Steve Teles and Brink Lindsey on *The Captured Economy* (BONUS)
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What happens when a liberal and a libertarian get together? In the case of Steve Teles and Brink Lindsey, they write a book. And then Tyler separates them for a podcast interview about that book, prisoner’s dilemma style.
How much inequality is due to bad policy? Is executive compensation to blame? How about higher education? And what’s the implicit theory of governance in Bojack Horseman? Tyler wants to know — and so do you.
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Note: This transcript has not been thoroughly checked for accuracy. If you notice an error, please email: email@example.com.
COWEN: Today on the podcast, we’re gonna have Brink Lindsey and Steven Teles. And they have together co-authored a new book “The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality.” What happens in this book is that you have a liberal and a libertarian come together. In fact, together they’ve helped produce something called liberaltarianism and try to show or set out a series of policy changes we could make that would both boost the rate of economic growth and give us a more equal society. I think this is one of the most important books of the year, but the podcast today, we’re gonna do a little differently. Rather than talk to the two of them together, we’re going to do them sequentially. First, will be Steven Teles, second will be Brink Lindsey. And I’m actually even gonna ask them some of the exact same questions, or at least parallel questions, so you can compare the different answers because again, part of the interesting feature of this book is that it is a co-authored product from people of two different points of view.
COWEN: To introduce Steve, he is a professor at Johns Hopkins University in the Department of Political Science, and he is also a senior fellow at the Niskanen Center. Welcome Steve.
TELES: Thank you very much.
COWEN: We just dive in with questions. First question, if we think about inequality in America today, how much of it is due to bad policy as opposed to people not having the right skills or there being some kind of cognitive or human capital gap?
TELES: I hate to disappoint you but I don’t think there’s any way to measure that. We dug around to try and figure out for good, aggregate ways to measure the extent of rent-seeking, and its interaction with skills, and the extent in the market, and we weren’t able to find them. In some sense also, measuring rent-seeking may be simply analytically impossible. We certainly tried to figure out how you would do it. Part of it is rent-seeking is to some degree a judgmental category, rather than one that’s easily measured by some neutral measure. I think the main thing you can say, is we have evidence in the book that it’s substantial. We sure have some evidence that the distribution of rent-seeking is changing but being able to come up with any good aggregate measure of how it compares to other causes of inequalities is impossible, which is not a very desirable or satisfactory answer. But that’s about the best answer you can give.
COWEN: We have this thing in public choice economics, I’m sure you know it, it sometimes called the Tullock paradox. Gordon Tullock, my former colleague, he set out to measure how much was spent on lobbying, relative to how much is handed out by government. And Tullock, at least, thought that the amount spent on lobbying is actually remarkably low. It may appear large if you’re sitting in Arlington, Virginia but relative to GDP, it’s pretty tiny, and the amount of resources controlled by government is pretty significant. How is it that you think about the Tullock paradox, at least on the surface, some kind of rent-seeking costs would seem to be low?
TELES: Right. As I understand the Tullock paradox, it’s that essentially the amount of lobbying should approach the overall amount of rent, right? That is the amount that everyone expends, trying to capture whatever rents there are, should go up to that level, and the paradox is, why doesn’t it? One is, that can be a institutionally established equilibrium, that is in the Tullock model, there’s no institutions. Whereas, we have a very substantial separation of powers that tends to lock in the status quo and reduce therefore the incentives for investing in lobbying. You also have severe limits on the political agenda which again means there’s only so many things that you cannot debate simultaneously. That creates a very substantial protection for the status quo. In that sense, if you’re given that a huge amount of lobbying is designed simply to keep political actors from doing anything. From simply having them take a walk and not on challenge the existing status quo, both institutions and the institutional factor of limited agendas. A limited agenda space would suggest that they don’t need to invest all that energy and at least protecting their existing rents, it would all go into expanding the ones they don’t have.
COWEN: Let me play devil’s advocate for a moment and try to defend crony capitalism. You look at the last 50 years and you ask yourself, “What are the two greatest growth miracles that have been seen on planet Earth?” Maybe the two greatest ever. It seems plausible candidates would be one, China and two, South Korea. And they’re about the most crony capitalistic societies you could imagine. If someone says, “Well, there’s two kinds of crony capitalism. Under one kind, the incentives are for the cronies to invest in infrastructure and human capital and then it does just fine. And then there’s other kinds of crony capitalism that stifle investment in education and infrastructure, but maybe the key is education and infrastructure and we just need a better crony capitalism of the sort, that say, South Korea and to some extent China have had.” What’s your reaction?
TELES: Well, so first of all, the politics of rent in the economics or in operations we think very differently whether you’re at the outer edge of growth like the United States or Germany or Britain, and very different if you’re in a developing country… That is developing countries, first of all, have a lot of catch up growth that they can do, and if they… They’re not since they have a potential for 10%, 11%, 12% growth. If some of that, substantial amount of that, gets filtered off into payoffs and lobbying or whatever, that’s not a big deal. They’ve got, in some sense, more room to do that. Also there’s some political science that suggest, at least at that level of development, some level of cronyism might actually facilitate growth in a way that it wouldn’t necessarily in an advanced economy. I wouldn’t assume that you can look at the two sides as being parallel in that sense.
COWEN: If we look at the federal budget and the tax system that accompanies it, that’s relatively easy to measure. Do you see the net impact of our tax and budgetary decisions as being progressive or regressive?
TELES: For one thing, so the book is all about the regulatory system. And I know that by saying that one argument we make, and this relates to an article I wrote called “Kludgeocracy,” which is that it’s really these other parts, other ways the government influences the economy other than directly through taxing and spending that are most likely to have these anti-growth, incumbent-protecting kind of qualities. That is the more salient, the more visible the policy instrument is, the more easy it is to capture for the purposes of upward redistribution. Given that a substantial amount of our spending is entitlements and they… We have difference of opinion. I think those are basically progressive on net given the inflow and outflow in them. And that our tax system, if anything, may be too progressive. That is, it’s too progressive to raise the amount of revenue that we need for the amount of state that we want. I think our tax and benefit system, which could be doing better or at least doing better than our regulatory and litigation systems.
