Liberals say that rising income inequality is hurting economic growth. Libertarians say that government regulation is to blame. Who’s right?

Both, say Steven Teles and Brink Lindsey, who visited Stanford Graduate School of Business recently as part of its Corporations and Society Initiative. Teles, a left-leaning professor of political science at Johns Hopkins University, and Lindsey, a libertarian-leaning researcher at the Washington, D.C., think tank Niskanen Center, coauthored The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality. The authors critique laws and regulations that they believe result from poor policymaking practices and ultimately suppress economic growth and hurt the public.

While the two authors ask conservatives to recognize that income inequality threatens growth, they also show liberals that government regulation, if misguided or badly constructed, can do more harm than good by increasing inequality.

Those regulations aren’t necessarily the work of incompetent or ill-intended people but rather the result of faulty processes, they say. “If we have bad processes, we get bad policies,” Lindsey says.

States, for instance, create licensing boards for certain fields, ranging from medicine to hairdressing, that regulate who can join the occupation and what qualifications and training are needed. But under current processes, states allow those licensing boards to be controlled by industry insiders and incumbents who set high barriers to entering the field.

Those barriers, such as requiring a minimum number of hours of sometimes expensive training, constrain the supply of people in a given field and thereby artificially boost the incomes of the incumbents and increase inequality, Teles and Lindsey say. Occupations requiring a license are often a ticket into the middle class, so making it costly for low-income individuals to enter a licensed trade exacerbates income inequality even further.

If we can’t get back to inclusive prosperity, that calls into significant question how much integrity liberal democracy will be able to retain going forward. The stakes are high.
Brink Lindsey

With licensing laws reducing competition, raising prices, and misallocating income, the economy doesn’t grow as fast as it could, the authors contend. Licensing rules also encourage incumbents to stick with old practices instead of considering new ways of doing business that can boost economic activity. The licensed taxicab industry, for instance, didn’t accept electronic payments until it faced competition from new ridesharing services, the authors write.

The authors also cite the “insidious phenomenon” of regulatory capture, in which corporations gain so much power over elected officials and legislative bodies that they essentially write the rules that govern their industries. This in turn creates a playing field stripped of the competition that libertarians regard as the engine of successful capitalism. “The U.S. economy has become less open to competition and more clogged by insider-protecting deals than it was just a few decades ago,” they write. “In real and consequential ways, the economic game has been rigged in favor of people at the top.”

Lindsey and Teles suggest a hybrid of solutions that they call “liberaltarian.” Changing when and where laws are made might help prevent small numbers of individuals from having disproportionate influence, the authors suggest. As it is now, hearings and meetings often occur at awkward and inconvenient times and places, making them likely to attract only vested insiders whose voice becomes magnified. Moving the venue or shifting the decision-making from, say, the local level to a state or regional level could encourage more people to take part and improve the process.

Encouraging lawmakers’ staffers to sharpen their knowledge of the issues they oversee would also help. Staffers frequently don’t have the expertise to evaluate complicated or highly technical areas, so they’re more likely to be swayed or misled by a lobbyist’s self-serving argument, the authors say. Increasing the pay and training of legislative underlings would make them better equipped to thwart unethical lobbying efforts.

Doing nothing to address economic inequality and malaise has more than just material consequences for individuals, says Lindsey. “Modern economic growth and modern democracy co-evolved,” he says. “If we can’t get back to inclusive prosperity, that calls into significant question how much integrity liberal democracy will be able to retain going forward. The stakes are high.

This piece was originally published by Stanford Graduate School of Business.