Holding onto the dream of a government for the little guy

Liberal New Republic writer, whom I first met in a debate on Iraq — he was advocating invading, I was saying not to — for the second time this year tries to deny there's a real problem of big business using big government to serve its ends.

When Peter Orszag cashed out of the Obama cabinet to take a multimillion-dollar job at Citi, left-libertarian blogger Will Wilkinson astutely argued:

it seems that time and again market institutions find ways to use the government's regulatory and insurer-of-last-resort functions as countervailing forces against their competitors and, in the end, against the very public these functions were meant to protect. We are constantly exploited by the tools meant to foil our exploitation.

Liberal Chait came back with this assertion:  “I don't think private capture of public functions represent a major, recurring problem with liberal governance.” Chait had asserted back in June “the corporatist critique is simply at odds with reality.”

His June article [subscription required] was almost devoid of facts or real arguments to back up this assertion. His current blog post at least makes a stab at supporting material:

Does the minimum wage result in regulatory capture? Does Social Security? The Earned Income Tax Credit? Moreover, when such capture does occur, liberals can un-capture it, something that happened with student loans, Medicare Advantage, and so on.

Let's take those one at a time:

1) Minimum wage doesn't result in “regulatory capture” because it's not a regulation — it's nearly a hard and fast rule that doesn't try to be too cute or “flexible.” Regulatory capture usually happens when regulators have discretion to tweak rules, or when lawmakers carve out tons of exceptions — like the toy safety legislation partly written by Mattel (and spurred by Mattel putting too much lead in its toys) under which Mattel got the first exemption from third-party testing.

But the minimum wage is an instance of the “Overhead Smash”: big-government legislation supported by the biggest affected business who know it will disproportionately hit the small guys.

Costco and Wal-Mart supported the most recent hike in the minimum wage. Costco and Wal-Mart pay more than the minimum wage. Their Mom & Pop competitors, on the other hand, are hit hard by a minimum wage hike. There's a general rule at play here: regulation adds to overhead, which larger businesses — through economies of scale — can better absorb.

2) Social Security is also too hard and fast for true regulatory capture. But there's also evidence that it's another boon to big business at the expense of small business. 

Henry I. Harriman, president of the U.S. Chamber of Commerce unequivocally supported FDR's creation of Social Security. New Deal historian Paul Conkin wrote: “The meager benefits of Social Security were insignificant in comparison to the building of security for large, established businesses…. Because of the tax policies even relief expenditures were disguised subsidies to corporations.”

Similarly, the EITC serves as a subsidy, allowing workers to pay lower wages.

But Chait's broader claim on regulation is the most incorrect — that regulatory capture is rare. I don't quite know the best way to rebut him, other than to say look at the recent toy safety law supported by and benefitting Mattel, Obama's tobacco regulation supported by and benefitting Philip Morris, the health-care “reform” bill supported by and benefitting the drug lobby, the cap-and-trade proposal supported by and benefitting GE, big miners, Nike, and Alcoa, the Wall Street regulation about which Goldman Sachs' Lloyd Blankfein said “We Will Be Among the Biggest Beneficiaries of Financial Reform,” the tax-prep legislation supported by H&R Block and written by Block's former CEO.

Seems a real phenomenon to me.

While we're talking about Chait being wrong, here's my last response to him, back in June.

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