Regulatory capture describes a situation in which the industry or entities being regulated obtain control over the regulator, so that the regulator does the bidding of the regulated for the benefit of the regulated. Bob Zadek offered that definition on the show and noted that the concept had come up in connection with the BP oil spill in the Gulf of Mexico, where there was a lot of complaint about regulatory capture Who Wants to Buy a Politician? With Mike Munger (2015).
The mechanism
Duke University economist Mike Munger gave the account of why capture is so general. There are two groups of value creators, he said: existing companies, and the companies that do not exist yet that would be nimble and innovative and create things much more cheaply. By definition the second group does not exist yet, so it is difficult for politicians to collect money from them, while they can collect from existing firms. Capture is therefore always to be expected, even though from consumers’ perspective it would be better to worry about the value creators of the future. Munger’s formulation: markets are focused on the future, politics is focused on the past Who Wants to Buy a Politician? With Mike Munger (2015).
Bob framed the same dynamic in terms of crony corporatists capturing the governmental system and legislating themselves protection against any kind of failure. He identified banking and healthcare as the areas where this is happening today, and described banking as the best example: bankers have made an alliance with government in which they carry out government policies—making loans to constituents who do not deserve loans—and in exchange receive free money and protection against failure. He compared that bargain to the deal AT&T made with the government eighty years ago, when the company became in many ways an arm of the government carrying out wealth transfers from urban areas to rural areas Bill Frezza’s History of Telecom Innovation (and Not) (2015).
Dodd-Frank and Sarbanes-Oxley
The most developed example in these episodes is the Dodd-Frank regulation passed after the housing bubble crisis of 2007–2008. Munger said Dodd-Frank does not regulate the activity of the large firms at all; what it does is impose a bunch of compliance and reporting requirements that have the effect of raising the costs of entry into the industry. It was therefore hardly surprising that large companies, Goldman Sachs among them, benefited enormously. Munger noted that Barney Frank, who wrote or participated in writing the legislation along with Chris Dodd, had year after year received by far the largest contributions in the House from Wall Street corporations and finance companies Who Wants to Buy a Politician? With Mike Munger (2015).
Bob called Dodd-Frank the poster child for regulatory capture, in effect written to a large degree by the big financial institutions and wonderful for them because it snuffed out any danger of competition from community and local banks and smaller banks. It was, he said, an industry-drafted, industry-sponsored bill marketed as one to protect us from too big to fail, but in fact a boon to too-big-to-fail banks. Munger added that Sarbanes-Oxley, the previous regulation, was also just a way of increasing compliance and regulatory costs Who Wants to Buy a Politician? With Mike Munger (2015).
Stephen Moore gave a concrete count of the effect. Dodd-Frank imposed huge costs for lending institutions, but the big banks like Wells Fargo and Citi were very much in favor of it because they could absorb the cost of the higher regulations. The effect was to squash the small community banks in neighborhoods around the country: they went down from 14,000 banks to 8,500 banks. Moore’s summary was that the sharks were eating up the minnows, that community banks are needed, and that small businesses could not get loans Stephen Moore on Trumponomics (2018).
Bill Frezza offered a related observation: since Dodd-Frank was passed, he said, there had been a total of maybe three bank charters let in the entire United States, and he thought they were on Indian reservations. Innovation, in his account, was happening at the edges—in the shadow banking business and in startups trying to develop new consumer lending models—and it remained to be seen how far they would get before they got crushed by the regulators Bill Frezza’s History of Telecom Innovation (and Not) (2015).
Licensing boards
A second, more granular example comes from occupational licensing. Dick Carpenter explained that a licensing board oversees everything about the license itself: the requirements, the fees, the policing of the fence, the gatekeeping function. The board is created by the enabling legislation; when a bill is passed and signed by a governor, that bill establishes a board to oversee the license, and the board is then immediately populated by people who are already in the occupation, often by the same people who lobbied for the creation of the license. The result is what Carpenter called, in his words, the two-dollar economics term: regulatory capture. The occupation is captured by people from the occupation itself, who are overseeing their competitors. Such boards have five, nine, or eleven members, almost always people already in the occupation or licensed in it, possibly with one or two non-occupational public members New data shows that occupational licensing does nothing to increase quality (2022).
Bob’s framing of licensing was that it is a series of statutes that are by definition anti-competitive: an activity is declared unsusceptible to competition. Others can get the license, but the cost, the time, and the standards are not designed to invite people into the activity; they are designed to discourage them New data shows that occupational licensing does nothing to increase quality (2022).
Food labeling and standards of identity
Baylen Linnekin described standards of identity as government-approved recipes for different foods that almost always differ from the actual dictionary definition of the thing. When the government decides to define things, he said, typically the definition is handed to it by big business, large food businesses, and the government accepts it; everyone who wants to compete then has to come up with some special name for their food. His example was the cream cheese competitor sold as Neufchâtel. He argued that people are smart enough to understand that almond milk is not from a cow, that food producers have a First Amendment right to say honest things about their food, and that whether someone is lying is a matter for courts, not for the USDA, the FDA, or state governments Food (Waste) Freedom (2022).
Bob introduced that discussion by noting that labeling is a product of what economics calls regulatory capture, where the government operates to protect the industries it is supposed to regulate, and cited the then-current flap over almond milk and whether purveyors could call it milk Food (Waste) Freedom (2022).
Minimum wage and the little guy
Moore extended the capture logic to the minimum wage. After Jeff Bezos announced that Amazon would raise its starting wage to $15 an hour, Moore said, Bezos went to Washington to require that every business raise the federal minimum wage to $15 an hour. Amazon was by then a company valued at a trillion dollars, competing against small companies with $10,000 in the bank that could not afford $15 an hour. Moore’s conclusion was that this was big business and big government trying to drive the little guy out of the equation, and that government does not help the little guy; it squashes the little guy Stephen Moore on Trumponomics (2018).
Bob offered Walmart as a parallel case: it was a strong supporter of Obamacare because it was already paying that and was at a competitive disadvantage, so it wanted to force its smaller competitors to pay as generous a healthcare system as it was paying, putting them out of business Stephen Moore on Trumponomics (2018).
Across episodes
The topic recurs across the excerpts without a single settled argument. The 2015 Munger episode supplies the fullest theoretical mechanism—the asymmetry between existing firms that can be taxed and future firms that cannot—and the Dodd-Frank case study. The 2015 Frezza episode restates the banking alliance and adds the observation about bank charters. The 2018 Moore episode adds the bank-count figure and the Bezos and Walmart examples. The 2022 Carpenter episode shifts the setting to licensing boards, and the 2022 Linnekin episode to food standards of identity. What changes is the arena, not the diagnosis: each guest describes incumbents using government power against competitors, and no excerpt shows a later guest revising or rejecting an earlier guest’s account.
What the sources do not cover
The excerpts do not describe any legislative or judicial remedy for regulatory capture beyond the general preference for markets, courts, and First Amendment protection of honest labeling. They do not give the outcome of the almond milk labeling dispute, the teeth whitening case, or any of the licensing litigation. They do not state the current number of bank charters, the text of Dodd-Frank or Sarbanes-Oxley, or the holding of any case. Several excerpts end mid-sentence or at a section break, and nothing beyond those points is reported here.