Did You Need Another Reason to Hate Lobbyists & Cronyism?

by on July 15, 2019 · 0 comments

My latest AIER column examines the impact increased lobbying and regulatory accumulation have on entrepreneurialism and innovation more generally. Unsurprisingly, it’s not a healthy relationship. A growing body of economic evidence concludes that increases in the former lead to much less of the latter.

This is a topic that my Mercatus Center colleagues and I have done a lot of work on through the years. But what got me thinking about the topic again was a new NBER working paper by economists Germán Gutiérrez and Thomas Philippon entitled, “The Failure of Free Entry.” Their new study finds that “regulations and lobbying explain rather well the decline in the allocation of entry” that we have seen in recent years.

Many economists have documented how business dynamism–new firm creation, entry, churn, etc–appears to have slowed in the US. Explanations for why vary but Gutiérrez and Philippon show that, “regulations have a negative impact on small firms, especially in industries with high lobbying expenditures.” Their results also document how regulations, “have a first order impact on incumbent profits and suggest that the regulatory capture may have increased in recent years.”

In other words, lobbying and cronyism breed a culture of rent-seeking, over-regulation, and rule accumulation that directly limit new startup activity and innovation more generally. This is a recipe for economic stagnation if left unchecked.

I cite almost a dozen sources in my essays which document this problem in far greater detail and which propose a variety of reforms. In a previous essay for AIER, I argued a periodic “spring cleaning for the regulatory state” was essential if we hope to address regulatory accumulation. In continued:

For starters, we need to get the problem of over-licensing and over-permitting under control at the federal, state, and local level. While sometimes justified, licenses are a direct restriction on entry and entrepreneurialism and should only be employed for the riskiest activities and professions. “Permissionless innovation” should be the default.

Other regulatory reforms will be needed, and I continue to be a big fan of “sunsets” as one way of cleaning out the stables. Sunsets are not silver-bullet solutions, but they can help create a periodic reset button of sorts for government programs or regulations that have outlived their usefulness, or did not make sense to begin with.

Some people will push back against such regulatory reforms, suggesting they will undermine public health or welfare. But that’s nonsense. Getting regulatory accumulation under control isn’t just about improving opportunities for innovation, entrepreneurialism, and worker opportunities.  It’s also about ensuring that government functions in more efficient and effective fashion.

When regulations accumulate without any rhyme or reason, it makes it more difficult for public officials to do their jobs effectively. Streamlining rules and cleaning up old, outdated regs will help public officials better serve the public interest and give economic dynamism a boost at the same time.

We need to get serious about getting this problem under control. Again, read my latest and previous AIER columns for more detail about how we can start that process.


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