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Cataloging Regulatory Costs of Cronyism and Rent-Seeking in a Self-Interested Administrative State

Here’s a sampling of industries—both fledgling and established—that want the government to slap some regulations on them, in some cases to provide some certainty, and in others to get rid of headaches...Drones...Autonomous vehicles...Electric Vehicles...Facial Recognition...Digital currencies...Online privacy...Financial advisers...Oil.

—“Yes, Some Companies Actually Want to Be Regulated,” Axios, December 28, 2018

Rent-seeking as a policy concern has been done to death: It’s been described over and over how regulation is often not about elevating the public good, but instead about disadvantaging rivals and snagging their customers, or creating artificial scarcity—whatever transfers wealth.

Prof. Robert Tollison, under whom I studied at George Mason University, laid it all out in 1982 in “Rent Seeking: A Survey.” Another early treatment I enjoyed was Roy A. Child’s 1971 Reason magazine article “Big Business and the Rise of American Statism.”

What’s it all cost? Rent-seeking remains largely unquantified as a cost of regulation, just as do most all other aspects of administrative state burdens. There are difficulties aplenty in measurement of rent-seeking, “both theoretical and empirical,” as professors David N. Laband and John P. Sophocleus describe in “Measuring Rent Seeking.” It’s not always apparent what precisely the rents are, nor what are the investments made in procuring them, nor the distributions of social and economic costs, nor their status as direct or welfare costs.

If people clamor over federal spending to funnel the spoils to themselves, regulation (which is far less disciplined than spending) gets used the same way. Costs include not just the spending and favors, but the resulting market distortions and ripple effects. And the inventory of goodies is fairly extensive. The Mercatus Center’s Matthew Mitchell identified several versions of government-conferred privilege, including “tax privileges, contracting abuses, trade privileges, bailouts, and loan guarantees.”

That’s a big catalogue. Large banks can use their politically bestowed status as “essential facilities” to overextend credit with the expectation they will be able to negotiate a future taxpayer bailout of losses. Other examples range from 1880s butter producers portraying rival margarine as unsafe and dirty to modern ones like the Solyndra solar panel boondoggle, farm bill subsidies, Elon Musk’s subsidy portfolio, and politicized/subsidized science generally.

Innovators are supposed to transform and revolutionize under their own steam and by non-coercive means, not by extracting others’ resources. Our fellow citizens have aspirations of their own that may not involve being forced to pay for battery research technology, the Hyperloop, a trip to Mars, and so forth.

Cronyism’s effects are probably far worse in these frontier sectors where entire industry structures are being upended and incumbent firms would be either adapting or evaporating were it not for the entrenched regulator. Unanticipated competitors are among the most important stakeholders in the rent-seeking game, yet are invisible as such to both us and perhaps themselves. This exemplifies the difficulties in measuring not merely unrealized costs of rent-seeking, but of regulation generally; too much is simply unknown.

The sharing economy—firms like Uber and Airbnb—faced backlash from the firms whose business models they threatened to upend or replace. Unfortunately in some instances ride-sharing services may become more like taxis instead of taxis becoming more like ride hailing. New unhappy rent-seeking “innovations” have emerged as well in this realm, such as a coalition among Uber and green pressure groups urging cities to ban the operation of privately owned automated vehicles.  

Writing in the Yale Law Journal with Mark Green, Ralph Nader, while stressing benefits of safety regulation, agreed that economic regulation (at least) is counterproductive:  

The verdict is nearly unanimous…that economic regulation over rates, entry, mergers, and technology has been anticompetitive and wasteful. [Such regulation] undermines competition and entrenches monopoly at the public’s expense.

Yet economic regulation persists, with antitrust and public utility regulation representing the big bang of protecting profits and eliminating competition for over a century in the United States. Somewhere along the Progressive Trail, likely at its start, agencies became “partners” with those they were supposed to regulate. On such unfortunate “synergies,” George Mason University’s Todd Zywicki portrayed cronyism as:

[A] system in which government, big business, and powerful interest groups ... work together to further their joint interests. Government protects and subsidizes powerful corporations and in (implicit) exchange the government uses those businesses to carry out government policies outside of the ordinary processes of government. Unlike simple models of political rent-seeking, in which businesses use government to advance their own interests in exchange for electoral support, under crony capitalism politicians and regulators use businesses to advance the interests of politicians and interest groups in a symbiotic relationship: government creates rents and then distributes them to itself and favored interests.

Both rewards and punishments get used in these pay-to-play arrangements, described well by economist Fred McChesney. The Hoover Institution’s John Cochrane similarly referred to a hybridized environment of not quite capture, and not quite cronyism, but a warped hybrid, wherein:  

[A] handful of large, cartelized businesses…are protected from competition. But the price of protection is that the businesses support the regulator and administration politically, and does their bidding. If the government wants them to hire, or build [a] factory in [an] unprofitable place, they do it. The benefit of cooperation is a good living and a quiet life. The cost of stepping out of line is personal and business ruin, meted out frequently. That’s neither capture nor cronyism.

The failure to roll back much regulation that was subject to repeal under the Congressional Review Act in the early phase of the Trump administration anecdotally indicates that large companies long since made peace with rulemakers. Meanwhile federal spending has predictably continued upward. As a Republican staffer purportedly (one can never be sure) told The New York Times in 2017, “even the cabinet secretaries at the E.P.A. and Interior are saying these [spending] cuts aren’t going to happen. They’re going to protect their grant programs, their payments to states, their Superfunds.”

The administrative state is equally a rent-seeking state. “Ossification,” as Kirby M. Smith described it, triumphs as regulation-altered firms replete with vast in-house regulatory compliance staff impede liberalization driven by outside disruptors.

After a century of big government and big business collaboration, the greatest endeavors (from artificial intelligence to infrastructure to space commercialization) now consist of partnerships with governments rather than free enterprise, on a scale so gigantic—and at a cost so gigantic—it can only be ignored.  

This blog post is part of a series on “Rule of Flaw and the Costs of Coercion: Charting Undisclosed Burdens of the Administrative State,” and comprises an element of A Brief Outline of Undisclosed Costs of Regulation.