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The Special-Interest State: Onward and Upward

My buddy Steve Teles—in my estimation, one of the country’s most creative thinkers—just sent me his latest on “The Scourge of Upward Redistribution.” Here’s the lead paragraph:

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.

The remainder of the essay argues that this opposition is false in many respects. Lots of inefficient, growth-inhibiting laws and programs actually increase inequality: the rents go to the rich. (Steve has a bunch of plausible examples and some casual empirics to support this claim.) So there ought to be common ground for the party of growth and the party of equality.

I have problems with much of the analysis. The “inequality” jazz, I think, misses most of what’s interesting about contemporary America (or for that matter the world), including how equal we’ve become in many respects. The Donald and his janitor drink the same coffee, use the same i-phone, and have about the same life expectancy. One has an airplane and “a whole lot of (a much younger) woman” and the other doesn’t; but on my list of urgent social problems, that clocks in at number 568. And I don’t think income inequality per se bothers ordinary voters very much. It’s the politicians’ code-speak for a wide range of more deep-seated and intractable problems, dysfunctions, and often legitimate discontents. Government can’t do very much about family breakdown or lousy schools or drug dependency, and the politicos know it. They babble about “inequality” because that looks like it can be fixed by action on the one margin where government has unquestioned competence: giving away more “free” stuff.

I also question the empirics. Sure: you can find institutional arrangements and legal rules with regressive effects. And you can find pure give-aways and rents for the rich in lots of places, from the tax code (carried interest) to the Federal Rules of Civil Procedure (the class action provisions of Rule 23). But I doubt this stuff would show up in any credible model of the causes of inequality. My hunch is that the rents are dissipated and distributed upwards, downwards, sideways, and any other direction you can think of (and that’s before you net them out against transfers going the other way). The only systemic effect I’m confident of is locational: a boatload of money ends up with people in my neighborhood, who engineer these transactions or try to block them. That, you can measure. If you live around D.C. you don’t have to, because you can see it.

All that said, I think Professor Dr. Teles is directionally right, and it’s worth paying attention to his arguments.

There’s this notion that we’ve pursued “neoliberal” or “trickle-down” policies and left the losers in the lurch; and now they’re moping. An economic school of thought has put this theme to music, denoted in squiggles and charts. Policies that maximize the total economic pie, these sages say, may not always be welfare-optimizing, on account of the declining marginal utility of income. (The next hundred bucks are worth nothing to Mr. Trump but a lot to his janitor. They are different after all.) So we’re told to fix that—not, obviously, by adopting less efficient policies, but by redistributing the net gains through taxes and transfers. Except it never works according to plan. And so “Kaldor-Hicks” efficiency becomes, in real life, a transfer to the wealthy.

There are two salient policy arenas where this is arguably true: free trade and liberal immigration policies (in fact, if not in law). Sure enough, demagogues left and right are trying to capitalize on the constituencies that have lost out, or think they have, under those policies. But the blackboard economics is basically stupid (the Princeton Econ guys themselves will explain why, once they find out that they’re playing Mr. Trump’s game), and the politics brings out the worst in everyone. Steve Teles draws us to another side of American politics, the side where equity and efficiency cut in the same direction, and where gains can be had from bargains rather than a politics of resentment. And he may well be right that that covers most of American domestic politics.

A very fine political economist, Steve Teles knows and acknowledges how hard such bargains will be; and he knows that the key problem isn’t economics but rather a matter of institutions. Thus, he laments the pathologies of our political system and

the unreasonable advantage it gives to the sagacious, the enterprising, and the moneyed few over the industrious and uniformed mass of the people. Every new regulation concerning commerce or revenue, or in any way affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow-citizens. This is a state of things in which it may be said with some truth that laws are made for the FEW, not for the MANY.

Aw’right: That’s Jemmy Madison, not Steve Teles. Like I said, though: it’s directionally right.

Reader Discussion

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on September 23, 2015 at 10:16:30 am

In a truly free market economic environment "economic inequality" would be impossible because economic success would be based on the hard work ethic,merit,entrepreneurship,invention,market discipline,with maybe some luck thrown in. The wealth would flow to the most competent. In today's work environment crony capitalism,protected markets,government regulations and political favors are what often allows success. This is because the Political Class elites and their cronies find it easier to control and tax large corporations then small to medium sized firms. Thus business formations are discouraged to the point that for the first time in recent memory there have been more business failures then new business start ups. Basically what has happened in America is that it's economy has been transformed from a relatively free market where the government played the part of referee to a fixed economy where the government and large corporation merge to form a modified socialist system. In other words America has embraced what we call Fascism.

