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Is America encouraging the wrong type of entrepreneurship? Yes, argue Robert Litan and Ian Hathaway, two economists, in a recent article in the Harvard Business Review. In their view, unproductive “rent-seekers”, who exploit special relationships with the government to secure public spending, or gain regulatory protection from competition at everyone else’s expense, are on the rise. On the other hand, productive entrepreneurship, which generates wealth by creating new and better products and services for everyone, is flagging – reported The Economist.
Their charge feels timely: since he was elected president last November, Donald Trump has paid more than 40 visits to Trump corporation properties. His Mar a Lago club in Florida makes twice as much profit as it did two years ago. Family friends fill government offices which oversee parts of the Trump business empire. The administration has hired dozens of former lobbyists, most of them working on issues they previously lobbied on.
But Messrs Litan and Hathaway are not concerned with the current administration’s shenanigans. They take a broader view. Their piece draws on the work of the economist William Baumol, who used his theory of productive and unproductive entrepreneurship in an effort to explain differences in productivity growth across countries and over time. For instance, he studied the decline of royal grants of monopoly in the 18th century, arguing that this helped propel British entrepreneurs away from spending their time currying favour at court towards more productive agricultural and industrial innovation.
Looking at the recent economic history of America, the two economists find that things are moving in the opposite direction. In 2009, the number of businesses that closed down exceeded the number of new ventures for the first time in three decades, a sign that productive entrepreneurial activity is declining.
What explains this shift? One factor appears to be the success of various professional groups in convincing the government to tailor regulation to their needs, for instance by lobbying for occupational licensing. Jason Furman, then the chair of the Council of Economic Advisors, observed in 2015 that the share of the American workforce covered by state licensing laws grew from less than 5% in the 1950s to 25% by 2008, arguing that this deterred new competition.
The proliferation of occupational licensing might be seen as harmful overregulation. Other sectors are plagued by the opposite. Jeffrey Zhang, an economist at the Federal Reserve, argues that banking deregulation in the 1990s led to rapid bank concentration alongside “sub-optimally higher levels of risk-taking”. As a result, the salaries of senior bank employees grew rapidly. Zhang concludes that the rent-seeking enabled by financial deregulation played a sizeable role in the growth of income inequality: bankers were able to skew the system in their favour, to the detriment of everybody else.
The success of such lobbying depends on the government’s susceptibility. This does not appear to be in short supply in America. James E. Bessen, an economist at Boston University, links high profits through regulatory advantages to political factors including lobbying and campaign spending. The work of other economists reinforces his observation. Jeffrey R. Brown and Jiekun Huang, two researchers writing for the National Bureau of Economic Research, use data from White House visitor logs during the Obama administration to show that corporate executives’ meetings with White House staff were associated with a bump in their company stock price, more government contracts and positive regulatory decisions. Firms that had better access to the Obama White House also experienced a large drop in stock prices when the 2016 election result was announced.
It will be difficult to repeat the same analysis for Mr. Trump’s administration, as it has stopped publishing visitor logs. But there is little reason to assume that Mr Trump will limit himself to enriching his own family and business associates. He has already suggested that the changes his administration is planning to make to financial regulation will make bankers “very happy”, rolling back many of the rules put in place after the global financial crisis.
Read more at economist.com
show source https://www.economist.com/blogs/democracyinamerica/2017/08/rise-rent-seeker