Want to Reduce Inequality?

For liberals who want to reduce inequality, the answer is simple: Reduce the number of burdensome regulations, according to a Mercatus Center article.

The article, using an example of an entrepreneur who has created a popular phone app, makes a convincing case against regulation.

The app’s creator will earn profits over time as the app’s popularity and sales increase. However, her profits will eventually decline due to the process of creative destruction: a newer, better app will hit the market that pulls her customers away from her product, erodes her sales and forces her to adapt or fail. The longer she is able to differentiate her product from others, the longer she will be in business and the more money she will earn. … A lack of competition stretches out a firm’s life cycle since the paucity of substitutes makes it costlier for consumers to switch products if the value of the firm’s product declines.

Indeed, regulation–especially regulation that inhibits market entry–exacerbates inequality by dampening competition and allowing entrepreneurs to dominate a market longer than they would in a world with no or reduced regulation. The article continues:

Maintaining market power for a long period of time by restricting entry not only increases corporate profits, it also allows doctors, lawyers, opticians, and a host of other workers who operate under a licensing regime that restricts entry to earn higher wags than they otherwise would.

Occupational licensing is a huge problem. Indeed, lawyers and doctors–using laws that require inordinate amounts of education–artificially reduce the supply of doctors and lawyers, which increases their pay. Even if you favor occupational licensing for doctors and lawyers,  licensing for hair braiding is clearly ridiculous. In fact, the percentage of the workforce that is required to have licensing rose from 5% in the 1950s to 20% by 2000 and 29% in 2006. A lot of fields, as a result, have been closed to low-skilled workers, which makes it harder for them to rise above poverty. These laws protect the entrenched laborers and quash the newcomers; in other words, they worsen inequality.

The Mercatus article continues:

Throughout America’s history the economy has been relatively dynamic, and this dynamism has made it difficult for businesses to earn profits for long periods of time; only 12% of the companies on the Fortune 500 in 1955 were still on the list in 2015. In a properly functioning capitalist economy, newer, poorer firms will regularly supplant older, richer firms and this economic churn tempers inequality. … But this dynamism may be abating and excessive regulation is likely a factor. For example, the rate of new-bank formation from 1990 – 2010 was about 100 banks per year. Since 2010, the rate has fallen to about three per year. Researchers have attributed some of the decline of small banks to the Dodd-Frank Wall Street Reform Act, which increased compliance costs that disproportionately harm small banks. Fewer banks means less competition and higher prices.

While some degree of inequality will always exist in a capitalist economy, especially in a society like ours which is (historically, at least) hyper-meritocratic, there would always be a churn. People would rise and fall, and there would always be a degree of dynamism. But as regulation is hampering competition, fat cats have the ability to get fatter without adding anything to society. Ironically, regulations meant to curtail their power have actually increased it by wiping out their competition.

America deregulated throughout the 1980s and 1990s. We were more prosperous as a result. Now, the issue isn’t even about becoming wealthier; it is about defeating the entrenched upper-class and unleashing competition into the market place. The answer isn’t more regulation. It’s less.


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