How the Powerful Captured the Economy

We discuss 4 pathological policy regimes that are responsible for the slow growth & inequality that’s plagued the US economy.

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Brink Lindsey and Steven M. Teles join us to discuss four pathological policy regimes they say are responsible for the slow growth and high inequality that’s plagued the US economy in the twenty-first century.

The case studies presented in Lindsey and Teles’s new book highlight how financial regulation, occupational licensing, intellectual property, and zoning and land use policies have been captured by the powerful and politically-connected to enrich themselves at others’ expense.

Show Notes and Further Reading

Lindsey and Teles’s book is The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality (2017).

Transcript

Trevor Burrus: Welcome to Free Thoughts. I’m Trevor Burrus.

Matthew Feeney: And I’m Matthew Feeney.

Trevor Burrus: Joining us today is Brink Lindsey, formerly of the Cato Institute, now Vice President and Director of the Open Society Project at the Niskanen Center, and Steven M. Teles, Associate Professor of Political Science at the Johns Hopkins University and Senior Fellow at the Niskanen Center. Together they are the authors of The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality. [00:00:30] Welcome to Free Thoughts, gentlemen.

Brink Lindsey: Trevor, Matthew, great to be back.

Steven Teles: Thanks for having us on.

Trevor Burrus: What’s wrong with the U.S. economy?

Brink Lindsey: Over the course of the 21st century, the U.S. economy has been experiencing a double whammy of slow growth and high inequality. As to growth, the growth rate so far in the 21st century has averaged about 1% a year in terms of real GDP or gross domestic product per capita. That’s half the rate that was the average rate of economic growth during the 20th century. Meanwhile, [00:01:00] with rising inequality, the growth rate overstates the degree of material improvement for most Americans because most of the gains from growth or a disproportionate share of the gains from growth are going to a relatively narrow slice at the top. When you put those two things together, you get to the point where on election night 2016 only 30% of Americans said that they expected their kids to be better off than they are.

Trevor Burrus: Do you know how that compares to other eras?

Brink Lindsey: Much lower.

Trevor Burrus: Much lower?

Brink Lindsey: Yes, so [00:01:30] when you’re in those kind of situation, you get political repercussions that I think we are living through right now.

Steven Teles: Yeah, and I think the main argument we have in the book is that this is not just a purely economic phenomenon. It’s not a natural consequence say of increasing globalization or changes in the human capital necessities of firms, that this is an explicitly political phenomenon and it’s a result of the actual change in regulatory and other governing policies. And therefore, we have [00:02:00] to think about this as a political economic problem, and not just a natural product of market forces.

Brink Lindsey: Not entirely a product.

Steven Teles: Yes.

Brink Lindsey: We think that these developments of slow growth and high inequality are incredibly complex phenomena with many different causes. We’re not claiming that we’ve got some monocausal explanation of everything that’s going wrong. But, what we are claiming is that an important aspect of what’s going wrong has been under-reported, under-appreciated, and that is the degree to which government policies are actively making matters [00:02:30] worse on both fronts.

Trevor Burrus: A lot of people would say that the economy is rigged. It’s kind of a common position. Occupy Wall Street and Trump voters. In what way would they both be correct, that something is rigged?

Steven Teles: I think the big argument we have in the book is that when people talk about rigged they often talk about it in a very casual way. It’s both over and under inclusive. People also ideologically cherry pick [00:03:00] which part they claim is rigged. Obviously Occupy Wall Street focused a lot on finance which is an important part of the story. Often conservatives don’t pay as much attention to that as they ought to. But people on the left ignore, at least until recently, changes in constraints in the housing market. They ignore increases in occupational licensing. For the most part they’ve been uninterested in intellectual property.

And what we argue is that this is a sort of comprehensive [00:03:30] problem and it goes even beyond the cases we study in the book. We could get into that in more detail. In some sense we’re just scratching the surface. We’re looking at the ones that seem to have the biggest impact both on innovation and therefore growth and inequality simultaneously.

Matthew Feeney: So maybe it’s my inherent pessimism that’s pointing me to ask the question but given that there seem to be problems with how the left and the right are assessing the problems is there any viable political solution to the problems [00:04:00] that you outline at the moment?

Brink Lindsey: Well when you extrapolate from current trends you almost always get into trouble predicting the future. There’s usually some kind of negative feedback and when things get really lousy and it seems like that’s just the course that we’re on and things are going to go down, down, down, lo and behold some negative feedback mechanisms kick in and things go off in a different tack. I know I lived through the 1970s where everybody was completely convinced everything was doing downhill and then voila we had lots of important economic and political [00:04:30] reforms and we had a period of economic revival and rejuvenation. 

So things are frequently … well the smart money is always that big important changes are completely impossible until the very moment in which they happen. So what we have to do is we recognize that there is great frustration throughout the political spectrum with both established parties, with established institutions, that creates a hunger for some … it creates a vulnerability to demagoguery and to a breakdown [00:05:00] of institutions. It also creates a possibility for openness to real reforms that can make a positive difference.

