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.