Tim Worstall in Forbes:
There’s a fascinating and very long essay over in National Affairs about how we might cut income inequality. And, contrary to what any number of Democratic candidates for office will tell you, the answer isn’t to impose ever more regulation upon the economy. Rather, it’s to strip away some of the regulation that allows certain favoured income groups to make excessive incomes. Excessive here defined as greater than the economic value they add to the lives of the rest of us, something they achieve by carving out economic rents for themselves. I would, myself, go rather further than the writer, Steven Teves, and start using Mancur Olson’s analysis, that this is what democratic (note, democratic, not Democratic) politics always devolves down into, a carving up of the public sphere to favour certain interest groups. But even this milder version gives us more than just hints about what we should be doing:
At the same time, however, we have seen an explosion in regulations that shower benefits on the very top of the income distribution. Economists call these “rents,” which we can define for simplicity’s sake as legal barriers to entry or other market distortions created by the state that create excess profits for market incumbents.
Let us take one very simple example of such rents. The earnings of those who possess taxi medallions in cities where there’s an insufficient number issued. Until very recently one such medallion, allowing one single cab to operate on the streets of NYC 24/7, had a capital value of $1 million. That led to a rent, a pure economic rent, of $40,000 a year to allow one cab river to use that medallion for 12 hours of the day. and, obviously, another $40,000 to allow another to use it for another 12 hours a day.
That is purely a rent: and one created by New York City not issuing enough medallions to cover the demand for cab services. Uber has of course exploded into this market and the success of that company, along with its many competitors, shows how pervasive the creation of such rents by limiting taxi numbers has been in cities around the world. That is an obvious and very clear creation of a rent purely through bureaucratic action.
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Deregulating the economy will remove many of those rents. This will reduce income inequality. So, why aren’t those who rail against income inequality shouting for deregulation? Good question and the only proper answers become increasingly cynical. Unions exist for the purpose of creating rents for their members. So, given the union participation in the Democratic Party we’re not going to see calls for deregulation from that side. And different groups, those car dealers perhaps, the doctors, have their hooks into the Republican Party too.
My own answer is that it needs to be done in the same manner that Reagan treated the tax code. Not that I’m particularly stating that Reagan’s tax changes were quite as wondrous as some now think they were, only that it all had to be approached on a Big Bang basis. Everything had to be on the table at the same time so that while there were indeed those who would defend their little corner the over riding interest of all was that all such little corners got eradicated. With this rent creation, given that so much of it is at State level, that won’t really work. Except for one idea that I’ve floated before.