So we interpret the populist mood now charitably, that there is a real signal there that people are treading water or falling underneath while they see people at the very top doing lots of self-dealing and even if they misdirect their anger, the anger reflects something real and if we can direct that towards policy changes that will actually [00:05:30] address the underlying problems, then we can make something good out of this mess.

Steven Teles: Right. And one of the things we argue in the book especially in the last couple of chapters is that you can be too pessimistic. Especially public choice economics which is very popular around here, leads you almost inevitably into pessimism and we draw on some of that but try and go beyond it I think in some important ways. The public choice argument for pessimism is that almost all this rent-seeking is driven [00:06:00] by the difference between the concentrated interests of those who are seeking to get various different kinds of government benefits and the diffuse nature of all the people who are paying for them. And if that’s all you think is going on, if you think basically a political system is a neutral environment in which concentrated versus diffuse interests play out, you have a hard time coming up with anything other than a pessimistic story.

But we don’t think that’s all that’s going on. We have political institutions and political institutions in some important [00:06:30] ways mediate or exacerbate that underlying basic public choice problem and one I think of the maybe counterintuitive arguments we make in the book is that you may need to increase government capacity, the number of people who are actually producing information in particular about these various different regulatory schemes. Government needs to invest more in that in some ways to prevent it from being exploited by concentrated interests and concentrates interests get their way not just because they have more [00:07:00] muscle but they have more resources to invest in information.

So while organizations like Cato and other kinds of things are very important for bringing information to policymakers it’s different than what concentrated interests have. The information that government produces internally is just as important and that information has become systematically dismantled over the last 30 years.

Trevor Burrus: Now before we get to the actual case studies you do or the topics, the four topics, I find it interesting that if someone were looking [00:07:30] at your book let’s say an Occupy Wall Street person and they walked past and they said, “Oh this looks exactly like what I believe.” They might notice though that it doesn’t say how the rich enrich themselves, it just says the powerful. So what’s the difference between the rich and the powerful?

Brink Lindsey: Rent-seeking by definition is bad economic policy. It’s pursuing profits through the political process through favorable rules rather than through adding value for customers. [00:08:00] So in terms of its implications for economic efficiency and growth it’s … rent-seeking definitional is negative. Its distributional consequences though are ambiguous. Democracy is just by the nature of things, rent-seeking favors the powerful. Power is just the capacity to get your way in the political process. But the powerful aren’t necessarily the rich. They frequently are but they aren’t always. 

We saw in the early decades of modern activist government, in [00:08:30] the New Deal era, lots of rent creating policies that were trying to do downward or sideways redistribution. Downward restriction in terms of labor legislation, minimum wage laws, rent control, universal service requirements, all kinds of things. Sideways redistribution even when government policies subsidize big business, those big businesses typically had large semi-skilled unionized work forces so the rents that went to the businesses were shared with the workers.

What we have noted is [00:09:00] that in recent decades a lot of that downward and sideways redistributing rent-seeking got cleared out by the economic deregulation of the 1970s but what has been growing up in recent decades has been regressive rent-seeking. Rent-seeking that slows down growth, stymies dynamism but so in a way that redistributes income and wealth up the ladder. Why the difference between the old ways and the new ways? We’re not 100% sure. We don’t put forward a theory [00:09:30] that we’re confident in. But clearly the disappearance or relative decline of unions, the decline of their political power has meant a decline in forceful political actors trying to rig regulations in a downward redistributing way.

Meanwhile, the changing employment profile of America’s leading industries is I think a major part of the story. Now, the industry [00:10:00] is at the vanguard of technological progress and therefore the ones that are most likely to be the focus of government policy because they’re important, tend to employ disproportionately highly skilled workers. And so if you subsidize them, the rents don’t get shared very widely. Put those things together and you get a very different, a clear distributional impact of rent-seeking today in a way that’s different from the earlier era.

Steven Teles: Yeah, there’s two policy regimes that may be useful for making this [00:10:30] kind of concrete. One, you can think in terms of finance. Go back and think about the way that we regulated banking for the most part up until the early 1990s. What we basically had is a whole bunch of savings and loans that had geographically cartelized markets, often very small savings and loans like in the little tiny town my mom grew up at. It had its own savings and loan, Lake City South Carolina Savings and Loan. And so that regime which had lots of inefficiencies and problems [00:11:00] with it but it-

Trevor Burrus: Yeah, you kind of collapsed.

Steven Teles: But it had a particular distributive effect which was to create thousands and thousands of small bankers who could afford country club fees in small towns, right? That was the main effect. It created a lot of upper middle class kind of people. When that collapsed in the late ’80s and early ’90s with the savings and loan blowup, the thing that replaced it was mortgage securitization, right? [00:11:30] And mortgage securitization had a very different distributive profile. It was mortgage originators and mortgage bond traders and that tends to be a smaller but a much higher income group.