COWEN: What if there is a potential default hypothesis? That policy just doesn’t change the distribution of wealth very much. The tax and fiscal side, that makes things somewhat more progressive. The regulatory side, as you argue convincingly in the book, that’s regressive and inefficient. And in part, we let the regulatory side get away with that because on the fiscal side we adjust, and maybe policy as a whole just doesn’t change the overall broad features of the distribution of wealth, something a bit like Pareto’s old law. And maybe it’s just much harder to change the distribution of wealth than we think because rent-seeking is another activity and the forces that are good at other things. And is government when it comes to distribution actually, ultimately, maybe awash? Yes or no?
TELES: There’s two things wrong with that. One is the argument from Pareto you made doesn’t have a mechanism. That is, it might accidentally be the case of the two sides would equilibrate. That doesn’t mean that there’s… But your argument assumes there’s a mechanism connecting them somehow, although it is unspecified exactly what that mechanism is…
COWEN: But think of lobbying as another sector. If we add on like the ski wear sector to the economy, that won’t change the distribution of wealth much because people who are good at building software maybe are also, on average, good at building ski wear. So lobbying is just another sector and the mechanism is adding on more sectors, it won’t change distribution much.
TELES: To go to the other side though, A, I do think that there are substantial evidence in the book that the policy regime has in fact redistributed upward, or it has created protection. If you look at finance I do think…
COWEN: Even adjusting for the tax and fiscal side.
TELES: Yes. Well, ’cause A, I don’t think the tax and fiscal side… I think the tax and fiscal side has been more or less neutral over the last 30 or 40 years. I think, especially if you include state and local taxes which tend to be much more regressive than federal taxes, that pushes even more in the other direction. But I think certainly there’s evidence in our book that both the finance and the IP regime have led to very substantial upward distribution and have in fact changed the distribution of income in the economy. So A, I would question your assumption that while everything’s basically have been awash over the last 50 years, I think even including both the tax and benefits system and the regulatory system, there’s pretty substantial evidence that the policy regime has re-distributed upward.
COWEN: As you probably know, Walter Scheidel has a fairly new book and it’s called “The Great Leveler.” And he argues another version of the default hypothesis that inequality tends to stick, and you have big egalitarian changes essentially only through war and widespread destruction. What’s your opinion?
“I think even including both the tax and benefits system and the regulatory system, there’s pretty substantial evidence that the policy regime has re-distributed upward.”
TELES: Like a lot of those theories, there’s not enough cases to be able to support an adequate theory. That is… Again, especially when you are doing long-term historical institutional kind of claims like the one you just provided for me, how would we even know? That is, just because we’ve had a couple of cases in the past, the aftermath of World War II, certainly in most advanced industrial countries was very powerfully redistributive. But lots of things have changed. We don’t simply see eternal recurrence in politics, we also have secular change. And I think those secular changes seem to have made it much harder for people at the bottom of the income spectrum to organize and have made much easier… The transaction costs have gone down, lots of other things have gone down, to make it easier for those at the top to organize. And I think also the effective mass mobilization seems to be a lot lower in advanced industrial countries. Partially ’cause states have figured out how to deal with things like riots and urban disturbances that at one point in time would have produced a substantial policy response and now assumed to have been producing a lot less.
COWEN: Are higher levels of executive compensation part of the problem?
TELES: There you probably would get a different answer between me and Lindsey.
COWEN: That’s why I asked.
TELES: [chuckle] So you are just trying to get us… Again, we originally had the idea that this podcast was gonna be called Prisoner’s Dilemma.
TELES: I have some suspicion that there is, it’s not one of the cases in our book precisely because we didn’t agree and also neither one of us felt sufficiently competent to have an expert opinion on it. I do think there’s some evidence from variation in executive compensation across advanced industrial countries, which varies with different ways of actually governing executive compensation, that it plays a role. Executives are a very large part of the 1%, and their compensation does seem to have gone up at a period in which it’s not that clear that productivity of these firms in general has gone up. My prior is it probably does have something to do with it but also that you can explain an enormous amount of this problem without looking at executive compensation, which is the place most people generally look first.
COWEN: What does Brink Lindsey eat for breakfast?
TELES: Well, one thing I know is Brink Lindsey eats breakfast very late in the day. Whenever I try and schedule a meeting with Brink, I would suggest 8:00 in the morning because I have children and so I’m up at quarter to seven. So Brink may or may not eat breakfast but he eats a lot later than I do.
COWEN: What’s the most important idea in the book that you understand better than he does?
TELES: Well, so there is a division of labor here. Brink did a lot more work on the cases than I did, although we talked about them all and I did a lot more work on the political analysis. We draw a lot on great, really seminal article by Rick Hall at University of Michigan called “Lobbying as Legislative Subsidy.” And I think that idea is dramatically under appreciated. The idea that what lobbyists are essentially doing is providing information, that information is scarce, it is a source of power. And one thing that we add is, if the state isn’t providing information itself, it essentially has to get it from outside. And when they get it from outside, it imports the overall inequality and information gathering and processing that’s in civil society. And that can be a very strong source of inequality in policy outcomes. I think Brink understands that, but this is my wheelhouse so I think probably if you were gonna push me, I’d say I understood it better that he did.
“The idea that what lobbyists are essentially doing is providing information, that information is scarce, it is a source of power. And one thing that we add is, if the state isn’t providing information itself, it essentially has to get it from outside. And when they get it from outside, it imports the overall inequality and information gathering and processing that’s in civil society. And that can be a very strong source of inequality in policy outcomes.”
