#829: Rigging The Economy Two guys from different ends of the political spectrum agree that the economy is rigged. And they think they know who's responsible.
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#829: Rigging The Economy

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#829: Rigging The Economy

#829: Rigging The Economy

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UNIDENTIFIED WOMAN: Just a quick note - there is a curse word in today's show.

NOEL KING, HOST:

One thing that I think is genuinely interesting about economic inequality is that it's kind of like a puzzle. There's all of these contributing factors. There's history and globalization and technology, racism and sexism.

ROBERT SMITH, HOST:

All the isms.

KING: All of the isms are there. But the thing that I hate about covering inequality is that it very quickly turns into a political fight. Conservatives have one solution. Liberals have another. Some groups don't even think inequality is such a bad thing. And that is why, a couple of months ago, my mind was blown when I heard that there were these two guys from very different ends of the political spectrum who were working on the problem of inequality together. The first is Brink Lindsey.

BRINK LINDSEY: I'm vice president and director of the Open Society Project at the Niskanen Center in Washington, D.C.

KING: What is the Niskanen Center?

LINDSEY: It's a libertarian-leaning think tank.

SMITH: I've spent a lot of time covering the libertarians, and here's what they'll generally tell you. Government's too big. There are too many regulations. We should let the market flourish on its own, and that takes care of most problems in the world.

KING: Yeah, that's why it surprised me so much that Brink is working with this guy.

STEVEN TELES: I describe myself as a liberal.

KING: That is Steven Teles. He's a professor of political science at Johns Hopkins. He's also a fellow at the Niskanen Center. And by liberal, he means he thinks government can play a role in solving problems.

SMITH: So we have a libertarian, and we have a liberal.

KING: And together you are...

LINDSEY: Liberal-tarian (ph). Are we supposed to do that together?

(LAUGHTER)

KING: Do it together. Together you are...

LINDSEY: Liberal-tarian.

TELES: Liberal-tarian.

(SOUNDBITE OF GREG HATWELL AND JAMES MILNE WALSH'S "DEVIL IN DISGUISE")

KING: Hello. And welcome to PLANET MONEY. I'm Noel King.

SMITH: That word is not going to take off. I'm Robert Smith. Today on the show, two guys from different sides of the political spectrum ask what is causing inequality. And they come up with an answer that strangely they both agree on. The economy is rigged.

KING: And they think they know how it's being rigged and who's rigging it.

(SOUNDBITE OF GREG HATWELL AND JAMES MILNE WALSH'S "DEVIL IN DISGUISE")

SMITH: Noel interviewed these two very different gentlemen at the same time. And since this is radio, we want you to be able to tell them apart. OK, so Steve - Steve is the liberal with the kind of voice that might be appreciated by a liberal.

KING: Steve, I think you sound a little bit like Tom Hanks.

TELES: That is the 4,000th time somebody has said that to me.

KING: Wait. Really?

TELES: Yes.

KING: Good. OK, good. So I was dead-on.

SMITH: Got it - fixed in my head. Now the second voice - the libertarian.

KING: Brink, you sound like an old-timey newscaster.

LINDSEY: OK.

KING: In a good way.

(LAUGHTER)

LINDSEY: Stand by for news.

SMITH: You're hired.

KING: These two guys, the liberal-tarians, met about a decade ago. Brink wrote an article for The New Republic about how liberals and libertarians had more in common than they thought. And Steve had just moved to Washington, D.C., and he was trying to make friends. Brink still remembers the first time they talked.

LINDSEY: Steve called me up a month or two after that article came out and said, hey, I think I'm a libertarian.

TELES: I have a tendency to be pushy and to call people when I read things if I like them. And I send them notes and say, hey, that's great. We should get together. We should get together for coffee.

KING: And they did. They started hanging out in Washington. And they realized that they both saw the world the same way. They're both sort of hopeful, and they're both sort of skeptical. And they're both obsessed with these two big problems in the U.S. economy. The first is how slowly the economic pie is growing - slow economic growth. And the second is how the pie is divided. Some people have very big slices. Some people have little slivers - inequality.

SMITH: So Brink and Steve are looking at these two problems. And we should say that neither of them is an economist by training.

KING: Steve is a political scientist, and Brink is a recovering lawyer. But they say, in this case, that's a plus.

TELES: Economists are at least somewhat hamstrung by the fact that they have to start out, at least in contemporary economics, with a fairly simplified model of the economy - a model of perfect competition. And then they try and explain things as deviations from that simplified model of perfect competition.