So those are just two examples of the distributive effects of two different regulatory regimes. The other one you might want to think about it the difference between unionization and occupational licensing. There’s been great work done by Morris Kleiner that we rely [00:12:00] on a lot in the book and just as unionization’s been going down, occupational licensing has been going up. 

Now I don’t think those two things are causally connected but they’re two different labor market regulation regimes. Unionization generally had the effect of wage compression. Whereas, occupational licensing doesn’t seem to have any wage compression effected in some other areas. Arguably it ends up protecting the incomes of high earners. So again if you think about [00:12:30] where we’re talking in the book, we’re talking about a sort of regime shift in regulation from at least a sideways or downward regulation regulatory regime to one that is at least is neutral or upward redistributing.

Brink Lindsey: Just one addendum on occupational licensing. It tends to increase the incomes of all incumbent service providers but the income boosting effect is highest at the high end. So the overall net effect of the explosion of occupational licensing has been [00:13:00] to exacerbate income dispersion and particularly high incomes at the very top. So doctors and lawyers both beneficiaries of occupational licensing between them make up 25% of the top 1%.

Trevor Burrus: And I imagine that another part of the distribution is the savings and loan bank executive who could go to the country club in South Carolina, they’re all in New York now. All those rents went to the well-heeled 1% even the [crosstalk 00:13:27] 14% of the 1% is financial. [00:13:30] 18% of the .1% is financial.

Brink Lindsey: Right.

Trevor Burrus: And they’re probably all in New York.

Brink Lindsey: Yeah, and literally one of the reasons for the old regulatory regime is that we had a geographic structure representation in Congress and people from places like South Carolina had a lot of power on banking committee and things like that and that’s the whole Glass-Steagall regime again which we make clear had lots and lots of problems. But it was designed to geographically cartelize and disburse the market in a way that the mortgage securitization regime does not.

Matthew Feeney: So [00:14:00] I guess the obvious question when you discuss occupational licensing is what’s the solution to this? You mentioned doctors and lawyers. Should there be no licenses for doctors and lawyers? How many occupation should be exempt from those kind of regime?

Brink Lindsey: The alternative to licensure is certification which can be done … The point of licensing, the justification for licensing is consumer protection. You want to protect consumers from information asymmetries where they can’t tell who [00:14:30] are the quality providers and who are the quacks, the fly by night operators and so forth. But in fact there is precious little evidence that this consumer protection actually is occurring.

What really is occurring is simply supply constriction and income inflation for income service providers in a way that doesn’t really translate into better service for customers. So, that information asymmetry problem can be addressed through voluntary [00:15:00] certification, through private actors like Underwriters Laboratories or the Good Housekeeping Seal of Approval or Consumer Reports or through government certification. We had the government seal of approval. We are a government certified doctor or lawyer. 

But, you don’t have to then proscribe legally economic transactions between unlicensed professionals and willing customers.

Trevor Burrus: That seems pretty radical.

Steven Teles: Well the important point here though is that [00:15:30] it’s not so much the public versus private distinction that matters here. It’s whether or not there’s a barrier to entry or not. And that also affects the competitive nature of the regulatory regime, right? So if we have a state of North Carolina has a certification regime for dentists, if it gets too extreme then people are simply going to opt out and the regulatory agent is going to know that. The people who are making the regulations know they have some competitive pressure to [00:16:00] set their regulations at something like a reasonable level because otherwise people are going to opt out or they’re going to opt into a private certification regime. 

And so the important point I think in the book is simply that it’s a good idea to not except in extreme cases create a formal barrier to entry. Whether that should be public or private in some of these cases you could have competition between a public and a private certification regime. A public certification regime is almost by definition not going to be a monopoly [00:16:30] in a way that a licensure regime is. 

Brink Lindsey: I think it’s worthwhile since it’s actually so counterintuitive to go ahead and grasp the nettle and talk a little bit about medical licensing because that’s the one case where everybody says, “But of course you have to have.” There was a recent Supreme Court case on occupational licensing and there was a little colloquy between Justices Scalia and 

Trevor Burrus: I think Breyer. 

Brink Lindsey: I think Breyer, where they were both saying, but of course we would want to … we don’t want to … we need licensing for brain surgeons. We want brain surgeons [00:17:00] to be able to pick and choose who the appropriate people are to do brain surgery. So that all sounds very commonsensical except it doesn’t have anything to do with actual legal reality. There is no licensing for brain surgeons or for any other specialties. There is only licensing for general practitioners. So the state licenses are given to anyone who completes a U.S. residency in anything and who completes a state medical licensing exam and passes.