COWEN: And who should pay for it?
TELES: For one thing we had to say what does it mean that it’s part of the problem? Certainly universities, even the classic economic definition of rent are beneficiaries of rent, right? Reputation, a huge amount of what makes one university different than another is the fact that they have reputations, those matter to employers, they matter to parents, and they matter to alumni…
COWEN: Self-reproducing elites with a lot of waste put into signaling.
TELES: Right. But the point is they can take that…
COWEN: So how do they fix it…
TELES: They can take that rent in part by getting large contributions from alumni and distribute it within the university however they want, and they have the control of anybody except the insiders over it. I think one thing you actually found is universities have been taking a huge amount of that rent and actually putting it into administration over the last 20, 30 years. My colleague in the… One of my colleagues in the department in political science has written a large, long book basically looking at the explosion of academic administration. I think when universities were extracting rent and putting it into research, there was an argument that that was generally a socially productive equilibrium, but now that they’re putting it into administration, which has a lot but very complicated explanation from that, I think that rent extraction has certainly not been producing these spillover effects for society.
COWEN: Here’s a question from a reader. I’ll just read this out word for word. “If the government is tilting the economy in favor of large corporations versus small businesses, certainly that’s bad for growth but doesn’t it increase equality? Bigger companies pay higher salaries and almost certainly more uniform ones, and on the capital income side, anyone… Can invest more easily in the larger company.” Your reaction?
“I think when universities were extracting rent and putting it into research, there was an argument that that was generally a socially productive equilibrium, but now that they’re putting it into administration, which has a lot but very complicated explanation from that, I think that rent extraction has certainly not been producing these spillover effects for society.”
TELES: First of all, the argument in our book is not primarily… Although it certainly can be a side effect in some areas that it increases industrial concentration, some of the policies we look in the book actually reduce artificially industrial concentration. That is, a lot of professional licensing and protection regimes actually have the effect of being anti-consolidation. So optometrists want regulation that protects them as sole proprietors rather than employers. The same is true for dentists, doctors, undertakers, you could go through the list quite extensively. In that sense, I question the original assumption of the question, that all of this is really about industrial concentration but the other thing is, a lot of the firms that are benefiting massively from some of the rents we’re talking about actually have very few employees. Even if they have a relatively larger bottom in the incomes that they pay employees, that doesn’t necessarily affect the overall distribution of income very much.
COWEN: There’s a famous paper by Bill Nordhaus, you probably know it. And in that piece he argues that for innovators, only about 2% of the value of their innovations is captured by them. The rest goes to society. If that’s true, admittedly and if, but is there really a good net estimate and I mean net, all factors considered, showing that IP law really is too tough at current margins, or is it the case that we actually don’t know?
TELES: I think we don’t know. That’s certainly close… You asked me before what was closer to Brink Lindsey’s wheelhouse?
TELES: I’ll give him the answer to that one.
COWEN: Why didn’t you do better in high school?
TELES: I was never the kind of person who was good at doing everything. High school, and essentially everything from elementary school all the way through high school, loads very heavily on people who are all rounders. My wife, who grew up in Britain, is a wonderful all rounder. She loved doing everything in school, she loved school, she loved the social environment of school whereas I hated it. I hated the social environment of school. I lived in a kinda isolated suburb in the outside of DC that I didn’t like. I wanted to be in the city, I wanted to do what I wanted to do and high school is all basically a huge institution designed to keep you from doing what you wanna do. I went to college and I immediately thrived. I did even better in grad school, where I could do even less of what I didn’t wanna do. Again, I’m the kind of person who’s good at doing what he wants to do.
COWEN: And what was it you finally learned that made your career click and take off? You’re a famous person. We all read and talk about your books. There’s a big pile of them here. I’ve read them all. I recommend them all on American conservatism. A book called Prison Break. A book on the history of the welfare state. A great book on the rise of the conservative legal movement. What went right for you?
TELES: Well, I think one thing that I learned is that in academia there’s sort of two strategies you can have…
COWEN: Academia. How did you even get to academia? You’re a failure in high school. You volunteer this information to me as a failure in high school. And here you are.
TELES: I’m a failure in high school. [laughter] How did I get from being a failure in high school to being a semi-famous professor? One thing I learned is I’m good at listening. That is, I’m very bad at a number of things. But I’m very good at not forcing what people say into my existing mental categories. And a lot of the work I did, the best work I’ve done, the book I would use as an example of that is the Rise of the Conservative Legal Movement. A lot of that was based on listening to people who, lots of people on my side, the liberal side, generally thought wouldn’t talk to you. Whenever I was telling people I was writing this book on the conservative legal movement, I told them I got access to the internal papers of the Olin foundation and the Federal Society and they asked me, “How do you do that?” Like I had to break in in the middle of the night. And I said, “Well, I asked.” And it turns out lots of people wanna tell their stories but they wanna tell them to people who they think are trustworthy. And trustworthy doesn’t mean that they’re on their side. But people who are gonna take respectfully what they have to say.
TELES: I think I learned the thing that would allow me to be successful was one, talking across ideological or other boundaries. And that’s still possible and it’s less possible than it used to be, but it’s still possible. We wrote this book in part to prove that it’s possible to other people. And so I think that trick of maintaining that in the polarized age is one of the things that helped me be successful.
“I think I learned the thing that would allow me to be successful was one, talking across ideological or other boundaries. And that’s still possible and it’s less possible than it used to be, but it’s still possible. We wrote this book in part to prove that it’s possible to other people.”
COWEN: Now, your dissertation, I believe it was at UVA on welfare reform.
TELES: Yes, it was.
COWEN: That became a book. And in that book, in the introduction you mentioned that you had three conservatives on your dissertation committee, yet you would not yourself be considered a conservative. What is it that so early on made you weird in that way? How did that come to pass?
