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Regulatory Capture

6 min read

Part of Regulation and the administrative state.

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Every episode (6)

Who argued it

Dick Carpenter · Baylen Linnekin · Lawrence J. McQuillan · Ryan Young · Mike Munger · Alex Nowrasteh

Public Choice Theory · Occupational Licensing · Economic Liberty · Property Rights · Zoning · Housing Policy · Antitrust · Big Tech

Background

Regulatory capture describes a situation in which the industry or entities being regulated have obtained control over the regulator, so that the regulator does the bidding of the regulated for the benefit of the regulated. Bob Zadek offers this definition on the show and notes that the phrase has been used there many times, citing the BP oil spill in the Gulf of Mexico as a case where complaints about capture were widespread Who Wants to Buy a Politician? With Mike Munger (2015).

Capture as a structural tendency

Mike Munger, an economist, explains why capture is so general: there are two groups of value creators, existing companies and the companies that do not exist yet that would be nimble and innovative and create things 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. Politics, he concludes, is always going to reward the value creators of the past, whereas markets are focused on the future Who Wants to Buy a Politician? With Mike Munger (2015).

Zadek frames the same dynamic in banking as an alliance between bankers and government: government asks banks to carry out its policies and make loans to constituents who do not deserve them, and in exchange gives them free money and protection against failure. He compares this to the deal AT&T made with the government, under which AT&T became in many ways an arm of the government carrying out wealth transfers from urban to rural areas Bill Frezza’s History of Telecom Innovation (and Not) (2015).

Dodd-Frank and the finance industry

Munger calls Dodd-Frank the product of an industry that got a free pass. Barney Frank, he says, received year after year by far the largest contributions from Wall Street corporations and finance companies of anyone in the US House, and then participated in writing the Dodd-Frank regulation along with Chris Dodd after the housing bubble crisis of 2007–2008. In Munger’s account, Dodd-Frank does not regulate the activity of the large firms at all; it imposes compliance and reporting requirements that raise the costs of entry into the industry, so that large companies including Goldman Sachs benefited enormously Who Wants to Buy a Politician? With Mike Munger (2015).

Stephen Moore gives a figure for the result: after Dodd-Frank, the number of banks fell from 14,000 to 8,500, with small community banks squashed and small businesses unable to get loans. He describes big banks such as Wells Fargo and Citi as very much in favor of the bill because they could absorb the higher regulatory costs Stephen Moore on Trumponomics (2018). Bill Frezza adds that since Dodd-Frank was passed there have been perhaps three bank charters granted in the entire United States, and that innovation is happening at the edges, in shadow banking and startups developing new consumer lending models, which may yet be crushed by regulators Bill Frezza’s History of Telecom Innovation (and Not) (2015).

Munger extends the pattern backward to Sarbanes-Oxley, which he says was also just a way of increasing compliance and regulatory costs Who Wants to Buy a Politician? With Mike Munger (2015).

Licensing boards

Dick Carpenter describes the mechanics of capture in occupational licensing. A licensing board is created by enabling legislation; when a bill is passed and signed by a governor, it establishes a board to oversee the license, and that board is immediately populated by people already in the occupation, often the same people who lobbied for the license. The board oversees the requirements, the fees, the policing of the fence and the gatekeeping function. Boards typically have five, nine or eleven members, almost always people already in the occupation or licensed in it, perhaps with one or two public members. Carpenter calls this regulatory capture: the occupation is captured by people from the occupation itself, who are given government power to regulate who may enter it New data shows that occupational licensing does nothing to increase quality (2022).

Standards of identity and labeling

Baylen Linnekin describes standards of identity as government-approved recipes for different foods that almost always differ from the dictionary definition of the thing. When government decides to define a food, he says, it is typically handed the definition by large food businesses, and everyone who wants to compete has to come up with a special name — which is why a cream cheese competitor is sold as Neufchâtel. He argues that people are smart enough to understand that almond milk is not from a cow, and that food producers, like everyone else, have a First Amendment right to say honest things about their food. Efforts to restrict such labeling, he notes, are typically led by dairy farmers groups, with meat producers similarly angry about competition from vegan or cell-cultured meats Food (Waste) Freedom (2022).

Across episodes

The topic recurs across the run without a change in the underlying account. Munger in 2015 supplies the general theory and the Dodd-Frank case; Frezza in 2015 and Moore in 2018 add the banking and charter numbers; Carpenter in 2022 supplies the licensing-board mechanism; Linnekin in 2022 applies the same logic to food standards. What shifts is the domain — finance, telecom, licensing, labeling — not the argument, and no guest in these episodes disputes another’s characterization.

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