SMITH: Perfect competition - where all the firms are fighting on a level playing field to get consumers better, cheaper products in the most efficient way. That's what I dream of at night. And industries are constantly innovating, and workers are finding new and better jobs. Everyone's moving up the ladder - sounds good.

KING: But is that how our economy is actually working right now, with perfect competition - or at least with very good competition? The guys say no. Yeah, some people are doing really well in this economy. A lot of others aren't. Something is going wrong with competition.

SMITH: Brink and Steve, they have this nerdy friendship where they talk about all of this all the time. And they start to hone in on something that liberals and libertarians generally do not agree on, which is regulation.

KING: Why do we have regulations in the first place?

LINDSEY: So you have economic activity, and it causes some potential harm to workers or to consumers or to the environment. And therefore, you need rules to align that industry's interests with the public interest. And so the purpose then of regulation is to do that - is to make sure that the companies in that industry are following the rules, and the rules are structured so that the public benefits.

KING: All right, so regulations are supposed to help consumers. But Brink and Steve say, if you look around the economy, there are a lot of places where regulations are helping businesses and industries and particular professions - not all consumers.

SMITH: This is the moment where we address the great North Carolinian teeth-whitening scandal of 2015.

KING: It started with the dentists.

SMITH: It always does.

KING: 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. And, you know, I'm behind licensing dentists all the way. These are people who work with drills. They come at your face with the drills. So make them get licenses.

SMITH: Yeah, you want to see something framed on the wall before they start to give you drugs and take out parts of your mouth. That makes sense. But the issue is once you have a corner on the tooth market, you have this desire to sort of control all truth-related activities. So when the technology came about, dentists started to offer teeth-whitening services. You know, why not?

KING: The thing is teeth whitening is a fairly simple process. It doesn't require a lot of years of school. And people in North Carolina had started opening up these little teeth-whitening kiosks in malls and salons. They charge less than a licensed dentist and...

LINDSEY: Dentists didn't like that competition. And so the licensing board for dentistry in North Carolina issued cease-and-desist orders to teeth-whitening clinics telling them to stop the unauthorized practice of dentistry.

SMITH: But the teeth-whitening revolutionaries argued, we're not practicing dentistry. We take little plastic trays. We pour some liquid in there and then place them against your teeth. I mean, it's more like giving a pedicure for the mouth.

KING: Yeah, and in a normal free market, we could trust consumers to decide if they wanted to go to a mall to get their teeth whitened or to go to the dentist office. But in this case, regulators stepped in. And they said, no, we are making the decision for you.

SMITH: You know, I picture dentists in a castle - a big banquet table. They have their nitrous oxide canisters for fun and tapestries of incisors on the walls. And outside, you have the teeth whiteners trying to get in. But there is a moat. And this moat is regulation blocking the way - saying, you need a license to come in here.

KING: Brink and Steve start to see this everywhere. In so many parts of the economy, business and regulation are not at odds with each other. It's not that regulators are just stepping in to stop industry from dumping toxins into the ocean. In a lot of cases, industry actually loves regulation because it's figured out how to make regulatory agencies and the government work for it.

SMITH: This is called regulatory capture.

TELES: Regulatory capture is the process by which narrow industries use government in order to entrench themselves and prevent competition.

KING: Notice that Steve said narrow industries. He's not saying all regulation is bad. But some industry regulation is being manipulated, and that's hurting the economy. Those teeth whiteners had to close up shop. That right there - that's job loss. The dentists who shut them down, they were doing OK. Now they're doing even better. And that's a small example of how you get growing inequality. Brink and Steve decided to write a book together about all of this. It's called "The Captured Economy." It came out a couple months ago. And it's about regulatory capture. The theory of regulatory capture was developed largely by an economist named George Stigler in the early '70s. But this idea goes back a long time. In Brink and Steve's book, they have this quote that I love from Adam Smith.

SMITH: Now imagine Adam Smith is played by Tom Hanks.

TELES: "People in the same trade seldom meet together, even for merriment and diversion. But the conversation ends in a conspiracy against the public or in some contrivance to raise prices."

KING: I don't know why, but that quote makes me laugh. And I think maybe it's the conspiracy part. But Adam Smith was not joking, was he?

TELES: No.

SMITH: You know who else wasn't joking? The teeth whiteners of North Carolina. Some felt like it was conspiracy against them.

