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An Economist Writes about the Rule of Law

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An Economist Writes about the Rule of Law

John Cochrane (AKA "The Grumpy Economist") has posted a long meditation entitled "Rule of Law and the Regulatory State" in which he makes a very important point:

The United States’ regulatory bureaucracy has vast power. Regulators can ruin your life, and your business, very quickly, and you have very little recourse. That this power is damaging the economy is a commonplace complaint. Less recognized, but perhaps even more important, the burgeoning regulatory state poses a new threat to our political freedom.

What banker dares to speak out against the Fed, or trader against the SEC? What hospital or health insurer dares to speak out against HHS or Obamacare? What business needing environmental approval for a project dares to speak out against the EPA? What drug company dares to challenge the FDA? Our problems are not just national. What real estate developer needing zoning approval dares to speak out against the local zoning board?

Readers who doubt that this is an urgent problem should read the whole thing, which includes numerous chilling descriptions of regulatory abuse, but here I want to focus on an issue he raises in passing: how best to refer to this urgent problem?

Cochrane says he hasn’t found "a really good word to describe this emerging threat of large discretionary regulation, used as tool of political control." He considers "socialism," "regulatory capture," and "cronyism," but he rejects all three. Regarding the last two, he notes:

We’re headed for an economic system in which many industries have a handful of large, cartelized businesses — think 6 big banks, 5 big health insurance companies, 4 big energy companies, and so on. Sure, they are protected from competition. But the price of protection is that the businesses support the regulator and administration politically, and does their bidding. If the government wants them to hire, or build [a] factory in unprofitable place, they do it. The benefit of cooperation is a good living and a quiet life. The cost of stepping out of line is personal and business ruin, meted out frequently. That’s neither capture nor cronyism.

The fact is, we’ve seen this system of political economy before — most notably in Mussolini’s Italy and in Hitler’s Germany — and there’s a commonly used term for it. It’s fascism. Maybe Cochrane thinks that term is too emotionally charged. However, I’d have thought a bit of emotional charge was warranted. As Cochrane says:

The power of the regulatory state…lacks many of the checks and balances that give us some "rule of law" in the legal system…. The clear danger we face is the use of regulation for political control. Each industry gets carved up into a few compliant oligopolies. And the threat of severe penalties, with little of the standard rule-of-law recourse, keeps people and businesses in line and supporting the political organization or party that controls the agencies….

A return to economic growth depends on reforming the regulatory state. But… preservation of our political freedom depends on it even more.

A Lawyer Writes about Economic Inequality

In a post at city-journal.org, New York attorney Francis Menton points out the correlation between progressive policies and inequality:

New York City mayor Bill de Blasio…has campaigned on the message that income inequality is "the defining challenge of our time." His key policy prescriptions are well known: more "affordable" housing, generous welfare programs, higher minimum wages, and income-tax hikes on high earners. However, if such policies actually reduced the gap between rich and poor, jurisdictions that have already adopted them would experience less income inequality. They don’t.

Last year, Bloomberg Rankings published a national study on income inequality, using U.S. Census Bureau income data to rank each of the 435 congressional districts by economists’ standard measure of inequality, the Gini coefficient. The study found high levels of income inequality in areas of the country known for their political progressivism. Topping the inequality list was New York’s tenth congressional district, which covers the West Side of Manhattan and Wall Street — including City Hall. Of the top 25 spots, 23 went to Democratic districts — and not just any Democratic districts. The five congressional districts covering some part of Manhattan earned the first, sixth, ninth, 13th, and 20th positions. Congressional districts in solidly liberal Chicago, Cambridge, Los Angeles, Santa Monica, and Berkeley placed in the Top 25. House minority leader Nancy Pelosi’s San Francisco district ranked 14th on the list, while Democratic National Committee chairwoman Debbie Wasserman Schultz’s Miami Beach district placed 23rd. All of those congressional districts have long been associated with progressive politics; most have long since adopted at least some of de Blasio’s policy prescriptions, including extensive public and affordable-housing programs, generous welfare programs, relatively high and progressive state and local income taxes, and higher minimum wages.

Could it be that progressive policies intended to reduce income inequality actually cause it to increase? Quite likely, yes….

After discussing each of de Blasio’s policy proposals in turn, Menton concludes:

The evidence indicates that de Blasio’s policy prescriptions would actually make income inequality worse. The point of the mayor’s progressivism may not be to improve the lot of the less fortunate or to ease poverty, but rather to broaden the base of voters permanently dependent on government programs.

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Jon Guze is Director of Legal Studies at the John Locke Foundation. Before joining the John Locke Foundation, Jon practiced law in Durham, North Carolina for over 20 years. He received a J.D., with honors, from Duke Law School in… ...

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