Rigging the Economy

 

One thing I find genuinely interesting about economic inequality is this:

It’s kind of like a puzzle.

There are all these contributing factors.

History, globalisation, technology, racism, sexism…

All the ‘isms’.

However, discussing inequality often turns into a political dogfight.

Libertarians have one solution.

Liberals – another.

In general, libertarians take a more conservative view. They think government can get too big and the market should flourish on its own.

This would solve most problems in the world, including inequality.

Liberals, on the other hand, think government can play a role in solving problems; in solving inequality.

Some groups, however, can’t even agree on the nature of the topic at hand, let alone how to solve it. They don’t think inequality is such a bad thing.

Is there some middle ground, then, that all sides can agree on?

 

The Problems

There are two big problems in the US economy.

The first is the ‘economic pie’ is growing very slowly.

Slow economic growth.

The second is how the pie is divided up. Some people have very big slices whilst others have thin slivers.

Inequality.

Economists have been looking at these problems for some time. Unfortunately, they’re typically hamstrung by contemporary models.

They have to start off with a pretty simplified model of the economy – a model of perfect competition.

Then, they try to explain things as deviations from that simplified model of perfect competition.

Perfect competition: all firms are fighting on a level playing field to get consumers better, cheaper products in the most efficient way. Industries are constantly innovating, workers are finding new and better jobs, and everyone’s moving up the ladder…

It all sounds good.

Is this how the global economy is currently working right now? Is there perfect competition, or at least very good competition?

Some argue no.

Sure, some people are doing well in this economy. However, lots of others aren’t.

Something’s going wrong with competition.

What could it be?

Regulation, perhaps?

 

Regulation

Some economic activity causes potential economic harm to workers, consumers and/or the environment.

Therefore, you need rules to align industries interests with the public interest.

The purpose of regulation is to do that; to make sure the companies in that industry are following the rules. The rules are structured so that the public benefits.

Ultimately, regulations are meant to help consumers.

However, if you look around the economy, there are a lot of places where regulations are helping businesses, industries and particular professions – not all consumers.

An example of this is the North Carolinian teeth whitening scandal of 2015.

 

Dentists

Dentistry is a practice that is highly regulated in North Carolina and pretty much everywhere else.

If you want to be a dentist, you have to have schooling and a license in order to practice.

You know what? I’m behind this.

These are people who work with drills.

They come at your face with these drills.

Make them get licenses.

The problem is, once you’ve got a corner on the tooth market, you have this desire to patrol all tooth-related activities.

So when the technology came about, dentists started to offer teeth whitening services.

The thing is, teeth whitening is a fairly simple process. It doesn’t requite a lot of years of schooling.

People in North Carolina had started opening up these little teeth whitening kiosks in malls and salons. They charged less than the licensed dentists and dentists didn’t like it.

Competition.

The licensing board for dentistry in North Carolina issued cease and desist orders to teeth whitening clinics, telling them to stop the unauthorised practice of dentistry.

However, the teeth whitening revoluntaries argued this:

We’re not practicising dentistry! We take little plastic trays, pour some liquid in there and then place them against your teeth.

It’s more like giving a pedicure. For the mouth.

In the normal free market, we can trust consumers to decide if they wanted to go to a mall to get their teeth whitened or to go to the dentist’s office.

But in this case, regulators stepped in and said no, we’re making the decision for you.

Picture it like this:

Dentists are in a castle. They have a big banqueting table made out of nitrous oxide canisters, and on the walls are tapestries of incisors.

And outside, you have the teeth whiteners trying to get in.

But there’s a moat.

This moat is regulation. It’s blocking the way.

You need a license to get in.

 

Regulatory Capture

In many parts of the global economy, business and regulation are not at odds with each other.

Regulators aren’t just stepping in to stop industry from dumping toxins into the ocean.

In a lot of cases, industry actually loves regulation.

Why?

It’s figured out how to make regulatory agencies and the government work for it.

This is called Regulatory Capture.

Regulatory Capture is the process by which narrow industries use government in order to entrench themselves and prevent competition

Narrow industries. Not all regulation is bad.

However, some industry regulation is being manipulated and that’s hurting the economy.

Those teeth whiteners had to close up shop. That right there is job loss.

The dentists who shut them down were doing okay. Now they’re doing even better.

That’s an example of how you get growing inequality.

This ain’t the end of the teeth-whitening story though. Some of the teeth whiteners of North Carolina felt like this was a conspiracy against them and the Federal Trade Commission agreed.

They sued North Carolina’s dental board. It went all the way to the Supreme Court.

And the outsiders – the teeth whiteners – won.

The economy was unrigged.

A little.

 

The Bigger Picture

This sort of fight is playing out in a lot of industries.

For example, there are taxi boards versus Uber and Lyft.

It seems like wherever there’s a profession where someone’s put time and effort into building their business, they’re also fighting to keep the doors closed.

Dentistry, doctors, lawyers…

Limit the number of entrants – limit the amount of competition they’re going to face – and hey presto; the job’s a good’en.

It’s understandable. You have a business, you think you’re good at it, your customers like you – why let more people in?

The problem is regulators – the referees – aren’t suppose to be taking a side.

When they do take a side, it sometimes leads to these really warped outcomes.

The more the interested parties protect their share, the less growth there is.

The less mobility.

 

What Can Be Done?

Once you see Regulatory Capture in the economy, what do you do about it?

First of all, you just have to notice it. What’s more, you have to notice when you’re benefiting from it.

After that, it might actually be useful to have some righteous, personalised anger.

One of the powers that existing interests have is what a political scientist might call a ‘policy image’.

In general, those practitioners have a positive image. People think “oh dentists, they’re good.

“Doctors – they help people.”

So long as they have that, it’s a very powerful resource against people who are coming in and saying “hey, you’re not acting in the public interest.

“You’re just using this regulation for your own benefit.”

Unless some of this anger is mobilised, it will be hard to move against them politically.

It may be time to get mad then.

 

Source: Planet Money