So if you complete a U.S. residency in podiatry and pass a state licensing exam, then in that state you are legally entitled to do brain [00:17:30] surgery or heart transplants or whatever you can convince people to do. So of course that doesn’t happen. [crosstalk 00:17:35]

Trevor Burrus: Yeah, a podiatrist, brain surgeon.

Brink Lindsey: So why doesn’t that happen? Because no practice group would hire a podiatrist to do brain surgery. No hospital would grant admitting or surgical privileges to that person. Why won’t they? First, because they want to serve their customers well and second because they are worried about liability for medical malpractice. So normal commercial and liability incentives actually do [00:18:00] constrain who gets to do brain surgery in a way that licensing doesn’t at all.

And three quarters of American doctors, 70% to three quarters of American doctors are specialists. Not GPs which means that their practice of medicine in unlicensed. They may be board certified but those certification boards are private boards and that certification is voluntary. Meanwhile, doctors practice for decades and medical practice changes dramatically over the course of [00:18:30] their careers and yet licensing is done at one time. It’s done at the advent of their career so there’s this check then but as the practice of medicine completely changes, there’s no recheck. 

There is theoretically the possibility of de-licensing for bad actors but it is notoriously lax and almost always has to do with handing out the wrong drugs to people or sexual misconduct with patients. In many states incompetence isn’t even a grounds for removing [00:19:00] a license. So, in reality licensing doesn’t do what it says and private mechanisms and the background of private law actually do the work.

Steven Teles: When we think about licensing of doctors people usually talk about it as if the thing that consumers are being protected against is a quack doctor. There’s a quack doctor out there and we need to protect them from being treated with him. And in fact in most cases what licensing is [00:19:30] doing is preventing you from being treated by a registered nurse, right, or some other medical professional and this has a huge actual effect on the way we organize medical care. One way to think about what a licensing regime does is it means there’s very limited kinds of way that you can organize medical practice. 

In many states it’s very hard to create minute clinics or other kinds of things that deal with lots of treatments for which almost nobody really needs a doctor. [00:20:00] Often those places … say even if all you’re doing is immunizations or putting a splint on somebody’s finger, there still has to be a doctor around and that doctor around massively increases the cost and mainly though prevents innovation. That’s the argument in the book is that innovation effect is very, very important in lots of these cases because growth often comes not just from huge, new inventions [00:20:30] but huge, new ways of organizing different kind of industries and occupational licensing tends to through scope of practice kind of rules tends to take those ways of organizing and cement them in place.

Brink Lindsey: Just as a sort of hypothetical, imagine if computer programming were subject to occupational licensing and the regime had started back in the ’50s or ’60s. You can imagine the licensing exam today would include punch card maintenance and all kinds of-

Trevor Burrus: FORTRAN. Yeah.

Matthew Feeney: So, when you’re talking [00:21:00] about a slowdown in innovation I suppose my question is how is this being measured? Because you could make the argument, look in the last couple of decades American companies we’ve got Google. We’ve got Facebook. We’ve got these innovative cool new companies. Students from all over the world come here to learn science and to get higher level degrees. What are the signs of actually slowing down in innovation?

Brink Lindsey: The metrics are all problematic because it’s difficult to measure these things statistically. But first [00:21:30] off we have the growth rate of the overall economy is growing half the speed it was during the 20th Century. And that is fed … so growth rate is fed both by growth and inputs and by growth and productivity and we have not only had a slowdown in growth in inputs but slowdown in population growth, but also a slowdown in productivity growth. So productivity growth since the 1970s has been very low relative to the decades previous. There was one decade in the ’90s where [00:22:00] productivity growth zoomed back up again but it has subsided once again and is very low levels today.

There are all kinds of questions about whether we’re measuring that correctly. But even if we’re measuring it incorrectly there’s no good reason to think that we’re … that the measurement errors are getting worse over time. So even if productivity growth absolute values are unreliable, the trends seem like they should be paid attention to and the trends are downward. Meanwhile there’s lots of other evidence of declining economic dynamism. [00:22:30] The rate at which new businesses are being created is down. The rate at which new businesses are growing is down. Not just down in the last few years but down steadily over the past several decades.

So there does seem to be lots of circumstantial evidence. It’s smoke not fire. But there’s lots of smoke that suggests that the U.S. economy is losing its Schumperterian mojo. That creative destruction, the churn of new businesses coming in and old businesses going out is slowing down. 

Steven Teles: One way [00:23:00] to think about where growth comes from is it’s over how much of the extent of the overall economy can innovation occur? So when you were saying oh there’s all this innovation, these new firms. But they’re occurring in one slice of the economy and that means that whatever growth or innovation we’ve got has to occur in that slice to the economy. So I was talking to somebody yesterday about one area in which you could see enormous innovation which is accessory units for houses. 

Lots of people [00:23:30] in America have three quarter acre lots, it’d be easy to put an accessory building. Put a student. Put your grandmother. Put anybody back there. And you could imagine enormous innovation in basically making those into machine built things where you could put them up on two days. You’d pour your foundation one day. You’d go and you’d staple all the pieces together and you’d have an accessory unit, right?

