Cronyism

Cronyism of ‘Regulatory Capture’

When businesses want red tape, to squelch competition

Based on an article by Adam Thierer of the Mercatus Center (see below)

Cronyism -- from Mercatus Center“Regulatory capture” occurs when special interests co-opt policymakers or political bodies — regulatory agencies, in particular — to further their own ends.

 Capture theory is closely related to “rent-seeking” which occurs when most benefits go to some single interest but most of the costs will be borne by a large number of people (such as all taxpayers).

Countless studies have shown that regulatory capture has been at work in various arenas, including: transportation and telecommunications; energy and environmental policy; farming and financial services.

Relevant Quotes

“If the government is to tell big business men how to run their business, then don’t you see that big business men have to get closer to the government even than they are now? Don’t you see that they must capture the government, in order not to be restrained too much by it? Must capture the government? They have already captured it.”

–President Woodrow Wilson

“When rights, worth millions of dollars, are awarded to one businessman and denied to others, it is no wonder if some applicants become overanxious and attempt to use whatever influence they have (political and otherwise), particularly as they can never be sure what pressure the other applicants may be exerting.”

–Anthony Downs

“The pressure on the legislature to license an occupation rarely comes from the members of the public . . . On the contrary, the pressure invariably comes from the occupation itself.”

–Milton Friedman

“In utility industries, regulation has often been sought because of the inconvenience of competition.”

–Harold Demsetz

“Regulation and competition are rhetorical friends and deadly enemies: over the doorway of every regulatory agency save two should be carved: ‘Competition Not Admitted.’ The Federal Trade Commission’s doorway should announce , “Competition Admitted in Rear,” and that of the Antitrust Division, ‘Monopoly Only by Appointment.’”

–George Stigler

“When a commission is responsible for the performance of an industry, it is under never completely escapable pressure to protect the health of the companies it regulates, . . . [The regulatory commission] comes increasingly and understandably to identify the interest of the public with that of the existing companies on whom it must rely to deliver goods.” 

–Alfred Khan

“During the forty years between passage of [Civil Aeronautics Act ] of 1938 and the appointment of [Alfred] Kahn to the CAB chairmanship, the overall effect of board policies tended to freeze the industry more or less in its configuration of 1938. One policy, for example, forbade price competition. . . . A second policy had to do with the CAB’s stance toward the entry of new companies into the business. Charged by Congress with the duty of ascertaining whether or not ‘the public interest, convenience, and necessity’ mandated that new carriers should receive a certificate to operate, the board often ruled simply that no applicant met these tests.”

–Thomas K. McCraw

“The regulated industries are often in clear control of the regulatory process.”

–Mark Green and Ralph Nader

“Although regulation is begun with the good intentions of those who promote and pass the laws, somewhere along the line regulators may become pawns of the regulated firms.”

–Richard B. McKenzie and Gordon Tullock

“Every act of intervention establishes positions of power.  How that power will be used and for what purposes depends far more on the people who are in the best position to get control of that power and what their purposes are than on the aims and objectives of the initial sponsors of the intervention.”

–Milton and Rose Friedman

“Regulation which is not directly sought at the outset is generally ‘captured’ later on so it behaves with consistency to the industry’s major interests.”

–Barry M. Mitnick

“It is much more difficult to retrench a bureaucracy than it is to bankrupt a company. A regulatory apparatus is a parasite that can grow larger than its host industry and become in turn a host itself, with the industry reduced to parasitism, dependent on the subsidies and protections of the very government body that initially sapped its strength.”

–George Gilder

“What do industry and labor want from the regulators? They want protection from competition, from technological change, and from losses that threaten profits and jobs. A carefully constructed regulation can accomplish all kinds of anticompetitive goals of this sort, while giving the citizenry the impression that the only goal is to serve the public interest.”

–Bruce Yandle

“A persistent criticism by political scientists is that agencies that regulate businesses are overly sympathetic to the industries they are responsible for regulating.  Critics charge that regulators often come from the businesses they regulate and thus naturally see things from an industry point of view.  Even if regulators weren’t previously involved in the industry, they have been seen as eager to please powerful clientele groups rather than have them complain to the White House or to the agency’s overseeing committees in Congress.”

–Jeffrey M. Berry

“The minutes of the First National Radio Conference in 1922 reveal that even at this early date, industry leader clamored for government limits on the number of licenses issued; they sought protection against entry by new licenses. For its part, the government desired control over the industry’s structure and programming content. . . .in exchange for regulatory controls on industry structure and programming content, industry leaders would be granted restrictions on market entry that they wanted.”

–Jonathan Emord

“Agency heads are usually not apolitical . . . Effective participation in agency lawmaking usually requires expensive legal representation as well as close connections to members of Congress who will pressure the agency on one’s behalf. . . . the general public . . . lacks the organization, finances, and know-how to participate as effectively in the administrive process.”

–David Schoenbrod

“The passage of the Interstate Commerce Act of 1887 was not a pure triumph of the populist movement and its allies in the anti-railroad camp. The railway industry largely decided that regulation was in its best interests and acquiesced in and even encouraged government involvement. This is often portrayed as the insidious capture of the regulators by the industry they regulate.”

–Andrew Odlyzko

“Economic growth requires innovation. Trouble is, Washington is practically designed to resist it. “

–Lawrence Lessig

“When the FCC asserts regulatory jurisdiction over an area of telecommunications, the dynamic of the industry changes. No longer are customer needs and desires at the forefront of firms’ competitive strategies; rather firms take their competitive battles to the FCC, hoping for a favorable ruling that will translate into a marketplace advantage. Customer needs take second place . . .”

–David J. Farber & Gerald R. Faulhaber

“When some hear the word ‘regulation,’ they imagine government rushing to the defense of consumers. In the real world, government serves up regulation to those who ask for it, which usually means organized interests seeking to block a competitive threat. This insight, by the way, originated with the left, with historians who went back and reconstructed how railroads in the U.S. concocted federal regulation to protect themselves from price competition.”

–Holman Jenkins

Adam Thierer is a senior research fellow with the Technology Policy Program at the Mercatus Center at George Mason University. See his article Regulatory Capture: What the Experts Have Found for a bibliography of these and other quotations.

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