How Jonathan Chait Misunderstands Regulatory Capture


The move of Peter Orszag from the Office of Management and Budget to Citigroup has sparked a renewed debate about the tight knit fabric that wraps Wall Street and Washington, DC. together.

This is a debate that is always worth renewing.

Will Wilkinson started the debate off by pointing to the seemingly inevitable capture of well-intentioned government programs by special interests.

In my opinion, the seeming inevitability of Orszag-like migrations points to a potentially fatal tension within the progressive strand of liberal thought. Progressives laudably seek to oppose injustice by deploying government power as a countervailing force against the imagined oppressive and exploitative tendencies of market institutions. Yet it seems that time and again market institutions find ways to use the government's regulatory and insurer-of-last-resort functions as countervailing forces against their competitors and, in the end, against the very public these functions were meant to protect.

We are constantly exploited by the tools meant to foil our exploitation. For a progressive to acknowledge as much is tantamount to abandoning progressivism. So it's no surprise that progressives would rather worry over trivialities such as campaign finance reform than dwell on the paradoxes of political power. But it really isn't the Citizens United decision that's about to make Peter Orszag a minor Midas. It's the vast power of a handful of Washington players, with whom Mr. Orszag has become relatively intimate, to make or destroy great fortunes more or less at whim. Well-connected wonks can get rich on Wall Street only because Washington power is now so unconstrained. Washington is so unconstrained in no small part because progressives and New Dealers and Keynesians and neo-cons and neo-liberals for various good and bad reasons wanted it that way. So, what is to be done? Summon a self-bottling genie-bottling genie?

Jonathan Chait at the New Republic responded with a list of things he thinks the government does that cannot possibly be viewed as capture by corporate interests.

"Does the minimum wage result in regulatory capture?" Chait asks.

Unfortunately, for Chait, my brother Tim Carney was around to explain how even something as seemingly neutral as a raise in the minimum wage helps big businesses crowd out smaller competitors.

"But the minimum wage is an instance of the 'Overhead Smash': big-government legislation supported by the biggest affected business who know it will disproportionately hit the small guys," Tim writes. "Costco and Wal-Mart supported the most recent hike in the minimum wage. Costco and Wal-Mart pay more than the minimum wage. Their Mom & Pop competitors, on the other hand, are hit hard by a minimum wage hike. There's a general rule at play here: regulation adds to overhead, which larger businesses — through economies of scale — can better absorb."

The real problem, however, is not with Chait's examples. It's that he doesn't understand how the capture of government programs by special interests operates. In fact, the very form of the question he asks — does X program result in "regulatory capture" — is a mistake.

It's not Chait's fault. The term regulatory capture can be confusing. It can falsely call to mind an earlier period in which regulation was uncaptured independent from corporate control or under the control of progressives. But capture is not a result of something that comes after a regulation; regulations are typically the result of capture.

This is often lost in popularizations of the concept of capture. But George Stigler made it very clear in his 1971 article The Theory of Economic Regulation. Stigler explains that as a rule regulation is designed and operated primarily to benefit business interests. That is to say, it is captured from the start, and it stays captured.

That is why Chait misses the point about, say, minimum wage. He doesn't understand how a hike in minimum wage could be captured after the fact, missing the idea that Wal-Mart lobbied for higher minimum wage because it operates to Wal-Mart's benefit.

"I don't think private capture of public functions represent a major, recurring problem with liberal governance," Chait writes.

But I get the feeling that is only because he doesn't understand private capture of public functions very well.

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