Think twice, build once.
There are a couple of good reads in today's Financial Times: Martin Wolf notes that "inequality is a hot topic right now" while John Kay writes about "regulatory capture, the phenomenon by which regulation intended to serve the public is hijacked by industry interests."
Bottom line up front: "Politicians should beware of policies that are easy to implement and costly to reverse," as Mr. Kay puts it. Or, as a carpenter might put it: Measure twice, cut once.
Many politicians are making inequality a hot topic, but economist Thomas Picketty has made it a best seller; while I write, Capital in the Twenty-First Century is the best-selling book on Amazon. At 696 pages, I won't give you a review here but I just wanted to lend a few thoughts to the topic.
Over the past year I have written posts about how energy companies may promote consumption over conservation, how tax preparation companies discourage tax simplification, how institutionalized business arrangements erode our democratic economy, how tax policy forces inefficient choices, and how our political options are constrained by statutory and arbitrary restrictions. These and other topics are sources for inequitable opportunities that may result in an unequal outcome. For all the lip service we Americans offer on a "fair shake" or "equal footing", it seems that many starting positions are moved forward for those with legislated influence and ingrained advantage.
And over the past year I've invoked the ideas of economist Mancur Olson more than once. In The Rise and Decline of Nations, Mr. Olson described how special interest groups form over time within countries: farmers of certain crops, manufactures of certain products, labor unions representing specific sets of workers. These groups form lobbies and seek government favor to protect their interests, skew markets, and discourage innovation and productivity. The favoritism bestowed constrains national economic growth though the costs are spread thinly across the population. As a result, the favored group reaps benefits with little public resistance since the pain is opaque and incremental ("boiling the frog"). As time goes by, the number of favored groups grows until "everyone is special" and – Olson postulates – the nation falls into economic decline.
Mr. Kay invokes the name of former George Mason University professor and economist Gordon Tullock who described “the transitional gains trap”: that while barriers to entry and restricted competition are bad for consumers, tearing down barriers and removing restrictions cause losses to those that play by the rules – rules that may have been in place when they started playing. Just as removing tax breaks right away may seem like the fair thing to do, doing so changes an economic environment that may have existed for generations.
A few weeks ago I was chatting with a fellow small businessman who remarked that elected officials are labeled "lawmakers" and are expected to write laws rather than see both sides of the equation: making some new laws while taking away outdated, antiquated, ineffective, and inefficient laws. Though inequality may be a "hot topic", its immediate remedy lies not in implementing "hot fixes" but in removing growth-sapping barriers to entry and rent-seeking fixtures of favoritism.
During any home remodeling project I find the most fun is in the demolition phase while knocking down drywall with a sledgehammer or removing a stud with a Sawzall. But I better be sure the ceiling above doesn't collapse on top of me. And when I rebuild I want to measure with care so I use my resources wisely. Unlike Congress, I don't get a do-over every two years.