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libertarian jerry
on September 23, 2015 at 15:49:55 pm

Thank you for sharing Teles' article. It was kind of interesting in that he suggested a general direction of reform. The complaints about inequalities fell a bit flat for me. We've had inequalities like he described even before we became the United States of America. I'm thinking of the ultimate inequality, which is slavery. I'm also thinking of the differences between the wealthy gentry class, such as Washington and Jefferson, and the common working folks. There is nothing new in our inequalities, except perhaps that things have improved somewhat since our early days.

Teles' suggestions for reform fall flat as well.

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.

He continues:

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.

(Who is the "we" he refers to anyway?)

Teles' is getting warmer. I don't believe that voluntary private counterfunding of the opposition is all that useful. It is slowing down the decay, but not stopping it. The Framers originally used "funding from something other than the affected group itself" by instituting the Senate, part of the publicly financed system of government. There is your institution of "third-party support." The Framers figured out the basics, but they messed up on the implementation.

Originally, the House was to represent the pluralistic frothiness of our democracy, and the Senate was to serve as a filter for the stuff that came out of the House--providing organizational balance. Unfortunately the design was flawed and the Senate collapsed into pluralism. The same with the presidency. What the Framers tried to do was improve on the British constitutional model with its virtually unchecked pluralism, and replace it with a model with better checks on a controlled pluralism. The Senate and President were to provide those checks. But with the checks now devolved into pluralism, the US constitution is little better than the British one we fought to get rid of.

I would differ from Teles' suggestions that minor kludges be applied to various offices and that private counterfunding against stupidity is the way to go. I suggest instead that the original Framers' design of using a noble Senate to filter the nonsense out of the acts of the House is more reasonable. The meaningful question is how to reorganize the Senate so it is a noble Senate and not a pluralistic Senate. I don't see any difficulties with doing that.

Use a biased voting method to filter out the riff-raff when electing senators and presidents. Require secret ballots for Senate votes to keep the Senate from being the pluralist democracy-by-proxy it is today. Provide political protection of the Senators and President against false accusations. Technically, it isn't all that difficult. Politically, we may have to wait for the crisis and pain of the next constitutional political cycle before we enact those kinds of reforms.

Meanwhile, we keep hearing and reading endless whining about how bad our government is. We're like one of those sick people who, when given a bottle of medicine that will cure their miserable disease, won't take it because they receive a greater pleasure from whining about their misery.

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Scott Amorian
on September 23, 2015 at 17:32:14 pm

There is a lot to digest in the fall 2015 issue of N A.

But, to "inequality" as addressed hereinabove:

One element seldom addressed is the **Transfers of Costs." There have been lots of analyses of Transfer "Payments," and redistribution of *incomes;" the latter being the popular symbolic "inequality" measure.

Transfers of Costs are an example of what has been occurring to counter balance what is perceived as inequality measured as incomes. Seen from the other direction inequalities of incomes can be perceived as offsets to transfers of costs.

A clearer understanding of those transfers can seen in the concept of "Public Goods," which now include individual healthcare in addition to "education," roads, potable water, etc. As a Public Good, the healthcare cost of female contraceptives is transferred from the individual user to the general public now required to pay for (in some manner) prescribed healthcare contracts.

A city supplying water may determine that indigent citizens need not pay.

But under the Garden of Eden Exit Rule - all costs must be covered.

In those same cities, organizations may provide the indigent with fuel cost and other assistance (borne by others). All that is at it should be.

However, let us note all that reduces what would otherwise be greater disparities in conditions - inequalities distinct (if related) to incomes.

It is somewhat "easier" to observe and measure Transfer Payments, as well as their inefficiencies, attendant added costs - and effects (economic, social and political), than Cost Transfers. Many of those latter falling as unintended and burdens misplaced on "wrong" segments of the incomes distributed by a commutative system.