KING: And the Federal Trade Commission agreed with them. They sued North Carolina's dental board.

SMITH: It went all the way to the Supreme Court. And the outcome - bright smiles all around - this time, the outsiders, the teeth whiteners, won.

KING: Brink and Steve say this is a good example of us unrigging the economy a little bit. But in other states, the same fight - dentists versus teeth whiteners - is playing out. And it's also playing out in a lot of industries. I mean, you think about it. There are taxi boards - taxi regulators versus Uber and Lyft.

SMITH: Optometry regulators are fighting on behalf of optometrists against online eye exams.

KING: And hair braiders - we did a whole episode about this - hair braiders are fighting to be able to braid hair without state licensing boards shutting them down.

SMITH: It seems like wherever there's a profession where someone has put time and effort into building their business, they are also fighting to keep the doors to the profession closed - dentistry, doctors, lawyers. Limit the number of entrants. Limit the amount of competition that they're going to have, which, you know, I understand. You already have a business. You think you're good at it. Your customers like you. Why let more people in?

KING: Yeah, the problem is, though, regulators, the referees, are not supposed to be taking a side. And when they do take a side, sometimes, it leads to these really warped outcomes.

SMITH: If there were a hall of fame - hall of fame for regulatory capture - right up front would be a talking statue in the shape of a giant mouse.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED ACTOR: (As Mickey Mouse) Hey, everybody. It's me, Mickey Mouse.

KING: You - we're going to get sued for playing that.

SMITH: We might get sued because of regulatory capture.

LINDSEY: So it's semi-serious, but observers joke that the development of copyright law over the past half century can be explained by making sure that Mickey Mouse never enters the public domain.

KING: I mean, copyright law - this is not a small thing. The story goes Walt Disney created Mickey Mouse in 1928. And under the copyright law of the time, he had a copyright on Mickey for 56 years. I mean, that was extended a little bit when copyright law changed in '76.

So then we get to the late 1990s, and it's just a couple of years before the copyright on Mickey Mouse is about to expire. And the Disney Corporation seems to realize what is at stake. So they open up an office in Washington. They hire a bunch of lobbyists, and they go to Congress. And they get copyright law changed to extend the copyright on Mickey Mouse, not to mention Donald Duck and Pluto and all them.

Now, this protected Disney's profits but not just theirs. It changed the law. It allowed all of these other creative industries to keep extracting more profits off of their own copyrighted stuff.

LINDSEY: So huge record company, movie industry fortunes are much larger than they would be. In a saner copyright regime, they could hold onto them for a few years, and then they would have to face competition.

KING: Competition, you know, the thing that keeps the economy going and growing. So they're drawing a direct line between Mickey Mouse and copyright law and this problem of inequality.

SMITH: (Imitating Mickey Mouse) Hey, everybody, so your median wages haven't risen over the last couple of decades. All the money is going toward the rich. Hey.

KING: Disney is going to sue you personally.

SMITH: (Laughter) I'm ready.

KING: But this is what Steve and Brink are arguing - they're saying Mickey and the dentist and the lawyers - the more they protected their share, the less growth there is, the less mobility. And once you learn about regulatory capture, you start to see it everywhere. Wherever you see a power imbalance in society, you got to ask yourself, who are the dentists, and who are the teeth whiteners? And is there some entrenched power? Is there some regulator that is tilting the balance in favor of one?

SMITH: Brink and Steve talked a lot about an example that everyone will know, and that is housing and rent. And in their book, they talk about the Bay Area a lot - San Francisco - one of the most expensive places to live in the United States. I mean, we live in New York, and we find the stories horrifying.

(LAUGHTER)

SMITH: I'm sorry, Bay Area people, but, like, it's tragic out there.

KING: And you know the reasons that are often given - there's a lot of new tech money. Rents are rising higher and higher. Landlords can charge more. And people don't want housing built in their backyards.

SMITH: Yeah. And so the obvious problem is in a competitive market for housing, there's just not enough places to live. And that causes the price to go up.

KING: Which is such a simple explanation - there's just not enough. But look at it from a captured economy point of view. People who own houses in San Francisco - they are already inside the castle. They have got it good. And so when there's a proposal to build new housing - and you see this - they go to the zoning board. They go to the regulators. And they get the proposal shot down.

SMITH: (Imitating Mickey Mouse) I feel like a new building would ruin the historic character of this neighborhood. It might hurt the environment.