TELES: Well, I think I always was attracted to things I didn’t agree with. I remember, people often have an experience in college where they first pick up, or in high school where they first pick up Ayn Rand and then they’re like, “Oh, this is it. I figured it out.” I first picked up Ayn Rand and thought it was awful but wanted to know why and wanted to argue with it. So I was attracted to people who had these ideas and I wanted to have it out and I wanted to figure it out rather than just dismiss ideas like that. And so, I think, that’s one of the reasons I was attracted to going to a graduate program where I would study with conservatives. And I figured, I already know a lot about what liberals think. And that’s why I’ve spent most of my time listening to conservatives disproportionately. My media diet is from conservatives because I feel like I can write all the liberal op-eds I want so I don’t really need to consume that.
“People often have an experience in college where they first pick up, or in high school where they first pick up Ayn Rand and then they’re like, “Oh, this is it. I figured it out.” I first picked up Ayn Rand and thought it was awful but wanted to know why and wanted to argue with it. So I was attracted to people who had these ideas and I wanted to have it out and I wanted to figure it out rather than just dismiss ideas like that.”
COWEN: And do you have this, maybe “contrarian” isn’t the right word, but I’ll use that word as a fill-in, contrarian streak in all spheres of life? So the music you listen to, the foods you eat, the ski lodges you decide to…
COWEN: To visit when you have vacation, or is it really just in your political and philosophical thought?
TELES: No. I think that it’s probably one of the features of how I think, that I’m always worried about whether I’m making decisions simply because I have a mental structure that has told me that that’s what’s preferable or desirable or reinforcing. In my teaching, I spend an overwhelming amount of time talking about confirmation bias. And that actually influences how I think in ordinary life. I’m always looking for the kind of arbitrage opportunity and whether it’s ideas or food or anything else. And that’s partially also about what are the areas where I’m not getting as much out of life because I’m going to where my comfort zone is.
COWEN: What’s the biggest intellectual hole in conservative law and economics?
TELES: The biggest intellectual hole. Probably the biggest intellectual hole is comparative. That is, when I think about what economic ideas mattered a lot to me. One of them was reading Robert Wade’s, Governing the Market, years and years ago, back in graduate school and thinking really systematically about how different political systems can generate different, often desirable economic equilibria, right? That is, South Korea has a set of… As you were talking about governing rules and laws that have some substantial rent for insiders but that also turned out in that particular setting to produce lots of economic returns, I wouldn’t recommend that for Argentina. And so the idea that there’s a universal set of laws or rules that are the market optimal ones, I think is a problematic one. I think thinking more systematically about why different economic laws, regulations and customs appear to work and produce economic surplus in different places would probably be the one I’d volunteer on that answer.
COWEN: Are you ready for a quick bout of overrated versus underrated?
TELES: I don’t think I have a choice, so I’m ready for lack of consent.
COWEN: You’re free to pass on any of these.
COWEN: Charles Murray’s book, Losing Ground, on the welfare state, does it help the poor?
TELES: Substantively overrated in that I think it was wrong and I don’t think it was a very good piece of scholarship. I should also say it’s in some sense underrated in that it had a huge effect on me, kind of like Ayn Rand, it forced me to actually go and find a lot better scholarship to try and argue against it.
COWEN: The Piven and Cloward’s semi-Marxist idea that the welfare state is actually there to control the poor.
TELES: I think it’s always been underrated but it’s one of those ideas that keeps coming up from the grave every time you think you got it buried.
COWEN: The Coase Theorem?
TELES: Probably still underrated.
COWEN: The influence of the Federalist Society, not whether one agrees or disagrees, but how strong their influence has been on the world.
TELES: I think it’s overrated on the choice of federal judges and it’s underrated on the overall infrastructure of conservative law.
COWEN: Your book, Prison Break, which I’m very much a fan of, what percentage of the current population in American jails should not be there?
TELES: That is a question you can’t answer on its own. I think…
COWEN: But in your moral view.
TELES: I think with a different set of parole and probation institutions, you could probably get it down below 50%.
COWEN: So more than half of them could be released in a way that would be acceptable to you?
TELES: If you could create the complementary institutions to do… Right.
COWEN: What’s the biggest thing “the left” could learn from conservative/libertarian law and economics?
TELES: What is the biggest thing that the… Again, I think the focus on rent-seeking I think people on the left tend to focus a lot on what government can do to solve problems, not enough on where government actually produces it. So in that sense I think, the left needs a more vigorously anti-statist agenda to go with its statist agenda. And that’s even true in areas like finance or taxation. It needs to have a balance between those two sides. And historically in lots of periods in the history, the left had a more vigorous anti-statist component and needs to get more of it.
“I think the focus on rent-seeking I think people on the left tend to focus a lot on what government can do to solve problems, not enough on where government actually produces it… and that’s even true in areas like finance or taxation.”
COWEN: Kludgeocracy, you have a famous piece on this concept, which I take to be the notion there’s so much gridlock that we still have to try to get some things done, but we do it in such convoluted roundabout ways that everything is just a kludge of unwieldy pieces fit together, barely working, and policy just creeks along in a highly ineffective way. In your view, how long can this go on for? Could we just sail along with kludgeocracy for 70 more years? Or is there some kind of breakpoint where it all snaps?
TELES: I’ll actually say theories in which things build up and then snap are overrated. I think there’s very rare… That’s a functionalist kind of theory and generally I tend to be suspicious of those. I think countries can slowly go into decline. And I think they can go in decline… Argentina was once a very wealthy and prosperous country and it just kept not actually getting its stuff together over time. I think there’s probably some evidence that you could actually… You could keep going in this direction for quite some time if you’re willing to accept gradual economic and political mediocrity.
COWEN: Overrated or underrated, the British system of government?