With the swelling of what are regarded as "Public Goods" (often misconceived as "Rights") and the political advantages sought (and available) from their distribution Transfer of Costs of those Public Goods deserves closer and more serious analysis when examining the social effects of "inequality."

The fact that taxation may not be the principal means of effecting Cost Transfers makes them all the more insidious in their impacts as to targeted beneficiaries and on "intended" or presumed burden bearers.

Let's hear it about Transfers of Costs.

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R Richard Schweitzer
on September 23, 2015 at 19:15:33 pm

" Provide political protection of the Senators and President against false accusations." -

what?

Are we advocating an updated version of the Alien and Sedition Act?

The real problem is not that we no longer have a "noble" Senate / Executive but that we are no longer a noble people having bartered away our strength, liberty and good sense for some attractive baubles from the dispenser of all baubles, the Federal Government.

Like you, I would prefer a "non-rabble" led Senate; yet, I do not foresee that happening anytime soon. "We" have consented to this reduction in our liberty; "WE" have applauded those who would promise us that which ought not to be "promised" and can not be attained; "We" have sat idly by and allowed the *noble* sentiments of this civil society to be corrupted in exchange for government favors / payoffs.
Nobility is gone having lost its footing / foothold on a steep precipice, albeit one with a rather enticing view!

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gabe
on September 23, 2015 at 19:21:02 pm

Oops! Should read: "promontory" not precipice.

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gabe
on September 25, 2015 at 15:36:40 pm

A repeat of the Sedition Act? No.

I propose having an officer, similar to the independent counsel, but elected by the public, investigate claims of wrong-doings. This counsel could call BS on false claims, and impeach if the wrong-doings are found. Nothing about that is the same as to the Sedition Act. The Sedition Act was meant to be used by persons in government to limit the speech of citizens. I propose having the citizens use an officer to expose and refute intentionally malicious speech so the persons in government are not driven into the partisan loyalties that conflict with loyalty to their electors.

The Sedition Act was a response, although certainly a bad one, of the problem of false accusations against government officials. I propose fixing the problem altogether.

Unlike other folks, I don't blame the character of the average American first for America's problems. Instead, I look to the causes which lie in minor misconstructions in government's architecture.

The original design of the Constitution is generally good, but still flawed yet easy to correct. The American people are generally good and noble, despite a few curmudgeonly opinions to the contrary.

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Scott Amorian
on September 25, 2015 at 18:25:22 pm

Scott:

Hey, what is wrong with curmudgeons? They possess a certain nobility - in a world in which far too many simply remain quiet and thus cede more of their liberty, the curmudgeon stands apart. He or she, at least, takes verbal exception to the zeitgeist. Let's hear it for curmudgeons!!!

Seriously, however, the point about Alien and Sedition Acts had little if anything to do with the dissimilarity in intent between your proposal and the Federalists of olden times. The concern I have, and one I believe is not ill-founded, is in the application of the remedy.

Far too frequently, *citizen* inspired / staffed / controlled(?) appendages, intended to eliminate mis- or malfeasance or other electoral / political mischief soon comes under the sway of those "curmudgeonly" leftists prepared to shout with a louder voice or able to devote the time to tackle the task. Look to many examples in the states and localities - say, for instance, the local school board or the local election committees. In due course (I forget who said this) any organization not explicitly conservative becomes leftist - the same is true for citizens committees or *independent* investigative arms.

Look at local / state judicial elections (where not appointed) - the citizens elect these folks. they are charged, are they not, with being an independent check upon the excesses of government. How has that worked out? (BTW: why I am so critical of the Black Robes is because I EXPECT more from them as did our Founders, their failures are larger and of greater import). How many folks really know anything about the municipal / state judicial candidates on the ballot. I suspect the same would happen with the *Scandal / Libel I.C.

Like you, I wish it were not so; like you, I still look for the noble in our fellow citizens and am delighted when I see it - but it is rare!
Perhaps when my new prescription lenses are in next week, I may see more clearly but......

take care as always
gabe

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gabe
on September 26, 2015 at 21:09:21 pm

Actually, the Framers had it pretty much right.

The powers of the federal government were originally limited and defined. The sort of rent-seeking that Teles laments simply couldn't occur under anything approaching the interpretation of the Constitution that held for the first 150 years.

As for state governments, that's what we had federalism for. Vote with your feet.

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Glen

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