and explain them or to draw attention to their regressive effects. More complicated policy mechanisms are difficult for legislatures to understand, and they render lawmakers more dependent on lobbyists who specialize in them. Large technology firms, for instance, are better able to master unclear intellectual property doctrines and can then use them to drive smaller innovators into the ground. All things being equal, rules or norms that prioritize simpler policies — such as direct taxing and spending rather than regulation and litigation — and bright-line rules will give opponents of rent-seeking an advantage over the long term.
Most controversially, any serious attack on upward-redistributing rent-seeking will need to enlist the power of the judiciary, especially to take on restrictions at the state and municipal levels. The sheer number of licensing and land-use restrictions in place over thousands of jurisdictions nationwide is more than even a well-resourced anti-rent organizational network could effectively challenge directly. These restrictions are the fruit of a basic defect in democratic government, one that must be answered with some institutional counterbalance.
While organizations like the Institute for Justice have challenged many of these restrictions in court on constitutional grounds, there is a limit to how much support this approach can get on the left as well as from more conservative judges who are hesitant to embrace judicial activism and substantive due process. However, Loyola University New Orleans law professor John Blevins has argued that there are a number of tools in administrative law that, while respecting legislative supremacy, could put local and state rent-seekers on the defensive. Applying a "hard look" doctrine to licensing would require proponents of such restrictions to prove that they do, in fact, serve the public interest. In addition, judges could rule in favor of only a very narrow interpretation of licensing restrictions rather than deferring to (typically captured) licensing boards, forcing legislatures to be explicit when they want to enforce such limits. All of these approaches would have the additional advantage of helping opponents of regressive rent-seeking in their fights, since they amount to a judicially enforced bias in their favor.
POTENTIAL FOR CONSENSUS
None of these devices is likely to do much to slow the upward redistribution of income in the absence of a widespread recognition, on both ends of the political spectrum, of the considerable portion of America's exploding inequality that has been generated by government itself.
State regulation of doctors, Commodity Futures Trading Commission rules for derivatives, and local land-use planning decisions rarely if ever occur to citizens and policymakers as having anything to do with the larger social debate about inequality. If the case is made effectively — if policymakers do start seeing these diverse policies as part of a larger problem — then it would be possible to generate political conflict in arenas that are currently too quiet and uncontested. This happened in the 1970s and 1980s when policymakers connected regulatory capture in areas like trucking and airlines to widespread concern with inflation. It could happen again if policymakers across the spectrum start to believe that rent-seeking, in all its forms, is deeply implicated in the problem of inequality.
Liberals and conservatives will continue to disagree about the sources and solutions for much of our inequality problem. We will fight over the role of unionization and minimum wages, the necessary scope of redistribution, and the funding and structure of public education. It is unlikely, however, that a political system polarized on precisely these issues will do much on any of these sources of inequality, at least until the voters give one of our political parties a definitive mandate to act.
Pruning rents to the wealthy provides a necessary libertarian prong to a larger agenda of reducing inequality, one with some chance of getting traction even in polarized times. Conservatives should embrace this agenda because it allows them to respond to the public's anger about crony capitalism in a market-friendly way. Liberals should support it because it gives them an opportunity to make a real dent in inequality even though they do not control all the branches of government.
The challenge of our time is to find what Madison called a "Republican remedy for the diseases most incident to Republican government." While the state is sometimes the friend of those working to produce a more egalitarian society, it is just as often the tool of those who would entrench inequality. Stopping that upward redistribution is the challenge of our times, one that can be met even while we are gridlocked on so much else.