TELES: I think one thing that we tend to underestimate about Britain is the fact that there’s very large barriers to entry to the agenda. The problem with the United States is, you can get lots of things on the agenda but there’s all these things that keep it from getting all the way to passage. But if you wanna do something creative, there’s lots of little holes, places where you can start. You can start in states, you can start in one branch of government, you can start in the bureaucracy, you can start in the courts. Britain has a much more compressed system of agenda setting and that dramatically reduces the overall creativity of the system, although it does mean that when you actually get a desire for action, you can produce it. Now that can also produce disasters like the poll tax and so in that sense I think our political system is also… At least at its best, is more deliberative. It’s a lot easier to do really big stupid things, at least through legislation, than it is in the British system than it is in the American system.
TELES: You’re a political scientist. Is there a region in the world today you would like to see become politically independent that is not currently politically independent?
TELES: A region in the United States?
COWEN: No, of the world.
TELES: In the world.
COWEN: You could say Catalonia, you could say Scotland, you could say Hawaii, you could say Bethesda, Maryland.
TELES: [chuckle] I have a bias against secession but that’s because I am a temperamental conservative and I am sort of obsessed by unintended consequences, unpredictable consequences. I can’t think of a huge number of secessions that I think were fabulous successes. I think secession’s one of those ideas that always sounds awesome in theory and rarely turns out to be very effective in practice.
COWEN: Last question. What’s your favorite TV show? And why?
TELES: BoJack Horseman.
TELES: BoJack Horseman, surprisingly, which actually surprised me is it’s the most visually, sort of, concentrated program I’ve ever watched. It’s one of the few programs I’ve ever watched that you actually have to watch with your finger on the pause button to go back, because every screen has some joke that’s sort of hidden in some corner of the screen. And the fact they created this entire world where humans and animals are seamlessly interacting in that kind of shallow Hollywood.
COWEN: So it’s a Coasian world, right?
COWEN: Well, what’s the implicit theory of governance in this show? Which I’ve never seen by the way.
TELES: The implicit theory of governance. I think the implicit theory of governance is it seems to be there’s a gargantuan surplus in Hollywood, [chuckle] so no matter how dissolute everybody is, the animals and the humans are, they still seem to be producing a net gain.
COWEN: Steve Teles, it’s been a pleasure, and we’ll be right back in just a second with Brink Lindsey.
TELES: Thank you.
COWEN: Thank you, Steve. And now we switch to Brink Lindsey, another of the authors of “The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality” and Brink is Vice President and Director of The Open Society Project at the Niskanen Center.
COWEN: My first question, Brink, I also asked Steve this but when we look at income inequality in America today, how much of it is due to bad policy versus being due to some kind of skills gap or cognitive gap or otherwise human capital deficiency? And how do we know?
LINDSEY: I don’t think we can quantify it. I would say a significant chunk of high-end inequality, that is, the percentage of total income that’s accounted for by the top 1% of earners, is due to bad policy. Some significant chunk. It’s non-trivial. So that if all of these policies that currently artificially inflate top-end incomes were reformed, the percentage of total income going to the top 1% would be significantly lower than it is today. But more specificity than that, I don’t think it’s within the realm of social science to offer a credible answer. And I would say that this is on top of underlying significant trends that would be delivering a more unequal distribution of income, even if policies were perfect.
COWEN: Let me ask you about the Gordon Tullock paradox, which I’m sure you know of. But Tullock pointed out that government seems to hand out so many goodies, and yet the amount of resources spent on lobbying, although it doesn’t seem that way here in Arlington, it’s actually quite small relative to GDP. Doesn’t that imply that rent-seeking costs are low and thus the share of rent income going to the top 1% is gonna be low as well?
LINDSEY: It’s an interesting puzzle. I don’t think anyone has completely, satisfactorily solved it. But I don’t think that’s the only way to answer the question that is, yes, you could infer from that, that there shouldn’t be much rent-seeking if the amount of money spent on it is so relatively trivial. But if we look at the distortions in the economy, we see massive ones, and those are, in some cases, artifacts of policy that had insider influence all over them. I say the facts deepen Tullock’s paradox rather than resolving it in the favor of rent-seeking not being a problem.
COWEN: Let me play devil’s advocate for a moment and try to defend crony capitalism. If I ask, what are the two greatest growth miracles in the last 50 years of history? It seems plausible candidates would be South Korea and China. And both of those places, there crony capitalism run amok. Maybe isn’t the distinction between forms of crony capitalism that encourage infrastructure and education, and those work out fine, and forms of crony capitalism that thwart infrastructure and education. But crony capitalism itself really isn’t so bad at all, maybe at some margins we even should have more of it, because it helps get things done, gets us of the Kludgeocracy, as your friend Steve would say.
LINDSEY: I agree that there are different kinds of corruption, and there is sort of growth-enabling corruption in less-developed countries and growth-stifling corruption. But the two examples you picked are very different from our present case; these are both examples of countries that took off from poverty and took advantage of opportunities for catch-up growth. Precisely because they were so backward and impoverished, they had a lot of artificially accelerated or… Let me back up and scrap that. Because they were so poor and backward, they had a lot of catch-up growth that they could grow faster than rich countries that must slug along expanding the technological frontier rather than borrowing good ideas from abroad and implementing them home. I think, generally, institutional quality in less-developed countries can be appreciably lower than in rich countries. It takes less high quality institutions to catch up than it does to blaze trails at the technological frontier. As countries get richer, the stakes for policy makers keep getting higher. They have to up their game continually, or they will run into the growth slump that so many formerly rapidly growing less-developed countries have run into.
COWEN: Singapore has higher per capita income than the Unites States, so arguably we need to catch up to them. Maybe a dose of crony capitalism is exactly what we need to put that extra zing in our step.