Trevor Burrus: A tiny house movement.

Steven Teles: The tiny house … and there are people doing tiny houses but the industrialization [00:24:00] of it which is the thing that would really produce enormous both opportunity for people to move into existing places and a whole new industry is basically being blocked by the fact that so many jurisdictions have extraordinary rules against accessory development, right? And that means that that’s an area of the economy in which you could have lots of innovation. You could have lots of growth but you don’t.

And you see that in lots of other areas. We talked about medicine where you could imagine all the business model innovation [00:24:30] that could be going on. People who are thinking about doing something cool and new could be thinking, “Oh we could go into medical practice,” and be doing all kinds of things in that area. But often they’re simply not going in at all because they think, “Do I want to deal with the headache and uncertainty that’s going to be associated with that?”

So again when you look at the things you were talking about, that’s a good area of sort of the clustering or crowding in of innovative capacity into one segment and more or less leaving the rest of it alone.

Matthew Feeney: So how [00:25:00] much does intellectual property play a role in this hampering of innovation? Is this a culprit?

Brink Lindsey: I think we’ve now sort of other than intellectual property we’ve mentioned the other three case studies. But we address four case studies in the book. Financial regulation. Intellectual property. Occupational licensing and land use or land use regulation.

On intellectual property, this seems at first blush surprising to include here in something that’s bad for growth because of the whole idea behind intellectual property is to encourage [00:25:30] growth by encouraging artistic expression, encouraging innovation through increasing the returns to innovation. You do that increase by granting temporary monopolies to artists and to inventors through copyrights and patents. That increases their returns and therefore incentivizes them supposedly to produce more.

And there is something to that argument but there are also costs as well as benefits associated with intellectual property. [00:26:00] We tend to think of the costs all being on the consumer side, that this is kind of a trade-off between benefits for innovators versus extra higher prices for consumers so consumers need to pay a little bit more now so that they can have better products down the line. 

But there’s another trade-off as well. It’s between what we could call upstream innovators and downstream innovators. So upstream innovators when they get their patents are advantaged thereby. But downstream innovators who need access to upstream [00:26:30] ideas to put together and recombine some new innovative gadget then have their access to those upstream ideas blocked or hindered by patent protection. And so with the explosion in patents in recent decades and these days every year the patent office issues about five times as many patents as it did 30 years ago. Then we’ve had this sort of growth of a legal minefield for innovators so that when they have a new product, [00:27:00] it’s almost impossible to do the due diligence to find out whether they’re infringing and so they have to wait for a shakedown call from somebody. Even if it’s not a good claim, there’s going to be legal costs so it really puts many innovators in a bind these days.  

The classic imagine of the alone inventor battling the big, bad corporation who’s stolen his invention, that just doesn’t describe reality. The vast majority [00:27:30] of patent claims are against … do not allege copying. They just allege independent co-invention but too late to have gotten the patent and so you lose. Meanwhile, the majority of patent infringement cases now are brought by so called patent trolls who … they have other nicer euphemism names. 

But basically they’re entities that exist to buy up portfolios of patents to weaponize them, to turn them into … to litigate on them and to make money from them. [00:28:00] So now you have the majority of patent infringement cases are brought by people who make nothing and they’re brought against innovators for incidental or unintentional infringement. And unsurprisingly there’s lots of evidence that this is not good for innovation.

Steven Teles: Right. And this effect on innovation is also probably has a concentration effect. That is, where there’s that degree of uncertainly, that uncertainly could be completely debilitating for a small or new firm. [00:28:30] And that’s why we’ve seen this sort of slowdown in IPOs and that whole part of the process of new firm formation. Innovation seems to be breaking down and there’s some reason to think that that’s connected to the uncertainly and high costs that are associated with the IP regime.

The other thing that I think is really important and it’s remarkable how few people have recognized this or how little it is, just how much our IP regime has changed. This is in a case where [00:29:00] we have an old storied policy regime and it’s just somehow had a new effect because something in the economy changed. We actually think that the original constitutional American standard which was actually to have temporary protection with a very strong emphasis on temporary, was the right way to go and what we’ve had is a distortion of that to where essentially now certainly in copyright and to some degree in patents, [00:29:30] that temporary element that was so important for the framers original balance has been completely turned on its head.

Trevor Burrus: So we have things like the Sonny Bono copyright Act which … it was the Mickey Mouse Copyright Act really. 

Brink Lindsey: For copyrights the idea is to encourage artistic innovation. The problem is that the overwhelming majority of artistic creations don’t make any money. And yet they get made anyway which means [00:30:00] the overwhelming incentive for artistic creation isn’t pecuniary, it’s expressive. So take away copyrights and people are still going to make music and make art. What copyright does is enable those very few jackpot winners that connect with the larger public to be monetized by one business. 

