Uncapturing the Economy Requires Limiting Government

Brink Lindsey and Steve Teles have written an excellent book that outlines several ways in which we can simultaneously help the poor and disadvantaged and increase economic growth by reducing government regulation. Lindsey and Teles also correctly diagnose a major cause of harmful government policies in these areas: widespread public ignorance makes it difficult for voters to effectively monitor complex regulatory policies. Unfortunately, they too quickly reject what is often the best strategy for combating regulatory capture: reducing the size and scope of government. We can also empower people to make better decisions by giving them greater opportunities to “vote with their feet.” Some of the reforms advocated by Lindsey and Teles can greatly expand foot voting.

Lindsey and Teles explain how capture has led to harmful regulatory policies in the fields of finance regulation, intellectual property, zoning, and licensing. In two of the areas analyzed by Lindsey and Teles, zoning and licensing, there is broad cross-ideological agreement among experts. In the case of zoning, most economists and property law experts across the political spectrum agree that government restrictions on building massively drive up the cost of housing for the poor and lower middle class in many major cities. In addition to increasing housing prices, zoning also prevents many lower-income people from moving to areas with greater job opportunities.

There is a similar story to be told about licensing restrictions. As Lindsey and Teles point out, some 30 percent of American workers are now required to have a license to do their jobs. These include such ridiculous cases as the licensing of florists, tour guides, and casket makers, in some states. Onerous licensing restrictions prevent large numbers of people (particularly the poor) from pursuing their preferred occupations, and also artificially inflate prices for consumers, while providing little or no measurable improvement in quality.

How Political Ignorance Facilitates Capture

All four of the issue areas analyzed in the book are highly complicated. It is very difficult for nonexperts to understand them. Given widespread voter ignorance about even far simpler and more prominent aspects of public policy, it is not surprising that most of the public is unaware of how zoning regulations and licensing restrictions impact their lives. As a result, well-organized interest groups are able to capture the policy process, in ways well-described in Lindsey and Teles’ book.

The problem is not that the voters are stupid or that information is unavailable to them. Rather, in most cases it is perfectly rational for them to devote little or no effort to seeking out political information, because the chance that any one vote will make a difference is infinitesimally small. Thus, most voters are “rationally ignorant.” They understandably choose to devote very little time to studying government and public policy, and instead focus on other matters. In addition, they tend to be highly biased in evaluating such political information as they do learn. As former British Prime Minister Tony Blair puts it, “[t]he single hardest thing for a practising politician to understand is that most people, most of the time, don’t give politics a first thought all day long. Or if they do, it is with a sigh…., before going back to worrying about the kids, the parents, the mortgage, the boss, their friends, their weight, their health, sex and rock ‘n’ roll.”

Why Limiting Capture Often Requires Limiting Government

Unfortunately, the authors dismiss what is often the best strategy for fighting ignorance-facilitated capture: reducing the complexity of government by cutting back on its size and scope. Lindsey and Teles argue that we can make government simpler and more transparent without reducing the range of its functions. But this is highly unlikely. So long as local, state, and federal governments continue to spend nearly 40 percent of GDP and regulate nearly every aspect of society, it is inevitable that their activities will be highly complicated and provide many opportunities for interest groups to exploit public ignorance. There just isn’t any simple and clear way to regulate and control so much. And voters cannot effectively monitor more than a small fraction of all this government activity.

Lindsey and Teles point out that regulatory capture can sometimes be curbed if the issue in question becomes the focus of public controversy. But they also note that such cycles of attention are fleeting, as public and media attention quickly move on to the next outrage du jour. The more issues government controls, the less time any one is likely to spend in the spotlight. Cutting back on government intervention in some areas increases the odds that the remaining functions of government will get meaningful public scrutiny.

If, like Lindsey and Teles, we want a simpler, more transparent government that is less vulnerable to interest group manipulation, we need government to be smaller, or at least take on fewer functions. There is no way around this fundamental tradeoff.