LINDSEY: I wouldn’t characterize Singapore as crony capitalism, I would characterize it as interventionist, but with an incredibly high quality civil service that is focused laser-like on the public interest rather than on what some money bags has paid them to think. So I would not think of Singapore as exemplifying the possibilities of crony capitalism.
COWEN: The effects of the federal budget spending in tax side, they’re relatively easy to measure. On net you see those effects as being progressive or regressive?
LINDSEY: The effects of…
COWEN: Federal, what we tax and what we spend at the federal level. Is that progressive or regressive on net?
LINDSEY: On net, progressive.
COWEN: Then why is the regulatory sector, as you argue in the book, so regressive? It’s both Congress and the President, right?
LINDSEY: Yes. Well, it’s a very interesting question. I think insider influence and shenanigans flourish in the shadows, flourish in obscurity and regulatory policy making, relative to fiscal policy making, I think is much less transparent, much more obscure, much more arcane, much more difficult for anybody to know what’s going on. At least in terms of big ticket, how big the budget is, how big the deficit is, what the top rate is. These are numbers that are publicly available, that people can argue about. Trying to quantify anything about regulation is devilishly difficult, and you immediately have to get into the weeds of this regulation or that regulation, so I think it’s much harder to police insider abuses in the regulatory sphere than it is in the fiscal sphere.
COWEN: Well, if the fiscal side is on net somewhat progressive and the regulatory side is regressive, what do you think of the null hypothesis that simply government as a whole, in terms of aggregate patterns, doesn’t change the distribution of wealth very much, period?
“Trying to quantify anything about regulation is devilishly difficult, and you immediately have to get into the weeds of this regulation or that regulation, so I think it’s much harder to police insider abuses in the regulatory sphere than it is in the fiscal sphere.”
LINDSEY: I think that’s an interesting conjecture. I don’t know the empirics to resolve it one way or another. Whether the government is net neutral, let’s say that that conjecture turns out to be correct, that doesn’t mean it’s correct, right? It could be the policy should be net progressive, in which case net neutrality is off.
COWEN: As you probably know, Walter Scheidel, he has a fairly new book out called “The Great Leveler.” And he suggests that once you get inequality, it’s baked in. Those are the people, they have the money, they sort of control the state, and you never ever get rid of it unless you have a major war or some other active epic destruction. Agree or not?
LINDSEY: I have not read his book. I think it’s…
COWEN: But is there hope? Is the general question, right?
LINDSEY: Yeah, I am generally dubious of big monocausal, historical explanations that fixes in and we’re just riding along and there’s nothing we can do about it. Just temperamentally and philosophically, I’m not going to be… I’m not gonna guide my life by fatalistic historical narratives. I think there is something we can do about, ’cause there’s plenty of things we can do to make them better and we are physically able to do them. There are things we can do about them whether we will succeed or not is a different question entirely.
COWEN: Are high levels of executive compensation also a part of the problem? And yes, I did ask Steve this too.
LINDSEY: I don’t know. I don’t think so. I can be convinced otherwise but I have not been convinced otherwise to date. It is possible that managers colluding with boards who are top managers who are on each other’s boards, there’s some kind of collusion going on, you scratch my back, I scratch yours, and that top managers pillage shareholders. It’s possible that could be the case. That seems to me to be damaging shareholders rather than the common good. I don’t see any evidence that American corporations are more poorly run than other corporations because they pay their executives too much. Likewise, if I look at privately held corporations versus publicly held corporations, the privately held seem to be paying similarly exorbitant sums to CEOs. To me, it looks like this is being driven by the enormous stakes that are in play. There’s a difference between the successful CEO and a failure of the CEO or it can be gigantic in terms of market valuation, nobody knows what’s gonna work and what’s not, but the stakes are big so it seems worth making a big bet on the right person.
COWEN: Is higher education part of the problem and if so, who should pay for it?
LINDSEY: Higher education, is it part of the problem?
COWEN: Self-perpetuating system of elites, it’s fairly closed it appears, a lot of wasteful resources invested in the signaling, top universities way back when are still the top universities today, doesn’t feel like creative destruction.
LINDSEY: Education as it exists is absolutely a replicator of social stratification, it is not a disruptor of social stratification. One can imagine, one can see episodes in the past where education has been a real transmission belt of upward mobility.
COWEN: But higher ed, the semi-private part…
COWEN: Is it a market problem? Is it something we should fix by regulation? What do we actually need to do so it’s not making the spiral of self perpetuating income inequality worse.
LINDSEY: I’m not sure I buy into your premise.
COWEN: No, that’s fine to challenge it but…
LINDSEY: Yeah, in general, my sense is that we are pushing far too many people into college, that is that we currently have a kind of two-track human capital development system. Track one is complete a four-year degree at a university and enter the meritocracy. Track two is you’re a failure. This seems to me to really be a terrible way to go about things that we have tried to shoehorn more and more people into the four-year college model even though it doesn’t necessarily suit what they need to improve on or what businesses or employers need from them, but we have not come up with any kind of improved way of developing skills at the primary, secondary level and post-secondary level for people who do not seem to be cut out for four-year colleges.
“We currently have a kind of two-track human capital development system. Track one is complete a four-year degree at a university and enter the meritocracy. Track two is you’re a failure. This seems to me to really be a terrible way to go about things.”
LINDSEY: We’re cramming more and more people into a system that I don’t think is necessarily doing them lots of favors, and spending lots and lots of money on it. In that sense, this over-dependence on higher education is a diversion of resources and a mis-diversion of human talent for wrong training. But insofar as the economy has grown more complex and it needs more highly skilled, symbolic analysts to coordinate the complex processes of a modern economy, then you would expect to see more and more people go into things like four-year colleges, and that’s what we’ve seen. The basic trend I think, is appropriate, functional. What is not appropriate or functional is the failure of a parallel human capital development program for the non-managers, non-professionals, and the overemphasis on putting everybody into the college model.