So if it weren’t the case and there was a jackpot winner, then you’d have other actors coming in to produce new editions of that novel [00:30:30] or whatever. The initial publisher would have first mover advantages but clearly would not be able to monopolize those gains for decades and decades and produce cash cows like Disney’s vault.

So now that you have this regime where you’ve got high fixed costs to find the next jackpot winner but then enormous returns that you can milk for decades that’s very conducive to huge scale. So you have unsurprisingly in the entertainment industry lots of conglomeration [00:31:00] and concentration as these enormous media enterprises are basically designed to maximize profits in this monopolistic regime. 

Trevor Burrus: Although Steve has endorse the classic, I think it was 14 years copyright originally?

Steven Teles: It was seven plus seven.

Trevor Burrus: Seven plus seven.

Brink Lindsey: So as of 1976 when it had migrated up to 28 plus 28, but then in 1976 it went to the life of the author plus [00:31:30] 50 years and then with Sonny Bono life of the author plus 70 years. That extension was then done retrospectively which just makes a joke out of the idea that this is incentivizing perspective artistic creation because you can’t incentivize artistic creations that have already been done. But it was just a straight up wealth transfer to Walt Disney and others.

Meanwhile, even if it’s just kind of a side show or irrelevant to the supposed subject matter artistic creation. On the one hand, this [00:32:00] legal discrimination against and hostility to copying poses real problems for the internet which is the greatest mechanism for copying and disseminating information ever invented. And so at various points there are tensions between copyright law and internet development. Every time you forward … So now copyright extends not only has the terms been extended but it applies to unpublished works. You don’t have to register your copyright like you did in the old [00:32:30] days. So it applies to everything that’s written.

So every time you forward a friend’s email you are doing … you’re infringing copyright material and are subject to possibly $150,000 fine. So with that kind of Sword of Damocles hanging over everything the internet does, then we’re getting a lot less out of this magnificent mechanism for sharing information than we could. There’s great gobs of information in the vaults of [00:33:00] BBC and movie studios, the so-called orphan works that … they’re material that could be distributed but we don’t even know who owns it so we can’t ask permission and so it just sits there and molders.

Trevor Burrus: But it seems-

Brink Lindsey: And we had the possibility with Google Books of just reading every book that’s ever been written right there at your laptop. After 10 years of torturous litigation Google was finally able to get permission to do little snippets [00:33:30] of all of the out of print but still copyrighted works which make up still the majority of everything in print or everything that exists. So Google Books is a fraction of what it could be in a more liberal regime.

Trevor Burrus: It seems though that it’s difficult to make an argument where you’re trying to draw a line like 7 years, 14 years, 28 years. It seems that you should either be no copyrights or it should be infinite. There’s a pretty good case if there’s a moral case for developing [00:34:00] property it’s the same case as lock in appropriate … I built a house, it’s mine. And there’s not like a 70 year … for 70 years it’d be hard to justify that. So shouldn’t we be having infinite copyright and then deal with the distributional effects if it’s a former property? 

Brink Lindsey: I think the name intellectual property is a marketing coup. It’s right up there with death tax in terms of …

Trevor Burrus: Appropriation of terms.

Brink Lindsey: … of setting the frames of debate in a favorable way. [00:34:30] It would just as easily be called intellectual monopoly. They both are plausible but they have very different connotations. Intellectual property seems very positive that the copyright and patent interests aren’t looking for special favors. They’re just looking to have their property protected against piracy and thieves. So that all puts them on the moral high ground.

But I think to think of intellectual property as a natural [00:35:00] extension of tangible property rights as a kind of category error I think rights in tangible property or corporeal property real or movable is necessitated by the existence of scarcity. So property rights are a way of allocating scarce good. Property rights tend to emerge when just using a commons starts producing conflicts and then people have to allocate what belongs to whom. [00:35:30] But intellectual property doesn’t do that at all. It’s not allocating scarcity. It’s creating scarcity out of nothing.

You have complete non-scarcity so my using an idea affects your ability to use that idea is zero. In fact it may make it more valuable to use that idea. So I think the idea … the analogy of intellectual property is a bad one. So you can make-

Trevor Burrus: Drugs. What about drugs?

Brink Lindsey: … you can make a policy argument for copyright. I don’t think it’s an argument that if we don’t have artistic expression, [00:36:00] excuse me, if we don’t have copyright we’re just … we’re going to lose all of our culture. I think that’s a silly argument. But you can argue that it’s just a good policy for artists and writers to be able to make a living at doing what they do. Copyright regime can make that possible in a way that other legal regimes won’t. If you think that’s a worthwhile policy goal then you can support a limited copyright law to that effect.