In their lead essay, Lindsey and Teles cite Social Security as an example of a relatively good government program that avoids excessive complexity. Social Security does indeed deliver retirement subsidies in a simpler way than some other programs. But it still exemplifies the perils of public ignorance. Along with other entitlement programs, it is a major contributor to our looming fiscal crisis. Reforming entitlements is politically difficult in considerable part because most of the public greatly underestimates the enormous percentage of federal spending that goes to these programs. In addition, politicians and activists have exploited voter ignorance by promoting the false perception that Social Security recipients are just getting back the money they themselves put in.

I am also skeptical of Lindsey and Teles’ claims that we can greatly curb capture by procedural fixes to the legislative process. One of the main ideas they advocate is giving policymakers more and better staff so that they will be less dependent on organized special interests for information. It is hard to believe this would make anywhere near as much difference as the authors claim. Lawmakers don’t need much additional staff expertise to get good information on the perils of zoning, licensing, and other similar policies. A great deal of work on these subjects has already been done by academics and policy analysts. Lindsey and Teles rely on it heavily in their book. Legislators with a genuine interest in getting at the truth can also readily access this literature.

In most cases of regulatory “capture,” the problem is not that politicians are unable to get information, but that they either don’t care much about the truth or at least prioritize ideology and reelection ahead of it. Like partisan voters, they also tend to evaluate new information in a highly biased way.

Making government smaller and simpler does not require the state to be anywhere near as small as a libertarian “minimal state.” But it does mean it will have to control many fewer aspects of our lives than it does today. A smaller state with fewer functions can still do much to help the poor, for example by bolstering their wages through an expanded earned income tax credit. It could also have means-tested retirement programs more limited – and more affordable – than Social Security and Medicare. But it will have to stop trying to control so many aspects of the economy and society.

Empowering Foot Voters

Curbing government power also need not require empowering some elite at the expense of the general public. We can instead empower ordinary people to “vote with their feet.”

People can vote with their feet by choosing which state or locality to live in, or by making choices in the market and civil society. Foot voters have much stronger incentives to acquire and use relevant information than ballot box voters do, because foot voting decisions are likely to actually make a difference to the outcome. That’s why most people make far more effort to seek out information when they decide which car or smartphone to buy than when they decide who to vote for in even the most important elections. The phone or car you choose is highly likely to determine which product you actually end up with. By contrast, you have only a minuscule chance of affecting who becomes president, or even who wins a local or state election. In recent decades, unfortunately, foot voting has become more difficult – especially for the poor – because of the increasing centralization of government policy and the growth of regulatory barriers to migration.

At least two of the reforms advocated by Lindsey and Teles could do much to expand foot voting: cutting back on licensing and zoning. Both are major obstacles to interjurisdictional migration, especially for the poor. The effects of zoning are particularly large. If zoning restrictions in high-productivity jurisdictions with above-average regulatory constraints were scaled down to the level that prevails in the median city, U.S. GDP might be some 9.5% higher, and millions of working-class Americans would have access to job opportunities from which they are currently cut off. Few if any other reforms can do so much to simultaneously help the poor, increase our overall economic growth, and empower ordinary people through foot voting.

We can also empower foot voters by decentralizing government power, thereby increasing the range of issues over which people can make decisions through foot voting, and reducing the associated moving costs. It is easier to move from one state to another than to leave the country entirely, and usually easier to move between localities than between states. Obviously, we cannot decentralize every function of government. But we can do so for far more issues than at present. Historically, foot voting has been a valuable source of opportunity for the poor and disadvantaged. Expanding it is a logical application of Lindsey and Teles’ focus on reducing inequality and breaking down barriers to opportunity.

Lindsey and Teles have written a valuable book that identifies a serious problem. It also proposes a variety of useful reforms for specific issues. But if we want to uncapture the economy in a systematic way, we will have to limit and decentralize government, and empower foot voters.