COWEN: What does Steve Teles eat for breakfast?
LINDSEY: I have no idea.
COWEN: What’s the most important idea in the book that you understand better than he does?
LINDSEY: Give me a few seconds on that one.
LINDSEY: That would be an easier question, I guess, to answer at the beginning of the process but we’ve had kind of a mind meld over the past couple of years of working on this so… I’m stumped.
COWEN: Well, you can bring it up again later, if you wish. Here’s a question from a reader. I’ll just quote this exactly. “Does their study of power and inequality give them any insights into some of the current issues around gender inequality, especially thinking about how low numbers of women in corporate boardrooms, CEOs and other high level corporate positions, lawyers, judges, professors etcetera?” Your take?
LINDSEY: How does gender inequality feed into the rise of regressive rent-seeking? I don’t see an obvious connection. We did not write a book about everything. We wrote a book about one thing. I don’t see the connection between gender inequality and rent-seeking.
COWEN: But surely there are groups that will try to entrench themselves. If you’re a beneficiary of statistical discrimination as many men are, in some situations women are, regulations can strengthen that or they can weaken that and you would expect the same rent-seeking mechanisms you outline in your book actually to take the form of altering gender balance in the workplace and family law and…
LINDSEY: One can see the whole sort of second wave feminist movement since the 60s as an anti rent-seeking movement, that white men were accumulating a lot of rents because of the way society was structured, that they were the breadwinner and there was a sexual division of labor, and they received higher pay than they would have otherwise because they were assumed to be the breadwinner, and women were just sort of kept out of the workforce in direct competition with men in many roles. The last half century has been an ongoing anti rent-seeking campaign and the dissipation of those rents especially by less skilled white men has been a cause of a great deal of angst and frustration and political acting out in recent years.
COWEN: As you probably know there’s a famous piece by Nordhaus that shows that from a given innovation on average, only about 2% of the value of that innovation is captured by the innovator, if that’s true and you may choose to challenge it. But how could we know that in terms of a net estimate for intellectual property, how could we know that right now IP law is too tough? It seems to me it could just as likely be too easy.
LINDSEY: Nordhaus’ estimate shows us that the basic premise of IP law that unless you can really appropriate gains from your… Appropriate something like the lion’s share or the gains from your invention, you’re not going to do it. And it’s clear that almost never happens. That innovation is occurring all the time when the innovators are capturing only a tiny fraction of the gains. The fundamental fear that undergirds IP that unless we give people strong ownership and ideas, they’re not gonna come up with anything, I think is fundamentally belied by the Nordhaus estimate.
COWEN: But at the margins…
LINDSEY: But to me that puts the IP status quo defenders very much on the defensive because it suggests that the problem they’re trying to solve is a non problem.
COWEN: But think of it as at the margin. If they’re getting 2% now, well we could change the law and give them 3%. They’d be getting 50% more. Society wouldn’t really lose that much surplus in percentage terms. We might have 50% more effort, say put into innovation and almost as much social surplus. Would it not be obviously a good thing, so in the non-tech world at least we should make patents stronger, not weaker?
LINDSEY: We can reason from the armchair or we can go out and look at data. And people have tried to go out and look at data and it’s hard to do, and it’s very difficult to show any benefits from the current patent system. It’s not impossible. There are cases where it looks like it’s accelerated technological progress, it looks like it’s affected the direction of innovation more towards innovations that can’t be preserved by trade secrets. But given how universal patent law is now and how long it’s been around, the actual empirical basis for having this affirmative policy is shockingly weak. In general, my predisposition is, don’t make laws unless you’ve got a really good reason for doing something, and we don’t really have a very good reason yet [chuckle] for having patents or copyright laws if the purpose is to encourage innovation.
COWEN: Let’s take the notion of liberaltarianism, which you’ve been one of the leading thinkers and writers behind. It’s just a blend of what you might call modern liberal views and libertarian views but you put them together, it’s called liberaltarianism. If we decided that regulatory reform were simply impossible, maybe a good wonderful idea, but there is simply too many regulations and there was no mechanism we had access to that could get rid of them all in a way that would really cut down on the stock, would liberaltarianism then simply collapse into mainstream liberalism, or is it still something quite different and distinct?
“But given how universal patent law is now and how long it’s been around, the actual empirical basis for having this affirmative policy is shockingly weak. In general, my predisposition is, don’t make laws unless you’ve got a really good reason for doing something, and we don’t really have a very good reason yet [chuckle] for having patents or copyright laws if the purpose is to encourage innovation.”
LINDSEY: I think it still could collapse. Excuse me, I think it still could survive. Maybe, alright. The way I think of the liberaltarian idea, especially for those of us who come to it as former libertarians or as quasi-Libertarians, as opposed to Steve who came from another direction. But from my own perspective, I still retain the lively libertarian sense of how government can go wrong. And so I am alert to more so than the typical liberal issues of agency capture and corruption of policy, also to unintended consequences and particularly interaction effects that produce Kludgeocracy. I think a general concern with hygiene of the liberal state, and a sense that things are not all well, and that things get rotten very quickly, and unless you try very hard to push back, things get rotten very badly. That would be a distinctive liberaltarian attitude, even if we didn’t talk about regulation.
COWEN: Are you up for a bout of overrated versus underrated?
COWEN: Now you’ve worked as a trade lawyer for almost a decade. It’s your original background, if I understand correctly.
COWEN: Take NAFTA, overrated or underrated?
LINDSEY: Overrated as something gigantically important and worth all the passion that we expend over it. It was a minor, from the US perspective at least, it was a very minor adjustment in US law. US tariffs against Mexican goods, at the time NAFTA was implemented, were an average of 2%. So we just didn’t change our policy very much at all. It was more important for Mexico but for us it just wasn’t that big of a deal.