But I think the natural rights … if the case for intellectual property has to rise and fall in a natural rights case I think it’s all …

Trevor Burrus: But pharmaceuticals [00:36:30] is … it’s just like doctors were the occupational licensing and you mentioned it in the book but you don’t really … although you take the doctor’s head on, you don’t really take the drug patents on head on.

Steven Teles: Well except … I mean we do make the point that if the argument for intellectual property here doesn’t have a natural rights foundation and we pretty strongly believe it doesn’t, then the argument has to be utilitarian. And then you have to start thinking about what are alternative regulatory regimes, [00:37:00] right? So intellectual property is one. Prizes are another. That is you can actually give people money on the front end but then make the marginal costs essentially zero. There’s lots of reasons you’d want to do that especially if you care about the diffusion of innovation. You want people to use it. You also want people to take it and to monkey with it and do new things with it.

The existing intellectual property regime both has a negative effect on diffusion and use and it has a negative effect on recombination and [00:37:30] innovation. And so again, the entire argument in there is simply which regime is going to get you the most out of different … I think the same thing is true in copyrighting. There’s a good argument that we’re to some degree facing a crisis in at least news production on that side because our copyright regime certainly doesn’t seem to be helping to support that. But we haven’t developed any other way to pay artists or journalists [00:38:00] or anybody else.

But those for us I think are all both utilitarian questions and they’re questions about the distribution, the benefits that are associated with different regimes and they’re unavoidable. They’re unavoidable questions about who do you want to actually benefit and how do you weigh that benefit versus whatever innovation you’re going to get out of those different regulatory regimes.

Brink Lindsey: But to circle back to pharmaceuticals and address that harder case. The consequentialist utilitarian argument [00:38:30] for patents is a market failure argument that because we’re dealing with production of ideas and ideas are non-excludable then you’re going to have underproduction of those ideas because you don’t get to internalize the benefits of what you’ve done. That argument seems to work the best for pharmaceuticals and for chemicals. That is the evidence that it encourages innovation in those fields is better than anywhere else. And that has to do with I think with a couple of things.

First, [00:39:00] whenever innovation is really, really costly and imitation is really, really easy, then the case for patents is stronger. That’s maybe one reason why recipes aren’t patented. It’s maybe hard to come up with a recipe but imitating a great chef is easier said than done. But in those regimes like pharmaceuticals where once you’ve got that chemical formula and you figured out how to make it, then just the producing it is fairly trivial, [00:39:30] then the case is stronger.  

Secondly, if you’re going to have intellectual property it really helps to know what the boundaries are. You can’t have any kind of viable regime and tradable rights to anything unless you know what the boundaries of your rights are. In the case of chemicals and pharmaceuticals those boundaries are very clear. They’re delineated by chemical formulas. In the case of software patents or business method patents which is where all the growth in patenting has been in recent decades, the scope of the patent is always [00:40:00] defined by vague abstract language whose exact contours can only be determined through litigation. 

So, therefore, you have an intellectual property regime where nobody knows where the boundaries are and that is legal chaos which is where we are right now. 

Matthew Feeney: I was just thinking about the role that reputation might play in a world without the IP regime we have now because you can think of industries like I was thinking of standup comedy where actual … the reputational costs of stealing a joke or something like that is [00:40:30] really, really high. Trevor and I could type out your book and say by Matthew Feeney and Trevor Burrus but there would be a pretty significant reputational cost to that. It would be very easy for you to prove that the idea was original to you. And I suppose that’s just a way of me adding on that I don’t think the horror show that some people outline is necessary. [crosstalk 00:40:50]

Brink Lindsey: Again, we’re not intellectual property abolitionists. But I think it’s worth thinking through a world without intellectual property to see that rally the sky wouldn’t fall and [00:41:00] so that these horror stories told by pharmaceutical and record industry lobbyists that if you just make the slightest marginal tinkering in any of these laws that American culture and American innovation are just going to collapse are just the self-serving garbage that they really are.

Steven Teles: Right. And I think the important thing to recognize is the argument that you’ve got a market failure does not necessarily necessitate an intellectual property response. [00:41:30] There’s multiple different ways you can deal with that, right? And even if you decide you have an intellectual property response that under-specifies how big the subsidy or essentially barrier to entry you want to have is and you always want to put that at the lowest level feasible for what’s going to get you the outcome you want.

So, it’s very important to not go immediately from the idea that there’s some kind of market failure all the way to the idea that our current legal regime is awesome and [00:42:00] is inevitable and it’s the only one you can get that’ll actually keep medical innovation from cratering.

Brink Lindsey: And it’s worth mentioning that even though the case in principle for pharmaceutical patents is pretty strong. The case for the actual status quo of patent law for pharmaceutical today is more contestable. There is good evidence that patent … that pharmaceutical producers do a lot of gaming of the system to make cosmetic changes and products just to extend patent lives. So if patent law is [00:42:30] incentivizing that kind of behavior rather than actual producing the new drugs that are going to save people’s lives, that suggests that patent law is not all that it could be and is in need of some kind of tinkering.