LINDSEY: Those big cities that are now the powerhouses of our information economy have pulled up the drawbridges by making it so expensive for people to buy housing there. And so as a result, we're having this economic boom that is throttled because ordinary people can't participate because they can't move to those metro areas and live there.

KING: Right. Some kid from Dayton can't move to San Francisco right now. Some kid from Dayton can't move to New York. And that means that that kid is stuck in Dayton or Cleveland or...

LINDSEY: That's right.

SMITH: Disclaimer time.

KING: I pulled those two cities out of thin air. Dayton and Cleveland are fine places.

SMITH: And we also don't want to give San Francisco a hard time. It has its housing issues. But you know what? New York has a lot of those same problems. What we're saying here is that in a country that is sort of built on mobility and choice, we have set up rules in a lot of the economically dynamic cities that keep the nice stuff for the people there and make it harder for people to come there. So once you see this in the economy - regulatory capture - what do you do about it?

KING: Well, the first thing they're arguing is that you just have to notice it and notice when you're benefiting from it. When I was talking to Brink and Steve, they said something very funny. They said a lot of the people who read our book will be the people in industries who are benefiting from regulatory capture.

Do you ever go into your dentist, Brink, and kind of, like, look at him and think, man...

LINDSEY: What an asshole.

KING: Yeah.

(LAUGHTER)

KING: Yeah, yeah. I mean, have you ever talked to your dentist about any of this?

LINDSEY: Yeah. So I don't want to - I try not to personalize things. These are systemic problems, and I'm sure we're - you know, dentists work hard, and they think they work hard, and they do what everybody else is trying to do in the economy. It's just ultimately - it's ultimately the duty of the governors to make sure that the rules are in the public interest, rather than in the narrow interests of the various clamoring claimants who come before them.

KING: The funny thing is at PLANET MONEY, all we do is personalize things.

LINDSEY: Yes.

KING: (Laughter).

TELES: Well, I mean, and...

LINDSEY: Yes.

TELES: But I do...

(LAUGHTER)

TELES: I actually do think that it's useful to have some righteous personalized anger, right? One of the powers that existing interests have is what political scientists call policy image - right? - the fact that, in general, those practitioners have a positive image - that people think, oh, dentists, they're good. You know, doctors - they help people, right?

And so long as they have that, that'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. And unless we can actually mobilize some of that, unless you can ding some of people's reputation, it's going to be hard to actually mobilize politically against them.

SMITH: And, really, that's why they wrote the book. They wrote the book to make all of us mad, to make us look around in our lives and say, wait a minute. That's regulatory capture there and there and there. And knowing it's going on is part of the solution.

KING: Yeah, it's better than looking back in 10 years and saying, oh, there's another industry that captured its regulators, and now no one can get a foot in the door. In fact, I was reading in the paper the other day that there is this hearing on Capitol Hill this week about banking. Banks are trying to get out from under some of the restrictions put on them after the financial crisis.

SMITH: And there was quite a robust debate over this, but we noticed that the robust debate was mostly among the people who showed up.

KING: Who were mostly bankers. And in the end, if we've learned anything from Steve and Brink in their book, it's that the people who show up tend to be the people who win.

(SOUNDBITE OF ANDREY TATARINOV, AVENTURINA DOROTHEA KING AND TY FRANKEL'S "TELL ME WHAT TO DO")

SMITH: Today's show was produced by Sally Helm. Our senior producer is Alex Goldmark. Our editor is Bryant Urstadt. When you need engineering, you call Isaac Gonzalez (ph) or Neil Rush (ph).

KING: We are @planetmoney on all social media. This weekend, on our Instagram feed, we have a wonderful picture of Robert Smith channeling "The Godfather."

SMITH: I'm Robert Smith.

KING: And I'm Noel King. Thanks for listening.

(SOUNDBITE OF ANDREY TATARINOV, AVENTURINA DOROTHEA KING AND TY FRANKEL'S "TELL ME WHAT TO DO")

KING: You've got all these people who can't go out and get jobs as teeth whiteners because dentistry has shut them down.

SMITH: (Imitating Mickey Mouse) I don't even have teeth.

KING: (Laughter).

SMITH: I don't know.

KING: Does Mickey Mouse have teeth?

SMITH: I don't know.

KING: Google Image him now.

SMITH: I don't know.

KING: He doesn't...

SMITH: It's just gums. It's all gums. I guess you don't want to see a little rat with teeth.

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