COWEN: If NAFTA collapses or is taken away by Trump, forget about aggregate income, but just the distribution of income, will that be more or less egalitarian if NAFTA collapses?
LINDSEY: Not sure. If NAFTA collapses, I think that’s very bad for the overall economy. It would cause all kinds of disruptions in the short to medium term. And in general, bad economic times are worse off or worst for those at the bottom. I think on the whole, kind of neolistic economic disruption of pulling out of NAFTA would be worse on people at the bottom because that’s what bad times usually do.
COWEN: Southern Thailand.
LINDSEY: What about Southern Thailand?
COWEN: Overrated or underrated?
LINDSEY: The beaches are wonderful but I am…
COWEN: But, no, that’s not an answer either.
LINDSEY: Yes, but I’m a partisan of the Northeast of Thailand, that’s where my wife is from. That is not the touristy part, but it is to me the part that seems most purely and platonically Thai.
COWEN: And if I could go only one place in the Northeast, where should that be?
LINDSEY: I’m not sure that I would go there with a guidebook in mind and things to check off, so it’s… There are…
COWEN: But for the Brink Lindsey Thai experience, the heart and soul of Thailand, where is it?
LINDSEY: My wife’s hometown is a lovely little town of 100,000 at Roi Et, which is the Thai word for 101. And 100,000 people, and 300 miles from Bangkok. Maybe 30, 40, 50 years ago a radically different place from where it is today. But today, you go there and you’re shocked at how a small town in rural Thailand actually has lots of 21st century conveniences, and yet the spirit culture there is still less touched by the hustle bustle gogoism, and sort of lack of politeness and charm that westernization tends to bring.
COWEN: The Thai movie “Uncle Boonmee Who Can Recall His Past Lives.”
LINDSEY: Which I have not seen.
COWEN: Oh. You must see it. It’s one of my favorite movies. Nuclear weapons. [chuckle] You grew up with the fallout shelter in your backyard, right? You thought about it then…
LINDSEY: Yes, I did.
COWEN: The eight year-old Brink Lindsey, did he think nukes were over or underrated?
LINDSEY: [chuckle] I don’t know how to put it in that prism. Overrated as usable, underrated as a peace keeper. Although perhaps, maybe we have actually been… Because we haven’t had a nuclear war yet between two nuclear powers, we think that there is something uniquely stabilizing about having nuclear weapons that it produces this mad scenario where it chastens and disciplines policymakers. That could be the case, although reasoning from 70 years seems to get ahead of yourself.
COWEN: But there is a disarmament movement that we should all get rid of nukes, do you root for it? Would you send it money? Would you embrace it as part of the liberaltarian canon?
LINDSEY: In international affairs generally, I have been badly wrong on issues in the past and that has led me to not rationally rationality, but a sense of my own rational ignorance, so I don’t have very strong opinions about things that I’ve been bad about in the past and acknowledged I’m not an expert about. In general, because of my rational ignorance, I’m a conservative about international affairs. I don’t wanna see any big sudden movements this way or that. By doing things a little bit at a time and seeing how it goes, seems to me the most prudent path when you don’t know what you’re doing. Any grand schemes to completely eliminate nuclear weapons I think is too far.
COWEN: Robert Nozick, overrated or underrated? One very particular kind of liberaltarianism.
LINDSEY: Robert Nozick, author of Anarchy, State and Utopia, overrated. Robert Nozick’s oeuvre, underrated.
COWEN: He was arguably one of the first liberaltarians, right?
COWEN: Who is your favorite political thinker or philosopher who would not be considered conservative or liberaltarian?
COWEN: You can’t say Steve Teles, either. [chuckle]
LINDSEY: Living or forever?
COWEN: Any. Favorite.
LINDSEY: I’m very fond of Mill. Does that count? He’s a liberal, not a libertarian?
COWEN: No, no, he’s too libertarian.
LINDSEY: Cato people don’t like him very much at all, so I was brought up not to like him.
COWEN: Doesn’t count. Someone who is really on the other side of what you think. Mill is a liberaltarian, arguably.
LINDSEY: Alright. I’ve never read anything that conveys the intense raw creative power of capitalism that matches the first few pages of the Communist Manifesto. I find reading Marx bracing and interesting. Even when he is profoundly wrong, he’s often framing questions in very interesting ways. I’ve gotten a good deal out of him and taken concepts from him, and turned them in ways that he would have thought horrible but useful for me.
“I’ve never read anything that conveys the intense raw creative power of capitalism that matches the first few pages of the Communist Manifesto. I find reading Marx bracing and interesting. Even when he is profoundly wrong, he’s often framing questions in very interesting ways. I’ve gotten a good deal out of him and taken concepts from him, and turned them in ways that he would have thought horrible but useful for me.”
COWEN: The final question, what’s your favorite TV show and why?
LINDSEY: Favorite TV show of all time is Star Trek.
COWEN: Which one?
LINDSEY: The original.
COWEN: The Star Trek.
LINDSEY: The Star Trek.
COWEN: Just Star Trek? Yes?
LINDSEY: Yes. [chuckle] The Star Trek.
COWEN: And why?
LINDSEY: It’s very liberal. It’s a hopeful future. Technology’s making people’s lives better. People are getting along across racial country of origin lines, even across planet of origin lines. I think it’s that fundamental optimism that hooked me, and it’s very easy in Washington to find earnestness and optimism, sort of gauche but cynicism and worldliness, and nothing can ever get done and things are always gonna get worse, those are the stock worldly smart positions, but I like a little bit of earnest clunky optimism, and so I’ll go with Gene Roddenberry in Star Trek.
COWEN: And with that, thank you very much, Brink Lindsey.
LINDSEY: Thank you.
COWEN: It’s been a pleasure.