Trevor Burrus: Now the other, the other, the fourth, we’ve touched on … we touched on finance. We mentioned zoning a little bit with the mini houses and that’s the one I think we should get a little bit more into on housing and how bad it is. People probably know that San Francisco is expensive [00:43:00] and New York City is expensive and Washington D.C. is expensive. But it’s much worse than that in terms of how much it’s stifling.

Brink Lindsey: Awareness of the consequences of zoning has really taken off in the last few years. Before that this was zoning’s been around for 100 years. It’s been endemic for a long time. Just the zoning of America occurred in step with the suburbanization of America. But it has become clear in recent years that this very local kind of policymaking that occurs [00:43:30] in these thousands of jurisdictions is aggregating up into big national consequences especially the land use regulation that’s occurring on the coasts.

So what has happened in recent years is that … always the purpose of zoning was to influence where within a metropolitan area building occurred. But, its purpose was not to influence the overall volume of housing within a metropolitan area. But, [00:44:00] in recent decades due to increasing restrictiveness and due to the running out of sprawl room on the coasts when you run into the water, you’re seeing that the actual total quantity of housing is being influenced by zoning. So the responsiveness of housing supply to housing demand is diminishing and what is … so in recent years when there’s been this kind of urban renaissance and there’s been new [00:44:30] economic dynamism in cities and highly skilled professionals have been moving back to cities, there’s a big demand for living in cities now. At the very same time those coastal cities have been ratcheting up their land use regulation making new housing harder and harder to build so that demand to live there is just translating into higher prices rather than into more units of housing.

So, in Washington D.C., Ed Glaeser, an economist at Harvard calculates about 20% of the price of [00:45:00] housing prices is a regulatory tax. It’s due to … you’re paying for the permission to build. In LA and Oakland, the regulatory tax is 30%. San Francisco, San Jose, Manhattan, it’s 50%. So people tend to think that this is completely supply and demand. San Francisco and New York, great places to live. They’re not making any new land, this is just natural, but it’s not. Half of it’s not natural.

Steven Teles: Right. I remember I was doing some research in the Peninsulans in San Francisco and had to go down to the Packard Foundation which is in [00:45:30] Los Altos, California. I took the train down. A very expensive fixed piece of infrastructure. You get off of the train station in Los Altos and there’s like a 7-11. Nothing, right? This enormously valuable piece of property which you could fill up with enormous concentrated housing that would be able to send people into San Francisco is completely underutilized. And so that’s problematic both for the general reasons we’ve been talking about. But [00:46:00] it also means that you’re under-exploiting that public investment that you put all that resources into. So that’s one of the dynamics here.

I think the other thing that this shows in the example that Brink talked about shows is, how many of the cases we’re talking about what protects these pathological policy regimes is the degree to which people just assume that the status quo policy is just obvious, right? “Oh of course we should have zoning. If you didn’t have [00:46:30] zoning then everybody would be living next to a smelter. That would be awful.” Or in the case of medical licensing, “Oh if you don’t have that then you’ll have quack doctors.” That’s all in a way that goes back to a question you asked earlier about the political conditions that create this regime, right?

They are produced by … economic monopoly is produced by political monopoly, right? That is, the people who support the existing regime are benefited [00:47:00] most by the fact that it seems natural. That it seems obvious. That arguments against it are seen as what Jack Balkin called off the wall, right? Simply so crazy as not even to need to be argued against. And so the thing that destabilizes these things and often makes them less sturdy than standard public choice analysis would suggest, is simply that that absence of counterargument. The absence of anything that would denaturalize these [00:47:30] policy regimes and make them seem not obvious. Make them seem like they have to be subject to being argued for.

And that’s where the market for ideas matters, right? The market for ideas both produced by outside actors who can make these arguments part of the argument for writing this book, right, is to take some of these things and in some areas are seen as off the wall or out of the mainstream and say, no, these are perfectly logical, natural [00:48:00] non-crazy arguments that ordinary people can make in licensing boards and local town councils. Those ideas therefore have an effect in an organization. People don’t even organize often around things that they view as if they think that they’re going to make them sound like a crank or sound like a nut.

And so one of the things therefore that can very rapidly change and I think you’re seeing this California, ideas about the effects of zoning. This is one thing where I think ideas really have mattered, right? Young people often [00:48:30] who are creating these YIMBY or these Yes In My Back Yard organizations and part of organizing because people did the research. They created the meme. An idea that can spread in that particular way. And that I think is part of the secret to how some of these seemingly unstoppable or inevitable or hegemonic policy regimes can very quickly crumble if there’s the resources put into undermining their [00:49:00] intellectual justification. 

Trevor Burrus: Thanks for listening. This episode of Free Thoughts was produced by Tess Terrible and Evan Banks. To learn more, visit us on the web at www.libertarianism.org.