Privilege-Seeking vs. Deregulation

Thursday, February 02, 2017

As the new President starts fulfilling his campaign promise to reduce the burden of federal regulations on our economy, a few opponents who might surprise you are coming out of the woodwork. Many of these are large businesses that gain short-term benefits from the regulatory state, as a story from Investor's Business Daily explains:

"Ask yourself why it is that the megabanks and the multinationals are pouring money into the Remain campaign," [European Parliament member Daniel] Hannan said. "I'll tell you why. The biggest surprise for me when I was a newly elected MEP was the extent to which these giant corporations wanted more regulation. They love regulation because they can afford the compliance costs more easily than their smaller rivals."

See? Regulations can give big companies a competitive advantage -- not only can they more easily afford the cost of regulatory compliance than their smaller competitors, they can finance an army of lobbyists to make sure the rules are written to their benefit.

The most noteworthy effect of Dodd-Frank, for example, hasn't been that it's made the financial sector less vulnerable -- as IBD noted recently, it hasn't. It is, instead, the destruction of smaller community banks, which in turn has let large banks further consolidate their grip on the industry.
The ordinary term for such behavior, and one I have used myself, is "rent-seeking." But Don Watkins of the Ayn Rand Institute recently argued that this term is flawed:
... On the one hand, financiers can capture rents when the government uses its coercive power to restrict freedom of competition in finance. On the other hand, financiers can capture rents by earning a good reputation that makes it more difficult for newcomers to successfully compete.

The lesson that most people draw from this sort of view is that sometimes we'll have to fight rent seeking by reducing government intervention -- but other times we'll have to fight it by increasing government intervention in the name of "promoting competition." (See Ayn Rand on why using coercion to "promote competition" is a contradiction in terms.)
In other words, that term package-deals earning money (or market share) on merit with being handed the same as a result of the government coercion -- two fundamentally different ways of acquiring wealth.

I agree, and I think Trump's push back against regulation, whatever its merits or shortcomings, presents an excellent opportunity to bring some clarity to any discussion of government regulation of the economy.

-- CAV

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