Smaller Government Does Not Mean Less Rent-Seeking

Ilya Somin has many nice things to say about our book The Captured Economy, but his main criticism is that we have pulled up short of confronting the fundamental cause of the problem we examine. Specifically, he argues that the scale of rent-seeking and regulatory capture, the ills we address in our book, is a function of the size and scope of government. The bigger the government and the more wide-ranging its activities, the more private interests will try to coopt government power for their own narrow gain, and the more they will succeed. The only way, therefore, to achieve large and durable victories over rent-seeking is to shrink the role of government dramatically.

Those familiar with Somin’s past work will find no surprises here. Once again, he argues that profound public ignorance about politics and policy dooms big government to pervasive dysfunction. With the general public so clueless about when it is being well served and when it is being fleeced, expansive and highly complex government offers a field day for well-informed insiders intent on serving themselves at public expense.

I used to find such arguments persuasive (here I am taking a very similar tack—27 years ago!). But I no longer think this line of reasoning holds up under scrutiny. Let me briefly explain why.

One obvious objection to Somin’s blanket theory of government dysfunction is that it ignores the enormous variation in the quality of governance—not only across countries, but across policy domains and levels of government within the same country. This variation shows that other factors besides size and scope have a huge influence on how well or poorly government works. Therefore, Somin’s contention that massive reductions in government are necessary to effect big improvements in quality of governance is mistaken.

It gets worse. The overall pattern of variation in government quality actually runs directly counter to Somin’s thesis. That is, there is a positive correlation between the size of government (in terms of levels of spending and taxation) and the quality of economic regulation (as measured, for example, by the economic freedom indices of the Fraser Institute or the Heritage Foundation). In other words, bigger governments are associated with more economic freedom, and less rent-seeking.

This counterintuitive (at least to libertarians) state of affairs highlights the two-sided nature of the problem of government power. “In framing a government which is to be administered by men over men, the great difficulty lies in this,” James Madison wrote famously in Federalist number 51: “you must first enable the government to control the governed; and in the next place oblige it to control itself. The dangers of bad government, then, come from both sides. A large and expansive government has correspondingly wide scope to harm and oppress; a small government, meanwhile, may lack the resources to prevent private actors from harming and oppressing their fellow citizens with impunity. Somin ignores the second half of the problem.

Consider Gilded Age America, in which the rise of giant industrial enterprises changed the balance of power between the private and public sectors. Corruption was rife, as firms often found bribery of judges and local officials cheaper than observing the law and respecting the rights of others. Pollution, property damage, bodily harm to third parties, unsafe food and workplaces—all were theoretically actionable and remediable at common law and pursuant to the state police power. And yet, with depressing frequency, the authorities were suborned and the wealthy and powerful were free to impose costs on others with impunity. This externalization of costs, and corresponding enjoyment of excess returns, is the other face of rent-seeking. Rents created by thwarting just laws are no less real than those created by promulgating unjust ones.

Economists Edward Glaeser and Andrei Shleifer have hypothesized that the vulnerability of courts to being overwhelmed by large industrial enterprises “made it efficient for American society to increasingly rely on regulation” during the Progressive era. The greater efficiency of regulation, they argue, lies in the fact that it is more difficult to suborn than private litigation:

As the scale of enterprise increased, the damage from industrial accidents rose proportionately, as did the incentive to avoid paying damages. The cost of influencing justice, however, did not rise as fast…. From this perspective, the regulation of markets was a response to the dissatisfaction with litigation as a mechanism of social control of business.

Glaeser and Shleifer’s analysis, while illuminating, is far from the whole story. The story of regulation is rife with gross inefficiencies, propelled by—yes, certainly—rent-seeking private interests as well as great dollops of technocratic hubris. But accepting their analysis as even part of the story is bad news for Somin’s argument. Under certain conditions, at least, a move toward smaller government can make rent-seeking worse, not better.

Somin’s prescription of slashing government functions also has this problem: it stands zero chance of being enacted. The modern regulatory/welfare state isn’t going anywhere. Its major components are overwhelmingly popular, and there is no prospect on any discernible horizon for wholesale elimination of any of those components. Reform, including the elimination of particular rules and spending programs, is on the table. An end to social insurance and safety net policies isn’t; neither is the complete phaseout of health, safety, environmental, and antidiscrimination regulations.

Somin’s insistence that only major rollbacks of government can remedy regulatory capture and rent-seeking is therefore a counsel of despair. If the only effective reforms are politically impossible, then corrosive cynicism about government is easy to fall into. The notion that government is inevitably a disreputable, dysfunctional racket is widespread in libertarian and “small government” conservative circles, and as that notion gets internalized by actual policymakers it becomes a self-fulfilling prophecy. If doing a good job is impossible, why even try? I believe that this dynamic has something to do with the increasing unseriousness of Republicans in Washington about sound policymaking and effective administration.

Without a doubt, the policy status quo is misconceived or poorly executed, or both, on many different fronts. And Ilya Somin and I agree about many of the things that are wrong. Somin’s stress on the importance of public ignorance is a useful corrective to naïve conceptions of democracy; his focus on the perils of government complexity pushes helpfully toward greater reliance on simple, transparent rules and straight-up fiscal transfers; and his support for fostering geographic mobility and interjurisdictional policy competition pushes in the right direction as well. But in all of these matters, the proper application of Somin’s insights is much more modest than he believes.

Yes it’s true the policy status quo is a mess. But it’s also true that the citizens of today’s advanced democracies live in, on balance, the best governed societies in human history. And so the path toward improvement lies in building on the real accomplishments of the modern regulatory/welfare state, not calling for its dismemberment. Put down the saw; take up the scalpel.

Also from this issue

Lead Essay

  • Brink Lindsey and Steven M. Teles have largely made their peace with “big government.” They insist, though, that not all big government is good, and they draw on libertarian insights to criticize government action that tends to concentrate wealth and power in the hands of a few. The political mainstream can learn much about doing even big government better, and ironically, some of that insight comes from those who have been most skeptical about big government itself - libertarians.

Response Essays

  • Ilya Somin argues that in our attempts to free the economy and deliver prosperity to more people, there is no substitute for limited government. Government has not only captured the economy; it holds people where they are by making it more difficult to live and work in new places. This reduces economy dynamism as well as limiting individuals’ choices. Human mobility is a key part of the puzzle, he argues.

  • Henry Farrell urges libertarians to give up on the idea of rent seeking. There is no such thing as an unregulated market, so “rent seeking” ends up meaning something like “state action I happen to disfavor.” This will not do, he says, and he urges decisive interventions, particularly in financial markets, to save the neoliberal state. This he characterizes as a mix of market institutions and democracy. Democracy is the part in peril, he argues, not markets.

  • liberal. Though it is out of fashion and more often found a term of abuse today, liberal politics works to ensure that citizens share power broadly, and that no one can wield arbitrary power over another. Reeves suggests that we need even more of this kind of liberalism.